17 th Annual ERES Conference Bocconi University

17 th Annual ERES Conference – Bocconi University – Milan, 24 June 2010 Public property management for Italian Municipalities. Framework, current issues and viable solutions. dott. Carlo Vermiglio Researcher of Business Administration Mediterranea University of Reggio Calabria Faculty of Law carlo. vermiglio@unirc. it

Agenda • • Purpose of the research; Local Governments as “Aziende Pubbliche”: brief comments; Main issues of Real Estate Property Strategies; A brief review of the subject with regards to Italian Public Sector; The divestment process of real estate asset: strengths and weaknesses Segment analysis as a viable tool for the enhancement of strategic planning and managerial control system in LGs’; The disaggregation of property portfolio within the organizational chart of a LGs’; Final remarks and future perspective.

Purpose of the research • Summarize recent developments in the field of public property management in the Italian public sector analyzing the problem from a multidimensional perspective; • Introduce a theoretical framework based on “segment analysis” of the whole management processes of a LGs’.

Local Governments as “Aziende Pubbliche”: Brief comments; • Azienda Pubblica Regions, Municipalities, Provinces; • Areas of Business Core Activities (provision of public services) Asset management Real Estate property management is a portion of “asset management activities” that mostly involves Local Governments (approximately 80% of total public portfolio is owned by local authorities )

Context analysis • The Financial Act for the 2009 -2011 period, has imposed a further effort to municipalities contributing to the reduction of public expenses; • Many local governments are facing financial distresses situations that are manifests or, in other cases, hidden by "cosmetic accounting actions“; • Loss of trust and credibility for government bodies; • Difficulties in the implementation of managerial enhancements and broad policies (short-term perspective); • – More theories than best practices –

Public Real Estate Property Management: some tricky issue • Lack of a well-structured information system on real estate portfolio; • Lack of skills and knowledges within the organizational chart of a LG; • Lack of a mid-long term strategic vision; • Absence of a “unified and systemic” approach; • Wideness and relevance of such “key variables” that affect the decision making process (social sustainability, intergenerational equity, risk assessment)

A brief review of the subject with regards to Italian Public Sector 1900 - 1990 1. Conservative approach 2. Strong regulatory framework 3. Low employment of property portfolio Real Estate = Burden 1990 - 2005 1. Centralization of tasks and responsibilities 2. Inventories updating processes (National Government) 3. New Public Mgt Real Estate = Valuable Item 2005 - 2010 1. Financial crisis 2. Huge divestments processes Real Estate = Crucial Asset

A brief review of the subject with regards to Italian Public Sector 2005 - 2010 1. Financial crisis 2. New regulatory framework 3. Huge divestments processes üabsence of a theoretical framework and of a wide-ranging and multidimensional vision of the "real estate management issues"; ümunicipalities are still not fully aware of the value of their assets; üreal estate divestments considered as a panacea to reach balance sheet equilibrium; üpoor estimation of the expected social, financial and economic fallouts in the mid-long term; üabsence of managerial control systems and internal reporting in order to monitor the role played by real estate asset in the provision of services for the community.

Strengths and Weaknesses of the divestment process of real estate properties Strengths Provision of additional incomes Reduction of previous liabilities Weaknesses Short- term perspective; Unreliability of the accounting system; Divestments adopted for financial constraint instead of “portfolio strategy” Poor consciousness about the contribution of real estate items to the achievement of the organization’s performances

Strengths and Weaknesses of the divestment process of real estate properties Provision. Strengths incomes of additional Reduction of previous liabilities Weaknesses Short- term perspective; Unreliability of the accounting system; Divestment assumed only for financial constraint instead of “portfolio strategy” Poor consciousness about the contribution of real estate items to the achievement of the organization’s performances

Toward a Segment analysis approach for the enhancement of strategic planning and managerial control system in LGs • municipalities present a significant heterogeneity of functions and processes that have to be managed – different segment – • it will be useful to investigate the different sub-systems that constitute the whole management of a LG, heightening relationships and linkages between the parts and highlighting the “key variables” that affect the decision-making process; • the key drivers of this approach are “space” and “time”. • “spatial segmentation” is a useful technique as it combines the analysis of the organization as a whole, “. . that for sub-systems, decomposing the system into its component parts. . recovering. . from general to particular, processes and combination of processes. . ”[Ferrero, 1980]; • “time disaggregation” disjoints performances and information into several time intervals (monthly, quarterly) measured on the basis of management’ needs, evaluating ex ante, ongoing and ex post, trends and performance achieved by each segment.

