Asset Recycling

Private companies taking over the assets WE paid for… what could possibly go wrong?

Buried deep within the stalled infrastructure package is a vague list of possible ways to pay for it. Somewhere on that list is something the politicians are being very quiet about… Asset Recycling. What is it? Well, it’s an obfuscation designed to ‘give an appearance of solidity to pure wind’. Asset Recycling is when a private company leases some public asset (like roads, bridges, or parks) for decades, and charges the citizens who built it to keep using it. It’s not a SALE, because the government still OWNS it during the lease, but it’s still just a nice name for private plundering of public goods. So settle back and let your Mechanic tell you about Asset Recycling… because no one else is doing it!

Asset Recycling isn’t new. It was tried in Australia from 2013-2016, and Wilbur Ross and Peter Navarro proposed it as part of Donald Trump’s never-seen infrastructure plan. The Democrats rightly howled when Trump did it, but Trump is gone and now it’s Biden’s turn. Flailing around for a way to pay for trillions in investment without (gasp!) raising taxes, Biden proposed using Asset Recycling himself but this time the response has been different. The Republicans are still quiet, possibly because the big-money donors on their side of the aisle would rake in avalanches of cash if it went through. But this time the Democrats’ response is different. The CorporaDems have forgotten their objections to Trump and fallen in line, again possibly because their big-money sources would dry up. But the Bernie wing, the wing that opposed Trump’s policies for principles rather than expediency, is still upset.

In all the stories we read for this, two ideas kept cropping up… 1) Australia is the place where Asset Recycling has the longest history, and 2) Chicago’s lease of parking meters is the poster case for Asset Recycling here in the US. Let’s just look at those two points.

Asset Recycling in Australia

Australia had 6 years’ experience with Asset Recycling, so how did it work for them? On the whole, not well. Libertarian think tanks like the Reason Foundation see nothing wrong with it, but the Australians themselves? Not so much. “Australia’s federal treasurer on Friday ruled out a return to an infrastructure investment incentive scheme, closing out a policy that spurred billion-dollar privatizations ahead of a meeting with state counterparts on increasing infrastructure spending.“

The Chicago Parking Meters

For a US example of Asset Recycling in action, almost every source pointed to Chicago. Here’s one of their summations: “The city of Chicago sold off 36,000 parking meters to a Wall Street-led investor group in 2009, taking back $1.15 billion to plug budget holes. Chicago drivers will pay $11.6 billion over the 75-year life of the deal to park, and fees are scheduled to rise as much as 800 percent. When the city shuts down a street for a festival or parade, it has to pay the private company for the parking revenue it loses. And the city cannot make improvements like bike lanes or sidewalk widening on metered streets, again because the privatizers might lose revenue.” The company that leased the meters made its money back in about 10 years, and they’ve made an additional half billion beyond that… so far. Not coincidentally, parking fees have gone from $3 to $7 per hour.

General Issues with the idea

One issue with Asset Recycling is that private investors are usually guaranteed a minimum profit margin to make the deal enticing. (The Trump plan specified 10%). This is an immediate problem, because “The government doesn’t require a 10 percent margin on equity, tax credits, and interest payments. That’s a layer of profit that gets built into the expenditure.”

Most government assets are low- or no-profit, so “There are only two ways for these companies to reduce ownership and operation costs below what the public sector would spend, while still being profitable. They can cut back, either on safety or labor or maintenance; or they can extract a lot of profit from users of the infrastructure (think toll roads).” So privatization means either unusable or unaffordable infrastructure. After all, if it’s attractive enough to sell to a private investor, seeing as how they have to deliver the same service for less money to make it profitable, why wouldn’t that be an income stream for the government?

Another issue is that most leases require cash up-front, a situation ONLY POSSIBLE if a company has sufficient untaxed reserves to work with. This means that the Billionaires and Corporations that have become rich buying the tax code are now, solely because of that tax code, in the position to buy the assets that the tax code is supposed to protect.

