Increasingly, governments are looking for creative ways to pay for infrastructure, including through Land Value Capture (LVC) and Commercial Value Capture (CVC), as a means to go beyond the traditional “user pays’ or “government pays’ funding models. LVC has significant potential for providing alternative funding for infrastructure. The concepts surrounding, and implementation of, LVC is the subject of extensive analysis in the literature.¹ CVC is far less extensively considered, and therefore will be the primary focus of the Guidelines. 

CVC can be a way for governments to increase revenues, to fund for example new projects, facility improvements, service expansion and/or improved asset maintenance, without increasing taxes or user fees. CVC revenues have, in many instances, proven to be successful in mobilizing additional funding for various infrastructure projects and help deliver better quality of public service. 

Although CVC is most common and well-established in urban transit, it can be relevant for a number of sectors including but not limited to urban services, public housing, government offices, hospitals, schools, libraries, stadiums, street lighting, parking facilities, airports, telecom services, urban renewal projects, parks, wastewater treatment, solid waste treatment and conservation areas.  

Governments play a critical role in maximizing CVC opportunities in infrastructure projects. By planning for spaces and places that create commercial opportunities and tapping into private sector expertise, governments will be in a far better position to explore and maximise the revenue generating potential of infrastructure. There is great value in engaging with the private sector in the early stages of project development, to get input on project design and assess CVC potential. Communities/stakeholders can play an active role in identifying and implementing CVC opportunities where they have the opportunity to voice their needs and have those needs incorporated in the project design.

Over-reliance on CVC revenues and excessive optimism in relation to demand increases over time can cause project delays or failures. For example, in some cases, projects rely heavily on CVC (in particular real estate driven) revenues. This can be a risky proposition, in particular where real estate values do not attain the levels expected, or where projected demand growth and improvements in footfall are not achieved. This drop in revenues, where CVC under-delivers, can undermine the financial viability of the project and lead to its failure. For this reason, thorough preparation of CVC is critical. These Guidelines will help mitigate these risks and deliver better CVC outcomes.

Opportunities for application of CVC are many. While such applications are increasing with time, this report showcases six, non-exhaustive, broad categories of CVC application: (i) commercial associated with core-services; (ii) commercial activities within the footprint of the infrastructure; (iii) asset and resource optimisation; (iv) leveraging green-house gas emissions reduction; (v) repurposing or adapting/reusing idle assets; and (vi) commercial activities outside of the footprint of the infrastructure . However, not all projects can or should mobilize CVC, a cost benefit analysis is critical to test whether CVC should be pursued, in each case. The cost benefit analysis is not just about commercial and financial viability, but should also consider legal and regulatory constraints to assess the extent to which CVC should be implementable.

In addition to the cost benefit analysis of possible CVC opportunities, a few key principles should be considered when assessing CVC potential:

Objectives – Commercial revenues must never take the focus off infrastructure services. The provision of core services is the primary reason for investing in infrastructure development. Non-core services are meant to complement core services and improve the end-user experience. Project developers are easily distracted by non-core activities generating commercial revenues. 

Comprehensive planning – Governments can apply a comprehensive planning approach that creates commercially-driven demand for integrated solutions by identifying the broader needs of users and beneficiaries within a community. Comprehensive planning looks at the infrastructure project in the context of other infrastructure sectors, local communities, national and local strategies and the dynamics of economic development. Through such models, CVC becomes a natural extension of community and national development, leveraging investments across the spectrum and providing commercial investment to further improve user experience and generate new cash flows to pay for infrastructure investments.

Impact on project design – Increasing commercial activities may also increase infrastructure service requirements and the right balance must be achieved without compromising the service level of the core infrastructure, for example where retail services are to be delivered within the footprint of the infrastructure, this may result in higher footfall, more traffic, more need for parking, more restroom facilities, etc. These additional demands must be included in the design of the infrastructure, potentially increasing the footprint of the infrastructure. While this increase in demand creates something of virtuous circle, developers will need to be sure that space fo these additional services and financing for the increased infrastructure services are sufficient.

Demand-driven – Similar to core services, the provision of CVC needs to be demand-driven. Like any other commercial investment, the design of CVC must follow consumer demand. CVC should not be designed based only on Government strategy or priorities only. There is always a risk when forecasting project fundamentals that demand will be exaggerated, undermining the sustainability of the project. 

