65600 Knowledge PAPeRS Guidebook on Capital Investment Planning for Local Governments Design: miki@ultradesigns.com Knowledge PAPeRS Guidebook on Capital Investment Planning for Local Governments Olga Kaganova October 2011, No. 13 Urban Development Series Produced by the World Bank’s Urban Development and Local Government Unit of the Sustainable Development Network, the Urban Development Series discusses the challenge of urbanization and what it will mean for developing countries in the decades ahead. The Series aims to explore and delve more substantively into the core issues framed by the World Bank’s 2009 Urban Strategy Systems of Cities: Harnessing Urbanization for Growth and Poverty Alleviation. Across the ï¬?ve domains of the Urban Strategy, the Series provides a focal point for publications that seek to foster a better understanding of (i) the core elements of the city system, (ii) pro-poor policies, (iii) city economies, (iv) urban land and housing markets, (v) sustainable urban environment, and other urban issues germane to the urban development agenda for sustainable cities and communities. © 2011 THE WORLD BANK The statements, ï¬?ndings, and conclusions expressed in this paper are those of the authors only, and do not reflect the view of the Board of Executive Directors of the World Bank, or of the governments they represent. Contents Foreword vii Acknowledgments ix Abbreviations x Introduction 1 1. Overview: CIP at Local Governments and Its Links to Other Activities 3 2. Inputs to the Investment Planning Process 7 Sources of Suitable Investment Projects 7 Financial Aspects 16 Public Participation and Overall Transparency of the CIP Process 22 3. Assessing Local Government Financial Capacity 25 Analysis and Forecast of Revenues and Expensesx 25 Debt Financing and Debt Policy 27 4. Steps in the Investment Planning Process 29 Step 1. Determining the Organizational Structure 31 Step 2. Establishing Policies for Capital Investment Planning 32 Step 3. Establishing Project Selection Criteria 33 Step 4. Developing Calendar, Forms, and Instructions 33 Step 5. Preparing Project Requests 34 Step 6. Reviewing Project Requests 37 Step 7. Prioritizing Project Requests 38 Step 8. Matching Projects to Available Funding 39 Step 9. Drafting Capital Program and Budget Documents 40 Step 10. Adopting Capital Program and Budget 40 iii iv 5. Implementing and Monitoring Investment Projects 43 Preparing Projects for External Financing 43 Monitoring Projects in the Capital Budget and Their Implementation 44 6. Sustainability and Evolution of the Investment Planning Process 47 Build a Strong Administrative Structure 47 Define and Make Explicit Local Investment Policies 47 Technical Support through Outsourcing 48 Typical Obstacles to Overcome 48 Where to Start? 48 7. Case Studies: The Cities of Nis, Serbia and São Paulo, Brazil 51 Case Study 1. The City of Nis, Serbia 51 Case Study 2. The City of São Paulo, Brazil 58 Appendixes 1. Some Facts on Life Cycle Costing 67 2. Example of Comprehensive Infrastructure Replacement Policy, City of Shoreline, Minnesota, US (Population 27,000) 70 3. Sample Forms for Budget Analysis 72 4. Sample Debt Policy 75 5. Sample Policy for Capital Investment Planning 76 6. Samples of Capital Investment Rating 78 7. Sample CIP Budget Calendar 79 8. Sample Capital Investment Project Requests 80 9. Sample Checklist for Project Request Review 83 10. What Project Lenders or Grantors Can Request 86 11. Property Maintenance Guidelines 88 12. References and Useful Resources 98 Contents v Boxes 1. Impact of Land Use Density on Infrastructure Costs 9 2. Possible Classification of Annual Life Cycle Costs 12 3. Reserve Fund for School Facilities, Tokyo’s Chuo Ward. 13 4. Opportunities for Cost Savings and Other Benefits under Integrated Waste Management, Vancouver, Canada 14 5. Tokyo Waterworks: How to Finance a Water Pipeline Replacement Project 18 6. Benefit of Long-Term Planning and Public Participation: Contra Costa Water District, California (US) 22 7. Engaging the Population in Raising Funds for Water System Improvement: City of Uzgen, Kyrgyzstan 23 8. Approaches to CIP Committees: Lessons from the Case Studies 31 9. Cost Savings from a Simple Life Cycle Costing Decision. 36 10. Local Public Facilities Built through PPPs 37 Figures 1. How Capital Investment Planning Is Related to Other Local Government Activities 6 2. Steps in Investment Planning 30 Tables 1. Example of Basic Property Inventory 11 2. Projects to Consider for CIP 38 3. Sample Summary of Requested Project Costs, Available Revenues, and Unfunded Difference 40 4. Sample Fragment of Approved CIP, with First Year Approved Budget (2010) 41 5. Distribution of Nis CIP Projects by Sector and Source of Finance 54 6. Projects Included in Nis CIP, 2010–15 56 7. São Paulo Special Funds 60 8. Summary of 2009–12 Multi-Year Plan (PPA) 63 9. Budget Expense Breakdown, 2011 64 10. LOA Investment Breakdown 64 Foreword Urbanization is growing rapidly. For the first time in history, more than 50 percent (3.3 billion) of the world’s population reside in urban areas. By 2030, this number is expected to grow to almost 5 billion. Over 90 percent of this urban growth is taking place in developing countries. This unprecedented growth creates a pressing demand for local governments (LGs) in devel- oping countries to further invest in infrastructure and other assets to support economic and social development. Such investments require capital that often far exceeds available resources. The unavailability of capital, in turn, puts a premium on the need for LGs to build capacity to appraise and prioritize their investment decisions. This guidebook on capital investment planning is designed to help LG officers; managers of municipal utilities and service companies; and the staff of donor agencies, particularly in developing countries, to improve their capital investment decisions to build infrastructure and enhance service delivery to their citizens and businesses, particularly to the urban poor. The guidebook was developed with support from the Cities Alliance and in collaboration with the Urban Institute, which has extensive international experience in these issues. Zoubida Allaoua Director Finance, Economics and Urban Development Department The World Bank vii Tokyo, Japan Acknowledgments This guidebook was prepared by Olga Kaganova, Ph.D., CRE, FRICS, of the Urban Institute, with assistance from Brittany Lane, Urban Institute. Hiroaki Suzuki, Lead Urban Specialist, FEUUR, World Bank, provided guidance and advice. Other advisors were Bank managers Zoubida Allaoua, Director of Finance, Economics and Urban Development; and Abha Joshi Ghani, Sector Manager, Urban Development and Local Government Unit; as well as Thierry Tristan Paulais, Senior Urban Finance Specialist, the Secretariat of the Cities Alliance. The guidebook greatly benefited from peer reviews by World Bank staff Mihaly Kopanyi, Senior Infrastructure Specialist, South Asia; George G. Wolf, Jr., Consultant, Financial Solu- tions; Stephen George Karam, Lead Urban Economist, Europe and Central Asia; and Robert Maurer, Lead Urban Sector Specialist, Middle East and North Africa. Valuable insights on issues of public finance and life cycle costing were provided by Jamie Boex, Sharon Cooley, Deborah Kimble, Anthony Levitas, and Juliana Pigey, all of the Ur- ban Institute; Peter Lufkin, Whitestone Research; Bruce Bowes, City of Toronto; and Masato Sawaki, Consultant. Sarah Polen, Urban Institute, helped structure and edit the guidebook; and Victor Vorobyev, Consultant, helped prepare the tables and graphic materials. Case studies were prepared by Eduardo Rottmann, Consultant (São Paolo, Brazil); and Jovan- ka Manic, Consultant (Nis, Serbia). Property maintenance guidelines were prepared by John Rutledge, CRE, FRICS, Consultant. Chris Corps, MRICS, of Sequel IRM, Inc., prepared the case for box 4. Ming Zhang, Sector Manager, South Asia; and Christoph Pusch, Deputy Manager and Lead Disaster Risk Management Specialist, World Bank, provided very valu- able comments. Vivian Y.N. Hon, Senior Economist, Development Economics, World Bank, contributed to the development of the concept of the guidebook at an early stage, including coordinating with the Cities Alliance and Urban Institute. Xiaofeng Li, Operations Analyst; Adeaide Barra, Program Assistant; Laura De Brular, Information Analyst, and Nozomi Tokiwa, Urban Expert, all of the World Bank, provided administrative and logistical support. Alicia Hetzner, Senior Editor, World Bank, performed the final edit. This guidebook benefited from many existing documents: guidance materials on the subject and related topics developed under the sponsorship of the United States Agency for Interna- tional Development (USAID) and the World Bank; “best practiceâ€? materials of the Govern- ment Finance Officers Association (Canada and the United States); guidance documents in the public domain from a variety of developed country government agencies; Urban Institute publications; and the capital investment plans and related documents of many cities in both developed and developing countries. We gratefully acknowledge all of these contributions and, in most cases, provide specific references within the text. ix Abbreviations BRL Brazilian real CIP Capital Investment Planning DRM Disaster Risk Management Program GHG Greenhouse gas ICMS Imposto sobre Operações relativas à Circulação de Mercadorias e Prestação de Serviços de Transporte Interestadual e Intermunicipal e de Comunicação LCCA Life cycle cost analysis LDO Law for Budgetary Guidelines (São Paulo) LG Local government LOA Law for Annual Budget (São Paulo) M&R Maintenance and repair MEGA Municipal Economic Growth Activity O&M Operations and maintenance PPA Multi-Year Plan (São Paulo) PPP (P3) Public-private partnership R&M Restoration and modernization UI Urban Institute URF Urbanization Review Framework USAID United States Agency for International Development VAT Value-added tax WBDG Whole Building Design Guide x Introduction The purpose of this guidebook is to provide practical advice to local governments (LGs) in de- veloping countries on how to establish and maintain a process of planning and funding capital investment as a regular activity integrated with other activities of the LG and based on principles of good public management. The guidebook is addressed mainly to cities that have not yet estab- lished such a process or are interested in revising their current processes. The guidebook is written for decisionmakers and technical experts in LGs who are engaged or should be engaged in this process. The guidebook is designed primarily for urban LGs, but much of the information is useful for mixed or rural jurisdictions as well. This guidebook also is useful for the staffs of donor agencies and/or consultants who assist cities in municipal development projects. This guidebook is one instrument integrated with other World Bank urban programs and instru- ments that support sustainable urban development in developing countries within the frame- work of the World Bank Urban and Local Government Strategy. These other urban programs include the (1) Urbanization Review Framework (URF), which provides macro-level diagnostic tools to identify key policy issues related to urbanization and the investment priorities for it; (2) Eco2: Ecological Cities as Economic Cities (city or metropolitan sustainable urban development initiative that assists developing country cities to achieve environmental and economic sustain- ability; and (3) Disaster Risk Management Program (DRM). This guidebook will help LGs pre- pare specific capital investment plans (CIPs) based on their national urbanization strategies and city-based sustainable urban development plans elaborated through the Eco2 initiative and/or various DRM instruments. The guidebook will be especially useful to LGs if they have adopted their urbanization strategies and established clear investment priorities. Throughout this document, users will note that engaging in full-scale capital investment plan- ning implies that government decentralization has reached some depth. First, the LG needs to have the responsibility and authority to plan and make capital investments for a specified set of functions. Second, the LG should have the degree of fiscal autonomy that enables it to raise fund- ing for its capital investment either through local taxes, fees, and other local sources; or through borrowing or involving the private sector. At a minimum, the LG should have influence over how outside funding—from upper levels of government or donors—is spent. Furthermore, LGs should have the authority to carry out the local budgeting process because a regular capital invest- ment planning (CIP) process requires that updates of a capital investment plan be linked to the budgeting cycle. However, given that LGs’ financial autonomy varies widely among countries, the guidebook identifies the elements of the CIP process that can be useful to introduce even if government fiscal decentralization and local self-governance are still at an early stage. In other words, the guidebook suggests starting points from which the CIP process can be developed and advanced incrementally as local self-governance deepens and matures. 1 2 Guidebook on Capital Investment Planning for Local Governments How to Use This Guidebook The guidebook consists of seven chapters. The first two describe the context of the capital investment planning process. The purpose of these chapters is to describe how the CIP process needs to be positioned among other functions of LGs. Chapter 1 provides a general overview of how the CIP process is related to other areas of LG activity such as long-term planning, asset management, and financial planning and budgeting. Chapter 2 reviews more specifically how urban planning, strategic planning, and asset management serve (or should serve) as sources of potential capital investment projects. In particular, this chapter details how life cycle costing, a key component of asset management, should be incorporated into the CIP process. The sec- ond chapter also provides an overview of the general financial aspects (how LGs usually fund and finance their capital investments) and practical instruments for public participation in the CIP process. Both chapters refer readers to specialized sources of guidance on such subjects as asset management, municipal creditworthiness, and public-private partnerships (PPP). Chapter 3 is a more detailed discussion of how the financial capacity of a LG is assessed and how this assessment forms the basis of its CIP process. Chapters 4 and 5 present a step-by-step outline of how to establish and maintain a CIP process. These chapters are designed to provide practical help in setting up the CIP process. Chapter 6 provides suggestions on how to sustain the CIP process once it is established. This chapter also discusses a basic set of activities for starting the CIP process, which later can be enhanced incrementally. Note: Chapters 2 and 3 are important for understanding the context of the CIP process and its intrinsic links to other activities. Thus, they are recommended as mandatory reading for decisionmakers. However, technical experts interested only in the organizational and techni- cal aspects of the process can read chapter 1 and skip directly to chapter 4. They can review chapters 2 and 3 later. Chapter 7 presents two detailed case studies: the City of Nis in Serbia and the City of São Paulo in Brazil. The case studies illustrate how the CIP process functions in each city. The “lessons for the futureâ€? sections at the end of both case studies are likely to prove especially instructive because decisionmakers and others involved in CIP can take these lessons into ac- count while establishing and maintaining their own CIP processes. Finally, the appendixes provide samples of key forms and documents that LGs require to es- tablish the process suggested in chapters 4 and 5 and a list of useful references for various CIP-related issues. 1 Overview: CIP at Local Governments and Its Links to Other Activities In the context of the public sector, and of LGs (LGs) in The framework suggested here is grounded in an approach particular, capital investment is understood as investment that emerged approximately 30 years ago in certain North in the acquisition or building of new assets; or major American cities and since then has been tried and tested. repair and replacement of existing assets that have an Over the past 20 years, this approach has been recognized economic life longer than one year and a value above a as a “good practiceâ€? by various organizations and adopted specified threshold. Capital investment planning (CIP) by (and adapted) by cities in many other countries. LGs includes (or should include) capital investment by the government itself and by its entities, including enter- This guidebook also was influenced by core ideas of New prises established and owned by the government for the Public Management, an approach that, over the past 10– provision of municipal services (utility companies). CIP 15 years, has shaped how a growing number of countries also may include investment by the private sector through understand the management of government assets. Spe- public-private partnerships (PPP). cifically, the core of this guidebook’s approach builds on six assumptions: There is no universal approach to CIP by LGs, not least because the frameworks for local financial management 1. A LG takes care of assets only if they are needed to pro- vary greatly from country to country, and even within one vide municipal services to constituencies or to perform country. Moreover, LGs face at least four substantial chal- other mandatory obligations of the LG.2 lenges in dealing with capital investment planning: 2. Since the financial resources available to a LG for capi- tal projects are limited, a process should be established 1. Demands and desires for capital investment are always to evaluate the competing needs of various municipal ser- higher than available funding; therefore, LGs must make vices to maximize the use of the financial resources in the choices. areas of highest priority to the LG. 2. There is an intrinsic timing challenge. On the one hand, 3 Local financial policy needs to be formulated and enacted allocating funding for capital projects should be done to define in which assets to invest, capital investment pri- annually within a city’s budgeting cycle. On the other orities, and finance sources. hand, complex infrastructure projects may require sev- 4. The approach should be multiyear. eral years’ preparation and “packagingâ€? before external 5. Capital investment should be considered within the financing (grants or loans) can be sought. frameworks of life cycle costing and assessment of al- 3. Contemporary approaches to evaluate options for ternatives (for example, reducing demand for the ser- complex infrastructure projects usually exceed the LGs’ vice/facility, engaging the private sector). technical capacities, even in large cities.1 6. The process and results should be inclusive and trans- 4. Capital investment planning is an evolving area of parent, involving all departments, senior staff, the local public management. Local governments across the world are continuously trying new approaches. 2 In developing countries, this principle can be blurred by the fact that central government agencies, often with do- nor assistance, implement capital investment projects (for 1 An example of such an option would be whether to build example, water, sanitation, roads) on LG territory without infrastructure as a purely municipal project or to engage in a involving the LGs. Such projects have implications for LG PPP. CIP and budget, as discussed later in this guidebook. 3 4 Guidebook on Capital Investment Planning for Local Governments legislative body (Council), the business community, asset management3 and financial management. Neverthe- and the public. less, capital investment by LGs has a direct, multifaceted impact on local life. Three key implications are: Following such principles ensures that five activities take place: 1. Quality of life in a particular city and its attractive- ness to people and businesses depend, to a substantial 1. Local government does not spend its limited resources degree, on the quality of public infrastructure and re- on “frivolousâ€? investment in projects that should not lated services. In most cases, this infrastructure in turn be government business (for example, speculative com- is an outcome of local capital investment planning. mercial real estate). Given that public funding for capital projects usually 2. All needs are compared objectively. is limited, making the right choices among competing 3. Prudent long-term fiscal policy is exercised. investments becomes an important factor in the city’s 4. Innovative solutions at the project level are considered. long-term vitality and competitiveness. 5. Individuals have effective channels through which to 2. Long-lasting spatial effects of capital investment proj- express their preferences. ects impact local life after the projects have been im- plemented. Locating public capital investment wisely The fact that this framework balances the conflicting in- and according to private sector demand can serve as a terests and preferences of different stakeholders (residents, catalyst to attract private sector capital investment— businesses, municipal utility companies) is perhaps its on top of public investment—in a particular location strongest feature. In particular, such balancing makes the and thus create a node of urban renewal or growth. framework itself reasonably resilient after changes of rul- Conversely, errors in locating public capital projects ing party or ideology. Nevertheless, the above principles can dramatically reduce their utility and waste limited need to be made compatible with the complicated realities public resources. For instance, infrastructure-equipped in which LGs operate. This guidebook is an outline that land for industrial uses can sit vacant for years due to users can adjust to their local realities and needs. oversupply. Erroneous choices also can have negative socioeconomic implications. An example is housing The product of the CIP effort is a multiyear (usually 3–6 for the poor built by the government in locations far year) program of capital investment projects prioritized by from jobs and markets. year with anticipated beginning and completion dates, an- 3. Fiscal legacy. Capital investment by LGs often requires nual estimated costs, and proposed financing methods. The some form of long-term borrowing. Moreover, even if program usually is approved by a local elected body such as new properties and infrastructure are acquired or built a City Council. After approval, the program can be used in- without borrowing, making wise choices is important ternally, by city government itself; and externally, for exam- because funding spent unwisely could be used bet- ple, by seeking outside financing from donor institutions ter elsewhere. In addition, capital investment usually or banks. Each year, the program is reviewed, revised, and leads to ongoing annual operation and maintenance projected for an additional year. In particular, the approved expenses. CIP connects mid-range plans with the annual budgetary process. When the process is established, the CIP becomes Capital investment planning should be viewed in the a rolling plan, linked to the annual budgeting process: (1) context of the LG functions and activities with which it the previous (past) year is removed from the CIP, and a new is connected. Understanding these connections is critical year is added at the end of the CIP period; and (2) current- for developing the CIP process as an integral part of LG year capital budget expenditures are approved as a part of 3 Asset management is the process of acquiring, holding, the total budget. managing, operating, and disposing of capital assets (such as land, buildings, infrastructure facilities and networks, mov- Capital investment is not a standalone activity for LGs. able property) and other assets needed for attaining govern- Rather, it sits at the intersection of two interrelated areas: ment goals. Overview: CIP at Local Governments and Its Links to Other Activities 5 that can evolve and mature. Otherwise, CIP could be a to afford less, so school buildings will accommodate 2 or one-time effort, disconnected from other LG activities. even 3 shifts of students each day. Questions about which Figure 1 presents a “big-pictureâ€? overview of how CIP property assets and what costs LGs can, or should try to, typically relates to other areas within a reasonably mature afford go to the heart of good governance. These questions LG system (a system with reasonably established, long- should be asked in every city, because, at the end of the term spatial planning, budgeting and financial planning, day, all services come from public financial resources that and asset management). belong to the people. For example, who, if anybody, in the city government should have the use of a municipal The three green boxes depict factors that establish a funda- car? Should it be an inexpensive car or a Mercedes-Benz? mental context for CIP: conceptually, legally, socially, and Should a city build and maintain a municipal soccer field economically. First, a key principle of contemporary good or a swimming pool? public management is that the properties and infrastruc- ture in which LGs invest should be only those needed for In any event, service provision mandates, along with soci- the services and programs that these governments provide etal expectations and the wealth in the public sector, form for their populations. In turn, which services to provide the scope of properties and the standards for consumption are defined either by law (mandatory services) or by local and provision of services that the LG must address in its policies (discretionary services). For example, a law may CIP process (figure 1). These scopes and standards also require LGs to provide preschool childcare, so LG may in- profoundly influence what cities include in their develop- vest in daycare facilities.4 For example, the same law may ment planning and public budgets. Very often, however, not list elder care as a LG function. However, a city may the types of properties and property consumption limits decide to acquire/build and operate a nursing home for permitted for government capital investment have not the elderly. Providing this home would be a discretionary been formalized. The absence of formal rules and result- service. ing ambiguity opens numerous opportunities for unwise or excessive capital spending by short-sighted government The challenge here is that laws very often are silent about officials. In this regard, the CIP process, especially if it is the specific content, quantities, and qualities of the services transparent to the public, can be an important instrument that LGs must provide. In such cases, societal norms and for instilling discipline and accountability in government expectations–– often not formalized in any document–– officials. In particular, having a smart, written local policy come into play. These are underpinned by the overall specifying which capital expenses are permitted is “good wealth of the public sector (real or perceived), which, in practiceâ€? for addressing this issue (chapter 3). turn, often is related to regional economic conditions. For example, in one country, the public expects public schools The gray boxes in figure 1 show three interrelated factors to be available in quantities sufficient to accommodate all that provide input to the CIP progress: sources of projects, pupils in one shift. In another country, cities might be able funding, and finance. The complex relationships among them are reviewed in the next chapter. Finally, figure 1 depicts a very important aspect of CIP: decisions related 4 Note that nonproperty solutions can exist as well. For exam- ple, this service could be outsourced to private sector provid- to capital investment, city budgeting, and financing all ers with their own spaces. Noncapital investment solutions directly impact the city’s financial health and its future to certain needs will be discussed further in chapter 2. ability to fund services for its inhabitants. 6 Guidebook on Capital Investment Planning for Local Governments Figure 1. How Capital Investment Planning Is Related to Other Local Government Activities Legal mandate: Societal norms Services and responsibilities and expectations; required by law level of public wealth Scope of local government services/functions that require property; standards for service consumption/provision City development planning: City budgeting, operating, and capital n Urban planning: Spatial Capital growth, development, and investment redevelopment planning n City Development Strategy Capital financing Asset management of government property and infrastructure: Needs for maintenance, repair, asset replacement and expansion, and new assets Financial health of local government Source: Authors 2 Inputs to the Investment Planning Process Sources of Suitable Investment required to implement the spatial plan will be built,5 as Projects in Singapore. However, in many cities, the actions of dif- ferent departments and enterprises are inconsistent with City Development Planning stated long-term spatial plans. In addition, LGs them- selves often lag far behind in providing infrastructure ac- City development planning identifies potential capital cording to their own planning documents. investment needs and often is a source of projects for the CIP process. At least two components of city development Moreover, urbanization in developing countries often planning should be distinguished (figure 1). The first is reg- occurs so rapidly that even a well-prepared Master Plan ular urban planning, which deals with spatial aspects and becomes irrelevant. In these cases, land development by is practiced, in some form, by almost all cities. Forms of the private sector often goes ahead—with varying degrees spatial planning range from long-term development plans of informality—without public infrastructure. In turn, (typically, 10–20 years), such as a Master Plan, which usu- such development makes it necessary later to retrofit the ally are developed for an entire city; to shorter term detailed infrastructure. spatial plans for specific urban areas. All of these forms address the planning of urban growth and development In summary, to avoid gaps between what is planned and and the redevelopment of certain areas. Spatial plans usu- what is built, LGs need to secure: ally have components related to the infrastructure––both physical (roads, public transportation, water, sewage) and 1. Good institutional coordination both within the gov- social (schools, healthcare facilities)––required to imple- ernment and with external stakeholders to ensure that ment these plans. Therefore, implementation of urban a real link exists from a Master Plan to the implemen- tation of infrastructure investment that it stipulates plans implies that new infrastructure, for which the LG or 2. Increased capacity to physically deliver the infrastruc- its enterprises are responsible, should be built, which, in ture projects in a timely manner, at a pace consistent turn, requires capital investment. Urban planning also may with urban growth. In this regard, a simple solution include an infrastructure retrofit for areas previously devel- that can work in some countries is to engage the pri- oped formally or informally. vate sector to design and build infrastructure according to plan specifications instead of relying on the govern- There are several challenges related to incorporating the ment’s own capacity. infrastructure stipulated by a spatial development plan such as a Master Plan into projects for a capital investment In addition, LGs often get caught between the complex plan. First, when it comes to suggesting projects for capi- and demanding requirements of the spatial plans and zon- tal investment, most of the “realâ€? planning is done by line ing regulations imposed by a central government and these departments or enterprises responsible for services such LGs’ limited capacity to develop such plans and regulations as roads, water supply, sewage, or public transit systems. locally and enforce them when they exist. If these multiple entities all act consistently by following the spatial concept of a Master Plan, the infrastructure 5 Assuming resources allow. 