The Guidelines are also supplemented with following Annex:

• Sector-specific asset recycling guidelines for airports, power, roads, and ports sectors, including sector-specific due diligence requirements, sample risk allocation matrix and sample terms of reference (TOR) for selection of transaction advisors.
• Template for term sheet for a typical concession/ lease model for an asset recycling transaction.
• The range of bid parameters for a typical concession/ lease model for an asset recycling transaction.
• The bundling and unbundling criteria for assets considered for asset recycling transaction.
• The governance requirements of a project company (JV) for asset recycling transaction.

Options for utilization proceeds

The government entities may consider the following for utilization of proceeds from asset recycling:

• Re-investment of proceeds in greenfield assets.
• Re-payment of existing debt relating to the asset that is the subject of the asset recycling transaction (this would usually be a pre-condition of the lenders, unless the current lenders agree to continue their exposure to the project even after the private party takes over operations and maintenance of the project).
• Meeting operational expenditure for existing assets; and
• Provide financial support for technical assistance for future projects.

Considerations in utilization of proceeds

There are several considerations for utilization of proceeds from asset recycling:

• A good practice for government could be to specify the application of the proceeds raised from implementing an asset recycling program. This should include providing clarity as to the intended investment program for new infrastructure asset to be developed as well as the amount that is to be re-invested. This will help in:
  • Defining priority assets.
  • Provide visibility in meeting the funding gap for new infrastructure assets.
  • Ensure transparency and accountability in the application of sales proceeds; and
  • Assess objectively and retrospectively the success of the program, and accordingly calibrate the implementation of the asset recycling program.
• Re-investment within the Relevant Authority’s purview: The Relevant Authority may intend to retain the proceeds from asset recycling for re-investment in new/greenfield assets which are within the purview of the Relevant Authority. This mechanism incentivizes Relevant Authority to recycle assets to unlock capital.
• Allocation of proceeds to a separate fund: The proceeds from asset recycling can be allocated to a fund that is separate and distinct from the Relevant Authority’s balance sheet. The application of the fund should be transparently specified so that the public can be assured of long-term value creation through the re-investment of the proceeds in infrastructure assets. In some jurisdictions, this approach is used to de-politicize the monetization and application of the proceeds through asset recycling programs by enhancing accountability and transparency.
• Add to the strategic criteria for determining the use of proceeds:
  • Conforms to the Long-Term Strategy for Low Carbon and Climate Resilience 2050 and net zero pledges and the country’s Nationally Determined Contribution (NDC).

Asset recycling transactions involving a long-term concession or lease of an asset to a private partner constitute a long-term commitment by the private sector to operate and maintain, and sometimes redevelop and/or expand, a Relevant Authority's existing infrastructure project to deliver services to the public or the Relevant Authority. These activities are governed by the project agreements.

As a result, effective delivery of the transaction hinges on the ability of both the Relevant Authority and the private sector party to execute their responsibilities, as outlined in the project agreements. Even if a contract is drafted in accordance with international best practice and industry standards, the parties’ objectives may not be achieved if the contract is not underpinned by effective contract management and performance monitoring over the life of the project.

This calls for an effective approach for managing the project agreements / contracts at every stage of the project term.

Contract management overview

Contract management defines the processes and procedures which the contracting parties follow in order to: 

• meet their respective obligations; 

• demonstrate their compliance with these obligations to their counterparts; and  

• monitor the compliance of their counterparts with the counterparts' obligations. 

Collectively, these efforts are intended to ensure that the contracting parties work towards the project objectives.  Effective contract management ensures that the users of the project (the general public, customers, riders or, in some cases, the Relevant Authority itself) continue to obtain the services set out in the output specification of the project agreement. The contract management process should also set out relevant measures that can be used to monitor the risk profile of the project.  

This section details the guidelines for effective contract management, which will identify, monitor and manage all risks over the life of the contract to assist in achieving project objectives. 

For those projects deemed to have medium to high-climate related risks it is wise to include climate change / climate resilience expertise as part of the contract management team. 