Digging Deeper…

Whatever else Asset Recycling might be, it’s a pretty dry subject. If you want to Dig Deeper we take our hats off to you… you’re a trooper! But for the dedicated, we have what you’re looking for…

‘Asset recycling’ is 1 piece of the bipartisan infrastructure deal that could prove controversial, Brigid Kennedy in The Week, Jun 2021

Critics, however, are far less convinced. In practice, they argue, asset recycling would “fleece the country’s public works, the common institutions we all paid to build, and allow private companies to control them,” writes The American Prospect. As HuffPost’s Kevin Robillard notes, we can take Australia, the birthplace of asset recycling, as an example. Officials ended the practice after just two years, saying they were “concerned” the initiative encouraged privatization “without appropriate consideration or analysis of future costs,” per ITPI. A similar venture in Chicago wherein the city sold 36,000 parking meters to Wall Street investors has continued to prove itself a headache for officials and taxpayers alike, reports the Prospect.

Although Democrats condemned the practice when it was favored by the Trump administration, they appear to be “mostly silent” in their criticism now, the Prospect notes. However, as Robillard points out, it might be just the progressives who stick up their nose this time around.

Bipartisan Senate Infrastructure Plan Is a Stalking Horse for Privatization, David Dayen in The American Prospect, June 2021

There was a time when Democrats did oppose such schemes; it was during the Trump administration. To the extent that Trump had an infrastructure vision, it was rooted in privatization. Wilbur Ross and Peter Navarro, who would each take high-level jobs in the Trump administration, wrote a paper before the 2016 election outlining their vision: $1 trillion in investment provided by private bond buyers, who would be guaranteed a tax credit to buy the bonds, interest on the debt, and an equity stake with dividends (with up to a 10 percent profit margin). It adds the usual song and dance about how private enterprise is so much more efficient than the public sector, therefore saving money overall.

It takes about two seconds to recognize how ridiculous this is. The government doesn’t require a 10 percent margin on equity, tax credits, and interest payments. That’s a layer of profit that gets built into the expenditure. Governments usually contract out design and construction to private contractors, but there are only two ways for these companies to reduce ownership and operation costs below what the public sector would spend, while still being profitable. They can cut back, either on safety or labor or maintenance; or they can extract a lot of profit from users of the infrastructure (think toll roads). If the infrastructure isn’t inherently profitable, like a bridge in New York City or a toll road in southern California might be, the upgrade probably won’t get built.

How could “asset recycling” work in the United States?, Jake Varn and Sarah Kline in Bipartisan Policy Center, Jun 2017

The first step in asset recycling is for public agencies to identify assets that are unused or underutilized such as vacant lots or buildings?and assets they may no longer want to own or manage such as airports, bridges, or parking facilities. Ideally, agencies would do this after taking a comprehensive look at all existing assets through a formal asset inventory. At that point, agencies have two options: they can either have a “garage sale” and sell the asset, or they can lease the asset to a private company who is tasked with handling its operation and maintenance, including all attendant costs. Ownership remains unchanged, and the owner receives compensation for the negotiated term of the rental. However, many of the risks of ownership, like unexpected repairs, are fully transferred to the lessee. It’s as if you rented out your home and the tenant fixed it up for you before handing back the keys.

What the U.S. Can Learn From Australia’s Asset Recycling, Robert Poole at the Reason Foundation, Apr 2016

So Schmidt’s adaptation of the Australian federal government’s incentive for asset recycling would be to allow tax-exempt debt to be used to finance long-term P3 lease concessions of brownfield infrastructure. As he argued in a piece for InfraAmericas, “The discrimination against privatized operations with respect to tax-exempt debt is a historical remnant of a time before privatization of these types of assets became commonplace around the world. There is no policy reason for the discrimination. Toll roads and bridges, airports, and ports do not cease to serve their public purpose when they are privatized; in fact, they serve them better with the enhanced quality of service that comes from experienced private management. And allowing continued use of tax-exempt debt in privatized infrastructure would result in no loss to the federal government of taxes on taxable debt interest, since these facilities are using tax-exempt debt now.”