7 8 Guidebook on Capital Investment Planning for Local Governments Another layer of complexity is that, in many cities, Mas- It is important to note that the CIP process is exactly the ter Plans are outdated or lag behind rapid urban develop- point at which spatial planning aspects intersect with fi- ment and often are not responsive to signals of economic nancial capacities and realities. One of the functions of demand for land for development or redevelopment. In CIP is to link these aspects. these cases, the spatial planning system needs to be revised and adjusted to meet the needs of fast-paced urbanization The second planning component that could supply inputs and increasing competition to attract and retain private for the CIP process is a City Development Strategy or investment and jobs. similar document such as a Strategic Economic Develop- ment Plan. Such documents exist less often than spatial Second, many projects from Master Plans, especially those urban plans, because they are required less often by law. related to transportation infrastructure in large cities, are However, if a City Development Strategy or a similar too expensive for LGs to finance on their own, even if they document exists, implementation of some of its elements can borrow. Examples of such projects are new major ring typically requires capital investment. Therefore, incor- or radial roads, bridges, passenger rail systems (under- and porating these needs in the CIP process is critical if LGs above-ground), and major water treatment plants. Imple- want their strategies implemented. mentation of such projects then becomes dependent on whether higher levels of government are ready to co-fund For example, in the City of Nis, Serbia (Case Study 1), or fully fund them. Similarly, for smaller cities, many cap- five projects with the highest priorities in the CIP corre- ital investment projects that by law are the responsibility spond to specific actions explicitly identified in the recent of LGs are beyond their financial capacities. Sometimes, City Development Strategy. These actions include recon- an entire group of projects can be included in a capital in- struction and expansion of the local airport; construction vestment plan only conditionally, on the assumption that of social housing; and transmission, collection and treat- the central government will provide the funding. ment of wastewater. The challenges are similar to ones outlined above: However, the cost of building public infrastructure for areas developing as a result of urban growth depends, to First, is there any entity in the city government tasked with a substantial extent, on whether these areas are planned implementing priority capital projects from the Strategy? as low-density sprawls or more compact, higher density Alternatively, was the responsibility for specific projects areas. By planning higher density residential land uses, explicitly allocated to specific entities, which would pro- cities can shorten the length of all linear infrastructure mote the projects in CIP? If not, the capital projects from networks (roads, streets, water lines), thus substantially the Strategy are unlikely to be implemented. reducing the capital and life cycle costs of the networks per household (box 1). Second, how feasible are these projects based on the LG’s financial capacity? In this regard, the quality of the Strat- The above peculiarities of urban planning have at least egy and its fiscal considerations are critical. Indeed, if the two implications. First, at a practical level, urban plan- Strategy did not include estimates of the costs and re- ners should be required to attach price tags to their urban sources needed to implement various projects, the chances plans (or, using more formal terminology, conduct finan- of implementation are substantially reduced. Of course, cial impact studies); and these costs should be based on even if estimates were included, if the costs of implement- a credible methodology. More broadly, both citizens and ing a project are too high, it is unlikely to be implemented. LGs should begin to be more conscious about the sustain- ability of land use patterns in their cities and the public In contrast, Strategies that rely on mobilizing the resources costs associated with low-density land uses. under a jurisdiction’s control can be especially promising. Inputs to the Investment Planning Process 9 Box 1. Impact of Land Use Density on Infrastructure Costs Using the scenarios in the Life Cycle Costing Tool developed by the Canada Mortgage Housing Corporation (CMHC), it is possible to estimate public infrastructure costs at different densities of land development. Let us compare two scenarios: 1. A low-density “conventional suburban developmentâ€? with approximately 22 residential units per hectare (ha), a curvilinear road network (requiring more km of roads than would a grid), and single-use residential development 2. A high-density “downtown coreâ€? or a “neotraditionalâ€? development with 272 residential units per ha, a grid road network (requiring fewer km of roads than would a curvilinear network), and mixed use (box table 1). Box table 1. Gross Residential Housing Residential area area units density (Land, m2/ Scenario (ha) (%) (ha) No. housing unit) Neotraditional/High density 40 50 20 5,430 37 Conventional suburban/Low density 40 100 40 860 465 The CMHC tool estimates that the “neotraditional high-densityâ€? scenario has lower initial capital costs and lower an- nualized life cycle costs per household than the conventional suburban development. The annualized life cycle cost is an annual average of the total life cycle cost calculated here as the sum of the initial capital costs, annual operating costs, and replacement costs amortized over a 75-year time horizon. Within speciï¬?c cost categories, annualized life cycle costs that are linked to population size, such as most municipal services (for example, ï¬?re, police, and waste management), remained approximately the same in each scenario. How- ever, in cost categories linked to the density of a development, such as hard infrastructure, annualized life cycle costs are almost 200 percent lower in the more dense (neotraditional) developments. Initial capital costs show an even greater difference between the two scenarios: the hard infrastructure costs in high-density developments account for less than 25 percent of the same costs in low-density developments. In general, initial capital costs per household in the high-density developments represented in the CMHC Life Cycle Costing Tool are more than 250 percent lower than the per-household initial capital costs for low-density developments. Annual operating costs for both scenarios are approximately the same (box table 2). Box table 2. Scenario Initial capital costs Annual operating costs Annualized life cycle costs Total Household Total Household Total Household development costs development costs development costs ($) ($/HH) ($) ($/HH) ($) ($/HH) Downtown core/ High 41,163,802 5,725 34,562,280 5,825 37,389,283 6,086 density Outer suburbs/ 13,266,191 15,426 5,065,340 5,890 5,898,170 6,858 Low density Source: CMHC 2008, 6–7. Note: HH = household. 10 Guidebook on Capital Investment Planning for Local Governments Asset Management that could be “flashierâ€? for politicians to support than the prosaic replacement of invisible pipes and pumps. Asset management is the prime area of LG activity that nâ–  The initial construction cost of most government capital supplies projects for the CIP process. The capital assets assets—from general municipal buildings to city roads— under LG control include property and infrastructure constitutes only a part of the total cost incurred by the such as buildings, roads, parks, water and sewage systems, LG during the useful life of these assets. (This total cost city landfills, and vehicle fleets. Among other things, as- set management means managing each property or facility is called the life cycle cost, defined below.) Moreover, as for its entire life, as long as it is owned or controlled by a rule, the construction cost makes up only a fraction of a LG or its entities (institutions, enterprises). Asset man- the total cost incurred during the 50-year life of a facil- agement addresses the costs associated with property’s life ity. This fact demonstrates very clearly that capital invest- cycle: the acquisition cost, operation and maintenance ment is only the first, and not the main, cost related to and repair costs during the life of the asset, and replace- government assets. The implication is that planning any ment or disposition cost of replacing it when the property new construction or capital reconstruction must be linked exhausts its useful economic life. to simultaneous planning for the future institutional and financial operation of the new property. In particular, LGs Which life cycle costs are included in capital investment should define (1) which entity will manage and operate planning; and which, instead, are a part of operating the new infrastructure and (2) from which sources the budgets vary across countries, even among cities in one operating expenses will be funded. Thus, figure 1 has ar- country (for instance, depending on city size). Which rows indicating that capital investment planning has an costs are included also can vary depending on accounting impact on both asset management and city budgeting. If rules. Often, this division between capital and operating any new capital asset is planned to be built or purchased, expenses is a subject of convention, locally or nationally. managing it during its life as government property would However, some of these costs—buying land for a new become a task of asset management. In addition, future building, building a new facility, conducting major repair operating costs should be factored into obligations for the or modernizing an existing facility, or replacing long-lived city operating budget (unless this asset is used by a fully components of a building (for example, the roof )—usu- independent and financially self-sustaining operator). ally are included in capital investment planning. For LGs with advanced asset management, all asset activi- Most importantly, regardless of the specifics of exactly ties, including capital planning, originate from a Strategic what is considered capital investment, there are deep Asset Management Plan, which defines long-term inten- connections between asset management and capital in- tions regarding assets based on the government’s service vestment planning, which LGs must factor into the CIP and program needs. When a Strategic Asset Management process. These connections are: Plan does not exist, three areas of asset management be- nâ–  In cities in which some infrastructure already exists, come critically important for the capital planning process a proportion of capital expenses (sometimes, a very and associated budgeting: substantial part) should be appropriated not for new construction but for the repair and replacement of ex- 1. Inventorying assets isting assets. The necessity to allocate capital funding 2. Tying capital investment to life cycle costing to existing assets implies that the asset condition and 3. Estimating long-term repair and replacement needs for needs assessment by departments and enterprises––part the entire asset portfolio. of their asset management––should produce a signifi- cant number of investment requests. Moreover, it can In addition, contemporary asset management can sug- be useful to have formal or informal policies that give gest new, alternative options for addressing infrastructure priority to the repair and replacement of existing core needs, including private sector participation and integrat- infrastructure over the construction of new facilities ed service provision. Inputs to the Investment Planning Process 11 Table 1. Example of Basic Property Inventory Current occupancy Building condition value (thousands, Year of construc- Property current Total floor area local currency) Building book Cadastre no. Land area Address function (sq m) (sq m) Notes tion NN (%) 1 2 3 4 5 6 7 8 9 10 11 1 Administrative Chapichi 170,477 7,500 2,600 1985 Good 80,670 80 building St., 4 2 Kindergarten # 1 Sevani NA 580 350 1980 Satisfactory 3,500 100 St., 2 3 Kindergarten # 2 River NA 990 690 1964 Bad 5,018 33 St., 57 4 Culture center Karmin NA 6,500 4,500 1984 Bad 61,732 50 St., 39 Inventorying assets. To reflect conditions and the main- Usually, there are records that can be used as initial data tenance and repair needs of the assets in the CIP process, sources for the inventory. The goal is to identify all capital a LG needs use these data to create and maintain an asset assets and assemble initial data that would help estimate inventory. Many LGs do not maintain a comprehensive and forecast asset repair and replacement needs. The le- inventory of their capital assets. It is recommended that gal or line departments typically have records of existing LGs start by creating a basic inventory with a simple capital assets. Often, asset ledgers are maintained by LG database. As the scope and sophistication of their asset accountants. Department managers and technical experts management as a whole grows, the LGs can advance in- also can provide valuable information on the current con- crementally to a more sophisticated database such as one dition of existing capital assets. linked to a geographic information system (GIS). Furthermore, assets usually are grouped in inventory da- As a start, the inventory should include a brief description tabases, for example, by asset type or by holders/managers of the asset (or group of assets), its location, condition, (departments, municipal enterprises). Typical groupings year of acquisition, remaining useful life, and replacement may include: cost.6 The initial inventory can be a simple spreadsheet (see table 1 for an example), which later can be imported nâ–  Utility and sanitation assets, including sewer and water into a more sophisticated database. Even basic inventory systems, solid waste facilities, and municipal electric information can help prioritize capital project needs. and lighting systems 6 In asset management, a common practice is to express vari- nâ–  Highways, roads, and bridges ous expenses associated with maintenance, repair, and op- nâ–  Public buildings (in large cities, this portfolio can be erations of a property as percentages of replacement cost. In further specialized: government use, education, sport, this document, replacement cost includes the base construc- culture, public housing) tion cost; supervision, inspection, and overhead (typically 6% of base construction cost); design and planning (9%); nâ–  Land or rights to land and contingencies (5%). (Whitestone Research 2010–11) nâ–  Certain improvements to land other than buildings 12 Guidebook on Capital Investment Planning for Local Governments nâ–  Certain equipment, vehicles, and furnishings. Box 2. Possible Classification A set of sample forms for asset inventorying can be found, of Annual Life Cycle Costs for example, in “Nova Scotia Implementation Guide to Tangible Capital Assets for Municipalitiesâ€? and adapted • Preventive maintenance and Maintenance or simplified for local conditions.7 minor repair and repair • Unscheduled maintenance (M&R) It is important to note that the content of the inventory • Renewal and replacement database depends on the tasks for which the data will be • Replacement due to obsoles- used. The data outlined above is needed to plan capital Restoration cence and modern- • Change-in-use modifications investment and life cycle costing. However, for other asset ization (R&M) • Policy-mandated modernization management tasks, such as optimization of the building (also known • Acts of war and nature portfolio, a LG would need to collect and maintain other as deprecia- • Restoration from neglect information (for example, the level of vacancy of each tion) • Long-lived component replace- building). ment • Custodial Life cycle costing. The useful life of buildings and infra- • Energy structure facilities and networks can be 25–75 years or • Grounds even longer. The costs associated with the useful life in- • Management clude: Operations • Pest control • Refuse nâ–  Construction/acquisition • Road clearance nâ–  Annual expenses • Security nâ–  Disposition. • Telecoms, water, sewer Source: Whitestone Research 2010. The annual costs, in turn, have many components. There is no unified view on how these components should be of the asset (figure A1). As noted, these costs vary geo- grouped. In addition, annual costs depend on the type of graphically as well. facility, materials and equipment used, climate (in some 2. Annual operations costs, compared with replacement places, heating is needed; in others, air conditioning; in costs, also vary substantially by type of asset and con- some, both or none), and labor. One of the established stitute a substantial amount (table A1). The M&R and classifications is presented in box 2 and includes three operations costs together, taken over the asset lifetime, groups of costs: maintenance and repair, operations, and are much larger than the initial (replacement) cost. Just restoration and modernization (or accumulation of as with the M&R costs, the operations costs vary very funding for replacement after the end of the useful life). substantially geographically. 3. Less certainty and agreement exists about what should Moreover, as mentioned above, there are differences in in- be included in annual restoration and modernization terpreting which expenses should be paid from the operat- (R&M) costs, which also are called recapitalization or ing budget and which from the capital budget. However, depreciation, and how these costs should be distributed commonly recognized ideas underpin good public sector over the useful lives of assets or beyond.8 Nevertheless, it asset management policies and practices: is commonly recognized that sufficient resources should be budgeted and accumulated to fund restoration and 1. Maintenance and repair (M&R) costs are distributed modernization or to replace the asset after the end of unevenly during an asset’s life and depend on the type 7 http://www.gov.ns.ca/snsmr/muns/manuals/PDF/guide_ 8 Detailed discussion and references can be found in Lufkin tangible_capital.pdf and others 2005. Inputs to the Investment Planning Process 13 4. The total annual costs associated with properties/facilities Box 3. Reserve Fund for School during their lives are almost always many times higher than Facilities, Tokyo’s Chuo Ward the initial construction costs. However, these annual costs may be lower (although still more than the initial construc- As do many other administrative areas in Japan, Chuo tion cost) for facilities that cost more to build—if the sav- Ward, 1 of the 23 wards of Tokyo’s metropolitan govern- ings on the M&R and operations costs exceed the extra ment, keeps a fund for the maintenance, rehabilitation, construction cost (box 4). The same is true for the costs and replacement of school facilities. The ward sets aside annually an amount close to the depreciation amount for of certain types of repair, replacement, or renovation. For the ward’s 16 elementary schools and 4 lower second- example, replacing an old air conditioning system with a ary schools. The fund may be used only for the intended modern, energy-efficient one can lead to substantial savings purposes unless the ward council decides otherwise. on annual energy cost, so that in a few years, the investment is recaptured and life cycle savings begin. At the end of FY 2009, the balance of the fund stood 5. Failing to properly fund M&R or R&M costs results at approximately Â¥10 billion (US$100 million), which in deferred maintenance, repair, and recapitalization. was sufï¬?cient to construct 3 school buildings. Under a These, in turn, diminish the useful life of the assets and long-term investment plan, Chuo Ward plans to replace the initial investment in their construction. three school buildings in a few years. Source: Suzuki and others 2010. A “good practiceâ€? method for accumulating proper resources for maintenance, rehabilitation, and replacement of public facilities and infrastructure is to set up special budgetary funds for these purposes. Box 3 illustrates how special funds its useful life (box 3). Moreover, without proper R&M, have been used by LGs in Japan. Appendix 2 provides an even if the M&R and operations costs are fully covered, example of a local comprehensive infrastructure replacement it is impossible to maintain the productive capacity of policy in a United States town that also relies on special re- public assets during their life spans. As a result, without placement funds. R&M, the overall life cycle cost will be higher, because per- forming emergency repairs costs more than planned repair The above review has very practical implications for LGs’ and replacement. Despite many methodological differ- asset management in general and the CIP process in par- ences among property and asset managers, engineers, ticular: and accountants, the consensus is that the simplest rough estimates of needed annual allocations for R&M can be nâ–  Planning any capital expense should be accompanied calculated as linear depreciation, that is, by dividing the by planning for future annual costs. This is good prac- replacement cost of the asset by its assumed life (table A1). tice even if these costs initially can be estimated only This amount may be insufficient, especially at certain approximately, for example, when local data or regional periods of the life cycle or if the asset has accumulated benchmarks are not available for a more accurate fore- deferred investment. Nevertheless, systematically al- cast. Based on appendix 1, very rough initial estimates locating and using the amount for either real R&M expressed as percentages of the replacement cost are works, or accumulating it in an earmarked fund for use annual maintenance and repair (M&R), 2 percent–6 when needed, would be significantly better than the percent; annual operations costs, 5 percent–19 percent; typical systematic deferred investment that takes place and annual depreciation, 2 percent–3 percent (see defi- at the local level in most of the world. One challenge nition in footnote 5). in establishing and protecting such a fund is that local nâ–  Moreover, when projects are evaluated during the CIP politicians might feel that establishing a reserve fund process, if funding sources for future M&R and opera- dedicated for future investment or refurbishment is a tions costs for new capital assets cannot be realistically poor use of resources when there are always immediate planned, it is advisable to consider whether this capital needs for other expenditures. investment should be postponed (chapter 4). 14 Guidebook on Capital Investment Planning for Local Governments Box 4. Opportunities for Cost Savings and Other Benefits under Integrated Waste Management, Vancouver, Canada Following European practices of integrated waste management, a 2007 British Columbia government study assessed how improved business cases could lead to more sustainable management of waste to generate energy, reduce costs and greenhouse gas (GHG) emissions, and other beneï¬?ts. Subsequent policy changes encouraged municipalities to pursue resource recovery. As a part of this change, in 2009 Sequel IRM, Inc. analyzed how to maximize waste-related beneï¬?ts for Vancouver’s North Shore communities. The analysis projected that over $1.14 billion in life cycle savings could be achieved compared to traditional practices. nâ–  A traditional waste management solution assumed building a new tertiary treatment plant with minor energy capture, for a projected cost of $335 million with annual gross operations and maintenance (O&M) costs of $7.4 million, be- fore ï¬?nancing. However once the ï¬?nancing and full life cycle costs were included, the actual total cost to the taxpayer rose to $1.1 billion over the 50-year life cycle projection. nâ–  Six nontraditional scenarios also were assessed. The best scenario (“preferred systemâ€?) assumed combining liquid and solid organic waste processing with sequenced but well-established technologies (anaerobic digesters, gasiï¬?cation, district energy loop with exchangers and pumps). The preferred scenario proposed and paid for replacing building heating boilers in nearly 300 properties to be able to sell them the recovered heat, cold, and water. This scenario also reduced GHG. It is projected to generate a net dividend to the taxpayers of $40 million after all of the costs––construc- tion, eventual replacement, O&M, and ï¬?nance––excluding inflation, are funded. nâ–  The preferred system’s initial costs were more than twice those of the traditional liquid waste treatment approach. However, the preferred system’s full costs will be covered by revenues. A cost-focused approach that minimizes costs would fail to identify this value. nâ–  The model measured success on minimizing net tax per household over 50 years. Since sustainable investment beneï¬?ts usually are long term, it is critical to use a life cycle valuation approach. A traditional discounted cash flow analysis was compared with the comprehensive model. The analysis did not reveal the potential of the preferred system largely because discounting tends to emphasize early revenues and reduce long-term value. The reason is that the issue with long-term, sustainable infrastructure is less about the initial value, which is lowered due to the cost of ï¬?nance, and more about the long-term equity created. Long-term equity is especially important for community infrastructure. nâ–  Environmental beneï¬?ts were fully integrated and priced. GHG reductions were expected to be 23 percent–25 percent below 2007 levels––roughly 5 times Kyoto Protocol targets. Ten percent of water would be recovered initially and dis- tributed through a 33-mile energy and water system, supplying the community with capacity for signiï¬?cant expansion. nâ–  The central driver was a strong proï¬?t focus and use of a comprehensive, integrated full life cycle valuation model, linked with an engineering and energy management model. While complex—with over 1,800 cash flows and 9,000 engineering variables—the underlying method is a business valuation model known in the private sector. Financial, community, and environmental goals all were measured to optimize the value gained from selling the recovered resources. The projected $1.14 billion in savings is for a community of approximately 175,000. The project is moving toward implementation: recommendations have been accepted by Metro Vancouver’s Board, and an implementation plan is being prepared. Wider application could create substantial tax and environmental beneï¬?ts, estimated at over $10 billion for metropolitan Vancouver alone. The discussion is moving to focus on policy changes in waste management and business case modeling and reporting. Source: Adapted from Metro Vancouver 2010. Inputs to the Investment Planning Process 15 nâ–  Property and facility managers in each department or total cost comprises additional components, such as the municipal company dealing with a specific portfolio of cost of land and borrowing. If borrowing is a financ- assets should establish and maintain systemized logs of ing option, LGs should examine the financial viability of all maintenance, repair, replacement, and operations projects with the cost of borrowing included (chapter 3). works performed; and of the annual costs associated The cost of land also should be accounted for in many with these works for each capital asset under their care. cases, even if a land site is taken from municipal land Simple guidance on basic low-technology maintenance stock and no monetary outlay is needed.9 When land and repair records for regular properties (buildings) is must be acquired—for example, by expropriation to widen provided in appendix 10. The managers should group streets—this cost obviously must be included. the works/expenses in meaningful classes, similar to those shown in box 2. Grouping enables managers to to- Forecasting long-term repair, replacement, recapitaliza- tal the annual costs for each group and calculate simple tion, and expansion needs. The useful life of buildings annual indices for each asset (table A1). and infrastructure facilities and networks is 25–75 years or nâ–  In addition, managers should set up a system to evalu- even longer. At the same time, the number of assets in even ate the condition of assets and reasonable schedules for mid-sized cities can be counted in the hundreds and easily maintenance, repair, and replacement. Practical recom- becomes thousands as cities grow. With this in mind, and mendations and forms are provided in appendix 10. given that the annual life cycle needs of each asset fluctu- Accumulated over time, the records of factual past ex- ate over its lifespan (figure A1), the total annual needs for penses, combined with an evaluation of the condition capital investment in the entire portfolio unavoidably will fluctuate as well (see example in figure A2). of the assets, will become an important basis both for objectively allocating the next year’s operating budget Such fluctuations imply that that prudent asset management among different assets and for developing CIP requests. requires projecting the capital needs for the entire portfolio, or at least for groups of assets, for a time horizon much Note that one element of life cycle cost that is not discussed longer than the 3 to 6 years covered by the CIP.10 There are here is disposition cost. It usually consists only of the trans- no commonly accepted rules for how far into the future to action cost if the property is sold at the end of its useful forecast, and to date not many LGs have established this life. The transaction cost would include the administrative prudent practice. Making such projections is more diffi- costs of the municipal lawyer and other staff time and of the cult for large cities with thousands of capital assets than for documents needed for disposal. However, in some cases, small cities. However, in practice, the task is simplified by the disposition cost can be very substantial and should be the fact that different types of assets (water works, roads, foreseen over the asset life cycle. A typical example is the schools) are managed by different departments or enterpris- cost of closing a landfill and rehabilitating the land. For es. Consequently, creating and maintaining a system that example, if a LG signs a contract with a private operator to enables long-term projections for each portfolio can be a operate the landfill for 20 years, does the contract stipulate realistic task for advanced asset management and long-term how the closure will be paid for? Or after contract expira- financial planning. Moreover, an initial step, from which tion, will the LG be left to cover this cost? Other cases with a system could grow incrementally, would be to identify potentially significant disposition costs are those in which the most important public-service properties and facilities substantial demolition/debris removal is required or a land (schools, hospitals, waterworks, or whatever is under LG site requires decontaminating before it can be disposed of or reused. For LGs, it is important to make provisions for 9 In particular, in some cases, the final “productâ€? of an in- such disposition (or end-of-contract) costs in the initial vestment will not be a mandatory LC function, or could contracts with land or property lessees or users. be delivered by the private sector (for example, housing or parking garages). In such cases, to know the total cost to society, the LG must include the market value of the land in Another important note related to capital investment the estimated investment cost. planning is that the construction cost and the life cycle 10 Note that, in large cities, the relative range of fluctuations cost together still do not constitute the total cost. The will be smaller. 