1. Understand the stakeholders and the contracts

Prior to the contract management strategy being developed, the Relevant Authority should confirm an overall understanding of:

• The various stakeholders in the project agreements: the stakeholders include direct parties to the agreements as well as other parties (such as other government bodies and the local community) that have an interest in the project and the parties' performance of their respective duties and obligations.
• The express terms of the project agreements: the terms outline the powers, obligations and responsibilities of the parties to the contract. The understanding of the relationships between all parties is vital as each party may have conflicting goals that may not necessarily align to achieving the project objectives.

While the Relevant Authority must adopt an approach that is in line with applicable regulations and guidelines; there is no generic 'one size fits all' approach. Rather, the contract management approach must be developed for each specific project, in a manner consistent with project's specific characteristics and requirements.

For reference, the typical parties to a concession or lease agreement are shown in the diagram below.

Figure 7: Stakeholders in a Concession / Lease Agreement

The Private Sector may enter into an operations sub-contract under which it subcontracts its obligation to operate and maintain the asset to an operator. The operator either performs the maintenance activities itself, if it has the capability to do so, or it subcontracts these activities to the rolling stock and systems supplier.

The Direct Agreement is a tripartite agreement between the Relevant Authority, the private sector participant, and the lenders. It provides the lenders with some right to take over the project where the private sector participant has failed to fulfil its obligations under the concession or lease agreement. This can include in circumstances of insolvency as well as other serious breaches. It allows the lenders to ‘step-in’ and assume the role of the private sector participant to give it the opportunity to rectify the breaches to avoid termination of concession or lease.

As detailed under legal and commercial structuring options, there are potential variations from the basic structure illustrated above. These may include:

• Inclusion of ancillary agreements with subsidiaries and affiliates of the Relevant Authority.

• Use of a shareholders/ joint venture agreement as the primary agreement between the Relevant Authority and the private sector in case the transaction is structured as a joint venture.

   

2. Establish the contract management team

Under the project agreement, the private sector is contractually bound to deliver the required services in accordance with the standards defined in the contract. An effective contract management process is aimed at ensuring that the private sector delivers to the standards defined in the contract.

The Relevant Authority should establish a contract management team to monitor operations under the project agreements and undertake regular reviews and performance monitoring to ensure compliance with the agreements. The contract management team should consist of experienced personnel with relevant skill set to manage these contracts.

Team members should consist of a range of specialists and technical advisors, if required. The contract management team's initial role after contracts have been signed will be supervising the handover of the asset from the Relevant Authority to private sector in accordance with the contract terms.

After that, the team’s focus should be on ensuring management and operations of the asset (i.e., the availability of asset to users and delivery of the services) to the required standards. If the project scope includes significant capital expenditure, during these activities the contract management team may need to also monitor quality and timelines. However, it should be noted that as revenue risk falls mostly to the private sector, this should be done on a light touch basis. At the end of the contract period, the focus will shift to the handover of the asset from the private sector to the Relevant Authority.

The overall size and complexity of the project would be the key variable in determining the size and skill set required by the contract management team. The size and composition of the contract management team may evolve through the project lifecycle.

An overview of the types of skills required include:

• Business and product assurance
• Facilities and services management
• Statutory safety and regulatory responsibilities
• Asset management and maintenance
• Legal and regulatory; and
• Finance

3. Identify contract management team responsibilities

The contract management team should be headed by a project manager. The project manager should be an employee of the Relevant Authority, not an external advisor, and should have sufficient authority to carry out the role effectively.

The key responsibilities of the contract management team should include:

• Developing and implementing the contract management plan
• Ensuring that both parties meet their contractual obligations and ensuring performance specifications are achieved
• Monitoring private sector performance and enforcing remediation steps where necessary
• Administering institutional obligations and protect institutional rights in the contract
• Managing risks and preventing and/or resolving disputes; and
• Managing approved changes/variations

4. Develop the Contract Management Plan

The contract management plan should include the following:

• Describe required tools and processes – The contract management team should identify the necessary tools and processes needed to manage the contract during the lifecycle of the transaction (e.g., monitoring of performance standards). These tools and processes should be comprehensive and outline measures to identify potential risks. Consideration should be given to both the types of performance standards, the frequency of reporting and remediation steps if there is deficiency in performance. The tools and process must align with the project's performance monitoring approach as described in subsequent sections.
• Assess resource availability – Relevant resources to administer the contract management framework should be specified. Staff with the requisite expertise should be appointed at the Relevant Authority to be involved in the contract management process. This should be supported by financial resources (i.e., budget related to contract management) and technological resources (i.e. systems and software for monitoring the contract performance).
• Timeline for the development of tools and processes - The contract management plan should contain the timeline needed to develop and implement these tools and resources.

