The federal government has signed its first agreement under its asset recycling initiative – with the Labor government in the Australian Capital Territory.

The ACT government is selling nearly A$400 million in assets, with all the money to be invested into its controversial light rail project.

Under the deal, the Commonwealth will provide about A$60 million in incentive payments to the ACT government.

The federal government has not been able to win parliamentary approval for its recycling scheme, but is finding means to implement it without legislation through appropriations.

The A$5 billion recycling initiative was signed by Prime Minister Tony Abbott and all first ministers last May. It is aimed at promoting infrastructure investment as the mining investment boom tails off.

The program is expected to produce nearly A$40 billion of infrastructure investment across the nation.

States and territories will receive 15% of any asset sales as a bonus payment from the federal government if the money goes into new infrastructure.

The New South Wales government, facing an election next month, has factored in A$2 billion from the Commonwealth as part of its plan to privatise electricity assets. It is not known whether a formal agreement will be finalised before the state election.

The ACT government has privatised ACTTAB and plans to sell public housing and commercial property.

Treasurer Joe Hockey acknowledged that the light rail project had been controversial in the ACT. He said it was the only infrastructure project the territory government had proposed. “While the project was considered to meet the criteria of the initiative, the Commonwealth is aware that there has been debate as to whether alternative projects may have higher economic benefits,” he said.

ACT Chief Minister and Treasurer Andrew Barr said: “Capital Metro is a vital project for Canberra’s economic future. It will deliver a billion dollars in benefits to our city and create 3,500 jobs in the construction phase alone, so it is great to have the Commonwealth on board”. Construction work on the project is due to begin next year.