16 Guidebook on Capital Investment Planning for Local Governments management) and start forecasting long-term investment Municipal managers should not have illusions; this kind needs for these properties/systems only. of justification is not easy. Governments around the world still experiment with how to make such decisions cost- A useful advanced instrument of long-term planning for efficiently. Some PPP guidance documents specifically municipal utilities is to develop a strategic plan for a spe- designed for LGs are suggested in the References. These cific service (for example, water/sewerage, solid waste). documents include (1) a guidebook prepared by the Cities This process is similar to the process of developing a stra- Development Initiative for Asia; (2) a toolkit for pro-poor tegic plan for a city. This strategy would include a capital municipal PPPs based on experiences in Europe and the investment plan for the particular utility, which should, in Former Soviet Union (3) an interactive learning guide- the ideal case, feed into the LG CIP process. book on municipal PPPs along with two toolkits on mu- nicipal PPPs in solid waste management and in water and Finally, it is the function of asset managers to identify, in- sanitation, respectively. vestigate, and justify the use of new modes of delivering and financing public services. For example, box 4 illustrates how Within the context of the current guidebook, an impor- new technologies and a paradigm change in such traditional tant question is how considering a PPP should be linked service areas as waste management could change the finan- with the CIP process (chapter 3). Nevertheless, PPPs deal- cial profile of a service from a cost center to a profit center ing with capital investment are not usually recommended and produce environmental benefits along the way. There for LGs that are only beginning to introduce systematic is no single answer to the question of who should serve as multiyear capital planning. asset managers, especially for such functions as developing innovative approaches to municipal service delivery. As a Higher Level Government Projects starting point, it can be useful to appoint a temporary cross- department task force led by a high-level municipal official As noted, in many developing countries, projects fund- (for example, a deputy Mayor or financial department direc- ed by central or regional government agencies (“central tor), which would include representatives of municipal util- schemesâ€?) often represent the bulk of local public capital ity companies, the construction/public works department, investments. Such projects create a number of complica- and the departments that hold property portfolios. This task tions for LGs. First, the projects often are selected without force should be charged with (1) reviewing current practices consultation or coordination with LGs, with the result related to municipal services and capital construction, spe- that these projects may not reflect local priorities. Second, cifically for identifying opportunities for cost savings, both their schedules can conflict with capital projects of LGs operational and capital; and (2) identifying potential innova- themselves. Third, such projects, when finished, often tions used by peers in other LGs in the country or region. have a major impact on local budgets. LGs are supposed to pay for the M&P and operations costs of the newly Incorporating new approaches such as PPPs in municipal built facilities, which generates a substantial, often unsus- practices takes time and effort. Investigating opportuni- tainable, budgetary liability. This liability often leads to ties and preparing initial justifications should be begun the elimination of current local budget surpluses, finan- as asset management and financial management activities. cially crowding out high-priority local projects. Moreover, One critical challenge is to determine whether private the “impositionâ€? of centrally planned projects reduces the sector participation in service/asset delivery benefits the incentives of local policymakers to engage in the time- local population. In other words, LGs should develop consuming CIP process. Ideas of how LGs can deal with and evaluate the proposal to establish a PPP or outsource; this issue are discussed in later chapters. make a preliminarily business case; perform a pre-feasibil- ity study; estimate economic and financial scenarios; and Financial Aspects demonstrate that a PPP or outsourcing solution is better than a traditional service or asset delivery model. Other- Finally, capital investment planning is closely related to wise a LG should not initiate a PPP/outsourcing. two elements of financial planning: capital financing and Inputs to the Investment Planning Process 17 budgeting.11 Capital financing deals with identifying and for LGs to understand the benefits and risks of incurring securing funding and financing for capital investment and managing debt. Moreover, LGs need to find out projects. Budgeting is a process of aligning resources to whether national legislation explicitly permits them to needs for a given fiscal period. In many systems, the gov- borrow or, at the very least, does not directly prohibit lo- ernment budget has two components: the operating bud- cal borrowing. get and the capital budget. Finally, some capital investment needs can be addressed Figure 1 shows the principal links among CIP, capital through the use of nonfinancial or nontraditional solutions. financing, and budgeting. First, at the end of the day, fi- On the demand side, as mentioned, governments can re- nancial resources available for capital investment define what duce the need for new infrastructure by planning for higher can be implemented. Second, if a LG has an established density land uses in growing cities. On the financing, build- budgeting process, capital investment spending will not ing, and operating side, engagement of the private sector in take place without being approved as part of a budget- the process through various forms of public-private partner- ary cycle. In addition, the implementation of a capital ships is a growing trend, at least in large cities. Finally, use investment plan has an impact on the budget. Indeed, as of such nontraditional instruments as land-based financing outlined in the previous section, the government needs to can enhance a government’s financial capacity,12 as detailed take into account the after-acquisition life cycle costs of in the next section. new or renovated assets, and these costs must be planned for and incorporated in budget forecasts during the capi- Sources of Financing and Funding tal investment planning stage. The total capital investment for any period of time (that is, the entire Capital Investment Plan) and the individual In sum, another key input in the capital investment process projects included in it can be financed through a combi- is knowledge of the LG’s financial capacity to fund capital in- nation of sources. Usually, sources of financing are defined vestments. This capacity includes the feasibility of incurring for separately each capital project (or for a group of simi- debt and the attitude toward borrowing. The list of projects lar projects, such as street repairs in different parts of the prioritized through the CIP process is nothing more than an city). Often one project, especially an expensive one, has expression of local needs and preferences unless there is a way to several sources (see examples in Case Study 1). fund and implement at least some of them. Most LGs around the world can only finance a few priority projects in any one Typically, potential sources include13: year and only a small percentage of their total capital needs. nâ–  Targeted transfers (grants) from upper levels of gov- The LG should analyze its financial capacity for capital ernment. Often they are allocated for specific sectors investments before deciding which projects to support, (for example, water, roads) or specific projects. In some so that it will know in advance how to allocate financial countries, such transfers may give some discretion resources to capital projects. Such an analysis provides to LGs to decide how to use the funds, especially in projections of future revenues and expenditures and de- countries with more advanced decentralization (such termines the financial resources that can be used to fund as Indonesia). investments or finance debt. Instruments for such analysis nâ–  Local budget, which may include such sources as: are detailed in chapter 3. a. Surplus from the annual operating budget. This can Given that the use of debt financing has long-term impli- 12 Land-based financing includes the mobilization of the eco- cations for a LG’s financial standing, it is very important nomic value of the government-owned land and govern- ment’s power to impose fees and charges, in particular on 11 This section draws partly from several documents produced developers, or to sell “development rightsâ€? to generate ad- by the Local Government Reform Project II/Croatia/US- ditional revenues to fund infrastructure. See Peterson 2009. AID/Urban Institute during 2004–07 and other USAID- 13 Modified from Peterson and Clarke-Annez 2007 and Peter- sponsored guidance documents. son 2009. 18 Guidebook on Capital Investment Planning for Local Governments be the surplus remaining from the previous year or should constitute a dedicated source for capital invest- the expected surplus from the current year. Some- ment (that is, for paying for capital components of M&R times this source for capital expenditures is called costs and for restoration and recapitalization). Tariffs for “pay-as-you-go.â€? The surplus can be created either such fees are critical (box 5). from own-source revenues (or savings of expenses) or from general (not earmarked) transfers from upper levels of government. Box 5. Tokyo Waterworks: b. Dedicated local taxes and fees for capital projects. Such How to Finance a Water Pipeline taxes and fees (for example, land development fees) Replacement Project usually are charged to developers and are used to fund city-wide extensions of public infrastructure. In some When determining the appropriate level of reserve fund- ing for revenue-generating enterprises such as water cases, the fee amount is linked to the need for addi- companies, it is important to take into consideration fees tional infrastructure caused by the new development and charges. The Tokyo Waterworks, which serves 12.5 (impact fee). The possibility of imposing this kind of million people in metropolitan Tokyo, has been ï¬?nanc- tax or fee often is defined by national law, but the ing its operating expenses and capital expenditures by implementation and administration are left to LGs. relying on water tariff revenues. Various reserve funds c. Users’ contribution. This one-time contribution have been set aside to cover fluctuations in these costs. can be a substantial funding source. For example, Currently, the utility is facing the daunting task, begin- hook-up/connection charges commonly are used ning in 10 years, of replacing old water pipes. The total in many countries for water projects. In most investment required is approximately Â¥1 trillion (US$10 South Asian countries, this charge covers approxi- billion), which represents 40 percent of the utility’s total assets of Â¥2.5 trillion (US$25 billion) in current yen. mately 10 percent of investment costs. In Jordan, citizens contribute up to 50 percent for local roads To meet this challenge, Tokyo Waterworks started identi- (street pavement). Contributing to the cost also fying ways to level out the Â¥1 trillion planned investment builds citizens’ sense of ownership and contributes over a reasonable period by planning for maintenance to citizens’ selecting priority projects and control- and rehabilitation (M&R) well ahead of the project and ling implementation—at least, to some extent. establishing a detailed construction plan. Meanwhile, the utility has already started accelerating debt repay- A good way to manage dedicated local taxes and fees (“bâ€? ments so that outstanding debt may be maintained at the above) is through a Special Reserve Fund. This is a spe- current level of Â¥0.5 trillion even after project ï¬?nancing cial permanent (multiyear) budgetary fund established has been undertaken. The accelerated repayments are through a formal LG resolution. This fund accumulates being covered by water tariff revenues even though the Tokyo metropolitan government lowered the water tariff specific earmarked resources identified in its establishing on January 1, 2005. The utility plans to ï¬?nance the Â¥1 documents for the future repair and replacement of essen- trillion replacement project by implementing a reason- tial capital assets. These funds usually cannot be used for able tariff adjustment. other purposes. Often, LGs have several such funds, each dedicated to a particular infrastructure system or group of Source: Suzuki and others 2010. properties (for example, roads and streets; water, sewer- age, rainwater; general immovable properties). The exis- tence of such funds and relevant accumulations in them often indicate that prudent long-term financial planning A good practice is that tariffs should be based on full cost and asset management policies are in place (see example recovery. Usually, this implies that the tariff would cover the in appendix 2). M&R costs, operations costs, debt service (that is, payment of loan interest), depreciation, and, for private companies, For infrastructure systems that provide user-paid services profit. In such cases, the loan principal is repaid from the (for example, water, sewerage), some part of the user fee depreciation. Inputs to the Investment Planning Process 19 The amount calculated for depreciation, if not consumed In practice, borrowing is not available to LGs in by debt repayment, should go into a special reserve fund/ many developing countries for several reasons. They account for capital investment to replace assets as they range from under- development of financial markets to reach the end of their useful lives. As good practice, such lack of policy and regulatory support from the central reserve funds should be supervised independently by a government to LG lack of capacity to handle the bor- special board. Moreover, these special funds must be pro- rowing responsibly. In general, LGs’ ability to borrow is tected by local regulations from use for other purposes and closely correlated with political and fiscal decentraliza- be available only for capital investment by the designated tion. Moreover, long-term financing options required service. For example, if water and sewerage are provided for infrastructure often do not exist in developing coun- by a special municipal company, the Water Reserve Fund tries. Again, the depth of the LG financial markets tends should be available for the water company to use accord- to mirror political decentralization, which is incomplete ing to a pre-approved CIP. In some countries, depreciation in some countries. Sometimes, LGs can obtain short- or is included in the user fees by law. midterm loans from the upper levels of government. Finally, in many countries, LGs sometimes can ob- However, two problems are common. First, tariffs often do tain loans from specialized donor-funded entities, such not recover the full cost due to concerns that the full-cost as Municipal Development Funds or Urban Infrastruc- tariffs would be not affordable for some users. To address ture Funds. These entities may be designed to support specific types of projects. As a result, this funding may the resulting budget shortfall, the first sacrifice is the re- not be available for all projects in a LG CIP or even serve for recapitalization (depreciation). Second, municipal for its high-priority projects. Nevertheless, it can be an service enterprises often include depreciation in the tariffs important source of funding for LGs. but spend this portion of the fees on operating instead of For cities that may borrow, deeper discussion of capital expenses. They make this choice for a number of practical issues related to the incorporation of borrow- reasons, one of which is lack of a proper supervision of their ing into overall financial planning appears in chapter 3. activities. When tariffs are set below full cost-recovery due nâ–  Local balance sheet: Mobilization of land and prop- to concerns about affordability, there are two good-practice erty assets owned by the LG. Many LGs are “cash poor, mechanisms that LGs can consider, rather than simply re- land rich.â€? They have limited fiscal autonomy and/or ducing tariff. These mechanisms are (1) cross-subsidizing small budgets. Nevertheless, they control substantial residential users from fees charged to industrial and com- holdings of land and built-up properties that they do mercial users; and (2) in more advanced cases, targeting not need for public use now or in the foreseeable fu- direct subsidies to households in need so that they can pay ture. Being “land richâ€? is particularly true for cities in the full tariff. many former centrally planned economies. Identifying such “surplusâ€? land and built-up properties and selling nâ–  Borrowing. Loans from financial institutions such as them at auction can generate substantial revenues to general banks, or specialized banks and financial enti- fund capital investment. ties (Europe), or municipal bonds (US) are the most Public land and property are practically unrecover- common forms of long-term borrowing from the fi- able resources, that is, once sold, they cannot be re- nancial markets by LGs. However, LG borrowing from couped without significant expense. Therefore, good the financial markets can be prohibited or limited by governance principles should be applied carefully in national laws and regulations. Even if borrowing is not making this decision: prohibited, entering the financial markets requires a â??â–  The “surplusâ€? nature of properties should be certain level of financial management maturity and so- established following an inventory of all public land phistication. Local governments also need to establish and property under LG control and after public- their creditworthiness to be able to obtain credit on use land has been reserved for future development conditions acceptable to citizens.14 (“rights-of-wayâ€? for streets and engineering and 14 The subject of LG borrowing and creditworthiness is dis- beyond the scope of this guidebook, and readers should use cussed more in the next section. However, in general, it is specialized resources (see References). 20 Guidebook on Capital Investment Planning for Local Governments social infrastructure). This careful preparation helps â??â–  Various forms of public-private partnerships (PPPs LGs to avoid selling land for private development or P3). The prevailing form of PPPs is based on a that is needed, for example, for school construction contractual relationship between the government or other public use. and the private partner (which can be a consortium â??â–  Land sales should be planned for several years of private entities). A less common form is a joint ahead, but flexibly adjusted to conditions on the legal entity established by the government and the real estate market so as not to oversupply land and private partner—a joint venture, which usually is to avoid sales during downturns of the real estate established with shares either held by the initial market (“time-to-marketâ€?). partners or publically traded. â??â–  Sales should take place in the form of simple auctions, Private partners in PPPs can play several roles, in most cases, for the highest price offered. Note that which include providing financing, expertise, and “auctionâ€? does not imply only a transfer to private efficiency; and, if a PPP is well structured, taking ownership. Long-term (and even short-term) land on specific risk. However, long-term PPPs associ- leases can be auctioned as well. ated with capital investment are the most complex â??â–  To increase revenues, the value of LG land should be instruments of all that LGs might use. For this rea- enhanced before sale. A very useful step is to remove son, other budgetary or balance-sheet instruments excessive land use restrictions and conditions by are more important. Only a minority of LGs are permitting broader combinations of land uses and likely to use PPPs. Moreover, as with borrowing, higher densities. Fiscal benefits for local budgets can PPPs usually are possible only if the LGs have a cer- be very substantial, with no harm to public interest. tain level of financial autonomy. â??â–  The sale revenues should be placed in a special On the financial side, there are two primary permanent budgetary fund used only for capital models, with a continuum of hybrids in between. investment and repaying long-term debt, as The first model applies to PPP projects that can be- discussed above for Special Reserve Funds. come completely financially self-sufficient and do â??â–  Sales of undeveloped land (land without infrastruc- not require public funding. For example, a public ture) should be coordinated with infrastructure garage is designed, financed, built, and operated by provision for this land (either by the government a private partner on a government-owned land site, or its entities or by private developers as a binding with parking prices controlled by the government. requirement for them). The private sector partner does this in exchange for â??â–  Expropriation of land from sitting tenants should permission to build a mixed-use commercial build- be avoided or minimized. ing on the site as well. In such cases, investors recap- nâ–  Grants from international donors. In some regions ture their costs and obtain profit from the revenues of the world, LGs can “shopâ€? for grants from various generated by the property/facility they build, while donor-sponsored sources. For example, in many coun- the government obtains the public-use facility (ga- tries in Eastern and Central Europe, grants from the Eu- rage) built without public capital outlay. ropean Union are available for certain types of projects, The second model requires public funding, both for countries preparing for future membership and but the initial capital costs are borne by the private for those recently accepted. This funding may be avail- partner in a PPP. The LG government repays this able for specific types of projects only, and qualified proj- cost over, say, a 15-year period from the operating ects may not be the highest priorities on the LG’s CIP budget. In this case, the LG’s financial obligations list. Nonetheless, it makes sense for a LG to be familiar are very similar to debt service. The reason to use a with funding potentially available through this channel. PPP is to allocate specific risks to a private-sector Obviously, use of international donor funding should be developer and benefit from the innovations and ef- investigated before an LG turns to borrowing. On the ficiency of the private sector. Many local facilities other hand, in many countries, no grants are available. such as schools and jails have been constructed or nâ–  Private sector participation, which can include: reconstructed this way. Inputs to the Investment Planning Process 21 PPPs also can provide savings on life cycle costs with debt proceeds in that they are funded over more by integrating stages of capital projects that are frag- than one year and subject to certain terms and condi- mented in the traditional public sector approach. tions; and create future payment liabilities. For example, the integration of design, building, â??â–  Developer exactions. This form is used widely around and operation in the hands of the same partner the world and implies that developers build on-site can lead to very substantial savings. In addition, a infrastructure on their own, with no public funding major benefit of PPPs is that well-structured PPP or finance. This form sometimes morphs into a “ne- contracts protect public budgets from the risks of gotiatedâ€? contribution of off-site infrastructure (see budget overruns and funding drying up before proj- below), in addition to on-site infrastructure. For ect completion. The project costs and funding for example, a developer is required to build an access the entire project are stipulated in the PPP contract, road to its development site, or complete off-site in- before the construction starts. frastructure that was supposed to have been built by Nevertheless, as already noted, long-term PPPs the government or its utility company but was not. â??â–  Voluntary and negotiated contributions. These are associated with capital investment are very complex transactions. They require specialized LG expertise. instruments such as business improvement districts, in which property owners in a specific area agree to The LG must have the capacity not only to prepare, pay a predefined amount for specific improvements procure, and negotiate a PPP but also to manage it. of infrastructure and services in the area, before in- For LGs, the recommendation is to engage in PPPs vestment in these improvements is made. In some gradually, starting with simpler, short-term forms countries, there are also more complicated models, such as outsourcing O&M of selected municipal such as tax increment financing (TIF).15 services or facilities (street cleaning, for instance). It Several forms of PPPs and land-based financing is advisable to enter into long-term PPPs only after such as sales of development rights are presented in gaining experience with simple contracts. Experi- Case Study 2 (chapter 7). ence shows that starting with complex long-term PPPs is risky unless qualified and often expensive There are no universal rules on how a LG should decide on technical assistance is provided to the LG at all stag- which sources to use. Using own resources (budget and bal- es of PPP preparation, procurement, negotiation, ance sheet) is the simplest, because there usually are no ex- and contract management. Without this support, ternal strings attached. However, these resources are always complicated PPPs often lead to deals that do not limited and usually are not sufficient to fund large-scale best represent the public interest. infrastructure investment. Common sense dictates that, as In particular, LGs in developing countries tend the next best source, and before any other external sources to sign complex contracts without understanding are tapped, free money (donations, grants) should be used all of the fiscal implications. An example would be to the maximum extent feasible. However, grant funding that if users did not provide a pre-agreed volume has certain disadvantages: of solid waste or wastewater to be treated at the PPP facility, the government would have to pay the nâ–  Most grant funds have specific goals, which do not private provider for the lost revenues. If and when necessarily correspond to the highest priorities on the LGs plan to engage in PPPs related to capital invest- municipality’s list. For example, the European Union ment, it should be part of their regular CIP process. or another donor institution may provide grants for Furthermore, the choice to implement investment environmental protection investments and therefore through a PPP should come after the project iden- tification stage (chapter 4). 15 Tax increment financing (TIF) is a public financing method that has been used as a subsidy for redevelopment and com- â??â–  Lease—or installment purchase—is another less tradi- munity improvement projects in many countries including tional form of acquiring capital assets. Under such the United States for more than 50 years. Costs and benefits arrangements, the costs to acquire premises or equip- of using this instrument continue to be a subject of debate ment are similar in some respects to purchases made and research. 