Using Asset Recycling To Rebuild America’s Infrastructure, Robert Poole at the Reason Foundation, Nov 2018

In typical long-term leases, most or all of the lease payments are provided up-front. These proceeds are dedicated to investment in needed, but currently unfunded, infrastructure projects. Provisions in the long-term lease of an existing facility include performance requirements, which in most cases of aging infrastructure, will require significant additional private investment to refurbish and modernize the facility. Hence, asset recycling is intended to fix both of America’s serious infrastructure problems: aging and inadequate existing facilities and lack of funding for a large array of new infrastructure facilities.

Does asset recycling actually work?, Blair Chalmers in GreenBiz, Aug 2018

Australia rules out return to state infrastructure incentive scheme, Hans Lee on Reuters, Oct 2019

Australia’s federal treasurer on Friday ruled out a return to an infrastructure investment incentive scheme, closing out a policy that spurred billion-dollar privatizations ahead of a meeting with state counterparts on increasing infrastructure spending. The decision shuts down a proposal backed by the most populous of Australia’s eight states and territories, New South Wales (NSW), to reinvigorate a subdued economy.

Under the “asset recycling” scheme which ran from 2013 to 2016, states which sold infrastructure such as roads, ports and electricity grids would receive an extra 15% of the sale price from the federal government to spend on new infrastructure. The scheme coincided with a wave of big-ticket deals including the 99-year partial lease by New South Wales state of electricity grid Ausgrid to two local pension funds for A$16 billion ($11 billion), the country’s biggest privatization.

Review of the National Partnership Agreement on Recycling, Australian Treasury Dept, Sep 2018

Effectiveness in achieving the outcomes and objectives of the NPA Based on stakeholder comments, the NPA has been effective in achieving its outcomes and objectives in relation to reducing funding constraints for additional infrastructure, increasing economic activity and enhancing productive capacity, for jurisdictions that participated in the NPA. For those jurisdictions that participated, these outcomes and objectives were achieved by selling state owned assets and investing in additional economic infrastructure. The NPA supported the achievement of certain state-led reforms to divest assets and to invest in economic infrastructure, and in some cases brought forward the timing of those reforms but generally did not catalyse consideration of new divestments or reinvestments.

The effectiveness of the NPA overall in achieving its outcomes and objectives was constrained: Many jurisdictions did not participate by nominating assets for divestment, either because asset divestment was not a policy priority at the time, or because there were no assets ready for sale within the NPA timeframes.
Non-physical assets were not considered eligible for consideration as asset divestment or required lengthy negotiations prior to being approved, and assets already considered as state priorities did not qualify as “additional” infrastructure.
Some jurisdictions reported difficulties in reaching agreement on what was “additional” investment, and that the NPA effectively encouraged them to put forward projects that were not necessarily considered the highest priority under well considered state infrastructure strategies, since in some cases, the highest priority projects already have funding committed and was not considered additional.
The funding pool was reduced when not all of the funding available at 30 June 2016 had been allocated. A cap was placed on the reduced funding pool with some jurisdictions commenting that they were unable to receive additional funding where actual sale proceeds exceeded initial estimates.

Asset recycling 2.0 the way to kick-start the economy, Mark Ludlow on Financial Review, Jun 2019

Infrastructure asset recycling involves the monetization of existing public assets through sale or lease to the private sector, with all funds received being reinvested in new infrastructure. Asset recycling offers the opportunity to provide newly needed infrastructure without adding to public debt, all while maintaining or potentially improving existing infrastructure service delivery.

Experience shows that asset recycling is not always a straightforward process. This can be seen in the case of Australia, the most recent champion of asset recycling. Australia’s asset recycling scheme may not have reached initial government investment targets, but it is broadly considered to have been a success.