Ease of implementation –CVC opportunities should enhance project implementation (e.g. improving user experience, providing better services for the community, creating job) by increasing buy-in from key stakeholders. While CVC is likely to increase project complexity (by adding additional scope of work to deliver), the developer should ideally avoid CVC making a project significantly more complex to the point that risk of failure of the project reaches unmanageable levels.  

Co-benefits –CVC can provide various co-benefits (economic growth, jobs, community development, climate mitigation, reduced subsidies), which should be encouraged. But these co-benefits may require additional investments and therefore cost more money. The project with CVC should be more financially viable than without CVC, even accounting for co-benefits.

Guidelines for applying CVC in infrastructure projects

Governments should consider CVC during early planning processes and later during the project preparation stage. Failure to engage early on CVC will limit opportunities and may undermine success of CVC opportunities.

The Guidelines for applying CVC in infrastructure projects have been designed to help and guide planning agencies and Project Owners in analysing key parameters to implement CVC across a portfolio of projects or for individual projects.

The Guidelines include six key steps as follows: 

1. Identifying potential CVC for projects
2. Assessing readiness of enabling environment to support CVC
3. Conducting technical assessment of CVC
4. Assessing commercial feasibility of CVC
5. Planning for implementation of CVC
6. Assessing and mitigating CVC related risks

The Guidelines can be used in a flexible manner, to assess individual projects and for program-level assessment. The Guidelines may therefore be used differently by different parts of governments.

Visit the Innovative Revenues for Infrastructure sections below or check the Content Outline.

Footnote 1: World Bank, Finding Innovative Sources of Revenues for Infrastructure (2022), Financing Transit-Oriented Development with Land Value, Flood Protection and Land Value Creation (2015), Unlocking Land Values for Urban Infrastructure Finance (2021): International Experience (2013), The Municipal Public-Private Partnership Framework – Module 16: Harnessing Land Value Capture (2019)

Watch this space. The Guidelines on Innovative Revenues for Infrastructure (IRI) is intended to be a living document and will be reviewed at regular intervals.

Visit the Content Outline to find out more, or let us know what you think by taking a Quick Survey.

Roll-out of CVC

Given the different contexts of each country, there are different scenarios for how CVC can be rolled out.

• In some countries, Project Owners need to be creative and take initiative to maximize CVC in individual projects without a highly structured approach or programmatic support by planning agencies. In these cases, the Guidelines can be applied in a few individual transactions to consider CVC opportunities in the feasibility studies. The lessons learned from pilot implementation can be used to help roll out CVC in other projects.
• In other countries, it is more effective to use a programmatic approach to apply CVC in infrastructure projects with planning agencies or a PPP unit playing a leading role. In these cases, the Guidelines (Steps 1 and 2) can be applied to assess the enabling environment and identify gaps to improve the enabling environment at the country level, identify projects with high potential for CVC and roll out CVC across projects with high CVC potential first. 

The roadmap below (Figure 14) covers a scenario where planning agencies, MOF, PPP unit take a programmatic approach to roll out CVC across a portfolio of projects. The roadmap includes: 

• Considering CVC as an integral part of infrastructure funding policy
• Guiding Project Owners to maximize CVC in individual projects at the project preparation stage (See Annex 4)
• Providing implementation support
• Monitoring and evaluating value-for-money from CVC post project implementation to ensure the policy objectives of CVC are achieved, including reducing infrastructure funding gaps and therefore fiscal support/commitment and liabilities as well as user fees. 

Figure 14: A roadmap for programmatic roll-out of CVC

Governments should consider possible innovative funding opportunities during early planning processes (at program and project level) and project preparation stage (at the Pre-Feasibility Study or Outline Business Case stage), to make sure that planning does not unnecessarily limit, or fail to identify and capture CVC opportunities. 

When making an early stage CVC assessment, a number of practical questions need to be raised on a preliminary basis to identify key demand, risk and challenges, and to avoid over-optimism. The Hyderabad Metro PPP project in India (more on this case in Box 2) is an example of a project that suffered from optimism biases, assuming more advantages from CVC than the project can deliver. 