22 Guidebook on Capital Investment Planning for Local Governments wish to finance a wastewater treatment plant, whereas More information about debt financing is provided in for the LG, investing in water supply may be a higher chapter 3. priority. Moreover, grants usually do not pay for future maintenance, repair, and operations costs. Thus, before Public Participation and Overall using a grant, the LG needs to identify who will man- age the property, facility, or infrastructure and how the Transparency of the CIP Process annual costs will be covered. “Public participationâ€? should provide channels not only nâ–  Grant funding requires substantial additional prepara- for citizens but also for the business community to have a tory and reporting work. say in the CIP process and product. Public participation nâ–  The amount of grant money usually is limited and ensures that what is funded and how these capital invest- there is a risk of discontinuation as a result of fiscal de- ments are paid for reflect the views of not only the politi- terioration or changes in priorities in donor countries. cians and technical experts from the government but also a broader constituency of local taxpayers, both individual The second constraint—additional preparatory and re- and corporate (box 6). At the same time, public participa- porting requirements—often is applicable to municipal tion in the CIP process enables the government to convey borrowing as well. Preparing “bankableâ€? municipal proj- to the public unpopular truths: about the true cost of new ects in a format acceptable to lending institutions requires or improved services and the associated tariff/fees implica- substantial research and preparation. This issue is dis- tions for the public. Without such communication, there cussed further in the next section and in chapter 5. is a risk of a common problem: people like services to be improved but tend to ignore the fact that improvements Nevertheless, debt financing is used by many LGs. The cost money. rationale is that it enables project implementation to be accelerated and financed immediately. Long-term debt re- sults in infrastructure that is used by more than one gen- Box 6. Benefit of Long-Term Planning eration also being paid for by more than one generation. and Public Participation: Contra Short-term debt, such as debt with a pay-back period of Costa Water District, California (US) five years or fewer, is more problematic because debt ser- vice then becomes a large expenditure and significantly In the Contra Costa Water District, which serves approx- reduces the LG’s near-term investment capacity. imately 450,000 customers, developed a 10-year CIP as part of an annual cycle that includes operating and It is important to follow these rules for debt financing: capital budget development and rate setting. In addition to a ï¬?rst-year plan for funding capital projects, the CIP nâ–  Use debt to finance only strategic infrastructure proj- estimated operations and maintenance (O&M) and debt ects that service mandatory LG functions. service costs, projected reserve balances, and projected revenue requirements. By projecting rates over 10 years, nâ–  The life of a loan should not exceed the useful life of the district was able to absorb one-time revenue short- the asset acquired with the loan. falls or unexpected expenditures without being forced nâ–  When possible, use loans to cover any gaps in financing to react with large rate increases. Moreover, increasing after own sources and grants; that is, LGs should prefer rates in small annual increments—rather than steep, sud- grant financing to loans. den hikes—was aligned with the ï¬?nancial plan and has nâ–  Make a careful forecast of the capacity to repay the slowed the rate of inflation. These increases went virtu- loan, because the limitations on borrowing that can be ally unnoticed compared to most tax or rate increases. established by law can be insufficient to prevent your Area developers even agreed to substantial increases in LG from over-borrowing. A LG that has not exceeded the district’s “facility reserve chargesâ€? after participat- its legal debt limits still may not be able to repay its ing in a technical advisory committee to review these debt. This point is elaborated in chapter 3. charges relative to the plant investments required to nâ–  Exercise caution when taking out large loans. If, as a serve growth. result of borrowing, the LG has no spare borrowing ca- Source: Suzuki and others 2010. pacity, financing other projects can become problematic. Inputs to the Investment Planning Process 23 The overall transparency of the process—both within less opportunities for LGs to employ creative approaches the government and for the public—and of the CIP is to engage the people in addressing specific challenges of no less important than the direct contribution of nongov- capital investment planning (box 7). ernmental players. Transparency is essential to keep the government accountable and to reduce opportunities for And, as mentioned, the public should be involved in the corruption, especially since government investment and spatial and strategic planning of the city.16 construction projects around the world have been prone to corruption. Practical transparency instruments are dis- 16 In the early 1990s, an approach to public participation in capi- cussed in chapter 5. tal investment planning called participatory budgeting emerged in Porto Alegre, Brazil. This approach is different from the one There are at least four public participation entry points detailed in this guidebook. Participatory budgeting generally involves four steps: (1) Community members identify spend- in the CIP process, each with specific instruments to be ing priorities and select budget delegates; (2) With help from used. These key opportunities are: experts, budget delegates develop specific spending proposals; (3) Community members vote on which proposals to fund; 1. Active engagement of the elected representative body and (4) The city or institution implements the top proposals. Since then, various elements of this process have been tried in 2. Public participation in the CIP Committee many cities in different countries. However, the future of par- 3. Public input during the preparation of project requests ticipatory budgeting in its birth city is not clear. Since 2005, 4. Public input into the draft CIP and capital budget. with a change in the political party at the helm, participatory These entry points are presented in chapter 4 with related budgeting has been supplemented by a parallel system of pub- lic-private initiatives. It appears that participatory budgeting as steps in the CIP process. Furthermore, in addition to practiced in Porto Alegre is vulnerable to changes in a city’s “standardâ€? methods of public participation, there are end- political landscape. https://nacla.org/node/4566 Box 7. Engaging the Population in Raising Funds for Water System Improvement: City of Uzgen, Kyrgyzstan The City of Uzgen’s potable water supply system was built asked all schools to teach a lesson for 1st-graders on “Why for a population of 12,000 . Since then, the population has We Need Clean Waterâ€? and to ask 5th-graders to write an increased by approximately 350 percent, but the system essay on the same topic. The 1st- and 5th-graders’ work has not been properly maintained. During the 2000s, the was sent home to parents, and the work convinced families World Bank-funded Community Development and Invest- to make the needed contributions. A few years later, for the ment Agency provided grants for local infrastructure in second phase, the local administration rented 6 buses and Kyrgyzstan. However, Uzgen could not meet the eligibility invited 300 women activists, all city elders, and members of condition that required LGs to make a matching contribution the City Council on a ï¬?eld trip to the water supply reservoirs of 3 percent of the total cost. At that time, neither the city to see their bad condition and, as a contrast, a billboard nor the water utility, which had a large debt from nonpaying with detailed design renderings of the reconstructed facility. customers, could provide the match. This campaign led to a second contribution by the popula- tion. The entire project was ï¬?nished in 2009 and increased The city administration designed and implemented a cre- the share of the population who have centrally supplied po- ative and successful public relations campaign to convince table water from 30 percent to 65 percent. residents to make a one-time contribution to raise the funds. To solicit funds for the ï¬?rst stage, the local administration Source: Interview with A. Nosirov, Deputy Mayor, 2011. 3 Assessing Local Government Financial Capacity Knowing and planning its own capacity to fund and fi- determining LG financial capability is the size of its local nance capital projects and maintaining fiscal discipline revenue base. This is the amount of revenue that the LG on this front are critical for a LG’s financial sustainability. is entitled to receive and collect. Sources of LG revenues Such financial planning is the foundation on which capi- usually are set by national laws, which entitle LGs to receive tal investment planning should be based. certain types of taxes and other fees. Usually, two types of revenues are distinguished: operating (recurrent) revenues Analysis and Forecast of and capital revenues (such as one-time revenues from land sales). Revenues and Expenses Several channels often have some potential to increase lo- Financial planning starts with an objective analysis and fore- cal revenues: cast of revenues and expenses. Not all of the sources for capital investment listed in chapter 2 are equally available in various nâ–  Improved administration and collection of local fees countries. For example, long-term PPPs or municipal bor- and charges, focusing on those that would produce the rowing may not be legally permitted, may be unattractive biggest addition to the budget or produce the largest for private lenders and investors, or may be too expensive for increase in funding for capital investment. Commonly, LGs. Even if these instruments are potentially available, the these payments would be related to land (land rent, land primary factors in determining LG financial capacity are (1) lease, land tax) and services (water, solid waste removal). the extent to which a LG can generate revenue or has a stable nâ–  Gradual increase of tariffs for services, toward the stream of grants and subsidies from upper levels of govern- level of full cost recovery. Note that tariff increases ment, and (2) the extent to which a LG can control expendi- should be tied to simultaneous improvement of the tures. Furthermore, countries vary greatly in the roles that LGs quality or quantity of the service and should address and upper levels of government play in funding local capital affordability concerns through targeted subsidies. investment. In many countries, various formula-based grants nâ–  Enhancement and mobilization of municipal land (such as capital development grants or unconditional grants) values, as discussed above, through the more sophisti- from upper levels of government are the dominant source of cated mechanism of selling development rights (see São LG capital finance. In other nations, own-source revenues are Paolo examples, Case Study 2). the main source of finance for capital projects. For example, in the case of Nis, Serbia (Case Study 1), central government Operating Expenditures capital grants constitute 9.4 percent of CIP funding, while the In evaluating the financial capacity of a LG, one should city’s own budget and that of the municipal utility companies be concerned with the number and extent of the pub- combined contribute 28 percent. lic services that is the LG is mandated by law to provide and the accompanying municipal expenditure. The costs Revenue Receipts of providing services are determined by the cost of labor, Transfers from upper levels of government for capital materials, and energy for each service plus the administra- investment and grants from donors usually are not suffi- tive costs of running the LG. In addition, LGs that have cient to fund the capital needs of LGs with responsibilities borrowed money have loan repayments, which are part for specific services. Therefore, one of the main factors in of their expenditures. A useful indication of the ability 25 26 Guidebook on Capital Investment Planning for Local Governments to provide services can be obtained from looking at the upper levels of government structure of the LG’s operating expenses, especially how nâ–  Analysis of potential capital funding sources. much is spent on items other than staff salaries. nâ–  In conducting the analysis, the following questions should be asked: Financial Balance (Net Results) nâ–  What are the operating expenditure, revenue, and net and Financial Analysis operating result (surplus, deficit) trends? Financial balance is simply the comparison of revenues to nâ–  What are the reasons for these trends? expenditures. If operating revenues exceed operating ex- nâ–  What would happen to the net result if key parameters penditures, there is an operating surplus. If expenditures such as a fee rate or a collection rate changed? exceed revenues, there is a deficit. Municipal policymakers nâ–  How dependent is the government on one-time rev- (local representative body) and financial managers (Mayor enues (such as land sale revenues) and funding from and finance director) should be concerned with both the upper levels of government? operating balance in any one year and future trends. Both nâ–  What is the current amount of outstanding debt (if ap- the LG and potential grantors and lenders are concerned plicable)? with the stability of the operating balance (and total bal- nâ–  What is the borrowing capacity (if applicable)? ance) from year to year and whether there may be wide nâ–  What is the level of debt service (if applicable)? swings between surpluses and deficits. nâ–  What is the potential for new sources of capital funds? nâ–  How much will be available for capital financing? Speaking pragmatically, to establish the limits for the nâ–  How can you improve the government’s financial con- capital budget for the current year and realistic multiyear dition? targets, an analysis of an LG’s financial condition and capac- ity to finance future capital projects should be made early in Spreadsheets for cash flow forecasts are required to con- capital programming. The analysis needs to be prepared and duct this kind of analysis. Sample forms for the basic cash discussed prior to the preparation of project requests. A flow analysis are shown in appendix 3, sheets 1 and 2. Ap- workshop for elected officials should be scheduled to dis- pendix 3 also includes a spreadsheet (sheet 3) for match- cuss the analysis along with economic and noneconomic ing available financing with requests for capital funding trends, expected amount of available capital funds, and assembled in the CIP process.17 This kind of analysis is a preferred methods of financing. In this way, elected officials part of financial management and should be undertaken will be able to use the information to prepare the policies whether or not the LG is carrying out capital planning. and guidelines to be followed by those who will develop The analysis should use scenario-based simulations under the requests. The establishment of fiscal parameters by the various assumptions about parameters that can be changed policymakers enables a more rational and realistic approach by the LG (from salaries of government employees to rates to the selection of projects in the CIP process. for local taxes and tariffs for local fees). The forecast also should include a sensitivity analysis. At a minimum, financial analysis should comprise: Note that sheet 2 in appendix 3 has sections (IV and V) nâ–  Three-to-5-year financial analysis of own-source rev- that simulate the impact of annual operating expenses enues by major source, expenditures, operating and caused by new capital projects on LGs’ net operating re- capital reserves and surpluses/deficits sults. Moreover, in connection with capital projects built nâ–  (If borrowing is an option), analysis of current and fu- by higher levels of government, if the future annual ex- ture debt capacity penses (M&R, operations) are expected to be borne by nâ–  (If borrowing is an option), analysis of per capita debt, the local budget, it is recommended that these costs also debt as a percentage of revenues, and debt service as a be included in the simulation. percentage of budget nâ–  Analysis of lease obligations 17 Matching finance to requests is discussed further in chapter nâ–  Analysis of potential future changes in funding from 4, step 8. Assessing Local Government Financial Capacity 27 Debt Financing and Debt Policy nâ–  Provide a basis for evaluating the impact of acquiring debt on the LG’s overall financial condition To what extent the use of borrowed finance—if legally nâ–  Communicate to citizens the importance of financial permitted—is feasible and prudent depends on several management factors: availability of such finance from the financial nâ–  Communicate to investors and the financial commu- market, creditworthiness of a particular LG, and its inter- nity in general that the LG is prudent and has a policy est in borrowing. Moreover, most countries have special basis for debt. regulations and limitations on LG borrowing that should be factored in. For example, the CIP budget planned by Adoption of a debt policy provides parameters for the the City of Nis, Serbia (see Case Study 1) was limited by consistency and continuity required to achieve financial the regulation that the total outstanding debt of the city goals. It clearly communicates to the finance department could not exceed 50 percent of operating revenues gener- a hierarchy of sources for the capital budget, so that staff ated in the previous budget year. can use this framework to carry out their responsibilities in debt management. The framework should be reasonably Once a loan has been incurred, debt service payments flexible so that officials can respond quickly to changes in must be included in operating expenditures going forward the financial market or other conditions without jeopar- (appendix 3, sheet 2). A key question, then, in evaluating dizing essential services. debt carrying capacity is whether the surplus will be suf- ficient to cover the debt service payments associated with Obviously, the debt policy needs to comply with the a given loan or loan program. The more the net operat- framework of existing laws and be based on a LG’s projec- tions of its future financial condition. Moreover, it may be ing surplus exceeds a LG’s anticipated new debt service prudent for each LG to establish its own additional limits payments, the more creditworthy that LG is. Indeed, the on borrowing, beyond those set by national regulations. ratio of net operating surplus to anticipated new debt service payments often is considered the most important More specifically, the LG debt policy should address the indicator of a LG’s debt carrying capacity. following questions regarding the specific local situation: If the ratio is close to 1.0, any serious fluctuation in a LG’s nâ–  What is the appropriate use and acceptable level of operating revenues or expenditures (or in exchange rates, if short-term debt? the loan is denominated in a foreign currency) could pro- nâ–  What is an acceptable level of long-term debt? duce serious problems in meeting the payment terms of the nâ–  For what purposes (types of projects) will long-term credit. If, on the other hand, the ratio of net operating sur- debt be used? plus to debt service payments is substantially higher than nâ–  When should tax-supported (or asset-backed) general 1.0 and is forecast to remain stable over several years, a LG’s obligation debt be used versus self-supporting revenue ability to support the anticipated debt is reasonably secure. debt (debt that finances projects that generate revenues sufficient to repay the debt)? To properly assess creditworthiness, a LG needs to look at nâ–  What is the desired mix of financing from current bud- this issue in more detail (Peterson 1998, 2000). get revenues and from debt? nâ–  When should variable rate debt be used, if at all, versus Incurring debt also is a matter of local policy. A LG should fixed rate debt? determine whether, to what extent, and under which condi- nâ–  What maturity schedules should be used for short-term tions, to borrow money. Local officials should adopt a formal and long-term debt? policy to provide general direction in planning and borrow- ing to finance capital investment. A debt policy needs to: Appendix 4 provides an example of a simple LG debt pol- icy, which, nevertheless, establishes important parameters nâ–  Establish parameters for the acquisition or issuance of for borrowing. The example can be used as a prototype debt and for acceptable levels of debt and adapted as needed. 4 Steps in the Investment Planning Process Before delving into the details of the CIP process,18 it is 6. Capital investment decisions are not transparent and useful to sum up common problems with capital invest- allow opportunities for all sorts of abuses: from un- ment in the absence of a proper process: necessary “pet projectsâ€? promoted by local politicians or officials to conflict-of-interest deals to outright cor- 1. Capital investment plans do not include realistic as- ruption. sumptions about funding/financing and end up being 7. Capital investment decisions are made without suf- a “wish lists.â€? ficient public participation, including by the business 2. Capital investment decisions are made without ref- community. erence to life cycle costs and management. This dis- connect from the realities on the ground often occurs Capital programming and budgeting is a dynamic process when capital investment is funded or planned at the that generally involves four stages: central or regional level—or by donors—but manage- ment of the completed asset and the operations and 1. Financial planning maintenance costs are the responsibility of the LG. 2. Project identification and prioritization 3. Capital investments result in LGs taking on a level of 3. Program and project management debt that is unsustainable or that substantially con- 4. Monitoring and evaluation (M&E). strains future activities. 4. Local governments plan or establish PPPs without a The complexity of the process depends on the law; the clear justification and without the capacity to manage extent of central government regulations; and the LG’s them effectively. size, organizational structure, staff capabilities, and fi- 5. Capital investment priorities are distorted by the nancial condition. For planning, this process can be di- availability or lack of funding for specific sectors/ vided into a number of steps. Many elements of financial works. For example, the existence of grants or cen- planning were considered in the previous chapter; the tral government funding for specific types of projects rest are presented in this chapter and the next and de- may result in such projects being implemented—and picted in figure 2.19 increase the city’s O&M expenses—even if these proj- ects are not priorities for the community. 18 Note that the appendixes contain useful sample documents 19 This chapter draws partly from several documents produced for most of the steps described in this chapter and the next. by the Local Government Reform Project II/Croatia/US- Many of these samples can be used as templates that may AID/Urban Institute during 2004–07 and the Municipal be adapted for local conditions by LGs that do not yet have Economic Growth Activity/Serbia/USAID/Urban Insti- their own forms. tute, and other USAID-sponsored guidance documents. 29 30 Guidebook on Capital Investment Planning for Local Governments Figure 2. Steps in Investment Planning Process Establish policies Determine for capital Step 1: organizational Step 2: investment structure planning Establish project Step 3: selection criteria Implement and monitor investment projects Develop Step 4: calendar, forms, and instructions Adopt capital Prepare project Step 10: program and Step 5: requests budget Draft capital program Review project Step 9: and budget Step 6: requests documents Match projects Prioritize project Step 8: to available Step 7: requests funding Source: Remake based on various USAID-funded project materials. Steps in the Investment Planning Process 31 STEP 1 Box 8. Approaches to Determining the Organizational CIP Committees: Lessons Structure from the Case Studies The process of developing CIP documents requires co- 1. São Paolo, Brazil. São Paolo has a special con- ordination, oversight, and preparation of the project rec- sultative council, associated with the department in ommendations to be included in the CIP. It is therefore charge of capital planning (Case Study 2). The coun- necessary to ensure an equitable and efficient process that cil has 17 members with 2-year pro bono terms: complies with policies and guidelines. The organizational nâ–  Five members are elected directly by the popula- structure will depend on local circumstances, including tion, 1 for each of the 5 big sectors of the city. the size of the LG. For midsized and large jurisdictions, a nâ–  Three are nominated by professional and business common approach follows: associations: Instituto de Engenharia (Engineering Institute), Associação Comercial (Commercial As- A CIP Committee is responsible for drafting policies sociation) and Federação do Comércio (Commer- for CIP development, determining the process and the ce Federation). timeframe, overseeing each step and providing additional nâ–  One is delegated by the City Council. guidelines, reviewing project requests, organizing public participation, assigning priorities, and recommending the nâ–  Eight are nominated by the Mayor (all City Sec- Capital Investment Plan to the Mayor. The committee’s retaries, 3 of whom are permanent members: composition is either defined by the elected body (local Planning, Government and Participation, and Council) or the Mayor. Partnership). The responsibilities of the consultative council are to ad- There is no universal formula for selecting the members vise the Mayor and the Planning Secretary on public of this committee. In some jurisdictions, the committee policies related to the multiyear plan and to monitor ex- includes members of the local council and business and ecution of its hundreds of programmed actions, ensuring professional communities. Other LGs’ CIP Committees that there is no overlap and that they comply with the are comprised of technical staff from key departments, city and sector policies. public enterprises, and budgetary institutions. In deciding 2. Nis, Serbia. The CIP Committee has 13 mem- who should be a member of the committee, the following bers, including the Mayor and Deputy Mayor, should be considered: but no representatives of citizens or businesses. Only ï¬?ve members of the CIP Committee were nâ–  This process requires knowledge, time, and commit- involved in project evaluation, further limiting ment from the CIP members. representation. nâ–  Members of the committee should be officials and/or professionals who understand the importance of the plan. nâ–  The CIP recommended by the committee must be sup- The Coordinator for CIP Preparation should be a mem- ported by the local council and the public. ber of the CIP Committee and is responsible to: nâ–  The role of the committee is critical in balancing com- peting needs for capital funding in the CIP process. nâ–  Coordinate the entire process Having various interests represented on the committee, nâ–  Organize meetings of the Committee therefore, is crucial. nâ–  Ensure that the Committee makes all of the required decisions It is instructive to see the difference between two actual nâ–  Ensure that all involved carry out their tasks on the approaches (box 8). schedule. 