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Technical Brief

www.norc.org | info@norc.org December 2013

Good Asset Management – A Pillar of Sustainable Urbanization

Prepared by Olga Kaganova, PhD, CRE, FRICS

for USAID Annual Infrastructure Workshop 2013

Government-owned capital assets (land, infrastructure, buildings) are a material foundation of public services and the

most valuable part of local public wealth. However, management of these assets often suffers from insufficient attention,

huge underinvestment in maintenance and recapitalization of existing assets and construction of new ones, aggravated

by bad policies, lack of accountability, and all shades of corruption. Meanwhile, the very sustainability of cities and of

urban services they offer, along with quality of life, depends on these assets in a very direct way. The purpose of this

brief is to help decision makers and staff of international donor institution to integrate asset management into their vision

of tasks ahead, in a quest for sustainable cities. In particular, the brief elaborates on some themes in the USAID Policy

Sustainable Service Delivery in an Increasingly Urbanized World and other recent donors’ flagship documents.

What exactly is asset management? The term has two different meanings:

Where does asset management belong and how is it linked with other areas?

Making and implementing decisions about acquisition,

use, and disposition of assets, for attaining owner’s

goals (e.g. delivering government services, use as

investment, etc.)

Dealing with a particular building, facility, or system during

its lifetime (life-cycle management): acquisition, operation

& maintenance, small repair, capital repair, and disposal

or replacement after a useful life ends

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Box1. Is the City of Kara-Kul, Kyrgyzstan, Heading for a Cliff?

Over 50% of municipal buildings are older than 40 years and will need replacement during the next 10 years. Several of these buildings are schools.

The need for O&M, capital repair and replacement expenses for the next 10 years, on an annual basis, is somewhere between 200% and 360% of the total city budget, while the current allocations for these purposes are around 20% of the city budget.

Jurisdiction %

Los Angeles County, US 66

City of Leeds, UK 95

Cape Town, SA 69

Warsaw, Poland 94

Table 1. Capital Assets as % of All

Assets (Financial and Capital)

Total need

through 2020

Estimated

funding

Funding

gap

Water/Wastewater

Infrastructure $126 $42 $84

Public Parks & Recreation $238 $134 $104

Schools $391 $120 $271

Table 2. USA's Municipal Infrastructure Gap, $ billion

Key reasons why municipal asset management is important

Quality of public services depends on assets’ quality and quantity (e.g. a school roof is leaking; classes are in three shifts).

The lion’s share of public wealth is in capital assets (Table 1).

Operation and maintenance (O&M) of buildings, facilities and infrastructure is a very large item of public expenses (if O&M are done properly): It may make up 15% - 20% of a municipal operating budget.

Government property holdings can be so large that they impact the urban economy and spatial shape (e.g. City of Johannesburg has 64,000 properties under management; governments can own up to 50% of urban land).

Historically prone to corruption - from Washington, D.C. to Moscow to Ulaanbaatar. However, municipal asset management in developing countries can become a perfect focal point for fostering local democracy and government accountability.

A source of large and unaccounted-for financial losses.

Some facts and realities to know

Historically, municipal asset management is ineffective and inefficient:

Only 25% of major Western-European cities can provide reasonably reliable data on the size and value of their developed properties

Sustainability of asset portfolios is not a strategic priority of municipal asset management

Most governments do not know annual O&M costs associated with their assets.

Chronic under-budgeting of existing public assets / infrastructure and needs

Canada’s deferred investment in municipal infrastructure alone is 3,735 Canadian Dollars per capita (2007).

USA’s infrastructure in 2012 was graded by the American Society of Civil Engineers between D- and B- and has a funding gap of $1,611 billion through 2020, including municipal infrastructure (Table 2).

In developing countries, the level of underinvestment is usually not known and if estimated, indicates a dramatic shortage (Box 1).

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Box 2. Lessons for Better Practices:

O&M manual should be a part of system / facility design

Capital investment planning (CIP) should always be accompanied by (i) estimating future O&M costs and (ii) realistic planning of who (which entity) would operate and maintain a new or renovated building / facility / system

If no funding is available for O&M and it’s not clear who will operate the new or renovated asset –

DON’T start capital investment in construction or renovation

Follow the money: There are substantial underutilized revenue and savings opportunities

Revenues* Expenses*

Operating

Reduce hidden property-related subsidies to private lessees / users of municipal property (land tenants, retail tenants, NGOs)

Increase rent collection up to private sector benchmarks

Operating

Optimize management and use of space and save 10-15% of operating cost

Save further by reducing the size of property portfolios

Improve efficiency of asset management and use at municipal enterprises

Capital

“Time-to-market” land / property sales (do not sell at the bottom of the real estate market)

Sell though good quality auctions (“direct sales” always produce lower revenues)

Sell surplus properties (shops, vacant municipal buildings, apartments, land not needed for public use)

Capital

Use opportunities for replacing public financing with private capital, through PPPs (e.g. public garages)

* Note: This table does not consider asset management issues at municipal service enterprises which deliver paid services like solid waste

management, as reform of such enterprises (e.g. cost recovery, tariffs, better targeted subsidies, efficiency, etc.) receives attention on its

own.