Environmental considerations for Contract Management Plan and Operation:

• Climate Risks Mitigation and Adaptation Plan for the whole concession period, that should be approved by the corresponding Relevant Authority, which is required to be updated
• Review and approval, of an Emergency Preparedness and Response (ERP) plan
• Maintenance plan that addresses climate risks
• Renewable energy, waste and water management commitments
• Bonds-related financing schemes for investments within concession scope must be green / social / sustainable labeled according to the ICMA principles

Gender Equality considerations for Contract Management Plan and Operation:

• Minimum commitment to gender equality in the total workforce
• Minimum commitment to gender equality in top management
• Gender Salary equality for similar positions
• Appropriate maternity/ paternity schemes

5. Monitoring and reporting strategy

An effective performance monitoring and reporting strategy has to incorporate the following elements:

• Understanding of the business environment and the objectives of the project contract – Definition of various performance measures hinges upon a solid understanding of the various elements contained within the project agreement.
• Understanding the private sector’s internal operating environment and management team – the Relevant Authority should ensure that it understands the business and cash flow model of the private partner’s business model.
• Timely quality measurement – the Relevant Authority should proactively and regularly monitor and measure the quality of service against predetermined KPIs and output specifications.
• Understanding all obligations of the Relevant Authority (if any) and the timelines for delivering on the same.
• Reporting the outcome of performance monitoring regularly. While the frequency of such reports would depend on the project, but typically, such reports should be prepared and shared with all stakeholders at least on a monthly or quarterly basis.
• Concession agreement should include obligations for environmental management, monitoring, and reporting to Relevant Authority that owns the asset, as well as required biannual reporting to local environmental agency on environmental instrument implementation (AMDAL/ RKL/ RPL or UKL-UPL).
• Annual sustainability report.

6. Performance monitoring process

The contract management team should develop a process to monitor performance. An illustration of a typical process for doing so is contained in the diagram below.

Figure 8: Performance Monitoring Process

If the failure to meet contractual requirements is persistent over time, the Relevant Authority should seek to understand the cause of this. If the failure is due to a contractual requirement becoming inappropriate over time, the contractual variations process should be activated. The contract variation process involves modifying the contractual requirements to align with the then current appropriate standards.

Performance monitoring should be carried out periodically. This can be carried out in the form of either reports or meetings, examination of financial data and inspections. The Relevant Authority will also reserve the right to carry out audits or surprise spot checks.

7. Penalties for Non-delivery in Asset Recycling

In addition to the payment mechanism employed in the project contract when the private sector is fully performing its obligations, the contract will also stipulate financial penalties and consequences for non-delivery of contractual services or standards. Such penalties are intended to incentivise the private sector to deliver outputs or services according to contractual standards. However, usually prior to activating such penalties, the Contract Management team would identify the lapses or shortfalls in service delivery, inform the private sector of the same and provide a certain rectification period within which the private party is expected to address these deficiencies.

8. Hand-back Procedure in Asset Recycling

At the end of the concession or lease term, there should be a set of obligations that both the private sector and the Relevant Authority have to fulfil. The contract management team needs to monitor the private sector’s compliance with the exit obligations under the transaction contract.

The contract management team should manage the handover of relevant documents and records. Further at this stage, the contract management team should plan for the continuity of service delivery and maintenance of service standards.

The project contract should include well-defined performance standards for the asset at the time of handover. In case of sub-optimal asset quality at handover, procedures should be defined to determine the assessment of actual quality and the rectification cost payable. This may involve an independent process to conduct handover checks.