32 Guidebook on Capital Investment Planning for Local Governments The CIP Coordinator usually is appointed by the Mayor reduce) spending on “pet projectsâ€? by politicians that (or the executive in charge) and should have sufficient au- do not serve the public interest (such as commercial thority in the LG to make the required decisions, direct real estate). others’ work, and resolve any disputes. The policy also may outline priorities for capital invest- The Technical Support Office provides support through- ment, which then should be reflected in the project se- out the process. The staff train government departments lection criteria. For example, for cities that do not expe- and enterprises on the CIP process and, in particular, on rience fast growth, the policy may state that the priority how to prepare project requests; compile data; help with should be given to investment that preserves the useful needs assessment and cost estimates; review project re- lives of existing infrastructure and public facilities. quests; and draft a preliminary Capital Investment Plan for the CIP Committee to finalize. nâ–  Definition of what constitutes a capital investment project. In effect, this definition sets the minimum cri- teria for inclusion in the CIP (usually, the minimum STEP 2 cost and useful life of the asset). For example, in Case Establishing Policies for Capital Study 1, capital investment projects are defined as cost- Investment Planning ing not less than 100,000 Euro with a period of imple- mentation (construction) not less than 2 years. One of the first tasks of the CIP Committee is to develop nâ–  Assignment of organizational responsibility for capi- a clearly defined written policy for the capital investment tal investment plan preparation and submission. plan. An illustrative sample policy is presented in appen- Outlined above, under Step 1. dix 5. The policy should cover, at least, the following: nâ–  Methods of financing capital projects. This policy should list specific sources that are available and that nâ–  Period covered by the Capital Improvement Plan. As the LG intends to use, accompanied by the specifics of noted, the period usually is 3–7 years. In Nis, the pe- using these sources. For example, it can be very useful riod is 5 years (Case Study 1), and in São Paolo, 4 years to state in the policy that net revenues from the sale (Case Study 2). of land and property will be used for capital projects nâ–  Eligible types of investment. The policy should list the only and to identify other revenue sources earmarked types of investment eligible for inclusion in the CIP for capital investment. Such revenues may include a and identify which types/components of cost should certain portion of the operating surplus and the total be included. For example, the policy presented in ap- of various land-based revenues, such as the land devel- pendix 5 stipulates that rehabilitation, replacement, opment fee, revenues from selling development rights, reconstruction of existing infrastructure, public-use fa- and lease fee. cilities, and social-use and government-use properties nâ–  Borrowing limits. These limits are defined in specific under the mandate of the city government are eligible terms in compliance with national and subnational for inclusion. Also eligible are the construction of these laws and regulations, in accordance with local views on types of new infrastructure facilities, if and when con- borrowing, and based on a preliminary understanding struction is economically and financially justified, and of the LG’s current financial standing. Setting these the acquisition of land for such construction. Acqui- limits in this policy does not imply that borrowing nec- sition of equipment and vehicles for public functions essarily will reach the limits, because a more detailed under the mandate of the LG also is allowed. With analysis of the financial capacity later in the process respect to cost components, the policy in appendix 5 may further limit borrowing (see sample schedule of states clearly which expenses must be funded and from the CIP process in appendix 7). which budget—capital or operating. Note that, if the nâ–  Criteria for prioritizing projects or how and who will policy identifies eligible types of projects clearly enough establish the criteria. The policy should establish who and the policy is followed in practice, it can prevent (or is charged with developing (drafting) these criteria and Steps in the Investment Planning Process 33 who will approve them. Typically, the CIP Commit- have the following characteristics20: tee drafts the criteria for prioritizing CIP projects, and either the local council adopts them as an ordinance or nâ–  Is understandable to both participants and users of the the Mayor establishes them in a special decree. process nâ–  Methods and timing of public participation. The nâ–  Is practical in terms of cost, time, and personnel avail- policy may state that the CIP Committee is responsible able to carry it out for securing public participation and indicate during nâ–  Considers all major consequences of a project which periods, but may leave it to the Committee to nâ–  Is supported by reliable, relevant information define specific methods. nâ–  Avoids double-counting evaluation criteria (use of two highly interrelated criteria) This policy (or set of policies) usually is approved by the nâ–  Indicates clearly whether the key value judgments (for local council as a special local ordinance and becomes a example, assigning “weightsâ€? to each criterion) are to binding document that should be followed in the CIP be made by technical experts or elected officials process, under CIP Committee supervision. nâ–  Provides information not only on the relative ranking of projects but on their individual merits or value nâ–  Identifies critical and noncritical projects STEP 3 nâ–  Is applicable to a wide range of projects Establishing Project Selection nâ–  Considers the interdependence of the suggested projects. Criteria Priority setting is guided either by ranking projects or by calculating a total score for each. In the latter case, the The project evaluation and prioritization process is more total score is the sum of the project scores for each crite- objective and rational if criteria are predetermined and rion. The higher the total score, the higher the priority. clearly defined. It is important that the CIP Committee Sometimes the score for each criterion is weighted in the involves key individuals, including key staff, the Mayor, total with predefined weights. and members of the representative body, in defining the selection criteria. Public participation through focus groups Appendix 6 provides two examples of simple project rat- and suggestion boxes can be used to provide citizens and the ing systems. Under the first option, all projects are sorted business community with an opportunity to participate in into 4 priority groups. A project goes into the first (high- the formulation and review of selection criteria. To pro- est) priority group if it satisfies 6 or more criteria from a vide guidance to those drafting the requests, evaluation predefined list of 6–10; it goes into the second priority criteria should be established prior to the preparation of group if it satisfies only 4 criteria, and so forth. project requests (Step 5). However, no evaluation system is perfect. Not all crite- STEP 4 ria will apply to every project. Good judgment, common sense, and political considerations will continue to play Developing Calendar, Forms, important roles, particularly when a local council approves and Instructions a CIP in which project priorities were established using the selection criteria. Nevertheless, carefully prepared Calendar criteria will sharpen distinctions among projects, narrow Capital programming should be scheduled to begin well the range of disagreement, provide a basis for discussion, before the operating budget cycle to avoid an excessive and, hopefully, make the entire process more transparent. staff workload and ensure adequate time for review. Ini- It is critical that project selection be supported by accurate tiating capital programming several months prior to the and relevant information. Moreover, practical experience shows that it is desirable that the priority setting process 20 Adapted from Hatry and others 1984. 34 Guidebook on Capital Investment Planning for Local Governments development of the operating budget also provides valu- departments in developing the forms to ensure that the able information on the potential effects of capital projects staff will be able to successfully use them. Pilot testing the on the operating budget. In addition, adequate time needs forms and instructions will help to identify and correct to be allowed for the CIP Committee and local council to problems prior to a city-wide introduction of the form. review project requests and obtain public input before the The CIP Coordinator should provide training for all city staff and local council must focus on the operating project-submitting departments and enterprises on how budget. Appendix 7 furnishes a sample CIP calendar. to prepare the forms. During the request preparation pe- riod, s/he should provide continuing TA to departments. Forms and Instructions It is important to note that even when LGs use relatively sophisticated project request forms in the CIP process, Project request forms are used to collect detailed informa- these forms often are less detailed and have fewer support- tion on each proposed project. Obviously, there should be ing materials than may be required at a later stage. The consistency between the project selection criteria and the request for additional information usually arises once the project request forms. The forms should contain the infor- project is approved as a part of the CIP, especially if the mation and data needed for project rating. Pertinent proj- project will need external financing from lenders or grant- ect information includes department/enterprise, project ees. Therefore, “packagingâ€? the CIP-included projects to name, location, description, purpose, priority according present them to lenders and grantees is a separate activity to department/enterprise, justification of need, expected and reviewed in chapter 6. useful life, estimated capital costs (total and annual), rec- ommended sources of financing, status of planning and engineering, construction data, net effect on annual costs STEP 5 (M&R, operations), effect on local revenues, relation- ship to other projects, and conformance with local plans. Preparing Project Requests Completed forms make it possible for the CIP Coordina- See Chapter 2 on the identification of investment projects tor or CIP Committee to compare projects, assign whole- at this stage of the CIP process. Note that LGs with sub- of-government priority, and even determine suitability for stantial deferred maintenance and deferred investment in the CIP. An incomplete form often is the first sign that a existing assets should be particularly diligent in assessing project is not ready to be considered for the CIP. their past unsatisfied needs and should include them in the project requests. Appendix 8 provides two sample project request sheets. In developing a local form, it can be a good idea to review forms that are required by national or donor agencies for Starting the Annual Cycle capital projects. For example, in developing its project request form, the City of Nis in Serbia slightly modified This step on the CIP calendar should be officially an- a form needed to apply for funding from the National nounced by the Mayor (or executive in charge of CIP) to Investment Fund (Case Study 1). the LG representative body. The CIP Coordinator should send out requests for project proposals, instructions for Use of standardized forms and instructions ensures uni- their completion, and a timetable to all contributing de- formity and completeness of the information supplied by partments and enterprises. These documents should be various departments and enterprises. The CIP Coordina- signed by the mayor (or executive in charge of CIP). If tor should design the forms and instructions. A common departments sense that top management is not involved mistake to be avoided is to require information that is not or not committed to the CIP process, they are likely to needed for review and evaluation. reduce their efforts. If the CIP process is being organized for the first time, Local government staff should not expect too much too the CIP Coordinator should work closely with 1 or 2 key soon. If this is the first year of developing a CIP, staff Steps in the Investment Planning Process 35 should have realistic goals. The CIP Committee and CIP was not known when the request was prepared and Coordinator might want to introduce a simple program approved. As a result of these unforeseen factors, cost in the first year and add new features in subsequent years. and time overruns on government capital investment The first year may be spent working with department projects are very common. heads and gathering important information on a few of â??â–  There is no universal way to handle this challenge, the most important projects. The CIP Coordinator should and LGs usually find compromises in their ensure that the first departmental CIP meeting takes place approaches that are acceptable in their particular at a time when most participants are able to meet. The local situations. For example, some governments, first meeting is to review the forms and calendar and to especially when the CIP process is not yet fully answer questions. developed, allow rough cost estimates in the project requests, but later have a second phase to clarify these After carefully reviewing the forms, the CIP Coordinator estimates with project-specific data for the projects should be very clear about the timetable. Offering separate selected for inclusion in the draft CIP. Furthermore, meetings with the staff who will fill out the forms can be in well-established CIP systems, project requests useful. During this period, while departments and enter- show how the requested amount will be distributed prises are preparing project requests, the CIP Coordinator over time (see sample forms, appendix 8). For should follow up with telephone calls and personal visits large projects, first-year expenditures usually are to these departments and enterprises, to see what progress for studies and other preparatory work, including is being made and/or whether any major obstacles have clarification of the costs for the later stages of the been encountered. project. These activities can be undertaken before the projects are considered for the CIP. Addressing challenges. When departments or enterprises â??â–  Another very common practice is that the CIP prepare project requests, this step poses a number of chal- itself, even after being approved, is not a budget lenges to the entire CIP process: document, so it does not provide any spending au- thorization. Instead, only the first-year requests for nâ–  How does a LG balance the schedule and resource con- funding from the CIP are included in the annual straints of the CIP process with project preparation budget and authorized (table 4). needs? Preparation of accurate project requests requires â??â–  Another practical approach is to stipulate in the CIP substantial work that is lost or becomes outdated if the documents that as soon as a project is approved as a project is not included in the CIP. For example, it is not part of the CIP, relevant departments or enterprises efficient to complete all of the needed feasibility studies, may use their budgets to pay for studies, surveys, including financial and economic analyses (especially for investigation of options, and engineering advice. large scale projects) and impact studies; and to make ac- nâ–  Are all costs recognized and accounted for? In their curate cost estimates before the project is approved for CIP processes, governments and their departments the CIP. In fact, in practice, these procedures are beyond commonly recognize components of the investment the technical and financial capacity of most LGs. How- costs21 and include them in cost considerations and ever, without such studies and reliable cost estimates, planning. However, governments often do not in- LGs are at risk of approving projects that turn out to be clude in their analysis and decisionmaking other cost substantially more expensive to implement than initially components, such as the cost of financing and com- planned, or not feasible at all due to legal or ecological ponents of life cycle costs such as R&M (chapter 2). factors that were not identified in the requests. For example, Case Study 1 indicates that, in the City â??â–  For example, it could turn out that a city does not have 21 The investment costs include feasibility and planning stud- clear ownership of a land site on which it had planned ies, engineering and architectural design, land acquisition, to build a school. Resolving this legal issue could demolition, construction and construction management, postpone the project for a long time. It could happen contingency, site improvements, equipment, and furnish- that the site has serious soil contamination, which ings. 36 Guidebook on Capital Investment Planning for Local Governments of Nis, departments and enterprises participating in the first CIP process did not include future operations Box 9. Cost Savings from a Simple and M&R costs in their project requests. As already Life Cycle Costing Decision discussed, including even rough estimates as part of the financial analysis is important. Guidelines for The Park District of Urbana, Illinois in the United States making these estimates are suggested in chapter 2 and maintains detailed expense records for each of its land and property assets. The business ofï¬?ce, which main- appendix 1. tains the records, discovered that the heating expenses nâ–  Are material cost savings attempted in project re- for one of its properties were very high. An inspection quests? Construction technology and materials are and cost-beneï¬?t analysis revealed that changing the old changing rapidly, but municipal utilities and depart- heating system to gas would pay for itself in two years ments of public works often either are not familiar and permanently decrease operating expenses. This re- with these new opportunities or are not concerned placement was included in the Park District’s budget and with potential costs savings from the use of cheaper implemented. contemporary materials, equipment, and technology. Source: Kaganova and others 1999. For example, a municipal utility may suggest upgrad- ing a sewage network using cast iron pipes, which were used in the past. However, using plastic alternatives suggested above for large projects: to allocate resourc- could save up to 33 percent of the cost. This example es from the operating budget or the special funds to indicates that scrutinizing technologies and the costs of conduct the required studies before the project enters material inputs is very important for capital investment the CIP cycle. As noted, given the complexity of such planning. A challenge for LGs, especially small- and PPPs, not many cities are expected to use them to medium-sized ones, is to ensure that their technical create and operate capital facilities. However, glob- staff have the capacity and incentives to keep up to date ally, a broad range of local properties, facilities, and on cost-effective technical solutions. infrastructure have been built and operated through nâ–  Can simple life cycle savings be found? Savings of this PPPs (box 10). Before undertaking such PPPs, LGs kind are not necessarily difficult to achieve or complex are well advised to build their capacities to manage (box 9). Looking for such opportunities should be en- contractual relations by starting with simpler, short- couraged as a part of asset management and CIP. term contracts. nâ–  When should projects for donors be “packagedâ€?? Some projects are expected to be cofinanced through Finally, although the finance staff should provide recom- external funding (grants, borrowing). These projects mendations for capital financing alternatives, it is ben- will require much more careful and detailed prepara- eficial for the operating departments and public enter- tion (“packagingâ€?) for presentation to potential spon- prises preparing project requests to recommend financing sors than is typically needed for financing through the sources. Individual staff in these entities sometimes pos- LG’s own sources. The implication is that after such sess financing source information not otherwise available. a project is included in the approved CIP, the project Suggestions of proposed financing methods should be will need to undergo the second, in-depth appraisal recorded as specifically as possible in the project request and “packaging.â€? forms. nâ–  When is the right time to consider PPP options? As mentioned, another challenge is to identify projects that are suitable for PPPs. The short period allocated STEP 6 for project requests in an annual CIP preparation Reviewing Project Requests cycle is not sufficient to carry out the initial steps to identify whether a particular service/investment need At this point in the process, the completed project request can appropriately be considered for a PPP. A possible forms have been received from the operating depart- solution to this timing challenge resembles the one ments and public enterprises. The first step is for the CIP Steps in the Investment Planning Process 37 this question requires expert review because departments Box 10. Local Public Facilities and enterprises are not always realistic in their assump- Built through PPPs tions and can underestimate cost components, particu- larly the cost of land acquisition or borrowing. Around the world, local public facilities built through 6. Do projects with large costs need to be broken down public-private partnerships (PPPs) include roads and into phases that can be financed and built separately? bridges, parking garages, passenger and freight rail- ways and stations, light rail systems, metros and sub- A sample checklist for reviewing project requests appears ways, ferries, bus lines and terminals, multimodal public transport hubs and terminals, airports and ports, water in appendix 9. treatment and distribution, sewage systems and waste- water treatment, solid waste management systems, An LG should not be surprised if the first submission of power generation and distribution, central heating and project requests contains a large number of incomplete cooling systems, hospitals and jails, city government of- forms, especially if this is the first CIP cycle. Incomplete ï¬?ces, sports facilities and auditoriums, police and ï¬?re forms may be due to confusion, because not all of the infor- stations, libraries, school, dormitories and social hous- mation is readily available or because department represen- ing, and farmers’ markets. tatives underestimated the amount of work involved. The Source: CDIA 2010. LG should reserve as much time as possible in the schedule for this step. If information is missing, the CIP Coordina- tor should contact the appropriate department representa- tive, who should supply the missing information. Coordinator to review the forms, checking each for com pleteness and accuracy. During this initial screening, no Department heads also may be consulted if further clari- judgment is made regarding the merits of the proposed fication is necessary. If an important department fails projects. Project ranking and selection occur later in the to submit project requests, the CIP Coordinator should process, once all of the information required to evaluate speak immediately to the department head. If the depart- the projects has been compiled. ment head cannot commit to submit the requests on time, the Mayor (or executive in charge) needs to be notified In this first round, the CIP Coordinator, with the as- and her/his assistance requested. This kind of delay can sistance of the technical support staff, reviews project cause enormous problems for the CIP Coordinator and request forms to determine whether the information ap- the CIP process. In fact, at this juncture, the CIP Com- pears “reasonable.â€? Written project justifications should mittee and the Mayor (or executive in charge) need to demonstrate the level of planning and care that has gone come to a joint decision as to whether to proceed to the into preparing these project proposals. In reviewing the next step without all of the projects having been submit- applications, the reviewer needs to ask six questions: ted and reviewed. 1. Is the project appropriate for submission for funding Sometimes, for the sake of efficiency, especially in large through the capital budget? jurisdictions, the CIP Committee may decide to simplify 2. Is the information complete and accurate? scoring and prioritizing projects. For example22: 3. Has the project justification section been written with enough detail and specificity to be useful in the evalu- nâ–  Conduct a preliminary screening of submitted project ation? requests and reject some outright (because the data pro- 4. Does the project overlap with submissions from other vided is not complete or the project is not desirable) For departments? Can two or more of the proposals be relatively inexpensive projects, request less information consolidated? nâ–  Focus the review on the most important projects, or 5. Are cost estimates reasonable? Can these estimates be used to develop a capital program and budget? Note that 22 Hatry and others 1984. 38 Guidebook on Capital Investment Planning for Local Governments nâ–  Focus on projects near the “cutoffâ€? point, that is, proj- 2. The appendix may result in modifications to schedules ects whose inclusion in the CIP is problematic (for ex- or other details of local projects and prevent waste of ample, controversial projects), and put less effort into local resources. For example, it makes no sense for evaluating projects that clearly will be included in the the LG to put new pavement on the main street in CIP. June, if the central government plans to dig it up in September to replace a sewage main. By the end of this step, the CIP Committee will have a list 3. The list of CIP projects and the list of potential cen- of projects eligible for inclusion in the CIP. Based on the tral projects may be a tool for the LG to guide central individual project sheets (numbered consecutively), the project selection by making local priorities explicit CIP Coordinator should create a summary sheet (table and known to the central government. 2). Usually future M&R and operations costs are not in- cluded in the summary (but they should be recorded on individual project sheets!). However, future costs should STEP 7 be included in the financial planning simulations of the Prioritizing Project Requests LG budget (chapter 3). If a requesting department or en- terprise suggests borrowing, the cost of borrowing should If Steps 3, 5, and 6 have been done carefully, Step 7 is made be included in the summary. Note that the CIP Com- much easier. In this step, the CIP Coordinator needs to mittee must be clearly informed about which costs are exert all possible skill to manage the work of the CIP Com- included in such a table and which are not. mittee. The first stage is to review with the procedural rules, schedule, and desired outcome with the CIP Committee. It A useful appendix to this list—and, later, to the final list of also is necessary for each committee member to understand CIP projects—can be a list of capital projects in the LG’s the purpose and scope of each project before attempting jurisdiction that are sponsored by higher levels of govern- to provide a rating. Conveying this understanding is ac- ment for the period for which CIP is being developed. It complished by convening the first meeting and asking one also may be possible to find out what the sponsors of such person from each department to explain each project and projects expect the future maintenance and repair (M&R) to answer questions. Depending on the number of projects and operations costs to be—and whether these costs will that need to be evaluated, going through all of these expla- be the LG’s responsibility. At least three benefits can be nations may take one or more meetings. expected from adding such an appendix to the CIP: Second, the criteria need to be reviewed again by commit- 1. If the future annual costs are expected to be paid out tee members and used in a hypothetical review of several of the local budget, the budget forecast should incor- projects. The hypothetical review doubtless will reveal porate them (chapter 3 and appendix 3). many unanticipated consequences, and there will be ques- Table 2. Projects to Consider for CIP (units of local currency) Project no. Name Dept. 2007 2008 2009 2010 2011 Total River Bridge C-13 C 7,800,000 8,400,000 0 0 0 16,200,000 Replacement Drainage C-7 System C 120,000 6,000,000 6,000,000 6,000,000 18,120,000 Improvements Fire Station F-3 no. 3 F 0 180,000 220,000 0 0 400,000 Renovation Steps in the Investment Planning Process 39 tions about using the criteria. If appropriate for the system The CIP Committee needs to work closely with the fi- of criteria selected, the CIP Coordinator should prepare nance department on Step 8. Several iterations may be evaluation sheets for each evaluator to use in rating each required to reconcile the budgetary forecast and list of project. It is important to realize that this exercise requires suggested projects. more judgment than precision. In addition, the amount of work required by the CIP Committee will depend on Due to limited funding, it is common that many projects the number of projects to review. Evaluation may take a will not be matched to any funding sources. For example, few meetings or a few months of regular meetings. in many US cities, available annual funds can pay for ap- proximately only 10 percent of the total need. Further- The process should enable CIP Committee members to more, projects with the highest priority occasionally do hold discussions about individual projects and to change not receive funding, but the next projects in line do. Being their minds and revise their evaluation scores if needed. passed over can occur for several reasons, such as special Changes often occur as committee members hear from earmarking (for example, from international donor orga- other members and are a natural part of the process. Re- nizations) and because very large projects often exceed all member that this evaluation is not a mathematical exer- funding available so must be skipped temporarily. cise but a process to identify the projects that will most As mentioned, there are no hard rules for deciding how benefit the community. each project should be financed. Relatively small projects often are funded from the city’s own resources or the re- The final product in this step is a list of all eligible proj- sources of its service enterprises, whereas bigger projects ects in order of priority and arranged by category. A sum- require multisource financing. mary report should be compiled that shows the projects arranged in priority order according to the categories used The final product in this step is for the CIP Coordinator in the scoring process. to develop summary tables. Two of them will be key. The first is a short list of the projects suggested for inclusion Public participation in this and the next step can be se- in the CIP, with their ratings and suggested cost alloca- cured through nongovernmental members of the CIP tions among finance sources (Case Study 1, table 6). The Committee (box 8). second key table will show, for each project, the suggested timing of expenditures during the CIP period and the spending prior to it. In the second table, after both the STEP 8 CIP and the annual budget are approved, the first year’s Matching Projects to Available spending becomes part of the annual capital budget for Funding the upcoming year (table 4). Ideally, one output of the financial analysis would be a Other Summary Schedules table of revenue sources available for capital financing for Other project summaries should be prepared that arrange the first year and forecasts for the subsequent years of the the projects by department and prioritize projects by pur- CIP (chapter 2, financial sources; chapter 3; appendix 3). pose. A list of unfunded projects from the CIP process also should be created, as it will be the starting point for This information is the basis for selecting projects for the next year’s CIP. (High priority unfunded projects year one and the subsequent years of the CIP program. may get funding later in the year as new funding sources Continuing projects should be funded first. High-priority become available.) Debt and debt service schedules also projects need to be matched with the remaining avail- should be provided. Tables showing forecasts of total rev- able funding sources. If some of the sources have special enue available for capital expenditures and total capital earmarks, projects that qualify for these eligibility rules needs should be prepared for each year of the multiyear should be matched with these funds. funding cycle (table 3). 40 Guidebook on Capital Investment Planning for Local Governments The CIP Coordinator or the CIP committee should trans- STEP 10 mit the results of this step to the Mayor (or executive in charge) in a memorandum. Adopting Capital Program and Budget STEP 9 The schedule should include enough time for the public and for the representative body to review the program and Drafting Capital Program budget. Workshops and study sessions for the local coun- and Budget Documents cil offer an informal setting in which to discuss project proposals with the CIP Committee and technical support The Mayor (or executive in charge) finalizes the recom- staff. Site visits also are a valuable educational tool. mended capital program and the budget and submits them to the representative body (local council). The CIP The first step in engaging the public is to disseminate program and budget may be combined in one document information about the CIP process through newsletters, or be presented as two separate documents. Typical com- radio and television programs, and social media. Second, ponents of the document are: the public should have a chance to provide ionput. Focus groups and public hearings are good means of obtaining nâ–  Capital program message or transmittal letter input from businesses and residents. When the citizens nâ–  Summary schedules and businesses participate in the process, they develop a nâ–  Detailed project information for the projects recom- better appreciation of the challenges facing local officials mended for funding in the first year. and the tradeoffs involved (box 4). Public hearings also provide the residents with an opportunity to consider A narrative statement or letter of transmittal summarizes how the program affects their community. Public meet- key issues that have influenced the selection of projects in ings take two forms: public hearings and community the proposed capital improvement program and budget meetings. (for example, financial trends, condition assessments, and new development). 