Olga Kaganova, a senior associate in Urban Institute's International Activities Center, provides technical assistance on real estate reforms and government decentralization throughout the world — from Eastern and Central Europe to the Middle East to Africa and Asia. She is co-editor of Managing Government Property Assets: International Experiences (UI Press, 2006).

Five Questions Archives

July 17, 2006

1. What are public property assets?

Physical properties owned by government at all levels. The term covers immoveable property — real estate — and moveable property, which could be equipment, vehicles, and so on. Also under this umbrella is such infrastructure as roads, utility facilities, water treatment plants, land fields and so on. Managing Government Property Assets mostly considers land and nonresidential real estate.

Urban Institute research on this issue started with a small assignment in 1999. I headed to Bulgaria to help a city mayor with a local government reform project that included managing municipal property. But when I looked at the disorder of municipal property in this city, I knew it wasn't an isolated problem.

Then the World Bank gave Urban Institute some modest funding to research good municipal property management practices internationally. This created a platform for us to expand our technical assistance work because — after that research — we knew what good practices meant. So we started implementing the best in countries transitioning to free markets.

Not long after, the Inter American Development Bank asked us to help Chile's government look at good practices for the federal level. This gave us knowledge of good practices for both municipal and national governments, and both could be transferred to countries where we were providing technical assistance.

2. How does the United States manage these assets compared with other countries?

All countries, including the United States, where asset management reform mostly stalled, do this about equally badly. Most governments — both local and central — don't know what they own. To manage what you own, you need to know what you have.

You could compare Washington, D.C. to Bishkek, the capital of Kyrgyzstan, at least until recently. Neither had records of sufficient quality and both regularly made unsound decisions. In 1997, Arthur Anderson was asked to study the status of asset management in the District. The accounting firm found that the city did not have consistent records of its real estate. Many cities often pay more than they should for real property or they receive less than the market price when they sell.

At the federal level, the United States has been pitifully behind such countries as New Zealand, Australia, the United Kingdom, and Canada. The major difference between the United States and these advanced reformers is their ability to introduce good nationwide policies and incentives for federal agencies to implement them.

Another obstacle to efficient management is this country's cumbersome legislative process. Disposal of federal property here requires congressional approval. How can you be efficient when you have to go to Congress to dispose of every piece of property? Only the departments of Defense and Veterans Affairs have special laws that allow them more freedom.

There are better ways to protect the public interest than through congressional oversight. For example, Australian government agencies can dispose of properties only on the open market at full market value. As a rule, no government should be allowed to dispose of or acquire property without competitive procedures.

3. What reforms have been tried?

Several cities in Croatia, for example, where the Urban Institute works now, have made enormous progress in asset management. They go this route because they have a history of self-governance and a highly developed legal culture, which is very important because asset management requires legal discipline.

Canada, another strong reformer, has combined development of nationwide policy with decentralized practical asset management and incentives to implement the policy. Let me give you an example. Prior to reform, Canada's government owned many "rusting properties." But a new policy created a strong incentive to sell unused properties by allowing departments to retain 100 percent of sale revenues, with several conditions attached. Government agencies became interested and started disposing of the properties.

Another plus is that Canada has a membership organization created by agencies and departments at all levels of government. They call this the National Executive Forum on Private Property, and this organization helps members to exchange knowledge.

The case of Panama shows how high the stakes can be. A study of Canal Zone properties had estimated that, if the property were gradually put on the market through competitive sales, the value could wipe out the country's entire national debt. Instead, much of the land was allowed to lose its value after being overrun by municipal garbage dumps and unregulated housing.

Talk about poor countries often ignores the public properties. Yes, the countries are cash poor, but not poor in the sense of real wealth concentrated in government-owned real estate. But such land wealth can invite corruption. Especially in countries where there are no democratic instruments, some basic rules for good asset management should be codified in the law and enforced.

4. Is there a role for real estate experts?

Without real estate experts, you cannot manage government property well. It's amazing how much this simple idea is neglected. Property asset management is highly technical and complex because real estate portfolios are a hodge-podge.

Cities own fire stations, police stations, other specialized facilities, administrative buildings, parking garages, storage facilities, vacant land, and — of course — streets and parks. To optimize the use of this diversified portfolio requires highly technical, very professional work. It's striking how few governments recognize that it takes professional expertise to manage these portfolios.

John Hentschel and Marilee Utter in their chapter on American cities give very interesting real-life examples of how lack of real estate expertise can lead to million dollar losses. This missed opportunity is what the governments and the public often do not understand. But in countries as rich as ours, this lack of efficiency in asset management is somewhat compensated by other resources. Bad asset management resonates stronger in economies and service delivery in poor countries where there is no fallback.

Yet, some American cities are pioneers of good asset management. In the past, Denver and Baltimore developed very good systems of managing their assets. Other good examples can be found across the country. In every such case, a real estate expert led the effort.

5. What are the unresolved "big issues?"

"One of our book's findings is that trying to remove politics from property asset management is like trying to remove sand from a beach. The real question is how to limit political influence. How to do this is a big issue.

Another big issue is the tie between accounting and asset management. A naïve hope ten years ago was that introducing accrual accounting would lead to better asset management. Now it's clear that accrual accounting is useful but not sufficient for good property asset management.

How do you value public property? Until recently, the thinking was leaning toward valuing all properties at market value. The IMF [International Monetary Fund] suggested as much in their guidance documents. Some countries introduced this approach -- Australia, New Zealand -- even for national parks. However, currently this approach is actively debated: Why attach a market value estimate to a beach or bridge that are not going to be sold? Now, people talk about "value in use." I say you value differently depending on the type of property. Some should clearly be at market value. Properties that are not supposed to be disposed at any event might have different values assigned to them.

Privatizing properties is still a big issue. The difference here is that, in most developed democracies, governments believe that they shouldn't own excess properties. The fundamental concept is that government should own only properties that they need for performing their functions. Governments in the former socialist countries are still eager to own properties for generating revenues or running businesses.