9. Dispute Resolution in Asset Recycling

The Relevant Authority's contract management team should build agreed mechanisms for settling disputes into the contracts. A proper dispute resolution framework will lead to a quicker resolution of issues. There are a number of existing dispute resolution approaches which may be included in the project's dispute resolution framework:

• Discussion between both parties, including escalation to senior management of both parties
• Expert determination
• Mediation or conciliation; and
• Arbitration or courts.

It should be ensured that relevant disputes resolution clauses are incorporated within the project contract. The precise drafting of the dispute resolution clauses should be the responsibility of the legal advisor.

Typically, adjudication by an arbitral forum or courts of law will be considered as the last resort. An illustration of the way a dispute can be escalated under a dispute resolution clause is presented below. The details of any escalation process will depend on the details contained in the precise clause governing the contract.

Figure 9: Escalation Process of Dispute Resolution

This section presents different modes of financing an asset recycling finance. Private sector participants in an asset recycling transaction will be required to fund the upfront payment to secure the concession or lease. The private sector may also be required to fund any required capital expenditure to refurbish or re-develop the asset. This section discusses the financing options and instruments available to the private sector and provides the relevant Authority with an understanding of the criteria issues to ensure the bankability of any proposed asset recycling scheme.

Traditionally, public sources have been the main source of capital available for finance, including financial resources from multilateral development banks (MDBs), multilateral organizations, governments, infrastructure funds and aid agencies. However, the cost of mitigating and adapting to climate change increasingly outweighs the amount of public funds available, thus there is a global need to increase and capitalize funds from the private sector and private sources such as commercial financial institutions, philanthropic organizations, institutional investors, non-profit organizations, corporate actors, institutional funds, etc.

This finance gap has led to the introduction of blended finance, where public and private sources contribute to a single funding flow, helping to reduce investment risks for the private sector. The blended-finance refers to the targeted use of alternative financing for high-impact projects (i.e., large infrastructure projects) where actual or perceived risks are too high for commercial lenders to enter on their own. While the search and preparation costs associated with accessing this means of financing may not always make it economically feasible, especially for small projects, as a rule, for larger projects it is worth exploring options to apply for this type of funding.

There are different typologies of financial instruments which generally fall under four (4) main categories: i) debt instruments; ii) equity instruments; iii) credit enhancement instruments; and iv) risk transfer instruments.

Types of Financing Instruments

The selection of the adequate instrument and/ or finance provider will depend on the type of asset recycling project as well as the type of concessionaire/ private partner selected. In the following table, a list of different types of instruments per category are presented:

Table 8: Types of Financing Instruments 

Instruments that can reduce debt vulnerability risks while facilitating long-term investments would allow private sector to consistently take long-term risks into account.

Find guidelines, roles of tender committee and required documents to tender Asset Recycling Transaction.

Procurement guidelines 

The selection of a private partner through a tender process is the next step in the lifecycle of an asset recycling project involving a private operator. There are several milestones involved in this process. An illustrative process is mentioned below; however, this is subject to the applicable laws of the relevant jurisdiction:

The Relevant Authority should consider the following key principles when implementing the bidding process:

• Timeline management – The proposed bidding timeline should consider the availability of key decision makers at the Relevant Authority. To ensure efficiency, the Relevant Authority should adhere to the proposed timeline as much as possible. Uncertainty in bid timelines, repeated delays and ad-hoc extensions may discourage serious investors.
• High-quality bid documents - The Relevant Authority should invest sufficient time and effort into the development of a comprehensive bidding process and high-quality bid documents. The bid documents should include both the Request for Qualification (RfQ) and Request for Proposal (RfP) and the draft transaction agreement.
• Transaction resourcing – An asset recycling transaction requires sufficient resources to achieve the optimal outcome for the Relevant Authority. This should entail the allocation of appropriate staff empowered to make necessary decisions to advance the transaction, as well as the appointment of advisors.
• Transparency in bid process - While changes are normally expected during a tender process, significant changes in the transaction structure, scope and timeline and documentation may indicate a lack of preparedness or understanding of the market. If these are unavoidable, the Relevant Authority needs to communicate the rationale for these changes to ensure that confidence of potential investors is not adversely impacted. Conducting market sounding in advance of a transaction offers them the opportunity to plan and provide inputs before the formal bid process starts. The initial discussions followed by clear and reasonable timelines should result in a smoother bid process.