1. Public Hearings A public hearing is a structured event used to gather residents’ and businesses’ comments concerning the CIP prior to its adoption. A public hearing reaches a large Table 3. Sample Summary of Requested Project Costs, Available Revenues, and Unfunded Difference (thousand units of local currency) 2007 2008 2009 2010 2011 2007–11 Requested project costs 93,386 208,692 145,104 138,792 49,911 Total 635,884 2007–11 Available revenues 32,009 11,764 18,077 13,040 10,300 Total 85,189 Unfunded difference 61,377 196,927 127,026 125,754 39,611 Total 550,695 Steps in the Investment Planning Process 41 number of people and provides opportunities for them put, including who is eligible to speak and the time to comment directly on an issue. Open hearings enable limitations on remarks major objections to the program and budget to be dis- nâ–  Whether written comments will be accepted cussed before the representative body formally adopts the nâ–  How information collected through the public hearing CIP. A public hearing may result in the need to amend the process will be used preliminary capital program and budget. These changes nâ–  How meetings results (including changes to CIP) will should be made before submitting the final capital pro- be reported back to the public. gram and budget to the representative body for adoption. After completing its review of staff recommendations and 2. Community Meetings public opinion, the representative body should adopt the Meetings with local residents can be held at the commu- capital program and budget (for at least the first year) nity or neighborhood level. Meetings can be scheduled to demonstrate its commitment to the program and to during the CIP process to solicit citizen input on proposed confirm its policy regarding the community’s approach to capital projects. The informal structure of these meetings meet its future capital needs. Adoption of the program is enables for indepth discussions, direct and immediate re- not a binding commitment to fund projects other than sponse to questions and comments, and clarification of for the first year (table 4). facts or ideas. Some representative bodies object to formally adopting To ensure adequate public notice for the meetings, the the program because they believe it restricts their poli- CIP Coordinator or other designated individual should cymaking authority and flexibility. They may decide to place an advertisement in the local newspaper or radio approve it in principle or merely accept it. Acceptance is announcing where and when the public meetings will not binding for the representative body. Instead, the body occur enough in advance to enable public participation. may only adopt the capital budget and appropriate funds. The CIP Coordinator also should develop a process for conducting the public meetings. Failure to adopt the program as a binding document does not eliminate its value. The program still serves as an ef- Organizational issues to consider include: fective planning and management tool. Moreover, it keeps the representative body informed of the LG’s capital needs nâ–  Who will represent the LG and helps the body respond to public inquiries about the nâ–  What procedures will be used for obtaining public in- status of projects. Table 4. Sample Fragment of Approved CIP, with First Year Approved Budget (2010) Budget by year (thousand €) Budget approved Total Requesting dept./ Before (thou- # Project enterprise Score 2010 2010 2011 2012 2013 2014 sand €) Airport Reconstruction Municipal enterprise 1 and Upgrade “Airportâ€? 73 0 1,467 533 0 0 0 2,000 Social Housing Municipal housing 2 Project # 1 enterprise 70 0 0 1,200 2,100 1,200 0 4,500 Livestock Cattle Department of rural 3 Quarantine affairs 67 81 25 0 0 0 0 106 42 Guidebook on Capital Investment Planning for Local Governments Once the CIP process is established, it produces a rolling Responsibility for managing an approved project normal- product. The following year, the column for the past year ly is delegated to an operating department. However, the (2010 in table 4) will be removed, and a new column (for implementation of capital projects requires multiple steps 2015) will be added, with the necessary adjustments to and activities by various departments and actors. At this the list of projects and cost estimates. stage, multiple inefficiencies and delays commonly hap- pen, even if the land and financing are available. 5 Implementing and Monitoring Investment Projects Several lessons learned from best practice can increase ef- structures, and workloads to identify opportunities for fectiveness and efficiency (Westerman 2004): eliminating roadblocks and enhancing accountability nâ–  Leveraging economies of scale by consolidating schedules nâ–  Centralize responsibility for overall program oversight (such as solicitation of proposals), standardizing processes in the financial department. and products (such as correspondence and “boilerplateâ€? nâ–  Treat project management as a professional function. sections of project specifications), and increasing automa- The project manager should focus on the management tion and accuracy through electronic tools. of resources, time, product, and risk, not on individual technical tasks such as design. Having project manage- It is useful if the CIP Coordinator maintains up-to-date ment duties performed by a central agency, as opposed information on each project. Quarterly CIP meetings to an operational department, can help prevent paro- with department representatives should be held to report chialism and promote a relatively objective orientation progress and discuss problems in implementation. toward the basic goals of project delivery. In addition to project management skills, project managers need ready Preparing Projects for External access to project information, such as budget, expendi- Financing ture, and contract information; and sufficient authority to effectively manage design consultants and contractors. Typical project requests prepared during the CIP process nâ–  Engage professionals from the private sector to support do not contain all of the data and information demanded government project managers or replace them entirely, by lenders and specialized grantors. Therefore, an impor- especially in the execution of extensive, complex, or tant task on the way to implementation of projects that ambitious capital programs. For larger, more sophisti- were planned to be financed in part through borrowing or cated LGs, it would be beneficial to shift away from the special grants is to present (“packageâ€?) the projects accord- traditional fragmented public sector model, in which ing to the requirements of a particular grantor or lender. various elements (such as feasibility studies, design, and construction) are procured and delivered separately (if It is useful for the LG to start by identifying all poten- they are outsourced to the private sector at all), or are tial grantors and lenders; establishing a database with delivered by separate governmental agencies. Instead, their contact information; and studying the conditions, elements of the process can be integrated under a single requirements, and limitations that each sponsor imposes. private sector provider within a PPP scheme (in this These steps can be carried out jointly by the CIP Coordi- case, “design-buildâ€?). nator and Head of Finance Department. This procedure Government strategies to improve project management enables a LG to zero in on the sources that fit best with a may include: specific project in need of external grants or finance and focus on preparing a proposal as required by a particular nâ–  Seeking methods to streamline interdepartmental proj- sponsor. ect elements such as procurement, contract and pay- ment processing, and zoning and building approvals. Techniques for “packagingâ€? projects for external fund- nâ–  Reviewing intradepartmental processes, organizational ing and finance go beyond the scope of this document. 43 44 Guidebook on Capital Investment Planning for Local Governments (Some specialized guidelines are listed in a special sec- The CIP Coordinator must develop a system that will tion in the References.) However, as an illustration of monitor the managerial and fiscal aspects of projects. A what can be expected, appendix 10 provides an outline CIP database is essential for monitoring project imple- of a proposal for a loan or grant (based on requirements mentation. The following are the basic categories of in- typical for Eastern and Central Europe). This outline formation that should be maintained and updated by shows that a proposal requires a large amount of in- the CIP Coordinator quarterly during the construction formation and preparation, which may require hiring implementation period: outside consultants. However, the level of sophistication expected from such proposals varies by region and by nâ–  Project title lender or grantor. In addition, the focus of each lender nâ–  Responsible department and grantor may differ. Commercial lenders may care nâ–  Key contact name most about the financial standing of the borrower and its nâ–  Total project cost ability to repay the loan (creditworthiness) and the proj- nâ–  Project phases (schedule) ect’s viability. Donors, for example, the European Union nâ–  Estimated expenditures/phase for its pre-accession funds, typically also care about the nâ–  Actual expenditures/phase schedule by phase net economic impact of the project. They want to see a nâ–  Fiscal year/quarter. cost-benefit analysis that reflects not only the financial but also the economic and social benefits of the project. Close communication between the CIP Coordinator and For a LG, this required cost-benefit analysis indicates the finance staff is necessary to monitor timely draw- that obtaining grants may require additional analyses downs of funds and to be aware whether payments are (for example, presenting an investigation of a project’s exceeding the level of completed work. net impact on economic welfare measured by several dif- ferent indicators) beyond those required by commercial Local governments lacking a tradition of budget disci- lenders. pline and capital planning face at least two big challenges in implementing a CIP. The first challenge is that the pri- In any event, donors often indicate that the existence of orities included in the CIP, even if they were approved an approved CIP improves the chances of a LG to receive by the representative body, may be revised during a fiscal funds. Moreover, a CIP can be an effective tool for a LG year; and other projects not included in the CIP may be to use to lobby for its capital funding priorities with cen- funded instead. For example, instead of capital repairs of tral government agencies and programs sponsored by in- two schools, funds may be used to repair street lighting ternational donors. and refurbish the Mayor’s office. The second challenge oc- curs when cost estimates included in the CIP turn out to Finally, making a case for a PPP with the financial partici- be insufficient and need to be increased, thus consum- pation of a private partner requires advanced expertise on ing funds planned for other investments. For example, the LG’s side (chapter 2). Guidance documents are sug- street repair may cost twice what was budgeted, so that a gested in the References. kindergarten roof cannot be replaced. Overcoming such shortcomings requires better government accountability Monitoring Projects in the and planning and effective public participation. Capital Budget and Their Implementation Project Reporting The CIP Coordinator needs to develop a system for moni- Status reports are a crucial aspect of project monitoring toring and reporting on the projects in the CIP. The cred- and oversight. The format and frequency of the reports ibility of the CIP process rests on the timely implementa- should reflect the information needs of the CIP Coordi- tion and completion of the construction or reconstruction nator, Mayor (or executive in charge), and representative of the priority projects. body. The CIP Coordinator should make quarterly reports Implementing and Monitoring Investment Projects 45 to the representative body. Basic information includes transparency can be achieved through simple, inexpen- department, project name, start date, estimated comple- sive means if the political and administrative will is there. tion date, percentage of completion, funding source, and For example, if a LG does not have yet an established costs (budgeted and actual). Costs can be broken down by system of monitoring and reporting on its capital invest- cost category such as planning, land acquisition, design, ments, it can simply publish annually a list of capital engineering, construction, and contingency. Narrative ex- projects paid for during the past year that includes costs, planations of delays, cost overruns, funding and construc- and a list of projects planned for the past and upcoming tion problems, and proposed corrective action are critical. year. These lists would be very informative for residents Figures and tables simplify the presentation for the Mayor and would show whether the LG had been disciplined in and representative body. following its plan. “Publishingâ€? can be as simple as post- ing a table with the list of planned and executed projects Transparency and Public Information and related costs on a billboard at city hall or on a city website. If the capital planning process is already estab- To maintain the public’s support, the LG needs to make lished, transparency can include reporting on achieving special efforts to keep the public informed about the the “targetsâ€? of a multiyear plan. For example, in São status of projects. Inviting the public to meetings of Paolo, the press closely follows the implementation of the representative body when CIP status reports are be- the 4-year development plan, Agenda 2012, against the ing presented can be one important method. Even for established targets (case study 2, chapter 7). cases in which LGs are just beginning the CIP process, 6 Sustainability and Evolution of the Investment Planning Process Cities that develop a sustainable CIP process are far more While on the surface it appears that the function of coordi- capable of making sound decisions with respect to spend- nating the CIP could be given to a relatively junior person, ing public funds and providing benefits to the community doing so often is a mistake. The coordinator should be a as a whole than cities that do not. International experienc- senior person who can communicate on comfortable terms es have shown that maintaining a multiyear CIP process with key department heads. It is a common that key depart- also prepares LGs to work more successfully with institu- ments often are late in delivering their completed project tions that offer financing for local capital improvements. requests and frequently challenge the availability of the data and even the credibility of the CIP Coordinator. The Developing a capital investment plan for the first time is position itself requires a person with strong organizational, time consuming and resource intensive. For smaller LGs, communication, and computer technology skills combined it can easily require one full-time person for part of the with finance and project management knowledge. year and part of the time of several departmental repre- sentatives. For larger LGs, this amount of staff time easily Another important matter alluded to in earlier chapters is can be multiplied by a factor of 2 or 3. See Case Study 1 that the CIP Coordinator needs to have a clear delegation for references to LGs’ challenges in preparing their first of authority from the executive. The CIP Coordinator CIPs. Due to the difficulties, it is not surprising to find needs to communicate clearly and, in some cases forceful- LGs that develop a capital investment program for the ly, with department heads. Additionally, because the CIP first year, then abandon it, Three areas that can improve is developed in the context of political pressure, the CIP the sustainability of the process are to Committee needs to develop the list of projects eligible for inclusion in the CIP independent of undue influence nâ–  Build a strong CIP administrative structure of parochial or commercial interest groups. nâ–  Formally adopt CIP policies nâ–  Hire consultants for specific professional expertise. Finally, the CIP function needs to be supported with sufficient budget. The work of a CIP Coordinator is pre- Build a Strong Administrative paring reports, communicating, and holding many meet- ings. The individual needs an office, up-to-date office and Structure communication equipment, and use of a meeting room. Similarly, the technical support staff should be authorized Step 1 of chapter 4 and the beginning of chapter 5 have to spend the time necessary to perform their work for the provided guidelines on determining the appropriate ad- CIP process. ministrative structure for developing a CIP program and managing a comprehensive investment process. Some LGs assign these tasks to the Department of Public Works, Define and Make Explicit Local some to the Department of Finance. Other LGs choose Investment Policies to create a separate department to implement integrated management of the investment process, such as a Devel- The CIP is much more than a technical procedure. The opment Department or a government land development plan is closely interrelated with the asset management and corporation. Smaller LGs usually assign coordinating the the budget processes, and all are at the heart of the political process to one staff member. process. Asset management reflects, explicitly or implicitly, 47 48 Guidebook on Capital Investment Planning for Local Governments societal norms, whereas the budget reconciles the conflict- expect to encounter obstacles as they implement the sys- ing needs and allocates limited resources among compet- tem. These obstacles will likely consist of political resis- ing interests. Capital investment, if not performed within a tance, staff resistance, information barriers, and others. transparent process such as CIP, often incorporates private interests of those close to the government, not broader pub- nâ–  Political resistance. Elected officials resist capital pro- lic interests. Even in democratic societies, a CIP process is gramming for several reasons. Some contend that it riddled with policy issues, choices, and political pressure. introduces excessive rigidity into policymaking because This is why the CIP needs to operate under the guidance plans for projects become solidified and are difficult to of established written policies, not the opinions of strong change. Others fear that it raises unrealistic public ex- individuals. This guidebook shows or mentions examples pectations that cannot be met due to limited funding. of the policies that should be discussed in all communities. They may believe it is not practical to plan more than 1 or 2 years into the future or beyond their term of It is common to think of only one option when considering office. Others believe that since only limited funds are an approach to achieve something. However, many issues available, it is meaningless to go through the effort of and challenges can be solved in multiple ways. Ultimately, creating a detailed program and budget. the way chosen by each community should be tailored to nâ–  Staff resistance. Staff often will object to capital program- that community and the result of discussions among key ming because they feel it takes an inordinate amount of stakeholders. The key factor to sustain a CIP process is to time and effort. Staffs frequently complain of a lack of embed it within the local policy framework. Once the LG commitment to the process by elected officials and top decides its policies on the investment process and determines management. There is a belief that elected officials will not the steps that it wants to follow in this process, these poli- adhere to the program and will give overriding consider- cies and steps should be reflected in an official local policy ation to political factors. The staff may be concerned that on investments that has been approved by the representative the process will place excessive information demands and body. In practice, this official local policy can be a set of controls on them. Finally, they may believe that they will policies, simple or complex. However, at a minimum, the not be given adequate resources to do the job and that the formal local policy should determine the range of eligible process is merely an empty exercise. projects, the way that projects are identified and proposed, nâ–  Inadequate information. Inadequate information is a the degree and components of citizen involvement, and the major obstacle. Data on the condition of existing in- approach to financing the investment projects. vestments frequently is limited. Information on com- plaints and service interruptions may not be tracked Technical Support through and analyzed. Information on project costs and fund- Outsourcing ing information and on financial condition and poten- tial funding sources often is unavailable. Finally, it is Many elements of the investment process require profes- difficult to quantify the benefits of many projects. sional expertise. Some LGs, especially small ones, might not have such expertise in house. Lack of local expertise Where to Start? should not prevent LGs from implementing an effective investment process. The solution to the problem of not Some elements outlined in this guidebook in connection having in-house expertise is outsourcing specific tasks to with capital investment planning, such as life cycle cost- a LG consultant. Note that donor financial support for ing or evaluation of facilities conditions, require relatively consultants sometimes is available as well. advanced systems of asset management and property management. These systems might not be in place in a par- Typical Obstacles to Overcome ticular jurisdiction. However, practically any LG, if its func- tions and responsibilities are defined, can start systematic Capital programming and budgeting are difficult and planning of capital investment with a simplified set of activi- time consuming. A LG and CIP Coordinator should ties, which can become more sophisticated over time. Sustainability and Evolution of the Investment Planning Process 49 Thus, the question is: What can be included in the CIP 5. Think creatively whether and how you can con- process at its simplest? A set of nine possible activities vince residents and businesses to pay for some costs follows. (See preceding chapters for detailed guidance through one-time contributions or increased tariffs on each.) (boxes 6 and 7). 6. Assemble simple project requests from all your 1. Make a basic inventory of the main capital assets departments and institutions. Try to include not and infrastructure under LG control and assess only the capital cost estimates, but annual M&R whether capital repair is needed and how urgently. and operations costs as well (see chapter 2, section For example, children freezing in a school because on life cycle costing for guidelines to make rough the heating is broken probably should qualify as estimates). Seek specific input from the public. Se- “urgent.â€? lect projects to be funded according to the priorities 2. Assess what assets that the population needs most agreed earlier by matching the projects with fund- are lacking. Public participation in identifying these ing you plan to assemble. However, do not include priorities is critical. projects for which it is unclear who would manage 3. Assess your resources: What do you expect from your the asset or for which there is no realistic plan for budget for the next 1 or 2 fiscal years? What can you covering annual costs. mobilize locally? (For example, is there a vacant plot 7. Discuss the suggested list of projects and funding of land across the street from the Mayor’s office that sources with your citizens and businesses at a public could be auctioned and sale revenues earmarked to hearing and correct the list if necessary. fund the urgent investment?) What could you solic- 8. Implement the plan and report the results to the it from the upper levels of government and donors? public: What did and did not work? Which devia- 4. Define which types of capital investment projects tions were made and why? your government is planning to invest in the next 9. Repeat next year, with corrections from lessons one or two fiscal years and in which order. Discuss learned during the first year. these intentions with your residents and business community and modify according to their input. 7 Case Studies: The Cities of Nis, Serbia and São Paolo, Brazil The two case studies—for Nis, Serbia, and São Paolo, Bra- Euros. Nevertheless, financial results were relatively stable, zil––describe in detail their 2011 capital investment plans due primarily to the fact that the city maintained strong and how they were developed. Each study concludes with financial controls over operating expenditures, keeping general lessons from the case. As background for the case increases in line with the growth of operating revenues. studies, a snapshot of the size and budgetary position of In 2009, thanks to the Strategy of Expenditure Reduction these two cities follows: implemented by the city, operating revenues were even higher than in 2008. Nis, São Paolo, Serbia Brazil In the structure of operating revenues, shared revenues Population (thousands) 255.5 11,244.3 typically made up a much larger share of the budget (83 Annual city budget (2011, 384 1,901 percent) than did the own revenues of the city (17 per- planned) (US$ per capita) cent). However, in 2009, this ratio changed, primarily Annual city capital 149 371 because of the transfer cuts, which reduced shared rev- investment (2011, planned) (US$ per capita) enues to 75 percent. Among own-source revenues, the largest contributor has been the land use fee (averaging 35 percent of own-source revenues for 2007–09) and the property tax (averaging 27 percent for the same period). Case Study 1 The most stable recurrent revenue is the shared wage tax, The City of Nis, Serbia which increased even in the period of extreme economic downturn. Although by 2008, central government trans- The City of Nis is the administrative center of Nisava Dis- fers were considered to be a stable source of revenue, in trict and the regional center of South East Serbia. Nis is 2009 they were cut. If this trend continues, capital invest- the third largest city in Serbia, with 3.3 percent of the ments are likely to be reduced since it is easier to reduce population of the country and 65.5 percent of the popula- capital expenses than operating expenses. tion of Nisava District. The share of capital revenues in total city revenues has The City of Nis provides 4.02 percent of Serbia’s total been significant—averaging 31 percent in 2007–09. This GDP. The city’s dominant industry is processing, which, revenue flow enabled the city to implement a program of in 2008, received approximately 39 percent of total pri- extensive capital expenditures without causing financial vate and public investment. The transportation sector re- deficits. Capital revenues consist of a self-contribution ceived 25 percent, followed by the construction industry, fee for capital improvements from property owners, land electricity, gas, and water supply. development fee, land lease fee, capital donations, capital transfers from the central budget, and revenues from sale In 2007–09 the Nis city budget reflected cautious fiscal of assets. Note that the land development fee may be a policies and worsening microeconomic conditions. In good indicator of investment activities because it is paid 2008 the city budget was 62 million Euros. In 2009 due by each person or entity that obtains a building permit. to the economic crisis and drastic cuts in transfers from In 2009 this fee generated less revenue than it had in the central government, the budget was only 59 million previous years. 