“ASSET RECYCLING”-MEANING & DEFINITION

Saturday Brain Storming Thought (146) 01/01/2022

COMPILED BY ER. AVINASH KULKARNI

ASSET RECYCLING

Asset recycling is a new phrase describing corporatization, marketization, and privatization of government assets

An asset is recycled when a government, corporation, or bank either sells or borrows against its physical assets to get money for investment in new capital

Asset Redeployability

Asset re deployability is the extent to which assets have alternative uses outside the firm

Less re-deployable assets have a lower liquidation value

Asset Deployment

Asset deployment is a capability of oracle asset tracking

The purpose of asset deployment is to signal the completion of operational tasks, to update item statuses in the oracle install base, and initiate the asset creation and update processes in oracle projects and oracle assets

Oracle assets

Oracle assets simplify asset management and accounting complexities

It lowers the cost of asset ownership and secures your assets while giving you a global view

Asset Relocation

Asset relocation is more than opening return shipments to be restocked to inventory

Components of Asset recycling

1) monetizing existing infrastructure assets through sale or lease to the private sector followed by

2) investing in new infrastructure using the proceeds received from asset Monetisation

3) Asset recycling holds out the possibility of providing new infrastructure without adding to public debt while maintaining or potentially improving existing service delivery

Requirements of Asset Recycling

1) clear policy

2) a regulatory and institutional framework

3) transperant processes

4) political commitment

5) consideration of long-term nature (>25 years) and involvement of public assets

6) selecting quality assets, monetization, and investment models

7) private sector risk appetite

8) financing market capacity

9) management of proceeds

10) stake-holders consultation, procurement, and equitable risk allocation processes

Importance of Asset Recycling

It has emerged as a viable option for raising much-needed money to fund India’s infrastructure build-out

Operating infrastructure assets with stable cash flows for long tenures attract long-term investors such as pension and insurance funds

Asset recycling has emerged as one of the options for governments to facilitate private participation in infrastructure development

Australian Model of Asset Recycling

1) select mature brownfield asset

2) receive funds and determine allocation of funds

3) reinvest greenfield assets

The Australian government had a two-year window to identify which assets they wanted to sell or lease, apply for a grant, and reach an agreement with the federal government

For this purpose, the Abbott government offered to provide the states with a bonus grant comprising up to 15% of the value of the divested or leased asset proceeds, provided that the proceeds were invested in infrastructure

Brownfield Asset

Brownfield assets mean government-owned assets

Greenfield Asset

Greenfield asset means assets that proceed into economic growth-enhancing infrastructure

Implementation of Asset Recycling Programs

1) preparing and sharing a compendium of lessons learned and guidance materials

2) creating an asset recycling enabling environment as a part of the infrastructure investment framework

3) assessing and building a pipeline of suitable public assets across sectors including documenting the track record of key performance indicators, latent risks etc

4) developing different asset recycling models taking into account the private sectors role and capacity, regulatory framework tax regime for foreign investors etc

5) financial structuring and market sounding with the private sector – investors, asset managers, lenders etc

6) De-risking investments through risk mitigation and credit enhancement instruments to attract competitive financing

7) investing as an anchor thereby conducting due diligence and enabling risk-sharing

8) developing climate transition conducted with MDB concessional finance used as an incentive for governments to co-mingle monetized proceeds

MDB means Multilateral Development Banks

Co-mingle means to mix together things of different types

NHAI’s Asset Recycling plan

The concept, implemented by NHAI through the toll-operate-transfer (TOT) model, culminated in a bid offer of Rs 9,681 crore, about 50% above NHAI’s estimate of Rs 6,500 crore

This was for the Monetisation of a bundle of Nibe highways with an aggregate length of about 680 kM

Under the TOT model, the concessionaire pays a one-time concession fee upfront, and gets the right to toll the project stretch for the predetermined 30 years concession period, while being obliged to maintain and operate the highways to prescribed standards

Every 10 years, the actual traffic growth is reviewed against the initial projections, and the concession period duration is adjusted accordingly

Asset class for asset recycling

1) Roads

2) Power transmission

3) power generation

4) national thermal power

5) airports

6) ports

7) Telecom towers

8) optical fibre cable

9) railway stations

10) railway tracks

11) natural gas pipeline

12) petroleum and products pipeline

13) warehouses

14) sports stadium

Considerations for contractual structuring an asset recycling

1) transfer of public assets including land

2) delegation of governmental authority to collect and appropriate user charger that are levied by force of law and must therefore be reasonable, protection of users interest and the need to secure value for public money

3) provision of services to users in a monopoly or semi-monopoly situation, which imposes a special obligation on the government to ensure adequate service quality

4) sharing of risks and contingent liabilities by the government, as applicable

TOT bundles bid out by NHAI to date

1) TOT Bundle 1
Aug 2018
682 kM
Rs 9,681 crores

2) TOT Bundle 2
Feb 2019
586 kM
Bid cancelled

3) TOT Bundle 3
Nov 2019
566 kM
Rs 5,011 crores

4) TOT Bundle 4
Sep 2020
401 kM
Bid cancelled

5) TOT Bundle 5A-1
Jan 2021
54 kM
Rs 1,011 crores

6) TOT Bundle 5A-2
Jan 2021
106 kM
Rs 1,251 crores

Compiled by:-

Er. Avinash Kulkarni

Chartered Engineer
Govt Regd Valuer
IBBI Regd Valuer

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