The Case for Asset Recycling

There are three key reasons for implementing an asset recycling program; namely to: (i) meet infrastructure investment needs and gaps (ii) alleviate constraints in raising financing and funding (iii) leverage private sector efficiencies for better service delivery of existing infrastructure assets.

Figure 2: Why is there a need for asset recycling?

Infrastructure Investment Needs and Gap

Investments in infrastructure are important for promoting economic growth and meeting the 2030 Sustainable Development Goals (SDGs), especially in EMDEs. These existing investment requirements in infrastructure in EMDEs have been compounded by the need to address climate change. 

• New infrastructure investments: The development of new infrastructure is estimated to require between 2- 8 percent of a country’s gross domestic product (GDP) per year until 2030 to achieve infrastructure-related SDGs. With the right policies, an average annual investment of 4.5 percent of GDP will enable EMDEs to achieve the SDGs and stay on track to limit climate change to below 2°C.

Table 1: Average annual cost to develop new infrastructure (billion USD) in EMDEs

Source: The World Bank Group

• Maintaining existing infrastructure: Beyond the investments in new infrastructure, resources are also required for the operation and maintenance (O&M) of existing infrastructure to ensure sustainability and longevity over the entire lifecycle. This costs EMDEs an additional 2.7 percent of GDP each year.
• Rehabilitation and expansion of infrastructure assets and capital improvements to ensure climate resilience: The need for funds for the development and O&M of infrastructure assets is further compounded by the requirements of rehabilitation, expansion, and resilience to climate change in existing infrastructure projects. An additional upfront capital investment of 3 percent of GDP is required to build climate resilience into infrastructure.

Financing and Funding Constraints 

The demand for infrastructure, driven by population growth and an accelerating rate of urbanization, has resulted in rising public debt. Furthermore, with tightening fiscal constraints (see Figure 2 below) and higher upfront costs associated with transitioning away from carbon-intensive infrastructure, public budgets alone are insufficient to fund the current and growing infrastructure needs across EMDEs. 

The global economy is unable to sustain the trend due to rise in inflation, geopolitical tensions, debt, and income equality. Downward revisions to potential economic growth rates will lower tax receipts of governments over the medium-term. This will exacerbate constraints on the funding of new infrastructure.

Increasing debt levels 

In EMDEs, government debt as a percentage of GDP has increased substantially over the last decade, resulting in a rising proportion of tax revenue used to service debt. This has impacted the ability of government to spend on other critical public services.

The further borrowing of debt to finance infrastructure and other government spending is not sustainable for EMDEs as it impacts their sovereign credit ratings, resulting in further increases in cost of borrowing. This is evidenced from the fact that sovereign credit rating downgrades and related negative warning announcements on country outlooks have resulted in a 160 basis points increase in the cost of borrowing.

Figure 3: Central government debt as a percentage of GDP (2023)

Impact of COVID-19 pandemic and geopolitical tensions 

The COVID-19 pandemic, subsequent recession and ongoing geopolitical tensions have led to a further rise in global debt levels, particularly in EMDEs. The debt-to-GDP ratio grew 10 percentage points between 2019 and 2020 due to pandemic-related fiscal measures. The debt-to-GDP ratio has sustained at a new high of over 60% of GDP level since 2020, with 2024 expected to reach 70% of GDP.

Figure 4: Trend of General Government Gross Debt as percentage of GDP for EMDEs

Leveraging Private Sector Efficiencies 

In addition to being an alternative mechanism for funding and financing, private sector participation in public infrastructure can introduce efficiencies by leveraging the private sector’s technical expertise and innovation.

Table 2: Private sector efficiencies in monetization of existing infrastructure assets

Other Considerations 

Address political economy considerations 

The adoption and implementation of an asset recycling program can help address political considerations given negative public perception that result from privatization and sale of public assets. These stem from concerns of the loss of public ownership of these assets and that the interests of the users are secondary to the commercial interests of the private sector. This Handbook provides a range of monetization options, many of which do not require sale of public assets and with strategic control and ownership either retained by the government or ultimately returned to government after a period. This important distinction is strong justification for adoption by governments needing to placate the fears of constituents of privatization. The difference between asset recycling and privatization is elaborated in Appendix A. 

Mitigate the impact of economic recessions 

Countries face uncertainties on the global economic outlook underpinned by multiple risk factors such as geo-political conflicts, the resulting shocks on global supply chains and rising inflation and tightening monetary policies. Given the attendant economic uncertainties and the cyclical nature of the global economy, asset recycling can serve as a mechanism for governments to ensure the continual development of key infrastructure. This is possible as governments can avoid increasing the level of sovereign debt for infrastructure spending. The reduced burden of debt obligations in times of economic recessions allow governments to continue much-needed spending on infrastructure development that crucially has a positive multiplier effect on the overall economy. 

Promote infrastructure as an asset class and mobilize private capital 

Asset recycling programs helps to promote infrastructure as an asset class to institutional investors. A viable investment pipeline of brownfield infrastructure with demonstrated history of robust cash flows can attract and mobilize private capital from foreign investors and domestic institutional capital. Further. the provision of investment capital from a country’s own sovereign wealth funds and pension funds helps to prevent capital outflows whilst ensuring that local infrastructure development needs are met. 

Further, given that revenue generated from assets would be in local currency, this may further help in developing local currency instruments and financing mechanisms. 

Climate change and resilience considerations for infrastructure projects 

The global impact of climate change has never been more present today with devastations seen across the globe from melting polar ice to forest fires, floods, droughts, hurricanes and beyond. The 2015 Paris Agreement and the recent 2024 United Nations Climate Change Conference (COP29) reaffirms governments’ commitments to accelerate action towards achieving climate goals. 

Existing infrastructure assets developed years ago may not be climate resilient. Asset recycling brings forth an opportunity for governments to incorporate climate considerations in infrastructure assets in line with pledged climate goals. The funds realized through asset monetization can be utilized to not only build new, climate-resilient infrastructure but also redevelop existing infrastructure to incorporate climate resiliency considerations. It is important to bear in mind that introducing climate resilience in brownfield assets is not always easy, and/or it may require higher costs. So, while climate risk assessment for brownfield infrastructure is important, realistic measures to improve climate resilience would be limited. 

The World Bank Group has developed Climate Toolkits for Infrastructure PPPs which addresses the challenges of embedding a climate lens into upstream advisory work and project structuring. Significant parallels can be drawn for incorporating climate considerations in asset recycling initiatives.

Case Study - Asset Recycling Initiative, Australia