Key points to consider during the bidding process

The following key points should be considered during the bidding process: 

• Anti-corruption: Clear policy should be set out to manage perceived or actual corruption (if any). Measures for countering such activities should be developed in detail and laid out accordingly. All processes should have built-in safeguards for disclosure, clear disclosure of the applicable code of conduct, structured oversight, and internal and external audits.
• Disclosure – Conflicts of interest: Predefined guidelines should set out governing conflict of interest so that all parties are clear as to the rules. A conflict check should be conducted for parties involved in the bidding process, including transaction advisors, tender committee and Relevant Authority officials. Parties to the transaction should disclose any potential conflict between their personal and family interests as per the predefined guidelines.
• Code of conduct: Compliance with the code of conduct will be mandatory for all parties involved in the bidding process. The pre-qualified bidders will also sign this code of conduct to be developed by the Relevant Authority. The code of conduct should cover the following:
  • Protocol for communications between the bidder and the Relevant Authority (and its delegates including advisors).
  • Prohibition of collusions between separate bid teams; and
  • Timely disclosure of any conflict of interest.
• Audit: Audits should be conducted to ensure compliance, as per predefined guidelines/procedures. This is particularly important for the process of selection of the preferred bidder.
• Prohibited participants: A list of prohibited/blacklisted bidders should be maintained. These bidders should not be allowed to participate in the bidding process. The Relevant Authority may utilize any existing list it has for this purpose. The Relevant Authority should also consult with other relevant government procurement agencies to develop this list.
• Security environment: All bid-related documents should be kept confidential and in a secured environment to prevent espionage. This is the responsibility of all those responsible for handling bid related documents.
• Changes in composition of bidding consortia: Changes in consortia during the bidding process should only be permitted in compliance with the terms of the RfQ/RfP and, if so permitted, must be communicated to the Relevant Authority in writing, along with reasons for the change and its impact on the consortium.
• Bidder due diligence: The Relevant Authority should facilitate bidder due diligence by providing a data room containing historical information regarding the asset. In some cases, it may be considered more efficient for the Relevant Authority to prepare "due diligence reports" by the appointed advisers for inclusion in the data room. If the advisors are globally reputed firms and the reports are perceived as non-partisan, this would help the bidder due diligence process and provide potential bidders with confidence in the process.
• Site visits: Bidders should also be given adequate opportunity to conduct their own due diligence on the asset. The protocol for due diligence and site visits should be communicated in the bid documents.
• Bid validity period: A sufficient bid validity period should be specified in the bid documents. The duration should balance the need for certainty for the Relevant Authority while avoiding an overly long bid validity period that will impact investors’ perception of the deal and to price in a risk premium for an overly long validity period.
• Bid security/bond: A bid security/bond commensurate with the transaction size should be provided by bidders.

Role of Tender Committee 

In proceeding with tendering an asset recycling transaction, a tender committee should be formed. The functions of the tender committee include:

• finalization of bid documents (in case of changes in project/contract structure).
• evaluation of bids.
• selection of the final preferred bidder; and
• final negotiations.

The decision to form a tender committee is transaction-specific and at the discretion of the Relevant Authority. Generally, the Relevant Authority should mobilise an internal team for this function. However, for certain transactions the Relevant Authority may appoint representatives from external parties. Other members, such as legal, financial, or technical experts, who may be considered necessary for the project evaluation may also be appointed to the tender committee. Alternatively, they could provide their expertise to the tender committee as external experts or advisors.

In case of material changes to the transaction structure, the tender committee also needs to ensure that the Relevant Authority agrees with any revised risk allocation and contractual terms. A formal approval from the Relevant Authority is required where there are material changes to the previously agreed transaction structure or scope.

Outline of the main steps in the tendering process

In the tendering process of an asset recycling transaction, the following steps are required:

At the project preparation stage, the Relevant Authority should conduct the following activities:

• Recruit and engage advisors, including financial, technical, legal, and other advisors (such as, accounting and taxation, and environmental and social).
• Conduct asset due diligence, including technical, commercial, financial, environmental, social, legal and accounting, and tax due diligence.
• Develop the transaction structure, including an evaluation of ownership models and developing the risk allocation and commercial principles; and
• Conduct market sounding exercise.