“Must know” facts about life-cycle costing and management (see also Box 2)

Initial capital costs constitute only a fraction of the total life-cycle costs (e.g. 40% for a public building), with O&M, repair and renovation making up the rest

Annual O&M costs vary depending on type of property or infrastructure (e.g. can be 6% of the replacement cost for a building, but 18% for a water system).

Even within one facility or system O&M can vary for its various parts.

Costs vary during a lifespan of an asset (e.g. a large one-time expense for a roof replacement needed after 30 years).

Without proper O&M, an asset’s lifespan will shorten (by 30% or even more).

“Eliminating political influence from government real estate decisions is like removing sand from a beach”

Implies that decisions are often made for political reasons, which can be justifiable.

A reasonable balancing act is to attach a price tag to any decision.

Good asset management happens only by design and as a result of systematic efforts

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Basics of good asset management

Basic inventorying of assets owned or controlled by government and its entities (institutions and enterprises): “You can’t manage what you do not know”

Asset classification

Why do you need this property? Align assets with government mandates and programs.

There are no universal classifications even within a single country, but most systems distinguish “core” properties (i.e. needed for mandatory functions and services), “social” (discretionary), and “surplus”.

Asset valuation and pricing

Distinguish between valuation for accounting purposes, which in most cases is total and at historic cost (depreciated for buildings), and valuation-for-management (i.e. for decision-making and transactions), which is selective and at market value.

Good public policy is to conduct a market-based valuation before any transaction, even if between government entities.

Pricing for sales and rent is best done through competitive allocations (auctions) or extrapolation of prices in the private real estate market.

Transparency and reporting on holdings and transactions

Transparency of documents and procedures.

Reporting: Inventory data, valuation data, transactions (what, to whom, at what price), and balance sheet.

Competitive / transparent land and property allocation

Auctions as the main instrument (i.e., at the highest price).

Limited list of cases for non-competitive allocation and cases for multi-criteria selection of a winner.

Good quality of procurement procedures is critical.

Use of revenues from asset sales: Capital earmarking

Useful to have a regulatory requirement that revenues from land / property sales are dedicated only for capital expenses or repaying long-term debt, through a special multi-year budgetary fund.

Some more advanced instruments of asset management

Common city-wide framework for and approaches to asset management and an identified responsible party overseeing and assisting implementation and compliance.

Strategic Asset Management Planning, including estimates of future long-term asset-related costs.

Advanced systems of asset data (e.g. digital maps for location, O&M cost data on a property-by-property basis, etc.).

Multi-year, city-wide capital investment planning (CIP) within a unified framework of priority setting and project selection.

Advanced life-cycle management.

Opportunities for staff to be trained and grow professionally.

Practices: How can local governments and technical assistance programs start?

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Conduct a high quality diagnostics and assessment of issues and needs.

Identify which modifications in the legal framework are needed and lobby for them.

Do NOT start from big institutional changes.

Create a temporary interdepartmental Work Group under auspices of Mayor and let them work out (with some

facilitation, training, and TA) what should be done, how, and by whom (Box 3).

Box 3. Success Story: Nis, Serbia

The City of Nis (population 255,500) decided to improve its land management and created a special temporary Work Group (WG), which included the Mayor; Advisor to the Mayor (Acting WG Chair); Member of the City Council; Head of Property and Inspection Department; Head of Finance, Local Revenues, and Procurement; Acting Head of Planning and Construction Department; Deputy Public City Attorney; Head of Information and Communication Technology (ICT) Department at City Administration; Financial Manager, Municipal Enterprise for Construction; and Representative of the Republic Geodetic Department (Cadaster). It was decided to start by focusing on four activities: (i) inventorying land, (ii) conducting demonstration land auctions based on modernized approaches to offering land to investors, (iii) developing land policy, and (iv) developing a Strategic Land Management Plan. According to participants, the WG played a critical role in modernizing land management for the following reasons:

Together members of the WG created “think tank” capacity at the City Administration, which none of the departments had separately

The inclusion of the member of the City Council secured constant behind-the-scene liaising with the Council and informal preparation of its members to suggestions that were coming from the WG

The inclusion of officials from two central government institutions (a local branch of the State Cadaster Agency and the municipal court) secured cooperation with agencies that held data critical for land inventorying

Unexpectedly, the WG turned out to be a forum where politicized approaches to administrative matters were put aside and true professional cooperation took place. While members of the WG were from different political parties, the temporary and “off-chart” status of the WG reduced the political pressure on them. The collaborative spirit was further reinforced by predominantly “technical” nature of tasks on hand and the “Chatham House Rule” de facto exercised at meetings of the WG (it implies that participants of a discussion group remain anonymous when their opinions go beyond a group meeting, which allows participants to express their honest opinions)

The WG became an effective setting for knowledge transfer from the technical assistance provider to members of the WG

The temporary nature and cross-department composition of the WG was a good platform for developing and preparing permanent organizational changes that were eventually introduced.

