Dag Detter and Stefan Fölster
National and local governments own a potential gold mine of assets, mostly in the form of real estate and government-owned companies. With better governance, many of these assets—such as outdated buildings, undeveloped land, brownfield spaces, and air rights—could generate value and a revenue stream to fund government budgets, lower taxes, or pay for vital infrastructure. Unfortunately, most opportunities for better public wealth governance have been lost in the debate over state ownership versus privatization.
Consider a city like Boston, which by its own accounting does not appear to be particularly wealthy. The city reported total assets worth $3.8 billion in 2014, of which $1.4 billion is in real estate. The city’s liabilities of $4.6 billion exceed its assets, but this valuation largely underestimates the true value of the public assets. Using accounting conventions followed by most cities in the United States, Boston reports assets at book value, valued at historical costs. If it used the International Financial Reporting Standards, which require the use of market value, to assess the city’s holdings, the assets’ worth would be significantly higher than currently reported. In other words, the city is operating without fully leveraging its hidden wealth.
A recent independent estimate of the real property portfolio owned by the City of Boston, based on a consolidated list of publicly held real estate, gives an indicative valuation of the real estate alone of about $55 billion. Boston’s real estate portfolio includes holdings ranging from the Boston Housing Authority’s $4.7 billion worth of buildings and land to the Boston Public Market, valued at $5.6 million. (The valuations are from work by one of the authors of this article and Tolemi, a company that provides data analysis to local governments.)
Accounting for the market value at current use is the first step toward quality asset management. The next step is to understand the return the city earns from revenue and rising market values on its assets. This is essential not only to compare its current use with the potential best use, but also to understand whether performance has been satisfactory and show stakeholders that their wealth is managed responsibly.
While Boston does earn revenue on some of its holdings, the city, by design or by default, does not report any return on its assets—that is, it does not make any connection between the value of the assets and their yield. Assuming, cautiously, that the city could earn a 3 percent yield on its commercial assets with more professional and politically independent management, such a yield on a portfolio worth $55 billion would amount to an income of almost $1.7 billion a year. That is about four times Boston’s current capital plan of about $400 million. In other words, even with a modest yield, Boston could quadruple its infrastructure investments.
For a glimpse at what’s possible with better management of city-owned real estate, consider Copenhagen’s By og Havn (City and Port) urban development project—the largest in Europe, with 1,290 acres in waterfront and inland districts. The successful development of these assets consolidated under a single independent institution and balance sheet will contribute to funding and managing the construction of more than 33,000 new housing units, 100,000 work spaces, and a new university for more than 20,000 students, as well as new parks and retail and cultural facilities. Returns from City and Port have helped finance infrastructure investments, including expansion of the local metro system. Hamburg’s 157-hectare (388 acre) HafenCity development is another example. This inner-city district of old harbor buildings is being transformed into more than 2 million square meters of space for offices, hotels, shops, and residential areas.
Buiter, Willem. 1983. “Measurement of the Public Sector Deficit and Its Implications for Policy Evaluation and Design.” IMF Staff Papers 30(2), International Monetary Fund, Washington, DC.
Detter, Dag, and Stefan Fölster. 2015. The Public Wealth of Nations: How Management of Public Assets Can Boost or Bust Economic Growth. London: Palgrave Macmillan.
International Monetary Fund (IMF). 2013. “Another Look at Governments’Balance Sheets: The Role of Nonfinancial Assets.” IMF Working Paper 13/95, Washington DC.