While early CVC assessment improves likelihood of success and value of CVC revenues, in practice, projects may require just-in-time design leaving little time for early CVC assessment. CVC may need to be incorporated in a project at different stages of project preparation or even during implementation. The timing for integrating CVC into a project can thus vary based on specific circumstances of each project. 

Three potential scenarios for incorporating CVC are:

Scenario 1: Early consideration of CVC in project planning and design.

CVC opportunities can be identified at project planning and design stage. This scenario is ideal as CVC can be optimized at early design stage and the Project Owner has the flexibility to structure the contract that fits best with the project’s characteristics and in a way that ensures effective coordination amongst project contracts. 

Scenario 2: Including CVC opportunities during the PPP process. 

In some cases, CVC opportunities might be identified after the concessionaire for the core service has been selected or when a PPP contract for core service has already been signed and the project is already under implementation, or may be proposed by a bidder where the Project Owner had not contemplated CVC. While not the most efficient manner to add CVC, this approach is often the most practical. The parties will need to amend the project contracts to allow for the CVC, regulate its delivery and share revenues.

Scenario 3: Reverse engineering CVC into an existing project 

In some cases, the Project Owner may realize the potential for CVC opportunities after project works have already been completed. In such case, CVC can be incorporated in the project by reverse engineering CVC into the existing project design. This scenario will be easier if the identified CVC opportunity does not require major change to existing project design. As above, the parties will need to amend the project contract, regulate its delivery and share revenues.

Consideration should be given to whether to include commercial activities and core services in a single contract or separating them into two (or more) contracts. Having two operators in one project can benefit the Project Owner if the operator responsible for core services has strong technical expertise but limited experiences with commercial activities. A second operator would manage commercial activities under a CVC contract. However, this scenario can lead to lack of coordination or competing interests if the contractual terms for both contracts are not fully aligned. See Box 4 for an example where CVC is tendered as a separate contract from the contract of the core service operator.

Box 4: CVC contract is issued separately from core service

Intercity Motorway

Background: Rest areas are an essential part of any Intercity Motorway. They are designed to enhance the convenience of motorway users, increase road safety, and provide employment and revenue generating opportunities for businesses, such as retail and food and beverage (F&B), which can benefit from a steady flow of demand from the traffic on the motorway. 

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Structuring of CVC in the project: The feasibility study report for the motorway was first conducted in 2003, during which opportunities for commercial rest areas were identified. The motorway was constructed with plots of land specifically allocated for future rest areas. The operation and maintenance of the motorway was tendered out as a PPP contract, the bidder with expertise in transport system operation was selected and a PPP contract signed during 2020-2021. At around the same time the PPP for core services was being prepared and tendered, the Project Owner conducted a separate feasibility study for the rest area component. The PPP for the rest area component is structured as a separate contract and expected to be tendered in 2024. The selection criteria for the rest area operator puts emphasis on commercial expertise. 

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Source: Department of Highways, Thailand¹

The Guidelines for applying CVC in infrastructure projects (the ‘Guidelines’) have been designed to help planning agencies/MOF/PPP Unit and Project Owners to consider CVC across portfolio of projects or in individual projects.

Objectives

The Guidelines provide governments (national, regional and local) an approach to identify, consider and analyse potential CVC opportunities in infrastructure projects. The Guidelines intend to help answer simple questions: 

• Are CVC opportunities allowed to be included in the project? What would need to change to allow CVC?
• Which CVC opportunities are potentially relevant?
• How can CVC opportunities be included in the project?
• Of those CVC opportunities, which are most technically, commercially and politically viable?
• Is it commercially sensible to include CVC opportunities in the project? Would the benefit from CVC opportunities outweigh the cost? 