Key results of WG activities included:

In the course of about 15 months, a newly developed database on municipal land was populated with 15,835 parcels identified in the Real Estate Cadaster; of those, 3,011 parcels were verified in field audits, and 119 were legally verified / cleared through the Land Books. This indicates that verification of the legal status has been the major limiting factor in finalizing the inventory of municipal parcels, and not only in Nis but in all of Serbia

The city conducted a very successful auction of five municipal parcels, despite the fact that the auction happened in the middle of the financial crises (March 2010). Factors of success included: (i) preparation and formal approval of a new set of good-quality procedures and legal documents, substantially attuned to efficiency expected by potential buyers, and (ii) marketing of the sites by a professional brokerage company

“Big picture” principles for the draft land policy (though the policy was not formally adopted)

Formulation of central issues to be addressed in the Strategy of Land Management and partial solutions (also not formally adopted).

One of the overall lessons learned and incorporated into land management practice was that the City Administration needs better “public diplomacy” and a good public relations approach in order to educate and influence the public opinion and to secure the understanding and support of particular groups such as local business circles and political parties.

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Some measures taken by governments in developed countries in times of austerity

Benchmarking key performance indicators, such as space consumption per full-time employee and annual O&M costs, and reducing the targets.

Consolidating agencies and services in smaller number of locations.

Moving from expensive prime locations and buildings to more modest settings.

“Greening” government assets.

Reducing asset portfolios (preferably, in a rational manner but sometimes in fire sales).

Useful References

2013 Report Card for America’s Infrastructure.- http://www.infrastructurereportcard.org/ Danger Ahead: The Coming Collapse of Canada’s Municipal Infrastructure, 2007.

http://www.fcm.ca/Documents/reports/Danger_Ahead_The_coming_collapse_of_Canadas_municipal_infrastructure_EN.pdf

Deferred Maintenance and Recapitalization of Municipal Property, City of Kara-Kul, Kyrgyzstan: Heading toward Collapse? – Case Study, NORC / PDI, 2013

Guidebook on Capital Investment Planning for Local Governments. – World Band, 2011. www.worldbank.org/urban/cipguidebook

HM Government. The State of the Estate in 2011. https://update.cabinetoffice.gov.uk/resource-library/state-estate-2011

Kaganova Olga. Valuation and Pricing of Government Land and Property: A Tip of a Growing Iceberg. - Real Estate Issues, 2012. http://www.cre.org/memberdata/pdfs/Government_Land_and_Property.pdf

Kaganova Olga. Government Property Assets in the Wake of the Dual Crisis in Public Finance and Real Estate: An Opportunity to Do Better Going Forward? – Real Estate Issues, 2010/2011, vol. 35, #3. http://www.cre.org/memberdata/pdfs/Government_Property_Assets.pdf

Kaganova Olga. Central and Local Governments as Land Regulators, Owners and Managers: Who Is Doing What? - Annual World Bank Conference on Land and Poverty, 2012. http://www.landandpoverty.com/agenda/pdfs/paper/kaganova_full_paper.pdf

Kaganova Olga. How to Make Auctions of Public Land Successful? – World Bank Annual Land Conference, 2010. http://siteresources.worldbank.org/INTHOUSINGLAND/Resources/339552-1272658002920/Kaganova.pdf

Peterson George E. Unlocking Land Values for Urban Infrastructure Finance: International Experience, Considerations for Indian Policy. - The World Bank, Policy Research Working Paper 6683. October 2013

Peterson, G. and O. Kaganova. Integrating Land Financing in Subnational Fiscal Management. – World Bank, Policy Research Working Paper # 5409. 2010

Peterson, George E. Unlocking Land Values to Finance Urban Infrastructure. - World Bank and PPIAF. Washington, DC. 2009.

NORC at the University of Chicago works on a wide range of asset management and governance issues in more than 20

countries, including surveys, performance evaluation and impact evaluation of infrastructure projects, and direct technical

assistance to and capacity building at recipient governments. NORC also conducts research that focuses on development of

innovative and appropriate asset management methodologies that are based on international good practices for cities in

developing and transition economies. Illustrative examples of NORC’s current asset management related projects:

o Municipal Asset Management: Estimating Operation and Maintenance Costs for Municipal Infrastructure. – Technical Guidelines, 2013.

o Technical assistance to the City of Ulaanbaatar on capital investment planning (CIP) and land value capture for infrastructure finance (for the World Bank)

o Where Are We with Management of Our Municipal Capital Assets? A Self-Assessment and Benchmarking Tool.

o Impact evaluation methodologies and an implementation plan for the Provincial Road Improvement and Maintenance (PRIM) Program Pilot Activity in Nusa Tenggara Barat (NTB), Indonesia (for AusAid).

For more information, contact Olga Kaganova at (301) 634 9540 or kaganova-olga@norc.org.