The main phases of segment analysis approach • “mapping of the organizational chart of LGs’, aimed at identifying segments, processes, and inputs assigned; • definition of a hierarchic scale of the processes; • property portfolio disaggregation in light of the functions performed; • exam of the “critical variables”; • analysis of the selectivity, heaviness and timeliness of the ”internal” reporting system to support decision-making process and “external” reporting to satisfy stakeholder’ accountability needs.

Segment analysis applied to Real Estate management • Mapping the segment

Segment analysis applied to Real Estate Management • Definition of a hierarchic scale of the processes; There at least three kind of processes: Administrative overhead processes “Core business” processes Asset management processes Property Management

Segment analysis applied to Real Estate Management • Property portfolio disaggregation in light of the functions performed; Real Estate Property Management "transversal" characteristic of real estate property portfolio, variously employed in the different functions and activities performed by the municipality Strategic Property Surplus Property Administrative overhead processes “Core business” processes Asset management processes

Segment analysis applied to Real Estate Management • Property portfolio disaggregation in light of the functions performed; Strategic cluster “Strategic cluster” of premises that are strictly linked to the core activities performed by a municipality Key Aspects • “securing the availability – for LGs’ – of properties through a wide range of contractual options”; • ensure the flexibility of the decision-making process; • align the buildings and its related real estate services (facility mgt, property maintenance ecc. . ) to the core business (processes) needs

Segment analysis applied to Real Estate Management • Property portfolio disaggregation in light of the functions performed; Strategic Cluster Direct Ownership Real Estate Property Strategies Leasing In-house providing Facilities Mgt Strategies Contracting-out Out-tasking Joint Ownership

Segment analysis applied to Real Estate Management • Property portfolio disaggregation in light of the functions performed; Surplus Property “Surplus cluster” of premises that are “mothballed” or in any case superfluous related to the organization’ needs Key Aspects • define an asset management strategy that guarantees the highest “profitability” and “maximization of the financial returns on the investment” • verify different employment’s solutions

Surplus Cluster Outsourcing Property Spin-off Public Funds Real Estate Asset Management Options Securitization STU Public Private Partnership

Exam of the “critical variables” Overall Strategy Social Issue Financial &Economic Organizational Risk level Operational Time Effect Asset & Property Mgt Issues Property & Facility Mgt Issues Political Issue

Exam of the “critical variables” Key Variables Key Figures Political Short-term political needs; Consensus sphere; Regulatory issues; Flexibility of the decision-making process; Social Impact Stakeholder perspective; Accountability degree; Tenants’ needs; Citizens expectations; Buildings’ role for the community; Operational Building’s Life-cycle perspective; Contract definition; Maintenance activity; Cleaning; Security; Energy saving; Sunk costs; Record keeping processes; Complexity costs; Space planning and management Organizational Lack of skills; Poor coordination of tasks within organization; Financial & Economic Budgetary constraints; Rebuilding costs; Investment calculation; Accounting systems; Rental system; Depreciation impact Transaction costs; Property taxes and fiscal impacts Equity Rate of Return; Capital costs; Risk Level Risk definition; Risk breakdown; Level of averseness Risk distribution during the time; Risk-shifting mechanisms; Time effects Low reversibility of the choices taken in the short term; Subjective perspective of the problem

Key aspects for the surplus cluster • • balance between political goals and stakeholder’ needs; financial stability; efficiency gains; risk assessment; investment planning; building life-cycle perspective accountability and disclosure on the decisions assumed

Concluding remarks • Flexible management of inflexible assets; • Flexibility is not synonymous of approximation; • In 1994, Byrne has observed that “. . three years ago the goal of achieving effective property asset management might have been, or should have been, a strategic aim for an existing authority. Now it has to be the actual target of such authorities, recognizing that some of them may not exist in a few years time”; • Sixteen years later we are dealing with local authorities who have not yet understood the importance of this statement. Survival of a municipality depends, to some extent, also on an effective and reliable real estate management strategy

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