Asset Recycling: Can it close the infrastructure gap for future generations?

To close the infrastructure gap, the world needs to invest in $100 trillion worth of infrastructure over the next 25 years, but it doesn’t stop here... The ageing of global infrastructure, continued rural to urban migration and the impact of climate change all have a price to pay. So how can countries afford this massive and growing investment?

Today, governments continue to tackle record levels of public debt a decade after the global financial crisis. This now stands above the critical level of 90% of GDP in Japan, the United States, France and Canada, and at 89% of GDP in the United Kingdom.

For countries with existing high levels of government debt, increasing further levels of borrowing is not always a viable solution.

First, it can trigger downgrades to sovereign credit ratings and increase the governments’ cost of borrowing.

Second, demographic patterns such as ageing populations are creating further pressure on government budgets, examples include increasing healthcare costs and the cost of providing national/state pensions. The latter of these has its own global challenge to address, the retirement savings gap is estimated to grow to a colossal $400 trillion by 2050. Thus, for the world to stay on a path towards sustainable growth, debt alone cannot be the solution.

Raising taxes to fund infrastructure can also be the least attractive option for many countries and its citizens, this leaves Governments with few options left to find alternative sources of funding.

Introducing Asset Recycling

One option that can help address the infrastructure challenge meanwhile avoiding the fiscal constraints highlighted above is Asset Recycling. This is a fairly simple concept and consists of two critical steps.

First, governments unlock the capital from existing infrastructure by leasing assets to institutional investors interested by stable long-term returns, i.e. pension funds.

Second, governments re-invest the capital proceeds into new infrastructure to meet the populations’ needs. These newly built assets can also be recycled again in future, helping to accelerate the pipeline of infrastructure projects.

This process recycles previous taxpayers' funds that have been locked up in older assets to pay for new or renewed assets to meet the demand of future generations. This approach avoids the need for governments to increase borrowing and debt levels or to continually raise taxes.

The population retains access to the public services and benefits provided by the older assets, but now also gains from additional or improved services and benefits provided from re-investment in new and/or improved infrastructure, as illustrated in Figure 1.

Citizens can also benefit from the asset twice, as users and as investors through their pension fund.

Figure 1: The infrastructure asset recycling process

Asset Recycling in infrastructure has the potential to significantly increase levels of investment and help close the infrastructure financing gap. This is the result of creating alignment with long-term institutional investors that have a preference for built infrastructure assets, notably pension funds. These investors have significant amounts of capital available to invest and their appetite for infrastructure assets has been growing year on year.

So how is Asset Recycling implemented?

Implementing an infrastructure asset recycling programme

Atkins Acuity recently collaborated with the World Economic Forum and its member partners to conduct research into the viability of Asset Recycling in infrastructure and has presented its findings and recommendations in a new report, "Recycling our Infrastructure for Future Generations".  

The report collects insights from experts and examples to understand when and how Asset Recycling can be implemented. The research collected in this report demonstrates that specific steps should be followed by governments to ensure a successful implementation, this is captured in a framework shown in Figure 2.

Figure 2: A framework for implementing infrastructure asset recycling

First, governments need to develop a clear program of infrastructure investment by publishing a (concise) list of projects, as well as creating an Independent infrastructure agency and infrastructure trust fund to enable capital proceeds to be transparently collected and allocated.

Second, the value of divested assets should be maximised, by benefiting from private sector expertise and innovation in operations while also strengthening government capabilities in planning, delivery and long-term accountability. Ensuring suitable investors and specialist infrastructure expertise are attracted to deregulated sectors through standardized and transparent bidding processes and contracts which include sufficient safeguards (e.g. service level and price agreements).

Finally, governments need to create momentum and sustain political support by encouraging intra-governmental collaboration towards the Asset Recycling program using incentives and setting clear expectations from the outset, plus more effective methods of engaging stakeholders and communities through public opinion surveys and town hall meetings.

Infrastructure is the backbone of most economies and key to increasing economic productivity. While there is no silver bullet to addressing the infrastructure gap, we need to think creatively and look at several options in parallel. The Asset Recycling option in infrastructure is a promising and viable concept and it has clear potential to be replicated and scaled up in other jurisdictions to the benefit of future generations. Infrastructure itself cannot vote so the time to act is now!

Martin Knights, manager, portfolio programme & asset management, Atkins Acuity
Marie Lam-Frendo, associate director, Atkins Acuity

For the full report “Recycling our Infrastructure for Future Generationshere.

Read the exclusive release of the report in Forbes here.


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