Kickstarting California’s infrastructure boom with asset recycling

By Nicholas Umashev
June 14, 2017

President Trump has been pushing for a $1 trillion investment in infrastructure and faces the struggle of how to best direct resources to useful projects. Meanwhile, California has proposed a list of $100 billion in infrastructure investment projects aimed at improving the transport network and water facilities. Clearly, there is a need for collaboration between the state and federal government – and asset recycling is the answer.

Under the Australian asset recycling initiative, when a state sells an asset it receives a bonus equal to 15% of the sales price from the federal government. To be eligible for the asset recycling bonus, states must invest the proceeds from the asset sale in infrastructure projects. The goal of the asset recycling program is to cause old assets to be sold and recycled into new assets with the help of the state, the fed, and the private sector. The Australian experience launching this program has been successful in developing the nation’s infrastructure and creating private investment opportunities.

The program helped several Aussie states mine their balance sheets for assets that could be divested. One example is the leasing of electricity transmission grids to pension funds. New South Wales (NSW) received a bonus of A$2.19 billion from the sale of TransGrid with the money spent developing Sydney Metro (A$1.7 billion), Parramatta light rail (A$78.3 million), and a range of other projects such as regional freight corridors. All in all, throughout the three-year program NSW leased A$15 billion of infrastructure assets and invested A$6 billion on new projects without raising any debt.

On the other side of the world, California is facing a backlog of $136 billion dollars of necessary repairs and is in need of a new innovative way to fund infrastructure that fosters private and public sector investment. Since raising the gas tax to fund transportation infrastructure won’t cut it, asset recycling becomes a pressing solution. The Trump Administration has hinted at embracing the Australian method of asset recycling to incentivize public-private partnership – with the director of Trump’s National Economic Council stating “the bigger the thing you [the state] privatize, the more money we’ll [the fed] give you.”

The asset recycling program will incentivize private sector spending by putting government assets in private hands – all while unlocking California’s balance sheet to provide government funds for infrastructure. The program will pave the way for improving the Los Angeles Metro rail fleet, building an early warning earthquake system, and developing the Temperance Flat Dam. There is a lot that needs to be done and luckily California has no shortage of infrastructure available to pay for it. The sale of the Golden Gate Bridge, the Bay Bridge and the Edmonston Pumping Plant would help raise the funds needed. This would follow the success of the Indiana Toll Road’s $3.8 billion dollar lease to Spanish-Australian companies that went directly into Indiana’s infrastructure fund. There is a reason why Indiana ranks first in the nation for its transportation infrastructure.

Asset recycling will also lead to increased efficiency by encouraging private-public cooperation on infrastructure projects. The United States lags behind most countries when it comes to engaging the private sector in infrastructure projects – with the US accounting for only 9 percent of global P3 spending. As John Schmidt, a partner at Mayer Brown law firm and commentator at P3 Bulletin, put it “recycling would mean both an increased volume of privatization of existing assets, which in the US have been a trickle – not the stream many predicted back when the Chicago Skyway and Indiana Toll Road deals were done – and more funding available for new projects that can be done on a P3 basis. For the P3 world it is really a double win.”

Asset recycling also provides a range of lower-risk well-established revenue streams that are highly desired by pension funds and infrastructure investment funds. The availability of a new asset class will provide pension funds with higher returns and go a long way in alleviating California’s public pension crisis.

Asset recycling is a win for the state’s balance sheet, a win for infrastructure growth, and a win for pensioner’s throughout California. Like any household that needs extra cash, California needs to have an asset garage sale and the asset recycling program is the best way to do that.

Nicholas is a policy research intern at the California Policy Center. Nicholas spent the past two years studying throughout the United States on exchange from the University of Queensland, Australia. Prior to interning at the California Policy Center, Nicholas interned at the Professional Research Institute for Management and Economics in Cambodia and at the Buckeye Institute in Ohio. When he is not studying, you’ll  often find Nicholas telling good (and bad) jokes to his mates…though he is not very koala-fied to tell them.

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