How to use the Guidelines

The Guidelines include six key steps as shown in Figure 13 and each step is discussed in further details in the following section. These steps include: 

1. Identify potential CVC
2. Assess readiness of enabling environment to support CVC
3. Conduct technical assessment of CVC
4. Assessing commercial feasibility of CVC
5. Planning for implementation of CVC
6. Assessing and mitigating CVC related risks

The Guidelines can be used in a flexible manner as different parts of governments may have a different focus on CVC, for example: 

• For project-level assessment, if a Project Owner conducts step 1 and step 2 of the Guidelines and assesses that policy, legal and institutional preparedness suffers from specific short-comings, reforms to address those short-coming will need to be coordinated with project and CVC implementation, for example
  • short-comings may require the Project Owner to change the design of the CVC, possibly removing an element or changing its functionality;
  • other shortcomings are easier to resolve in a timely manner or are so fundamental to the project that they need to be resolved for the CVC to move forward. The Project Owner can resolve these shortcomings while the project is prepared. There is of course a risk that a delay in resolving the shortcomings might derail the CVC or the entire project. This risk of delay will need to be addressed in the CVC design and implementation;
  • Some short-comings are so fundamental and difficult that the whole CVC effort needs to be cancelled entirely or until the short-coming is resolved.
• Where the Guidelines are applied for project-level assessment, the Guidelines should help Project Owners answer two fundamental questions in a lucid manner:
  • Does CVC have net commercial benefits, and so maximise potential revenues from the project?
  • And if so, is the CVC mechanism potentially implementable?
• The Worked Examples in Annex 1 demonstrate how the Guidelines can be applied at the project level.
• The Guidelines are not a substitute for a detailed feasibility study and are best used to supplement the full feasibility study.
• The Guidelines only cover up to project preparation stage and do not include guidance on the bidding and implementation stages. 

Figure 13: Six-step process to consider CVC in infrastructure projects 

Footnote 1:  Bang Pa-In – Nakhon Ratchasima Intercity Motorway Project (M6)

In this section you will find more about the context of and the need for Innovative Revenues for Infrastructure (IRI), challenges faced by governments in funding infrastructure gap, the role and potential of IRI and CVC  in closing the funding gap, the role of government in streamlining CVC, what are the potential CVC opportunities in infrastructure projects and core principles to consider when applying CVC in projects.

To find more, visit the Guidelines on Innovative Revenues for Infrastructure (IRI) sections below:

The Guidelines are intended to be used by practitioners who are looking for innovative ways to address and reduce infrastructure funding gaps (and therefore fiscal contributions/liabilities), diversify revenue sources from user fees, and/or help build a better business case for infrastructure projects (commercial value capture or CVC). Such interested parties include:

1.     Planning agencies 

2.     Ministries of Economy and Finance 

3.     Central agencies responsible for managing Public Private Partnership (PPP) programs or PPP Units

4.     Project owner(s) (“Project Owner(s)”) are defined for the purpose of this report as agencies or entities that have the right to develop and deliver public services including but not limited to:

• Infrastructure line ministries or agencies (e.g. the Ministry of Transport, Department of Transport, etc.)
• State-owned enterprises (SOEs)
• Specialised agencies responsible for infrastructure development such as those responsible for asset recycling programs, or special economic zone development
• Local governments
• Private developers

The Guidelines aim to inspire governments and Project Owners to identify CVC opportunities, and to provide a framework to implement CVC opportunities. They are intended to be aspirational and operational rather than detailed and exhaustive. Governments and Project Owners are encouraged to be creative and develop solutions suitable to each country and project context.  

Structure of the Guidelines

• Section 1 provides a background to the report, its intended purpose, as well as the limitations of the report.
• Section 2 introduces the reader to the context of and the need for CVC, the role and potential of CVC in closing the funding gap, the role of government in streamlining CVC, potential CVC opportunities in infrastructure projects, and core principles to consider when applying CVC in projects.
• Section 3 provides practical guidance for implementing CVC at the program- and project-level, a roadmap to roll out CVC programmatically across a portfolio of projects and recommendations for including CVC as part of the pre-feasibility and feasibility study.

The report includes three Annexes to provide additional resources to help practitioners apply CVC. 

• Annex 1 provides five generic Worked Examples which help demonstrate how The Guidelines can be applied to real-world projects. All Worked Examples presented in this report are hypothetically recreated solely for the purpose of demonstrating the concept of CVC.
• Annex 2  100+ Case Summaries with examples of commercial value capture in various sectors, countries and CVC categories
• Annex 3 provides recommendations in drafting ToRs for pre-feasibility and feasibility studies.

