Can the US import asset recycling?

When US Vice-President Mike Pence visited Australia in April, one topic broached with business leaders was the country’s asset recycling scheme. Looking to increase the private sector’s role in infrastructure, Pence noted that the US may look to its ally for inspiration.

Australia launched its asset recycling initiative (ARI) in 2014, earmarking A$5 billion ($3.8 billion; €3.4 billion) of federal funding. Aiming to incentivise privatisation, the government rewards states that sell brownfield assets and reinvest the proceeds into greenfield projects by contributing 15 percent of the asset sale, provided all the sale proceeds are reinvested. Therefore, a state that offloads a A$1 billion asset and puts that money into new construction would receive a A$150 million reward.

Robert Poole, director of transportation policy for the Reason Foundation, a libertarian think tank, sees this as a model for the US. “This might be a way to make it bipartisan enough that you can actually get something like that through Congress,” Poole tells Infrastructure Investor.

Enter President Donald Trump, who has promised to tap into private capital to honour his $1 trillion infrastructure promise. He faces resistance on at least two fronts: Democrats who accuse him of a giveaway to Wall Street; and rural Republicans afraid any plan relying on public-private partnerships will exclude their sparsely populated districts.

Asset recycling may not help with the former, but the gap between his plan and the Democrats’ vision – along with the president’s unpopularity on the left – has made progressive support increasingly unlikely anyway. For the latter, the prospect that reinvested funding could go towards projects that would not draw interest from investors could give hesitant Republicans enough incentive to get on board.

The concept of an American asset recycling initiative has been floating around for years. John Schmidt, a partner at Mayer Brown, a PPP-focused US law firm, was pushing the idea in 2014, shortly after Australia’s programme was launched. Following Trump’s inauguration, the Australian embassy in Washington published a report suggesting the initiative could be used in the US.

“Australia’s wider reform experience over the past few decades is very relatable to the US,” Brendan Lyon, chief executive of Infrastructure Partnerships Australia, told Infrastructure Investor in an email. “The Trump administration would be very wise indeed to look at federal funding incentives [like those used in Australia’s scheme].”

The idea has certainly caught on within the administration. In addition to the vice-president, Steve Roth and Richard LeFrak, co-chairmen of President Trump’s infrastructure council, pointed to asset recycling as a possible solution. And Australian fund managers familiar with both markets see potential.

NOT SO FAST
However, while the US could theoretically emulate aspects of Australia’s success, the actuality of doing so will present unique challenges.

“There are clearly some structural and political nuances here in the US which differ from Australia,” explains Dylan Foo, the head of Americas infrastructure equity for Sydney-headquartered AMP Capital. “The idea of privatising a state enterprise – whether it is social infrastructure, transport or utilities – always comes with some form of political risk.”

In Australia, the results varied from state to state. New South Wales and Victoria embraced the programme, but others – particularly Queensland and Western Australia – resisted. Moreover, while Australia has just six states and a handful of territories, working with 50 state governments is inherently more complicated. In addition, local municipalities, such as cities, hold more sway in the US and can put the brakes on a project.

“It has been more difficult to get private capital involved in US infrastructure,” Foo says. “There are more political nuances and stakeholders here across federal, state and local levels than you would see in Australia.”

The initiative’s success in Australia, Foo says, hinged on the government’s ability to convince the public of the programme’s benefits and to allay fears over privatisation.
“The benefits were well communicated by New South Wales and Victoria, so they were very clear about the safeguards around prices,” explains Ross Israel, head of global infrastructure for Brisbane-based QIC.

“They were clear about how they were protecting employees in the businesses being sold,” Israel continues. “They were also minded to show that there was capital being reinvested in the communities from the sale of the assets that would provide a soft landing around any issues that might ensue with the change of ownership.”

So, while the public may be wary about an asset being put into private hands, knowing that the deal will lead directly to new construction is a benefit. Structuring long-term concessions in which the asset eventually reverts to public control was easier to message than an outright sale, Foo adds.

Was the Australian scheme a success? That depends on who you ask. The initiative was wound down last year, with the government having agreed to pay out around A$2.3 billion, not including A$1 billion for Victoria.

“Not all states embraced [the programme], and that was reflective of the political views of the electorates of each of the states,” says Israel.

Victoria, meanwhile, believes it is being short-changed following the sale of the Port of Melbourne. Canberra, claiming the state missed the deadline to qualify for ARI funding, has earmarked for Victoria A$1 billion previously allocated to the ARI (Victoria believes it is owed an additional A$450 million).

Opponents of privatisation point to these problems as proof that the scheme was a failure and that the US would be foolish to follow in Australia’s footsteps. But supporters note the benefits seen by states which have backed the programme.
“Without asset recycling, we’d still be talking about infrastructure rather than celebrating each project opening,” says Lyon.

#TRUMPTOLLS
During his presidential campaign, Trump’s promise to invest $1 trillion to rebuild America’s crumbling infrastructure was a rare topic that bridged, or even flipped, the partisan divide. After his election victory in November, Democrats cited infrastructure as one area where they could work with the president, while conservatives were shaken by Trump’s Keynesian rhetoric.

The politics has since shifted to more familiar territory. Trump’s budget plan released in May included a six-page ‘fact sheet’ on infrastructure. The plan called for $200 billion in new government spending over a decade, but that came alongside cuts to the Department of Transportation. Most of the $1 trillion in total infrastructure spending envisioned would come from non-federal sources – in large part the private sector – though details on these points remain scant.

With limited federal spending and an easing of environmental restrictions, the plan has had little appeal for Democrats, who have dubbed it a giveaway to Wall Street. Noting that privatised assets would require a revenue source, senate minority leader Chuck Schumer has said the plan would lead to the proliferation of “Trump tolls”, a hashtag-in-the-making that has since caught on among the president’s opponents.

Any major initiative will face the task of navigating this American political minefield. A plan could theoretically pass the House without a single Democrat in support, but any spending increase would draw opposition from more conservative representatives.

Convincing the public – as well as on-the-fence lawmakers – that private-sector engagement is the key to an infrastructure boom remains a daunting challenge. But while Trump continues on that path, asset recycling is an idea with clear momentum. ?