To privatize or not? The economic crisis has revived interest in selling state-owned enterprises (SOEs) and property. Governments are using sophisticated software to estimate the potential of these assets and how to best manage them.
To balance government budgets, calls to consider privatization of state-owned enterprises and assets are increasing. Proponents tout the potential benefits of selling state-owned buildings, properties, and other assets, including reduced public debt burdens and better management. But this immediately raises questions regarding the valuation of the properties and assets. After all, no one wants to sell things below their worth. The whole idea of privatization is to get the best price possible on the market.
According to the Organization for Economic Cooperation and Development (OECD), the International Monetary Fund estimates that non-financial assets of rich-world countries amount to up to three-quarters of their gross domestic product. The U.S. government, for example, maintains over one million buildings, of which some 45,000 are not even used (source: OECD 2011). The Italian government owns properties valued at $1.6 trillion, while Sweden’s assets have a market value of $100-120 billion.
It can also make economic sense, however, to continue operating the properties while changing the way they are managed. Here, as well, a solid valuation base helps support the right decisions.
Of course, the size of property portfolios also depends on political leanings. Japan, France, and Norway, for example, have much more publicly-owned property than Australia or Canada. Nonetheless, the basic question remains: how these properties can be valuated objectively and whether they should be sold or managed.
In this process, three primary factors make accurate assessments difficult:
- Governments often lack information about their exact holdings.
- Many governments use a strict cash basis for their calculations, which causes difficulties in balancing commercial accounts. Future potential is ignored and there is a lack of transparency with regard to the costs incurred.
- Properties that the government wants to continue managing require professional administration for economic use, steered by political decisions.
A successful example of professional land use management in the public sector is Germany’s BImA (Federal Office for Real Estate Management), which manages nearly all of the federal government’s properties. This public agency owns some 500,000 hectares of land and 39,000 apartments. It manages more than 26,000 properties – including more than 4,400 service properties. Federal property assets are worth €23 billion; the annual balance sheet total is €27.5 billion. The main duties of the BImA include property management for the federal government and the exercise of owner and builder rights – in short, property management that includes operation and sales. This is in addition to sovereign tasks for the armed forces, the administration and management of federal forests, and management of contaminated sites.
The BImA, created in 2005, decided early on to implement a dedicated financial accounting system with comprehensive asset management. The agency has long relied on SAP software for its modeling and administration. “We have set up an effective, efficient property management system,” reports Jörg Kayser, representative of the BlmA Project and Business Management department. Kayser supported the entire SAP implementation at the agency and continues to coordinate functional requirements.
Contrary to its original plans, the BImA’s goal is no longer just asset disposal. “Our core business consists of uniform land use management, support for commercial facility management, and providing services for technical and infrastructure management,” explains Kayser. The federal agency is responsible for construction status management, rental contract management, service charge settlement, vacancy rates, the modeling of technical equipment, site management, and exploration methods.
A look at the figures shows that management is a higher priority than disposal: €2.5 billion in annual rental income dwarfs the sales proceeds of €500 million. Although the political significance of sales remains high, conventional real estate management is the much more complex task.
The broad range of services offered by the BImA makes it unique. “No other real estate service provider performs as many duties, to say nothing of these dimensions. SAP supports us with this. Their software lets use a wide range of functions,” says Kayser. Since the agency’s decision to implement SAP in 2005, the system has been expanded continually, with new modules implemented in addition to SAP ERP.
With its double-entry accounting system, the BlmA created the foundation for an objective, market-oriented valuation approach, implemented with financial accounting and controlling modules, along with profit center accounting. The precise asset management functions help achieve better valuation of the portfolio. The buildings were recorded in portfolio management; the overview is linked with accounting. Portfolio management also makes it possible to segment the real estate portfolio. To do so, values from the past five years and forecasts for the coming five years are used.
This makes it possible for owners to run through different strategic variants: should we invest in an object or dispose of it? If we invest, in what way and how much? In addition to intensive investment calculations, this approach also involves examining the development potential for the given building condition.. Ongoing operating expenses are also taken into account, with renovation for energy efficiency being a hot topic. Assessment of the market value is decisive before conversions; it can vary widely depending on the location. For personnel recruitment, it is important to create attractive locations — alternative construction options are supported by modules such as the project system.
With the support for its processes, the BImA has continued to expand its pioneering role in the public sector: integration between the SAP system and an ARIS solution helped optimize the processes. The agency uses SAP Solution Manager to coordinate the full production of development, test, training, and live landscapes, and the change request procedure has also become much more structured.
The BImA just recently implemented the first block of human capital management (HCM), taking its personnel administration, organization management, and time management to the state of the art. In future, areas such as e-Recruiting and personnel development will also go live. The federal agency has made great progress in its central procurement area: its supplier relationship management (SRM) will manage suppliers and contracts. This is no simple task – after all, it will involve processing up to 100,000 different service agreements. “We will push the promises to the limit!” says Kayser. With so much commitment and foresight, the BImA can look to the future with confidence.