Project Preparation Overview

The following represent details of the activities that the Relevant Authority should conduct during their Project Preparation for Asset Recycling:

Find samples of Asset Recycling Transactions from around the world.                                                                                              

Asset Selection Process

In selecting an appropriate asset as the subject of an asset recycling transaction, the Relevant Authority should consider five (5) key parameters; being (i) operational, (ii) financial/ commercial checks, (iii) legal and regulatory, (iv) early-stage market testing, and (v) and social and environmental. Against each parameter, the Relevant Authority should apply the relevant checks as set out below:

Operational Checks

The Relevant Authority should check the following from an operational perspective:

The asset should meet the following criteria:

• Historical operations - the asset should already be operational to enable an assessment of its operational and financial track record.
• Remaining life - the asset should have an adequate remaining life to ensure that the private sector can generate sufficient return on its investment. In addition, the remaining life of the asset may also be impacted by climate related risks that may shorten its effective life.
• Scope for operational efficiencies - scope for improvement or innovation by the private sector partner in terms of operational efficiency or effectiveness (including those related to energy consumption).
• Climate risks - The Relevant Authority should assess how climate risks may affect the potential asset recycling transaction. If left unmitigated, the adverse effects of climate change may impact the operational, financial, environmental, and social performance of large, fixed infrastructure assets. The climate risk assessment at this stage can be considered on the basis of a high-level assessment, or ‘screening’ of the risks compared to the preliminary technical, economic, and financial assessments conducted. An asset recycling transaction with high climate risk might be determined as too risky. The following high-level assessment are recommended as an initial assessment of an asset recycling transaction, prior to making further investment in acquiring permits or conducting more in-depth assessments:
  • Screening-level assessment of climate-related risk exposure;
  • Screening-level assessment of project vulnerability; and
  • Screening-level assessment of the overall climate risk profile: assessment of GHG emissions baseline of the asset.

Financial/Commercial Checks

The following commercial and financial reviews should be considered to determine if an asset has the potential to be recycled.

The key factors to consider are:

• Historical cashflows: the asset should be supported by positive historical cash flows.
• Revenue generating potential: the asset should, over the remaining life assessed based on the demand forecast, tariff setting and the impact of government policies, be able to generate positive cashflow for the private sector party.
• Sustainability of debt serviceability: the revenue generated by the asset, depending on leverage used to finance its investment, should be able to service debt obligations.
• Capital generation: ability to generate sufficient funds from an upfront fee, periodic payments by the private partner, shared profits or dividends, or other revenue sharing modalities.

Legal and Regulatory Checks

The following checks should be undertaken on the asset:

• Legal compliance: full compliance with applicable regulatory requirements; if not, the transaction preparation will require the remediation of any non-compliance.
• Litigations and claims: not subject to any current or threatened disputes, claims or other legal liabilities, such as, disputed land ownership or associated arrears, history of adverse environmental impacts and associated liabilities, as this will likely raise concerns from potential investors and adversely impact the attractiveness of the transaction to the market.
• Other legal risks identification: The Relevant Authority should review legal risks which may affect the asset and transaction including required licences for the private sector to hold and operate the asset, if applicable, and any existing rights applicable to the transfer or assignment of material agreements; transfer of staff.

Social and Environmental Checks

Social and environmental due diligence and considerations, and corresponding mitigation measures, should also be taken into consideration in the asset selection process. These should include consideration of matters relating to environmental as well as social impacts such as relocation of communities and/or employee retrenchment.

Case Studies on Asset Recycling and Selection of Assets

Concession and Lease Models

Infrastructure is pivotal to sustainable development with positive impacts on the economy, environment and society if implemented correctly. Each piece of infrastructure asset should not be viewed on a standalone basis (such as a power plant, an airport, a road, or a water facility), but as part of an ecosystem comprising of a portfolio of assets that collectively support the SDGs. 

