2024 Public Sector Perspectives

Historically, concession models have been a popular choice for managing European infrastructure 9 but they have also become successful beyond Europe. Since 2018, the National Highways Authority of India (NHAI) has been monetizing publicly funded existing national highways projects under the Toll-Operate-Transfer (TOT) model. In return for an upfront lump-sum concession fee to the government, a selected concessionaire maintains and operates the infrastructure during a long-term concessionary period (usually a few decades), reducing the NHAI’s maintenance and financial efforts. 10 In 2019, the Government simplified funding mechanisms to augment the uptake of the TOT by providing more alternate sources of funding. The Government authorized NHAI to monetize its highway assets in December 2019 via Infrastructure investment trust (InvIT), which functions like a mutual fund in allowing individual and institutional investors to pool their funds together for infrastructure projects and receive a portion of the income as a return. In 2023, a third player, the National Investment and Infrastructure Fund (NIIF) took over the TOT project as the latest concessionaire. The Indian TOT model has created a track record of successfully attracting private capital due to its provision mitigating adverse demand risks throughout the concessional term. Since the beginning of the concession, the NHAI has raised so far USD3.7 billion. 11 The Government of Indonesia has monetized its cashflow- positive operating infrastructure assets to use the proceeds to finance greenfield assets. In 2020, the Government put into effect The Limited Concession Scheme (LCS) framework, as an alternative to the widely existing Public-Private Partnership (PPP) scheme. 12 The structure is similar to the aforementioned India’s concession TOTmodel, where the government receives an upfront annual lease payment to be redeployed to develop new strategic infrastructure, such as Trans Sumatra Highway or greenfield infrastructure. Lease contracts are common across high-maintenance assets in the energy, transport and telecom sectors. In 2016, Australia awarded a 50-year lease of the Port of Melbourne for AUD 9.7 billion, requiring in return regular maintenance and enhanced competitiveness and efficiency of the port. 13 The Government used the secured, long-term funds to support the development of national railways, improving the port’s connectivity and adding another layer of competitiveness. In a Joint Venture (JV) model , the public sector operates the asset jointly with a private investor under a long-term lease or concession. In 2000, Bucharest municipality entered into a JV with a transnational utility company under a build- rehabilitate-operate-transfer concession. The municipality retained ownership of all infrastructure during the 25-year concessionary period as well as the power of veto on certain decisions. 14 Structured financing Securitization is a popular solution for countries with lower sovereign credit rating to raise external financing. In 1987, oil exporters were the first emerging markets to use collateralized borrowing. Traditionally, Latin America has dominated the collateralized bond market while Southeast Asia has dominated the collateralized loan market. Collateralized borrowing includes both borrowing collateralized on existing assets (e.g., buildings) and on future receivables (e.g., next year’s oil revenue). In 2015, the Peruvian Ministry of Transport and Communication entered into a concession agreement with Metro de Lima Linea for the construction and operation of railway lines in return of the compensation by the Ministry under an RPI-CAO 15 payment regime. This translated into the construction phase of Lima Metro Line 2, which was financed by issuing a project bond backed by RPI-CAO regime payments. A decade earlier, the Kingdom of Belgium identified a new asset class for securitization - EUR 500 million of tax arrears, which were difficult to recover. The Government set up a debt investment company (SIC) which issued bonds on the international capital markets. The coupon and principal repayments were covered from the underlying securitized tax arrears portfolio. The majority of the proceeds was destined for the Budget, while EUR 40 million were reinvested to enhance the national IT system to improve government’s ability to collect the debt. 16 Trust -based financing solutions, such as Infrastructure Investment Trusts (InvTs) and Real Estate Investment Trusts (REITs), provide opportunity for the private sector to invest in assets with long-term contracts, low operating risks and stable, predictable cash flows and dividends. The underlying infrastructure or real estate assets are transferred to a trust, which then operates similarly to a mutual fund, attracting investors while securitizing the proceeds from the underlying infrastructure or real estate assets. In 2021, Power Grid Corporation of India Ltd (PGCIL) set up 9 The National Interest (2021) The ConcessionModel: A Very European Approach to Infrastructure 10 The Economic Times (2023) National Investment and Infrastructure Fund (NIIF) wins