To find more, visit the Guidelines on Innovative Revenues for Infrastructure (IRI) sections below:

Commercial Value Capture (CVC):

CVC can be a way for governments to increase revenues to fund facility improvements, expand services and/or asset maintenance without increasing taxes or user fees. CVC revenues have, in many instances, proven to be successful in mobilizing additional funding for various infrastructure projects and help deliver better quality of public service. However, optimism bias and over-reliance on CVC revenues could also result in project delays or cancellation. 

Annex 2 features over 100 case summaries of commercial value capture, categorized by sector, country, and CVC category. It is designed to provide a framework and aspirational ideas that can help government planners approach CVC opportunities in a practical way. 

Concept of CVC:

• Public infrastructure creates opportunities for increased, improved, or different commercial activities in various places and spaces.
• Commercial activities generate new or additional revenue streams
• Government capture a fair share of the value created to fund the infrastructure

Stakeholders' Role:

• Government can plan for spaces and avenues that create commercial opportunities and tapping into private sector expertise
• Government can encourage CVC throughout project development (planning, designing of rights to be concessioned, design of procurement bid process)
• The private sector is typically better positioned in exploring and delivering commercial activities
• Communities/stakeholders can play an active role in identifying and implementing CVC opportunities. 

Core Principles:

• Commercial revenues must never take the focus off infrastructure services
• Government can use a comprehensive planning to create demand for integrated solutions
• The right balance must be achieved without compromising the service level of the core infrastructure
• CVC need to be demand-driven
• Revenue should be directed back to funding core services
• CVC opportunities should avoid making a project more complex.
• CVC can offer various  social and economic co-benefits not just financial benefits

Sectors:

To find more, visit the Guidelines on Innovative Revenues for Infrastructure (IRI) sections below:

The PPPRC Asset Recycling Section     

Executive Summary                                            

The Case for Asset Recycling

Guidelines for Asset Identification

Asset Recycling Models

• Direct Contractual Agreements
  • Casestudy
• Divestment
  • Casestudy
• Infrastructure Asset-Backed Securitization (IABS)
  • Casestudy
• Infrastructure Investment Trusts (InVITS)
  • Casestudy 

Checklists for Asset Recycling

I. ASSET RECYCLING PROJECTS

Asset Recycling: Decision Maker’s Notes

Project Preparation

• Engaging Advisors in Asset Recycling
• Due Diligence Process in Asset Recycling
  • Technical Due Diligence in Asset Recycling
  • Commercial Due Diligence in Asset Recycling
  • Financial Due Diligence in Asset Recycling
  • Legal Due Diligence and Review in Asset Recycling
    • Review of Legal and Regulatory Context
    • Descriptive Legal Due Diligence
    • Prescriptive Legal Due Diligence
  • Accounting and Tax Due Diligence in Asset Recycling
  • Environmental and Social Due Diligence in Asset Recycling
  • Asset Valuation Methodology
• Guidelines for Legal and Commercial Structuring Options
  • Ownership Models in Asset Recycling
  • Risk Identification and Allocation in Asset Recycling
  • Commercial Principles in Asset Recycling
  • Multi-asset Procurement (Asset Bundling) in Asset Recycling
• Market Sounding in Asset Recycling

Tendering Process

• Request for Qualification (RfQ) in Asset Recycling
• Request for Proposals (RfP) in Asset Recycling
• Managing the Bid Process in Asset Recycling
• Bid Evaluation and Award in Asset Recycling
• Contract Finalisation in Asset Recycling
• Towards Financial Close in Asset Recycling

Financing Options and Instruments

Contract Management  

Utilization of Proceeds

II. ASSET RECYCLING PROGRAMS

What is the roadmap for Asset Recycling?