51 52 Guidebook on Capital Investment Planning for Local Governments Capital Investment Planning Process to external sources of finance (EU pre-accession funds, ministries’ funds and programs, and other donor funds). The Draft Capital Investment Plan (CIP) of the City of Nis is a document of strategic importance that defines In October 2009, the mayor issued a Decision on the the city’s midterm development guidelines. It is a five- Formation of the CIP Working Group. He appointed 21 year plan of budget investments in infrastructure, public members to the working group and 1 CIP Coordinator (a buildings, and facilities and equipment. staff member from the Mayor’s office). This was the first time that Nis embarked on such an endeavor. This work This document was prepared by the CIP Working Group, was supported by advisors from the Municipal Economic appointed by the mayor, and made up of the staff of the Growth Activity project. The CIP was finalized in Novem- Local Economic Development Office and representatives ber 2010 and submitted to the City Council for adoption. of the Nis administration. The process was facilitated by advisors from the US Agency for International Develop- Other LGs in Serbia include in their CIP Working Groups ment (USAID)-sponsored project, Municipal Economic representatives of public utility enterprises and organiza- Growth Activity. tions outside the municipal budget system. However, members of the Nis CIP Working Group were primar- The CIP is designed to bring together the City Develop- ily representatives of line departments and city budgetary ment Strategy and the City’s financial capabilities. One of institutions. Specifically, in addition to the mayor him- important final results of the strategic planning process is self and his deputy, other members of the CIP Working a list of potential capital projects that will be implemented Group represented the Department of Utility Activities, in the future. Energy and Traffic; Department of Finance, Own Rev- enues and Public Procurement; Department of Planning The CIP draft relies on the following documents23: and Construction; Department of Economy, Sustainable Development and Environment; Department of Property nâ–  Development Strategy of the City of Nis (adopted at and Inspections; Information and Communication Tech- the City Assembly session on December 3, 2007) nologies and Maintenance Office; Mayor’s Office; Local nâ–  Revised Development Strategy of the City of Nis Economic Development Office; City Council; Public 2009–2020 (adopted at the City Assembly session on Housing Enterprise; and Public Construction Enterprise. April 15, 2010) and Operational Plan 2009–2011 Because no staff member was officially appointed to pro- nâ–  Sustainable Development Action Plan of the City of vide technical support to the working group, individual Nis 2010–2014 (adopted at the City Assembly Session staff members, particularly those from the Department of on April 15, 2010) Finance and the Department of Planning and Construc- nâ–  Spatial Plan of the Administrative Area of the City of tion provided significant support during the process. Nis 2021—Draft nâ–  Local Environmental Action Plan of the City of Nis Indirectly, all stakeholders relevant to city development nâ–  Housing Strategy of the City of Nis were included in the process because they were able to nâ–  Local Economic Development Strategy of the City of submit project requests. These stakeholders comprised Nis city departments, public enterprises, public utility enter- nâ–  General Urban (Development) Plan of the City of Nis prises, education, science and research institutions, health 2010–2025. care institutions, and social welfare institutions. The idea behind the CIP was to enable the city to better The CIP Working Group developed the following guide- use its budget capacities, define priorities, prepare proj- lines, assessments, and forms: ect documents in a timely manner, and improve access nâ–  Period to be covered by CIP: 2010–15 23 They are available on the City’s website: http: //www.ni.rs/ nâ–  Definition of a capital investment project: Sectors that government.html Case Studies: The Cities of Nis, Serbia and Sáo Paulo, Brazil 53 may be included (table 5); minimal value: 100,000 Note that only 5 of the more than 13 members of the CIP Euro; period of implementation: Not fewer than 2 Working Group were assigned to rate the projects. years nâ–  Possible sources of finance: City budget, the National Content of the Capital Investment Plan Investment Plan and other central government pro- The first part of the CIP describes the city’s organizational grams, loans, donations, own resources of municipal structure, composition of the CIP Working Group, and public companies, and concessions (public-private city development vision and general data about the city: partnerships) population, economy, employment, education, natural nâ–  CIP calendar, according to which the document had to and cultural resources, and transportation infrastructure be adopted in December 2010 (chapters 1, 2, and 3). nâ–  System for rating projects (see below) nâ–  Assessment of city’s financial capacity and budget pro- The second part presents the methodology used to draft jections through 2015 prepared by Department of Fi- the CIP. The methodology includes guidelines on formu- nance lating the CIP, calendar, project selection criteria, assess- nâ–  Project Proposal Form (project request) was adopted. ment of city’s financial capacities, and selection of project Nis slightly modified the form in order to apply for proposal form (chapters 4–10). funding from the National Investment Fund. The form included five sections: (1) general project information; The third part of the plan provides project descriptions (2) project goals and strategic framework; (3) project and ratings. Projects were described by value, budget share description; (4) degree of project readiness for imple- of funding, and degree of readiness for implementation. mentation; and (5) project management structure/ Two projects that had been included in the SLAP system project sustainability. The CIP Working Group sent also were presented.25 A total of 33 projects were selected the form to all direct budget beneficiaries. They dis- and ranked (table 6). tributed it on to indirect beneficiaries and public utility companies. The top priority projects in the CIP were for utility in- frastructure and general infrastructure: reconstruction Budget institutions and public utility companies filled out and expansion of the local airport; parking garage; central the forms and sent them back to the working group. Once waste water treatment system; and a farmers’ market. In the project proposals were submitted, the working group addition, three social housing projects (housing at sub- eliminated those that did not comply with the defined sidized prices) also received high ratings. Table 5 shows criteria (cost was below 100,000 Euro or was not from the the distribution of project cost by sector and source of targeted sectors, or implementation period was fewer than funding and finance. 2 years). Next, the working group rated the remaining projects according to the 16 criteria, with a weight (from 1 to 3) assigned to each criterion. Each project was scored against each of the 16 criteria; the points were multiplied by the weights and added to produce the total score for the project.24 25 SLAP is a database of municipal projects ready for financing 24 Author’s note: From the materials provided, the rating sys- hosted by the Serbian Standing Conference of Towns and tem is not quite clear and appears to be overcomplicated. Municipalities. 54 Guidebook on Capital Investment Planning for Local Governments Table 5. Distribution of Nis CIP Projects by Sector and Source of Finance By source of finance (thousands Euro) Own City Dona- sources of Other Investment sector Ministry budget Loans tions beneficiaries (PPPs) Total % Sport and recreation 600 1,000 0 0 0 0 1,600 1.6 Utilities and other infrastructure 5,960 5,386 54,100 1,360 1,600 7,367 75,773 73.7 Education 0 2,780 0 0 0 0 2,780 2.7 Culture 2,344 5,631 0 0 0 0 7,975 7.8 Social housing 700 950 5,480 2,000 4,830 0 13,960 13.6 Rural development 83 530 0 0 73 75 761 0.7 Total 9,687 16,277 59,580 3,360 6,503 7,442 102,849 100.0 With budget projections for the following five years pro- Three projects for which private participation in funding vided by the Department of Finance and the assessment is planned are a parking garage, visitor center, and sewer- of the city’s financial capacity, the city government will be age line in one district. able to make better informed decisions about spending on capital investment projects. The total budget funds avail- CIP Approvals able for investments are calculated as the sum of the net The CIP Working Group submitted the draft CIP to the operating surplus, capital revenues, carryovers from the City Council, which adopted it in November 2010 and previous year, and revenues from interest rates. The bud- submitted it for adoption to the City Assembly,26 where as get projections were produced using special creditworthi- of February 2011 it was pending. ness assessment software. The CIP guidelines stipulate an annual update of the However, the budget forecast did not include future op- CIP by adding new projects or eliminating completed erations and maintenance (M&O) costs for the new infra- ones according to the same procedure used for the CIP’s structure and facilities because project proposals provided adoption. this data only for 2010. Lessons for the Future Six different funding sources and finance are expected to be used (table 5). Most of the projects, mainly relatively The following observations and comments regarding the small ones, are planned to be funded from the city budget. CIP process are related to the experience of the City of The remainder will use a combined bundle of 2, or even Nis but, to a certain degree, are applicable to all LGs in 3 or 4 sources. Serbia and their CIP processes: No. of sources of ï¬?nance No. of projects with this no. nâ–  The CIP process is a complex set of activities that of sources requires almost 12 months of engagement. Unfortu- 1 20 nately, LGs do not always understand this, and after a 2 7 period of initial enthusiasm, only a couple of employ- 3 4 ees followed through on the entire process. 4 2 nâ–  The experience of using the National Investment Fund Total 33 application form for CIP project requests produced 26 A local representative body in Serbia. Case Studies: The Cities of Nis, Serbia and Sáo Paulo, Brazil 55 mixed results. On the one hand, it is a good form that LG, it is desirable to include businesses, institutions, requires solid data and information. On the other and citizens in the CIP process. It is especially desirable hand, many projects still lack technical and engineer- to include citizens’ and businesses’ vision of investment ing documents. For this reason, it often was impossible priorities in the city. In Nis, for instance, no public par- to complete the form. For instance, in Nis, only one ticipation was brought into the process. project (the relocation of the Nis-Niska Banja railway) nâ–  The City of Nis CIP is based on well-prepared strate- was fully prepared for implementation so that all of the gic documents, which clearly identified the long-term information required by the form was available. needs of the city. nâ–  Even when technical documents (for example, surveys, nâ–  Lack of documents such as pre-feasibility studies often engineering studies and design) have been prepared for makes it impossible to identify all of the investment a project, an economic feasibility assessment usually is cost components. lacking, and often there is no financial analysis. Conse- nâ–  The project request form did not include a section for quently, it is impossible to specify the timing of project estimates of future maintenance and repair, investment expenditures. The LG should allocate more attention maintenance, and operating costs of the projects. As a and resources to prepare feasibility studies. result, except for 2010, this information was not col- nâ–  A CIP calendar should allocate more time for budget lected, making it impossible to evaluate the impact of beneficiaries and public utility companies to fill out and future annual costs on the city budget. return the project proposal forms and for members of nâ–  Midterm budget projections (for five years) often are the CIP Working Group to evaluate and rate projects. unreliable due to uncertain fiscal and monetary policies nâ–  It would be better to include the entire CIP Working and an unpredictable inflation growth. It also is impos- Group in evaluating projects. Doing so would secure a sible to rely on such sources of revenue as donations broader based evaluation, less influenced by judgment and funds provided by central ministries. of the Mayor, his deputy, and other members of the nâ–  CIP preparation and adoption often depend on the 5-member evaluation group. distribution of political power in the City Assembly. nâ–  Although there is no “standardâ€? for selecting CIP Obstruction by political parties has occurred. To over- Committee members, in addition to budget benefi- come such obstacles, a clear CIP methodology must be ciaries and public utility companies established by the in place. 56 Table 6. Projects Included in Nis CIP, 2010–15 Funding sources and finance (rounded to thousand Euro) Own No. of City Dona- sources No. Name of project Submitter points Ministry budget Loans tions (PUC) Others Total Reconstruction and Additional 1 Construction of Airport Municipal Co. Airport 73 1,600 400 2,000 Construction of Branko Bjegovic 3 Apartment Block Municipal Housing Co. 70 700 2,000 1,800 4,500 Uprava za poljoprivredu 2 Livestock Cattle Quarantine i razvoj sela 67 33 25 48 106 Construction of Ledena Stena 4 Apartments Municipal Housing Co. 60 3,980 1,000 4,980 Construction of Apartments 7 on Mayakovski St Municipal Housing Co. 61 950 1,500 2,030 4,480 5 Parking Garage Parking Service Co. 55 1,600 1,200 2,800 Central Waste Water Treatment Municipal Utility Co. 6 System Naisus 54 54,100 1,000 55,100 Guidebook on Capital Investment Planning for Local Governments Reconstruction, Expansion, 8 and Construction of an Additional Floor over National Library Library Stevan Sremac 48 622 622 Municipal Utility Co. 9 Farmer Market Krive Livade Tržnica 48 4,000 4,000 6,047 14,047 Heating Pumps for Swimming 10 Pools Sport Center Èair 44 300 300 11 Final Works on Museum Building Museum 44 2,204 2,204 4,408 Reconstruction and Conservation 12 and Restoration Works on Walls Historic Preservation of Nis Fortress Institution of Nis 44 100 100 Dept. of Rural 13 Visitors Center Development 43 50 150 25 75 300 Sanitary Sewer - Gornji Mateje- Dept. of Rural 14 vac Development 43 360 360 360 120 1,200 15 Solar Energy for Heating Water Sport Center Èair 42 400 400 Renewal of Opera Section of 16 National Theater Theater 40 270 270 (Continued) Table 6. Projects Included in Nis CIP, 2010–15 (Continued) Funding sources and finance (rounded to thousand Euro) Own No. of City Dona- sources No. Name of project Submitter points Ministry budget Loans tions (PUC) Others Total Construction of Second Phase of 17 Outdoor Swimming Pool Sport Center Èair 39 600 300 900 Municipal Utility Co. 18 Environmental (Posts) Stations Mediana 37 349 349 Dept. of Rural 19 Livestock Market Development 36 105 105 Reconstruction and Restoration of 20 National Theater Theater 28 140 80 220 Reconstruction and Construction 21 of an Additional Floor over Serbia Gallery Public Art Gallery 25 1,230 1,230 Construction of a Swimming 22 Pool in Bambi Kindergarten in Medijana Municipality Kindergarten Pèelica 25 130 130 Construction of Additional Floor 23 and Steep Roof over Leptiric Kindergarten Kindergarten Pèelica 25 300 300 Reconstruction of Neven 24 Kindergarten Kindergarten Pèelica 25 250 250 Reconstruction of Plavi Cuperak 25 Kindergarten Kindergarten Pèelica 25 250 250 Construction of Kindergarten and 26 Providing Equipment in Pantelej Municipality Kindergarten Pèelica 25 800 800 Case Studies: The Cities of Nis, Serbia and Sáo Paulo, Brazil 57 58 Guidebook on Capital Investment Planning for Local Governments Case Study 2 constitution or capital increase of (government) compa- nies that are not of commercial or financial purpose.â€?29 The City of São Paulo, Brazil Investment is included in capital expenses and constitutes The City of São Paulo City, with a population of over 11 its largest part (over 90 percent). Financial investments million, is governed by a directly elected Mayor with a (including the acquisition of properties in use, assets for 4-year term. Elections of the Mayor and of City Council- resale, credit titles, and equity and loans) and capital ors are held simultaneously. The city has 30 administra- transfers make up the rest of capital expenses. tive subdivisions, (Subprefeituras) managed by appointed “Submayorsâ€? (Subprefeitos), which have executive func- Operating expenses comprise cost expenses (including tions and permanent staff. The direct administration also payroll, materials, and maintenance of properties) and op- includes 22 secretariats in charge of 15 investment funds erating transfers (for subsidies, debt interest, and social and 8 city-owned companies, some of which have inde- security, among others). pendent budgets.27 There are also six indirect administra- tion autarchies (local authorities). Although it is not always summarized clearly, budget in- formation is publicized and easy to access. Most planning All secretariats, Subprefeituras, investment funds, autar- information includes “Operating Expensesâ€? and “Capital chies, City Council, auditing authority (Tribunal de Con- Expenses.â€? tas), and ombudsman’s office (Ouvidoria) are explicitly budgeted within the system of city planning and budget- São Paulo City Planning System ing described below. Six of the city’s companies are pub- licly traded (S.A., or Sociedade Anônima),28 although the São Paulo City expenditures and investments are coordi- city is the majority shareowner (with 51 percent–99.95 nated by the Municipal Planning, Budget and Manage- percent of shares). As public companies, they have their ment Secretariat (SEMPLA, or Secretaria Municipal de financial statements independently audited and published Planejamento, Orçamento e Gestão), which is in charge of and call regular shareholders’ meetings. However, these the SP City Planning System. SEMPLA’s current struc- S.A.’s are more or less permanently in deficit. Their ac- ture was established in 2010. It results from the fusion counts are balanced through capital transfers from the of two secretariats, the Municipal Planning Secretariat city, making them dependent on the total city budget. (SEMPLA) and the Modernization, Management and Table 8 lists these companies, their business lines, and Debureaucratization Secretariat (Secretaria de Moderniza- their investment budgets. ção, Gestão e Desburocratização). Formerly, in addition to budget and economic planning, SEMPLA was in charge Definitions of urban planning.30 In 2009 this last function was trans- ferred to the Municipal Secretariat of Urban Develop- Investment in the City, according to the city planning ment (Secretaria Municipal de Desenvolvimento Urbano, or budget glossary, is defined as “any expense related to plan- SMDU). ning and execution of (public) works; real estate acqui- sition and its utilities, equipment and permanent assets; The SP City Planning System was organized in 2005 and has been SEMPLA’s responsibility since the secretariat was established. The city planning system’s “fundamental task is to develop and execute the city budget,â€? which is an 27 An exception is COHAB, the City Housing Company, which is treated in the budget as an autarchy. 29 http://sempla.prefeitura.sp.gov.br/orc_homenew.php#orc_ 28 This business model was created during the 1960s and 1970s glossario.php to render government management more agile. However, 30 Until 2004, SEMPLA was in charge of only urban plan- today, all of these companies are subject to bidding and con- ning, whereas economic planning was a Finance Secretar- tracting rules similar to those of the direct administration, iat responsibility. City budget management was passed to but with few practical advantages. SEMPLA in 2005. Case Studies: The Cities of Nis, Serbia and Sáo Paulo, Brazil 59 instrument to control and monitor governmental actions. to a specific Secretariat and managed by a Secretariat These actions, in turn, are divided in two categories: those Board, usually headed by the Secretary. Table 7 lists the of direct visibility (such as income generation, transpor- funds, the corresponding secretariats, the main funding tation, and leisure), and those of indirect visibility (such sources, and the identifiable capital expenses. as urban infrastructure, security, health, education, and environment). According to the 2011 LOA, of a total income of BRL 35.6 billion, 41 percent will come from “tributary incomeâ€? The city planning system operates through a set of three (that is, from city taxes, fees, and improvement contri- local laws: Multi-Year Plan (PPA, or Plano Plurianual), butions). Thirty-six percent will come from “operating Law for Budgetary Guidelines (LDO, Lei de Diretrizes transfersâ€? (mainly State VAT, or “ICMS,â€? transfers).31 The Orçamentárias) and Law for the Annual Budget (LOA, remaining 23 percent will flow from “capital incomeâ€? (11 or Lei do Orçamento Anual). All three must be passed by percent) and other operating incomes, such as contribu- the City Council after being presented by the Mayor and tions, property, and services. his secretaries. 31 ICMS (Imposto sobre Operações relativas à Circulação de Mer- Structure of Funding Sources cadorias e Prestação de Serviços de Transporte Interestadual e Intermunicipal e de Comunicação) is a Brazilian state tax for City special funds all are allocated in the PPA and LOA. goods and services. The tax ranges from 7%–25% and is All of these special funds (with one exception) are linked payable at all stages of sale from manufacture to consumer. 60 Table 7. São Paulo Special Funds Code Total allocation Capital expens- in city in 2011 LOA es in 2011 LOA budget Special fund City Secretariat Main funding sources Business lines (BRL million) (BRL million) • Speciï¬?c taxes, through city budget Funding and management of 18 • Penalties, fees, and SUS (Sistema Único da Saúde Health Health services’ income or Uniï¬?ed Health System) 5,161.21 307.1 • Fees • City budget • State and Federal 81 Municipal Authority governments’ budget for Urban Cleaning transfers focused on urban Funding of the urban cleaning Urban Cleaning (Autarchy) cleaning system and of the autarchy 0.012 none Funding works and services related to urban upgrading, stream cleaning and 86 channeling, title regularization, Sanitation and Housing (SEHAB) urban drainage and earth slope Infrastructure City budget containing, and expropriations 400.0 400.0 Guidebook on Capital Investment Planning for Local Governments • Trafï¬?c penalties • State and Federal Financing and improving trafï¬?c 87 governments’ budget development programs and Trafï¬?c Development Transportation transfers focused on trafï¬?c projects 660.5 39.2 NA 88 Heritage Preservation Culture NA 0.4 0.4 • City budget • State and Federal 89 Sports, Leisure and Sports, Leisure and governments’ budget Support of sports, leisure, and Recreation Recreation transfers focused on sports recreation projects 8.8 0.2 • City budget • State and Federal governments’ budget 90 transfers focused on children and teenagers’ Children and Participation and rights Complementary funding for the Teenagers’ Rights Partnership • Tax incentives development of public policies 116.6 9.0 • City budget • State and Federal 91 governments’ budget and Housing (FMH) Housing (SEHAB) tax transfers focused on Management of low income housing housing programs and projects 55.0 33.0 (Continued) Table 7. São Paulo Special Funds (Continued) Code Total allocation Capital expens- in city in 2011 LOA es in 2011 LOA budget Special fund City Secretariat Main funding sources Business lines (BRL million) (BRL million) • City budget • State and Federal govern- 93 ments’ budget transfers Assistance and Social focused on social assis- Financing social assistance Social Assistance Development tance public policy 602.5 11.6 Plans, programs, and projects aimed at environmental sustainability 94 • City budget Control, protection and Environment • Penalties and indemni- recuperation of environmental and Sustainable Green Areas and ties due to environmental assets Development (FEMA) Environment abuse Environmental education 64.8 60.6 Promotion of Cultural • City budget 95 Activities • Tax incentives Funding of artistic and cultural Culture • Box ofï¬?ce income projects 10.6 none Government (also • Rental of premises, except 96 linked to Mayor’s of Anhembi compound Tourism ofï¬?ce) • City budget Funding of the City Tourism Plan 0.6 0.6 • City budget • Penalties due to Heritage preservation works 97 Protection of Cultural mistreatment of cultural or Acquisition of heritage and Environmental environmental asset properties Assets Culture 0.8 0.8 • City budget. • State and Federal governments’ budget transfers focused on urban development 98 • Income from additional Support and implementation of real estate development plans, programs, and projects rights deï¬?ned in or derived from PDE Urban Development Urban Development • Income from concessão (Plano Diretor Estratégico, or (FUNDURB) (SMDU) urbanística PPPs City Urban Master Plan) 161.0 161.0 • Contribution for public lighting funding (charged 99 Public Lightening through private electricity (FUNDIP) Services companies) (COSIP) Financing of public lightening 253.6 56.9 Case Studies: The Cities of Nis, Serbia and Sáo Paulo, Brazil Totals 7,496.4 1,080.4 61 Source: City of São Paulo, Planning Secretariat (SEMPLA). http://sempla.prefeitura.sp.gov.br/orc_homenew.php 62 Guidebook on Capital Investment Planning for Local Governments In addition to the funds, public enterprises have their own of 223 actions were defined, and their status is posted on lines of capital expenses, which account for an additional the city government’s website. BRL 3,040 million in the 2011 LOA. Agenda 2012 established a special Consultative Coun- Developing the Multi-Year Plan (PPA), Law for Bud- cil to be associated with SEMPLA. This council has 17 getary Guidelines (LDO), and Law for the Annual members with 2-year pro bono terms. Five of these mem- Budget (LOA) bers are elected directly by the public to represent the 5 sectors of the city: North, South, East, West, and Inner Among its many activities, SEMPLA is in charge of devel- City. Three members are nominated by civil society and oping the draft PPA and monitoring its implementation, professional associations.35 One member is nominated by developing the draft LDO, and developing the draft LOA. the City Council. The remaining 8 are nominated by the Mayor. They comprise all City Secretaries, 3 of whom are The development of a new PPA is linked with the start permanent members: the Secretaries of Planning, Govern- of a newly elected administration and must be presented ment, and Participation and Partnership. to the City Council by September 30 of the council’s first year and passed by December 31 that year. The plan The Consultative Council has two responsibilities. The should be valid for the next four years (which would in- first is to advise the Mayor and the Planning Secretary on clude the first year of the following administration). São public policies related to the PPA. The council’s second Paulo is in its second PPA, for 2010–13. The PPA law responsibility is to monitor the programmed actions to includes three technical appendixes: ensure that they do not overlap and that the PPA con- forms to city and sector-specific policies. 1. Appendix I presents forecasts developed by SEMPLA and the Central Bank32 and scenarios that support the Both the PPA and Agenda 2012 include 5 “structural axesâ€? figures used. as their conceptual frameworks: (1) the city of rights, (2) 2. Appendix II lists the proposed indicators. the sustainable city, (3) the creative city, (4) the city of 3. Appendix III details the targets established for the opportunities, and (5) the efficient city. A “cross-cutting four-year period. axisâ€? also is included: the inclusive city. The PPA includes both operating and capital expenses PPA investments are heavily concentrated in sustainabil- with both physical and financial targets. ity issues, followed by citizen service improvements (table 8). These types of investment are generally consistent with The legal structure of this budget planning is in line with the needs of a city that suffers from regular floods and Brazil’s Federal Constitution and Sao Paolo’s City Statute. landslides in the rainy season and has a legacy of traffic In addition, following its election campaign platform, the gridlock and poor public services. present administration established, during its first year (2009), Agenda 2012.33 The agenda is a “user-friendlyâ€? The Law for Budgetary Guidelines (LDO) connects version of the PPA and translates the latter into well-de- long-term planning (PPA) and short-term planning (LOA, fined, short-, medium-, and long-term actions.34 A total that is, the annual budget) by establishing budget guide- lines, targets, and priorities. The LDO may change the level of taxes, and it defines fiscal targets, such as primary surplus or deficit levels and fiscal risks. Draft legislation 32 Essentially, forecasts of the GDP, interest rates, inflation must be submitted annually to the City Council by April indexes, and exchange rates, as well as city taxes (property and services), real estate market expansion and number of 15, and the law must be passed by June 30–after 2 public licensed vehicles. 33 Officially known as Programa de Metas da Cidade de São 35 Instituto de Engenharia (Engineering Institute), Associação Paulo, the Target Program of the City of São Paulo. Comercial (Commercial Association), and Federação do Co- 34 Http://ww2.prefeitura.sp.gov.br/agenda2012/ mércio (Commerce Federation). Case Studies: The Cities of Nis, Serbia and Sáo Paulo, Brazil 63 Table 8. Summary of 2009–12 Multi-Year Plan (PPA) Capital expenses total Capital Capital Total expenses per item expenses expenses Reference (BRL mil) (BRL million) (% per item) (% per axis) City of Rights 25.6 Access to quality health services 614.1 5.8 Access to quality education 936.4 8.9 Improving education quality 13.1 0.1 Access to housing 668.4 6.3 Strengthening social protection network 93.7 0.9 Others 377.6 3.6 Sustainable City 53.1 Environmental issues 3,700.2 35.0 Urban mobility improvement 1,883.7 17.8 Others 35.9 0.3 Creative City 818.7 7.7 7.7 City of Opportunities 759.9 7.2 7.2 Efficient City 117.4 1.1 1.1 General 5.3 Total 133,804.8 10,575.2 100.0 100.0 Source: City of São Paulo, Planning Secretariat (SEMPLA). http://sempla.prefeitura.sp.gov.br/orc_homenew.php hearings. The first semester of legislative work cannot be are discussed and voted on during a negotiation between concluded without the passing of this law. Its develop- the Executive and Legislative branches. The council must ment is shared with the Finance Secretariat, which pro- past the LOA by December 31. The 2011 LOA has four vides income forecasts and details on city debt issues. The appendixes: current version of the LDO (2010) is a short text with three appendixes: nâ–  Appendix I. Statement of incomes and expenses by economic category nâ–  Appendix I. Establishes priorities and targets nâ–  Appendix II. Statement of expenses by institution and nâ–  Appendix II. Technical note on fiscal risks economic category nâ–  Appendix III. Details fiscal targets. nâ–  Appendix III. Statement of expenses by institution, special operation, project, activity, and economic cat- Based on the LDO, SEMPLA, together with the Finance egory Secretariat, drafts the next year’s budget, LOA, based on nâ–  Appendix IV. Description of the expenditures. Table 9 the individual budgets of all city administrative institu- presents the expenses scheduled for 2011. tions (Secretariats, Subprefeituras, and City Companies). The draft budget sets out forecasted revenues and planned Table 9 shows that capital investments constitute 18.3 expenses according to the priorities and targets defined in percent of total expenses. What makes up the “Othersâ€? the LDO. The draft budget must be presented annually account is not completely clear, but approximately 50 to the City Council by September 30–– after at least two percent of it is allocated to “payment to companiesâ€? and public hearings. third-party labor. During the City Council discussion and voting sessions, the Councilors present a number of amendments, which 64 Guidebook on Capital Investment Planning for Local Governments Table 9. Budget Expense ed by the “saleâ€? of additional land development rights Breakdown, 2011 (such as additional building height and coverage or floor area ratio). This practice started in the late 1980s through Amount Reference (BRL million) % “Interlinked Operationsâ€? (Operações Interligadas), in Running expenses which developers built low-income housing in exchange Payroll and social costs 8 23.8 for the right to add density on these sites. As the instru- Debt - interests paid 3 8.3 ment evolved, payments from developers accumulated Others 17 48.4 in the “City Special Housing Fundâ€? (FMH). In the late Subtotal 1 28,664 80.5 1990s, this instrument was ruled unconstitutional and Capital expenses its use terminated. However, by then, this practice had Investments 6,522 18.3 become incorporated in the city’s urban and economic Financial investments 30 0.1 planning culture. Debt - amortization 404 1.1 Contingency 1 0.0 In the early 2000s, when the present Urban Master Plan Subtotal 2 6,957 19.5 was being designed, this concept of “Interlinked Op- Total 35,621 100.0 erationsâ€? was integrated in the law through “chargeable Source: City of São Paulo, Planning Secretariat (SEMPLA). grantingâ€? (Outorga Onerosa). The funds obtained through http://sempla.prefeitura.sp.gov.br/orc_homenew.php this instrument are channeled into infrastructure works through the City Special Fund for Urban Development Table 10 presents a breakdown of the “Investmentsâ€? ac- (FUNDURB), which can be applied in any part of the count. Most investment is concentrated in public works city, for planned expenses. and utilities, followed by third-party labor, consultants, Another scheme for using sales of land development and real estate acquisition. rights is run under “Urban Operationsâ€? (Operações Urba- nas). The city has 5 active and 8 scheduled projects of this Special Long-Term Projects and type. All are large (100–500 hectares) urban development Public-Private Partnerships projects, with completion terms of 15–20 years. In each In addition to ordinary budgetary investment allocations, project, important infrastructure works on the project ter- São Paulo has a number of long-term projects, some fund- ritory are funded by sales of additional land development Table 10. LOA Investment Breakdown, 2011 LOA 2011 investment account breakdown Values Subaccount (BRL million) % Transfers to States and Federal District 3.7 0.1 Transfers to nonprofit private institutions 76.6 1.2 Direct costs 6,442.3 98.8 Miscellaneous 18.1 0.3 Third party handwork and consultancy 874.3 13.4 Public works and utilities 4,241.6 65.0 Permanent equipment and materials 248.6 3.8 Real estate acquisition 695.3 10.7 Lawsuits, liabilities, and indemniï¬?cations 347.9 5.3 Social security investments 16.4 0.3 Totals 6,522.6 98.8 100.0 Source: City of São Paulo, Planning Secretariat (SEMPLA). http://sempla.prefeitura.sp.gov.br/orc_homenew.php Case Studies: The Cities of Nis, Serbia and Sáo Paulo, Brazil 65 rights. In the most recent of these projects (Faria Lima environmental concerns (such as water resource pres- and Ã?guaEspraiada), these additional rights are purchased ervation and flood control) consume 35 percent of the through stock market tradable certificates called Certifi- allocation; transportation issues consume 17.8 percent; cates of Additional Potential Development (Certificados and improvement of services for citizens (health, edu- de Potencial Adicional de Construção, or CEPACS). These cation, and low income housing) make up 25.6 percent certificates are issued by the city and traded through an (table 8). Even so, due to the city’s large deficits, there is auction system.36 This procedure enables revenue plan- always the impression that “little is done.