toll, operate and transfer project fromNHAI for Rs3,144 crores 11 Converted fromRs 31,200 crore at FX rate of Rs/USD 83.25 12 Allen & Overy (2020) New Concession model introduced to monetise existing Government/SOE infrastructure assets 13 UNCTAD (2016) Australia sold Port of Melbourne lease to a consortium including foreign investors 14 World Bank. City Resilience Program. Public Private Partnership (2010) 15 Retribuciones por Inversiones según Certificado de Avance de Obras, Remuneration for Investments according to Works Progress Certificate 16 LaLibreEco (2005). La titrisation rapportera 500millions à l’Etat belge Powergrid Infrastructure Investment Trust (PGInvIT) to monetize five power operational transmission assets. The PGInvIT offered an additional financing window to finance new and current capex but also drive the company’s net worth on the back of the premium earned from the asset monetization. 17 Privatization with sole controlling rights In 2016, the Australian Government monetized, under its Asset Recycling Initiative (ARI), a regulated asset through privatization of a large state-owned electricity transmission company TransGrid. A consortiumof pension and infrastructure funds (including but not limited to the Abu Dhabi Investment Authority, Caisse de Dépôt et Placement du Québec, andWren House, part of the Kuwait Investment Authority) bid AUD 10.3 billion for a 50% ownership, financed with AUD 5.8 billion debt and AUD 4.4 billion equity. As a critical national infrastructure, the Australian Government maintained sole operation and control role, and required for the board to be composed exclusively of Australian citizens and residents. 6, 18 (Partial) divestment Finally, asset recycling provides also an opportunity to divest in brownfield assets across various sectors. In 2018, the New South Wales Government sold a 51% stake in the WestConnex project for AUD 9.3 billion. This enabled the state government fund the construction of later stages of the green motorway scheme. 19 Later in 2020, the Government sold its remaining 49% stake as part of the State’s successful asset recycling strategy. The proceeds were earmarked to build and upgrade schools, hospitals, and infrastructure. 20 At the beginning of 2023, the Federal Government of the Kingdom of Belgium reduced its stake in an international financial institution for EUR 2.2 billion while maintaining a seat on the Board of Directors. The rationale was driven on the back of a strategic approach of reinvesting the majority of proceeds from the sale to strengthen the domestic anchorage of two key local institutions. Roughly EUR 500 million was reserved to service the national debt. 21 Conclusion The current economic landscape, characterized by multiple compounded challenges and uncertainties, including a rising opportunity cost, presents a timely and strategic opportunity for governments to diversify their financing base, exploring alternative and innovative financing sources. Within this context, there is a compelling case for governments to adopt a targeted and forward-looking approach, consisting in mapping, identifying and engaging with the private sector to effectively benefit from underutilized 17 T&D India (2021) Powergrid InvIT: Five Assets Identified for Monetization 18 IJGlobal (2016). TransGrid, Australia 19 Transurban (2018) WestConnec Acquisition 20 NSW (2020) Media Release: WestConnex Transaction Continues Successful Asset Recycling Strategy 21 The Brussels Times (2023) ‘A clear choice’: Belgium earns €2.2 billion from sale of BNP Paribas stake or dormant public assets, creating incremental revenue stream. The long- term, regular financial income from the latent value of these assets, can then be strategically directed toward critical investments that are pivotal for driving socio-economic development of the country or sovereign debt burden reduction, optimizing public finances health. Successful implementation of the asset monetization stands on well- designed and executed asset recycling framework, which unlocks financial gains but also encourages regular private investment inflows, fostering long-term economic growth and operating efficiencies in the interest of a broader society. In addition, part of the use of proceeds can be reinvested into sustainable and energy transition initiatives, contributing to national key priorities. Considering the constantly evolving economic and climate environment, asset monetization represents an array of untapped opportunities that have yet to be fully realized. By embracing these innovative approaches, governments can not only navigate the challenges of today, but also proactively shape a more resilient and sustainable future. The current economic landscape, characterized by multiple compounded challenges and uncertainties, including a rising opportunity cost, presents a timely and strategic opportunity for governments to diversify their financing base, exploring alternative and innovative financing sources. Citi Perspectives for the Public Sector 41 40 Asset Monetization: A ParadigmShift Unlocking the Value of Public Sector Assets by Tapping Private Capital andOperational Efficiencies