With the government’s expected option to maintain a narrow budget deficit this Friday, possibly putting pressure on its capital expenditure program, ANZ Bank economists are mooting ‘capital recycling’ as a way to raise infrastructure financing.
“Recently, ‘capital recycling’ (or ‘asset recycling’) has emerged as an avenue to bolster the public sector’s ability to fund infrastructure.
“In this approach, governments privatise (or offer as a long-term lease) income generating public sector assets and use the funds to build new assets,” wrote the authors of ” Budget Repair”, the latest report from ANZ on Fiji’s upcoming national budget.
“A review of existing government-owned infrastructure, property and other assets would determine whether any of these could be privatised. Sale proceeds could then be used to fund new infrastructure. In Fiji’s case privatisation doesn’t mean losing Fijian ownership, as it could be done in partnership with the Fiji National Provident Fund, other Fijian investors and/or long-term leases.”
The Business Process Outsourcing (BPO) sector has been singled out as a good example of where asset recycling could work in the near term.
“Fiji is promoting itself as a location for large multinationals to set up their operational functions.
“However, because of a scarcity of available privately owned land in and around central business districts, Fiji has not yet been able to build a one-stop technology park for the BPO sector to take off.
“The government has significant land and property holdings in urban centres.
“It could sell some of these assets and use the proceeds to finance BPO hubs or precincts with multiple towers and shared facilities including retail, food, accommodation, medical and parking. Once such an investment yields a sufficient return, it could be sold to build the next project,” the report’s authors wrote. They note the strong demand globally from institutional investors and superannuation funds for purchasing the limited supply of ‘de-risked’ assets.
“This is in contrast to a world where private sector financiers have experienced heavy losses on infrastructure development projects through a misallocation of risk.
“From a public sector financial perspective, capital recycling makes sense if the yields on the asset being sold are less than the prospective yields of building (and eventually transferring) that asset. That said, capital recycling is not a financial panacea and can have drawbacks if employed poorly.”
Among the benefits of capital recycling:
- For governments facing borrowing, privatisation or long-term leases can release funds without increasing debt;
- Governments can build and own assets for a period of time until they generate a steady demand stream and income, reducing both construction and demand risk for prospective private sector purchasers.
In this sense, capital recycling works as a reverse ‘Build, Own, Operate and Transfer’ (BOOT) scheme, with governments undertaking the role of financier and developer instead of the private sector.