Given the fiscal constraints and higher upfront costs associated for developing low-carbon infrastructure and transitioning away from carbon-intensive infrastructure, public budget alone will be insufficient to fully fund the infrastructure needs. The COVID-19 pandemic has seen severe pressure on public budgets as governments have re-directed the resources to address the fall out of the pandemic. 

Given so, governments must find alternative sources of funding for infrastructure investments; a well-implemented asset recycling program presents as an option to monetize invested capital to meet the infrastructure development needs. 

This set of Asset Recycling Guidelines have been developed to support governments in selecting, preparing, and delivering asset recycling transactions, with a focus on long-term concession and lease models only. The Guidelines have been drafted to provide a systematic and consistent approach to facilitate asset recycling transactions under these models.  

The Guidelines have been prepared with the assistance of KPMG. They were not prepared with any specific transaction in mind and were meant to serve only as general guidance.  It is therefore critical that the Guidelines be reviewed and adapted for specific transactions. 

This section of PPPRC focuses on two main areas: 

• Asset Recycling Projects: Practical Guidance on Asset Recycling Projects

• Asset Recycling Programs: A Long-Term Structured Approach to Asset Recycling

Governments around the world are increasingly looking at improving the quality of infrastructure and delivering improved services to the community. Infrastructure investment is crucial to the on-going economic prosperity and development of any country. For most countries, to meet the substantial infrastructure investment capital needed to fund an infrastructure program, there is a need to unlock multiple sources of funding to ensure that current developmental momentum can be sustained.  

This is in line with the commitment of Governments under the Paris Agreement's ambitious target to protect and sustain ecosystems addressing climate change adaptation and mitigation as well as achieving the Sustainable Development Goals (SDGs), by fostering sustainable infrastructure solutions that deliver low-carbon development pathways. 

Infrastructure is pivotal to sustainable development with positive impacts on the economy, environment and society if implemented correctly. Each piece of infrastructure asset should not be viewed on a standalone basis (such as a power plant, an airport, a road, or a water facility), but as part of an ecosystem comprising of a portfolio of assets that collectively support the SDGs. 

Given the fiscal constraints and higher upfront costs associated for developing low-carbon infrastructure and transitioning away from carbon-intensive infrastructure, public budget alone will be insufficient to fully fund the infrastructure needs. The COVID-19 pandemic has seen severe pressure on public budgets as governments have re-directed the resources to address the fall out of the pandemic. 

Given so, governments must find alternative sources of funding for infrastructure investments; a well-implemented asset recycling program presents as an option to monetize invested capital to meet the infrastructure development needs. 

With tightening fiscal constraints and the high upfront costs associated with building new infrastructure and carbon transition, public budget alone will not be sufficient to fund the current and growing infrastructure needs across EMDEs. While governments have raised debt to fund infrastructure developments, the servicing of these debts may require the raising of taxes. In addition, at times the financing required for infrastructure is being diverted to other social programs such as healthcare and welfare. 

In addition, there are increasing expectations for service standards delivered by public infrastructure assets. Optimal asset utilization requires expert planning, implementation, and monitoring of the infrastructure asset through well-defined service standards. However, many governments face a shortage of requisite expertise and resources in the efficient management and delivery of public infrastructure assets. 

To this end, governments must find alternative sources of funding for infrastructure investments, to complement broader strategy for financing the infrastructure sector and private participation; a well-implemented asset recycling program presents an option to monetize invested capital to meet infrastructure development needs. Many countries are exploring asset development of new infrastructure assets. 

Asset recycling broadly consists of two important and interlinked components: (1) the monetization of existing infrastructure assets (brownfield assets) and (2) the subsequent reinvestment of proceeds obtained from the monetization to develop new infrastructure assets. 

• The development of new infrastructure needs in EMDEs are estimated to require between 2% - 8% of a country’s gross domestic product (GDP) per year until 2030.
• In addition to the investment needed for new infrastructure, an additional 2.7% of GDP each year is also required for the operation and maintenance (O&M) of existing infrastructure.
• An additional 3% of GDP is required for rehabilitation, expansion, and capital improvements of existing infrastructure assets to incorporate climate resilience.