Evolving Approaches to Managing Governmental Real Property Assets

1. Evolving Approaches to Managing Governmental Real Property Assets Olga Kaganova, CRE The Urban Institute, Washington, DC Okaganov@ui.urban.org For National Executive Forum on Public Property Sponsors’ Retreat 2003, November 6-8, Montreal, Canada

2. Contents • Background: The Urban Institute’s research, book, technical assistance, sponsors, and contributors • Pre-reform issues and reform drivers, context, and concepts • Some lessons learned from advanced reformers (central governments) • Methodology for municipal governments • What remains unclear (“big issues”) Olga Kaganova, Urban Institute

3. Sponsors of preceding research and the book (a partial list) The book is based on the results of projects sponsored by: • The World Bank • The Inter-American Bank • The US Agency for International Development • Treasury Board of Canada, Secretariat • The Urban Institute • Individual researchers With assistance from: • City of Saskatoon Olga Kaganova, Urban Institute

4. Book Managing Governmental Property Assets in the Time of Globalization: Search for Transferable Experience • Central governments’ property (Australia, Canada, New Zealand, France, and Singapore) • Municipal property (the USA, Switzerland, Eastern Europe and NIS) • Special critical components (information, corporations, and PPPs) • Lessons and “big issues” Olga Kaganova, Urban Institute

5. Common Issues of Pre-reform Asset Management • Fragmented management • Multiple inefficiencies(vacant and underused properties, forgone financial gains, not “highest and best use,” deferred maintenance and repair) • Lack of relevant information • Lack of transparency and accountability Olga Kaganova, Urban Institute

6. Reform Drivers and Context • “New public management (NPM)” • Recognition – in difficult fiscal and economic times - of potential financial and economic gains associated with governmental property holdings • Realization that real estate is a major component of overall public wealth • Reform of accounting and financial reporting in the governmental sector • Participation of real estate professionals in governments Olga Kaganova, Urban Institute

7. Conceptual Changes Underlying Reform • Government as “enabler” rather than “provider” of urban real estate • (i)   Direct privatization of large property portfolios • (ii)  Separation of ownership and management, and • (iii) Changing the role: “supplier” “partner” “enabler” Olga Kaganova, Urban Institute

8. Conceptual Changes Underlying Reform (cont’d) • Public real estate as productive assetvs. aspublic good • Corporate real property asset management as a prototype for governmental asset management Olga Kaganova, Urban Institute

9. Some Lessons from Advanced Reformers • What serves well as a trigger for reform? A special high-level report focused on the area of property asset management, which identifies serious problems and suggests reform directions – A, C 2. How do we overcome fragmentation and overlapping of institutional responsibilities and authorities? By targeted reform (especially an asset management reform) -by-design -A, C, F, NZ Olga Kaganova, Urban Institute

10. Some Lessons from Advanced Reformers (cont’d) 3. Which elements of regulatory framework seem to be important? a) Laws (only on a few key provisions) - A, C, F, NZ b) Explicit strategic principles of property asset management adopted by the government - A, C c) Authority and incentives for portfolio decision-makers (such line Ministers or Heads of program departments) to implement these principles in practice (example: own vs. lease) - A, C, NZ d) Effective safeguarding and controlling mechanisms (examples: an independent third party for property valuation; financial audit) - A, C, NZ Olga Kaganova, Urban Institute

11. Some Lessons from Advanced Reformers (cont’d) 4. What are mainstream international trends in central government’s asset management? • Significant reduction of ownership portfolios / clearance of central government balance sheets by: (1) divesting properties to lower tiers of government, and (2) privatizing property - A, C, NZ • Involvement of the private sector and professional associations in developing a regulatory framework, standards, guidance, etc. – A, NZ • Use of private sector’s asset management approaches and measurements (including market value, return on investment, expense ratios) - A, NZ Olga Kaganova, Urban Institute

12. Some Lessons from Advanced Reformers (cont’d) 4. What are mainstream international trends in central government’s asset management? (cont’d) d) Use of enterprise-type entities (governmental corporations) as holders and managers of some specialized portfolios - A, C, NZ • Use of private property and private property-related services for governmental needs (lease, PPPs, private management companies) - A, C, NZ • Recognition and accounting for full costs of governmental property ownership and use (all operating and management expenses, opportunity cost of property ownership (capital charge), property-related debt liabilities, and risks) - A, C (partially), NZ Olga Kaganova, Urban Institute

13. Some Lessons from Advanced Reformers (cont’d) 4. What are mainstream international trends in central government’s asset management? (cont’d) • Link of strategic planning for property needs with financial (capital and operating) planning -A, C, NZ, F (at an initial stage) • Use of effective positive incentives and market-based performance indicators for improving asset management - A, C, NZ • Use of relevant reporting and controlling mechanisms - A, C, NZ Olga Kaganova, Urban Institute

14. Some Lessons from Advanced Reformers (cont’d) 5. Which institutional arrangements work well? Varies 6. Which technical tools are used? • Standardized contracts of various types - A, C, NZ • Market-based property appraisal for both property transactions and bookkeeping - A, C (for transactions only), NZ • Financial and/or cost-benefit analysis of investment projects, using private sector instruments (such as Net Present Value) - A, C, NZ Olga Kaganova, Urban Institute

15. Some Lessons from Advanced Reformers (cont’d) 6. Which technical tools are used? (cont’d) d)      Accrual accounting and associated forms of financial reporting - A, C (partly), NZ e) Cost recovery instruments (rent from tenants at governmental properties and a capital charge on holders of governmental properties) - A, C (partly), NZ • Performance and budget indicators, in particular based on private sector’s benchmarks – A, NZ • Financial incentives for agencies and individual managers – A, C, NZ Olga Kaganova, Urban Institute

16. Some Lessons from Advanced Reformers (cont’d) 6. Which technical tools are used? (cont’d) • Strategic asset and investment planning - A, C, NZ • Rigorous reporting requirements, including financial reporting within accrual accounting - A, C, NZ • Regular internal and external audits - A, C, NZ Olga Kaganova, Urban Institute

17. Municipal Asset Management: Denver Model Olga Kaganova, Urban Institute

18. “Big Issues” as Work in Progress • The relationship between accounting reform and asset management reform • The degree of separation of ownership and managementand proper governance for managing entities • Information systems Olga Kaganova, Urban Institute