Define the Asset Recycling Program

• Create the Necessary Setting (Public Sector Governance of Asset Recycling)

• Create Momentum

• Monetize Asset / Transaction Process

• Reinvest Proceeds

• Monitoring the Asset Recycling Program

Re-investment

• Re-investment Mechanisms

• Critical Factors for Re-Investment Mechanisms

III. ANNEX IN ASSET RECYCLING 

Airport Module

• TOR for Transaction Advisors for Airport Development
• Risk Matrix for Airports 

Power Generation Module

• TOR for Transaction Advisors for Power Generation Development
• Risk Matrix for Power Generation

Toll Roads Module

• TOR for Transaction Advisors for Toll Roads Development
• Risk Matrix for Toll Roads

Ports Module

• TOR for Transaction Advisors for Ports Development
• Risk Matrix for Ports

Sample Term Sheet

Bid Parameters

Bundling and Unbundling Criteria

Elements for Governance of Project Company (JV)

IIII. CASE STUDIES IN ASSET RECYCLING

• Infrastructure Asset Recycling: Insights for Governments and Investors
• India National Monetisation Pipeline (NMP)
• New concession model introduced to monetise existing Government/SOE infrastructure assets
• Asset selection for toll-operate-transfer (TOT) model of road asset monetization, India
• Sample Transaction Documents, TOT Model, India

V. ASSET RECYCLING GUIDE TOOLS AND REFERENCES

Explore Modules and Sections:

Find Tables, Figures, Boxes and Tools in Asset Recycling below.

Tables

Table 1: Models of Asset Recycling

Table 2: Key Elements in Drafting Terms of Reference

Table 3: Asset Due Diligence Checklist

Table 4: Scope of Descriptive Legal Due Diligence

Table 5: Asset Valuation Methodologies

Table 6: Key Parameters to Consider for Multi-asset Bundling

Table 7: Key Evaluation Criteria for RfQ Stage

Table 8: Types of Financing Instruments

Figures   

Figure 1: Advisory Services for an Asset Recycling Project

Figure 2: Commercial Due Diligence Coverage

Figure 3: Financial Due Diligence Coverage

Figure 4: Legal Due Diligence Coverage

Figure 5: Structure of Concession/ Lease Model

Figure 6: Structure of Joint Venture Model

Figure 7: Stakeholders in a Concession / Lease Agreement

Figure 8: Performance Monitoring Process

Figure 9: Escalation Process of Dispute Resolution

Boxes 

Box 1: Case Study on Asset Recycling Initiative in Australia

Box 2: Case Studies from India and Indonesia

Box 3: Descriptive Legal Due Diligence

Box 4: Prescriptive Legal Due Diligence

Box 5: Special Considerations for JV Structure

Box 6: Common Risk Categories

Box 7: Case Study on Lessons Learned from Asset Recycling Initiative in Australia

Box 8: Case Study on Sample Transaction Documents of TOT Model

Box 9: Case Study on Innovative Financing in Peru

Box 10: Case Study on the Utilization of Proceeds from Asset Recycling

Module 9 of the Annex in Asset Recycling.

Financing is a process of providing funds for business activities, making purchases, or investing. Conventional finance achieves this by leveraging the time value of money (TVM) whereas Islamic finance generally achieves this by leveraging the income stream generated from an underlying asset or commodity. By its nature, Islamic finance involves using traditional investment techniques and structures (that comply with the principles of Shari'ah) to leverage the income stream generated from an asset or commodity thus creating arrangements that work in ways that are analogous to, and which achieve the economics of, modern conventional finance. This is what is meant when Islamic finance is described as being "asset-based" financing.

Islamic finance is also often described as involving (even requiring) "risk-sharing". As profit cannot be pre-determined or assured, an Islamic financial institution must assume part of the risks of a given transaction. The financier's assumption of some commercial risks (as opposed to credit risk) relating to the underlying asset will be necessary to ensure Shari'ah compliance. On the other hand, a financier in a conventional financing will seek to ensure that, so far as possible, it does not take on any commercial risk relating to the borrower or the asset it is providing finance for. Find more below, or visit the Guidelines for Implementing Asset Recycling Transactions section and Content Outline, or Download the Full Report.

Module 8 of the Annex in Asset Recycling.

Climate finance has a central role in enabling sustainable transitions to a low-carbon, climate resilient future and asset recycling transactions may benefit from this alternative source of financing. This Annex provides key guidance for both public sector project owners (in charge of structuring and tendering the asset recycling transaction) and the private sector (selected private investors or Concessionaire) for mobilizing climate finance.  Check the Guidelines for Implementing Asset Recycling Transactions Section Overview and Content Outline, or Download Full Report for more.