Australia’s experience has provided a number of valuable lessons for other governments and private investors to learn from. A key takeaway is that asset recycling is not always a suitable solution to a country’s infrastructure needs. The decision-making process must take account of future infrastructure needs and the government’s ability to fund those needs.

Having enough public assets to potentially monetize is a key pre-requisite for an asset recycling scheme, but equally important is the willingness of the general public to accept private investment and management of infrastructure. Previous negative experiences with privatization in a country may cause lasting damage to public perception of asset recycling.

Asset Recycling In America, The Hon Joe Hockey, Australian Ambassador to the United States, Nov 2018

Asset recycling- a concept that taxpayers need to understand!, Mary Scott Nabers on Strategic Partnerships Inc., Jun 2017

Often misstated, misinterpreted or misunderstood, asset recycling is simply a practice that allows government entities to either sell or offer a long-term lease of public infrastructure to private-sector investors. Any public asset, such as an airport, toll road, utility or parking facility, if sold and repurposed, could generate its own revenue stream. That concept appeals to private-sector investors. And, in exchange for the sale or lease of those assets, governmental entities can receive a large up-front, lump-sum payment. The proceeds can then be used to finance new and critical infrastructure needs. It’s important for taxpayers and the public at large to understand this concept because the Trump administration is considering paying a bonus to state or local governments that enter into asset recycling agreements.

Vital Signs: No, Joe, America should not be copying Australia’s ‘asset recycling’ misdirection, Richard Holden in The Conversation, Dec 2018

But there is an even more fundamental objection. When the government sells the hypothetical airport it gives up $300 million in revenue every year to get $4.2 billion immediately. Unless the private operator values the cash flow stream more than the government does, or can generate more cash flow, there has been no value created. All that has happened is that the government gets money sooner rather than later, over time. Since the government ought to be at least as patient as the private sector, and can borrow long term at 3%, it is unlikely the government values future cash flows less than some infrastructure fund. So the only value that might be created is from a private operator running the airport more efficiently. It’s probably true it will – but by how much? Even if it does, will the government cut a good enough deal to capture a good chunk of that value for the public?

Asset Recycling and its Potential for Infrastructure Savings, Brianna Fernandez in American Action Forum, July 2017

While asset recycling could be a viable strategy for state and local governments to adopt, a federal asset recycling initiative would be difficult to implement as part of the administration’s anticipated infrastructure bill. The U.S. government has only $267.6 billion in non-defense fixed assets, also known as property, plant, and equipment (PP&E), for potential recycle, with many assets unlikely to attract permanent or temporary private sector operation.

While there is no definitive model for asset recycling, it is understood as a way for governments to fund new assets or revitalize existing assets using proceeds from the sale or lease of preexisting public assets. Asset recycling has primarily been advertised as a measure to fund infrastructure at no cost to taxpayers—and no additional government debt.

Unfortunately, very few federal fixed assets have profitable revenue streams and therefore are unlikely to pique the interest of the private sector to purchase or lease. The Department of Defense, Department of Energy, Department of Veterans Affairs, Department of Interior, Department of State, and Department of Transportation, along with the Tennessee Valley Authority (TVA), General Services Administration, and the United States Postal Service comprise 95 percent of the federal government’s related PP&E net. TVA is the only entity with earned revenues exceeding gross costs.

Asset Recycling: Can it close the infrastructure gap for future generations? Jonathan Spear in SNC/Lavalin

Does asset recycling actually work? Blair Chalmers in GreenBiz, Aug 2018

Asset recycling could be the best fix to crumbling national infrastructure, Richard Geddes in The Hill, Mar 2021

Asset recycling may look new and exciting. But it’s the last gasp of a failed model, John Quiggin in The New York Times, Jun 2017

Senators Want to Pay for Infrastructure With “Asset Recycling.” That’s Just a Fancy Term for Privatization, Hannah Levintova and Noah Lanard in Mother Jones, Jul 2021