â€? Quantitative ning, which is helpful for financial planning and manage- estimates of the total investment needs reportedly exist ment of infrastructure development. but are not accessible to the public, and the quality of estimates and how up to date they are vary across In addition, new public-private partnerships—“Urban Secretariats. Concessionsâ€? (Concessão Urbanística)––are being devel- nâ–  Despite a number of legal and formal planning instru- oped in which derelict parts of the city will be converted ments (and some quite ambitious targets), the level of to “private operationâ€? in exchange for the execution of an investment is relatively low (18 percent of the total infrastructure plan. The concessionaires will recoup their budget), compared to total operating expenses and investment and obtain profit from the redevelopment of payments to third parties. expropriated properties during the concession period. The nâ–  This situation is mitigated by the City Companies, expropriation rules are still under development by the which add considerable investment. In the 2011 LOA, Housing Secretariat. It is envisioned that owners of prop- these companies add BRL 3,003 million to the BRL erties will receive compensation according to predefined 6,523 million allocated through the direct administra- criteria, while sitting tenants may either be relocated to tion (tables 8 and 12). low income housing or obtain a rental grant. This busi- nâ–  Investment decisions within the São Paulo model re- ness model will be tested in Projeto Nova Luz, which is main highly centralized in the executive branch. Even designed to upgrade a decaying inner city neighborhood. though it is legally and clearly defined, public partici- The project is still being designed. pation––through City Council intervention, public hearings, and the participation of elected representa- Finally, the newest and maybe most ambitious initiative tives in the Agenda 2012 Consultative Council––is is the establishment of regular public-private partnerships limited Councilors usually do not have the technical through a special municipally owned company, Compan- capacity to present relevant projects, and the city has hia São Paulo de Parcerias. This company is procuring 10 little tradition of voters putting pressure on their po- year–15-year contracts with private companies to con- litical representatives. Usually City Councilors are seen struct and operate 3 large healthcare compounds. During as negotiating on their own behalves. However, a new the contract period, the private investor-operator will re- factor in the process is the growth of NGOs, ranging ceive repayment from the city for investment and annual from environmental organizations to neighborhood costs. Another upcoming project is the development of a “defender groups,â€? who are becoming effective pressure large exhibition compound in Pirituba (on the northern groups. outskirts of the city) through a similar scheme. Many of nâ–  Transparency has been improving, and a great deal of the large projects needed in the city for the 2014 World information is publicized through web sites. However, Cup are expected to be delivered in this way. accurate monitoring by the public is difficult due to the inherent complexity of understanding a sophisticated Conclusion and Lessons for the Future set of public accounts and indicators. It must be noted nâ–  Generally, the City of São Paulo City’s long-term in- that in January 2011, 18 of the 223 targets of Agenda vestment planning (PPA) is focused on the right issues: 2012 were reduced by the city. 36 Older operations have these rights valued through appraisal reports, analyzed case by case by city technical staff. Appendixes Appendix 1. Facts on Life Cycle Costing 1. Maintenance and repair costs of capital assets are distributed unevenly during an asset’s life and depend on the type of asset (figure A1). As noted, these costs vary geographically as well. For example, within the sample of 234 loca- tions in the United States and Canada, the M&R costs range roughly from 70 percent–130 percent of the Washing- ton, DC level. For the sample outside North America, these costs range from 25 percent (Beijing) to 105 percent (Zurich) of the Washington, DC level. Finally, the M&R absolute amounts, even averaged over the life span, vary depending on the type of facility (figure A1). Figure A1. Estimated M&R Costs for Different Facilities, Washington, DC (US) 600 Central plant, boiler $/sq ft 400 200 0 1 3 5 7 9 9 15 21 27 29 31 35 37 39 41 43 45 47 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 years of facility life 150 Pump house $/sq ft 100 50 0 1 3 5 7 9 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 15 21 27 29 31 35 37 39 41 43 45 47 49 years of facility life 40 Municipal building $/sq ft 20 0 9 11 13 15 17 19 21 23 25 11 33 55 77 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 41 43 45 47 49 years of facility life 20 Public library, 3 story $/sq ft 10 0 9 11 13 15 17 19 21 23 25 11 33 55 77 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 41 43 45 47 49 years of facility life Source: Whitestone 2010a. 67 68 Guidebook on Capital Investment Planning for Local Governments 2. Annual operations costs, compared with the replacement cost, also vary substantially by type of asset and constitute a noticeable amount (table A1). The M&R and operations costs together, taken over the asset life-time, are much larger than the initial (replacement) cost. Thus, for the sample of 4 types of public facilities in table A1, the 2 costs combined vary from approximately 340 percent to more than 1100 percent of the replacement costs. Table A1. Estimated Components of the Life Cycle Costs for Different Facilities, Washington, DC (US) Sum of M&R and Estimated annual operations costs, Annual M&R (average) R&M (average) assuming 50-year Replacement cost and operations costs costs life cycle M&R Operations (% of (% of replacement replacement (% of (% of Facility $/sq ft % cost) cost) replacement cost) replacement cost) Central plant, boiler 640 100 6.4 4.9 Min. 2.3 561 Pump house 640 100 3.0 19.4 2.3 1117 Municipal building 264 100 1.7 5.1 2.4 340 Public library 230 100 1.7 5.1 2.9 338 Source: Calculated from Whitestone Research 2010a and 2010b. 3. Even less certainty and agreement exist about annual restoration and modernization (R&M) costs, also called re- capitalization or depreciation. What should be included, to what amount, and how should these costs be distributed throughout the useful lives of assets or beyond?37 Nevertheless, it is commonly recognized that sufficient resources should be budgeted and accumulated to fund restoration and modernization or to replace the asset after its useful life ends. Moreover, without proper R&M expenses, even if the M&R and operations costs are fully covered, it is impossible to maintain the productive capacity of public assets during their life spans. As a result, compared to planned repair and replacement, the overall life cycle costs for emergency repairs will be higher. Despite many methodological differences among the views of property and asset managers, engineers, and accountants, one consensus is that the simplest rough estimates of needed annual allocations can be derived as the linear depreciation, that is, by dividing the replacement cost of the asset by the assumed life of the asset. This amount may be insufficient, especially at certain periods of the life cycle or if the asset accumulated deferred investment. Nevertheless, if this amount is either allocated systematically and used for real R&M works, or is accumulated in a special earmarked fund, these paths would be much better than the typical systematic deferred investment that takes place in most LGs in the world. For asset life spans that range from 25 years to 50 years, the depreciation ranges, respectively, from 4 percent to 2 percent of the replacement cost as an annual R&M amount that should be budgeted. For the specific facility types shown in table 1, the table provides the annual R&M estimates based on this linear depreciation model.38 37 Detailed discussion and references can be found in Lufkin and others 2005. 38 They are based on the Whitestone Research assumptions about the service life of specific buildings and infrastructure (or similar facilities): pump house–43 years; central plant, boiler–not more than 43 years; municipal building–41 years (similar to office building), and public library–35 years. (Whitestone Research, 2010a, 299) Appendix 1 69 4. The total annual needs for capital investment in the entire LG portfolio fluctuate unavoidably because the annual life cycle needs of each asset fluctuate over its lifespan. For example, figure A2 shows the historic record of replacement expenses for 1985–2009 and the long-term forecast for 2010–55 for the general assets of the City of Shoreview (Minnesota, US). The general assets include residential streets, public safety buildings and equipment, city hall and community center remodeling, furnishings, mechanical systems, data processing systems, park buildings, and trails. Figure A2. Historic and Projected Costs of Replacing General Municipal Assets, City of Shoreview (Minnesota, US), 1985–2005 10 8 US$ (million) 6 4 2 0 1985 1995 2005 2015 2025 2035 2045 2055 Source: Shoreview 2010. Appendix 2. Example of Comprehensive Infrastructure Replacement Policy, City of Shoreline, Minnesota, US (Population: 27,000) REQUIREMENTS APPLYING TO ALL OBJECTIVES REPLACEMENT FUNDS TS • Create a permanent program to finance infrastructure replacements • Investment interest remains in the fund • Moderate changes in the tax levies and user fees caused • Inter-fund loans are subject to Council approval and must be repaid with by replacement costs interest. • Carefully plan for new debt • Avoid assessing property owners twice for improvements General assets Proprietary assets Infrastructure Enterprise Internal reserve (street General fixed asset assets service assets Description renewal) revolving Water Sewer Surface water Central garage Replacement 40 years 40 years 40 years 40 years 40 years 40 years projections New improvement Not applicable Not applicable 10 years 10 years 10 years 10 years 70 projections Operating projections 40 years 40 years 20 years 20 years 20 years 20 years Source of revenue • Property taxes • Property taxes • User fees • User fees • User fees • Rental fees • Investment • Investment interest Investment interest Investment interest Investment interest Investment interest interest • Other future • Area charges • Area charges • All other revenues • All other revenues • Other future revenues • All other revenues • All other revenues revenues Eligible expenditures • Street Public safety Water systems and Sewer systems and Surface water Central garage reconstruction equipment; public other water fund other sewer fund systems and other equipment, buildings, • Street resurfacing safety buildings; assets assets surface water fund and other central • Seal coating street lights; city hall assets garage fund assets • Crack filling building; furnishings and mechanical systems; data processing system; park buildings, improvements, and trails General assets Proprietary assets Infrastructure Enterprise Internal reserve (street General fixed asset assets service assets Description renewal) revolving Water Sewer Surface water Central garage Minimum fund or US$2 million None US$1 million $US1 million None 50% of operating cash balance minimum cash minimum cash costs balance. Desired balance. Desired cash balance over cash balance over $2 million $2 million Debt restrictions Replacement monies declared as source of No restrictions No restrictions No restrictions Equipment certiï¬?cates funding when bonds authorized and/or City allowed; current Council approves transfers to debt fund resources preferred Procedure required 4/5 vote of City Council or public notice and Not applicable Not applicable Not applicable Not applicable to deviate from public hearing deï¬?nition of eligible costs Appendix 2 71 Appendix 3. Sample Forms for Budget Analysis DETAILED (ANALYTICAL) ESTIMATE OF OPERATING (RECURRING) REVENUES (Sheet #1) (US$ thousands) Actual Plan Projection Current Current Revenues year year Year +1 Year +2 Year +3 Year +4 Year +5 A Inherited from previous year B Local taxes 1 … k Subtotal taxes C Local fees 1 … n Subtotal fee revenue D Other local revenues 1 … m Subtotal other local E Grants (any transfers that can be used for operating or unrestricted purposes) Total (A+…+E) 72 Appendix 3 73 ESTIMATING THE NET OPERATING SURPLUS/DEFICIT (SHEET #2) (US$ thousands) Actual Plan Projection Current Current Description year year Year +1 Year +2 Year +3 Year +4 Year +5 Total operating (recurrent) I revenues, from Sheet # 1 (A+…+E) A Inherited from previous year B Local taxes C Local fees Other local operating D revenues E Unrestricted grants Total operating (recurrent) II expenses (A+…+F) A Salaries and beneï¬?ts B Utility expenses Maintenance and repair C expenses D Other operating expenses Operating subsidies to E municipal institutions and utility companies F Reserve/depreciation funds Debt service (interest and G principle) for existing loans Projection of net operating surplus/deï¬?cit before impact III of new planned investment (I minus II) Estimated M&R, depreciation, and operations IV expenses or savings from planned new investments Projection of net operating surplus or deï¬?cit after M&R, V depreciation, and operations expenses of planned new investment (III less IV) Net operating surplus or VI deï¬?cit as % of operating revenues ( V/I ) 74 Guidebook on Capital Investment Planning for Local Governments CAPITAL BUDGET PROJECTION (Sheet #3) (US$ thousands) Actual Plan Projection Current Current Description year year Year+1 Year+2 Year+3 Year+4 Year+5 Capital revenues I (1+…+8) Planned operating surplus (from Sheet 1 # 2, above, Line V) 2 Revenues from sale of assets Voluntary contributions (or special 3 assessments) 4 Federal/regional capital grants 5 Donor capital grants 6 Loan or bond proceeds 8 Proceeds from capital reserves Capital expenditures II (1+…+6) 1 Capital repair* 2 Replacement* 3 New equipment acquisition* 4 Construction (including design)* 5 Land acquisition* 6 Addition to capital reserve fund NET (I-II) Note: This spreadsheet should be investigated in 2 versions: (1) with (*) items from the previous CIP, to see how much would be left after previously started capital projects are further funded; and (2) with additional projects from draft CIP budget. See chapter 3. Appendix 4. Sample Debt Policy 1. The Municipality of _____________ will try to avoid the use of short-term borrowing by establishing and maintaining adequate reserves. However, should short-term borrowing be needed for cash flow purposes, it must be repaid before the end of the fiscal year in which it was borrowed. 2. Total debt services will not exceed______% of the LG’s total operating revenue. 3. Outstanding long-term debt will not exceed $ _______ per capita. 4. Average maturity of loans and LG bonds will be maintained at or below ____years. 5. The LG will not use long-term debt for current expenses. 6. The LG will limit long-term borrowing to capital investments that cannot be financed from current revenues and capital grants. 7. The LG will use borrowing only for funding capital investment needed to perform its mandatory responsibilities and functions. 8. When the LG finances capital projects through debt, it will repay the debt within a period not to exceed the expected useful life of the project (asset). 9. When possible, the LG will use self-supporting debt (that is, repaid from project revenues) before using tax- supported debt (repaid from government’s other revenues). 10. On all debt-financed projects, the LG will make a down payment of at least_____% of the total project cost from current revenues. 11. The LG will follow a policy of full disclosure on every financial report and debt statement. 75 Appendix 5. Sample Policy for Capital Investment Planning 1. Period covered by the Capital Improvement Program. A five-year Capital Investment Program will be prepared for the period ______ to ______ and updated annually, and the capital budget will be adopted annually by the City Council. 2. Eligible types of investment. Capital investments that can be considered for inclusion in the CIP are: nâ–  Rehabilitation and/or replacement of existing infrastructure, public-use facilities, and social-use and government- use properties under the mandate of the city government nâ–  Reconstruction of the above infrastructure, facilities, and properties nâ–  Construction of new infrastructure, facilities, and properties of the above type if financially and economically justified; and acquisition of land for such construction nâ–  Equipment and vehicles for public functions under the mandate of the city government. The costs needed for adequate and timely maintenance, repair, restoration, and modernization of physical assets are eligible for inclusion in either operating expenses or capital costs. Funding the replacement reserve for capital assets (infrastructure, facilities, properties, and equipment and vehicles) should be a part of the annual capital budget. Future operations costs of all new capital investment projects should be included in project requests and planned for funding. 3. Definition of capital investment project. All capital investments that belong to the above-mentioned categories, exceed ______[unit of currency], and have useful lives of longer than three years can be included in the Capital Investment Program. Project costs can include feasibility studies, land, engineering, architectural design, and contract services needed to complete the project. 4. Organizational responsibility for capital investment program preparation and submission. The CIP Commission will lead the CIP preparation process, and provide needed guidance and instructions. The CIP Coordinator will coordi- nate all activities, and the technical support staff will draft the CIP based on the instructions from the Commission. The CIP Commission will select the projects for inclusion in the CIP based on the preapproved criteria and submit the draft CIP to the Mayor to present to the City Council for review and approval. 5. Methods of financing capital projects. The following funding options will be considered for capital projects: nâ–  Budget nâ–  Own sources of local enterprises nâ–  Central government programs nâ–  Commercial Loans nâ–  Soft loans nâ–  Donations nâ–  Private-public partnership (concessions). 76 Appendix 5 77 In particular, one-time revenues, revenues from the sale of property, land development fees, land lease fees, and operating surpluses will be used for capital projects. Budget revenues will be used to fund the projects that can be implemented without long-term borrowing. Long-term debt will be used to fund capital projects that cannot be implemented from budget revenues, grants from central government agencies, and soft loans. The total amount earmarked for capital investments cannot exceed _____% of budget revenues. 6. Borrowing limits. Capital projects financed through borrowing will be financed for a period not to exceed the useful life of the project. Long-term commercial debt can be incurred only if all technical specifications for the project, including permits and licenses, already have been obtained. The total amount of old and newly planned loans can- not exceed _____% of the budget operating revenues. Borrowing should comply with a separate Policy on Debt Management. 7. Criteria for prioritizing projects, or who will establish them and how. Criteria for determining priorities in the Capital Investment Plan will be developed by the CIP Commission. 7. Methods and timing of public participation. The CIP Committee will develop and implement public participation tools. Appendix 6. Samples of Capital Investment Rating Step # 1: Define (6 to 10) evaluation criteria. The following list is illustrative only: Criterion A: The project was mandated by the central government (or other legal requirement). Criterion B: The project was started in a previous year or included in a previous year’s CIP. Criterion C: The project provides an important health or safety benefit. Criterion D: The project is a necessary repair or replacement of existing capital equipment or facility. Criterion E: The project cost will be offset by operating cost savings or increased revenues. [Could specify a period, for ex- ample: “offset over a five-year periodâ€?]; and/or there is a good probability of donor funding for the project. Criterion F: The project must have a life expectancy of over [X] years. Criterion G: Any extra operating and maintenance cost for the project must be less than [X] in any 1 budget year and less than [Y] for a 5-year period. Criterion H: The project must be used by or serve at least 50% of the local residents. Criterion I: The project advances _________. [Note: Cite a specific planning objective that the municipal council has identi- fied as a special priority, for example: improvement of living conditions in an illegally constructed neighborhood.] Criterion J: The project would have positive economic development impacts and is supported by the business community as a priority. Step # 2: Choose and apply a method for using the criteria to select and prioritize projects. Here are two options. Option A. For each project request, judge how many of the established (6–10) evaluation criteria it satisfies. Then rank the projects in priority groups. For example: First Priority Group: Projects that satisfy 5 or more criteria Second Priority Group: Projects that satisfy 4 criteria Third Priority Group: Projects that satisfy 3 criteria Fourth Priority Group: Projects that satisfy 3 criteria. Option B. Using common sense, select the most urgent projects using the following 1–3 criteria: 1. Mandatory project 2. Corrects extremely hazardous condition 3. Replaces or repairs essential equipment or facility at risk of having to be removed from service. Then use Criteria A–J to rank the other projects. 78 Appendix 7. Sample CIP Budget Calendar When What Who CIP Committee, CIP Coordinator, and Technical Mayor (or executive in charge of CIP); February Support Ofï¬?ce Assigned City Council, professional associations Capital investment policies and calendar City Council and Mayor (or executive March 15 adopted in charge of CIP) Evaluation criteria, forms and instructions March 30 developed by CIP Committee CIP Committee, CIP Coordinator Package containing instructions and forms distributed to all departments and public April 15 enterprises Technical Support Ofï¬?ce and CIP Coordinator Capital needs assessed through public hearings April 15–May 15 and focus groups CIP Committee Capital needs assessed through Strategic Plan, asset management data, laws and regulations, All departments and public enterprises April 15– past capital investment requests May 31 Previous CIP reviewed CIP Committee April and May Financial capacity analyzed Finance Department May 1–June 1 Project requests developed and submitted All departments and public enterprises July Project requests reviewed Technical Support Ofï¬?ce August Project proposals prioritized CIP Committee Funding options evaluated and projects Finance Department September matched to funding and CIP Committee October CIP Package prepared Technical Support Ofï¬?ce Mayor (or executive in charge of CIP) November Public hearing organized and CIP Committee City Council, Mayor (or executive in charge December CIP adopted of CIP) 79 Appendix 8. Sample Capital Investment Project Requests Example A. CIP Project Request Form Year Request for investment project no. Department 1. Project description A. Project name: B. Description: C. Location: D. Purpose: E. A project request to cover this project was/was not submitted last year. F. (Optional): Site location map ___and/or photograph of site or structure ___ are/is attached. 2. Need A. Who will derive the greatest benefit from this facility? o Citizens o Businesses o Industries B. What will be the scope of services provided by this facility? o Regional o Municipal o Neighborhood C. Comment on the needs to be met by this project. Source: This appendix was adapted from Urban Institute 2006, prepared for LGs in Ethiopia under a World-Bank-sponsored project. 80 Appendix 8 81 3. Costs (US$) A. Approximate total investment cost $ 2. Land a. Site already acquired $ B. Cost already incurred $ b. Site to be acquired $ c. Area required (hectares) $ C. Balance $ d. Estimated cost $ D. Detailed cost estimates: 3. Construction a. Estimated cost $ 1. Planning a. Engineering $ 4. Equipment and furnishings b. Architectural $ a. Equipment $ b. Furnishings $ Subtotal $ c. Other $ Subtotal $ Total investment cost $ 3a. Estimated annual maintenance, repair, and operations costs $ 4. Proposed expenditures by years (the possibilities for phasing, number of phases, and cost) Prior year $ 4th $ 1st $ 5th $ 2nd $ 6th $ 3rd $ Later $ 5. Construction and procurement method 6. Estimated effect of completed project on municipal budget Revenue: Operating expenses: a. Increased a. Increased b. Decreased b. Decreased 7. Relationship to other projects — Project name — How related 82 Guidebook on Capital Investment Planning for Local Governments 8. Priority a. What priority number does your department/institution assign to this project among those being requested at this time? b. What are your reasons for the priority you have assigned to this project? 9. Recommended financing (by amount in currency or by percentage. Can be more than one source) Own sources, general (unrestricted) revenues State transfer (categorical grant) Own sources, earmarked (restricted) revenues Bank loan or municipal bond Municipal reserve fund International donor grant International donor loan Comments (Please specify any local matching requirement for state or donor funds.) Appendix 9. Appendix 9. Sample Checklist for Project Request Review Does project conform to adopted capital policies _____ Have all required forms been completed? _____ and work programs? Is project required by law, court action, or other _____ Is the information complete and accurate? _____ levels of government? What is the level of political, citizen, and interest _____ All are mathematical calculations accurate? _____ group support or opposition? Have the projects been categorized as one of the following: carried forward-no change; modified How does project relate to results of citizen _____ as to nature or cost; changed as to scheduling; _____ surveys? submitted in a prior year but not scheduled; first- time projects? Have the summary forms been verified against Have alternative ways of meeting the need or _____ individual project forms? _____ solving the problem been evaluated? What are any negative project impacts (environ- Do the projects meet the adopted eligibility _____ definitions? _____ mental, natural disaster and climate risk, reloca- tion, economic, nuisance)? Is project need identified and supported with _____ appropriate data? _____ Are location and land requirements adequate? Are the justification and priority sections well What are the consequences of not undertaking _____ documented? _____ project? Does the project have a positive or negative impact _____ on other projects? 83 84 Guidebook on Capital Investment Planning for Local Governments Checklist for planning review Checklist for financial review Does project conform to development and Are the ï¬?nancing recommendations accurate and _____ other plans (Strategic, parks and recreation, _____ feasible? transportation, solid waste, water, sewer)? Is the demographic, land use, trafï¬?c, housing, eco- _____ nomic base, and other information supporting the _____ What other funding options are available? request accurate? What is project’s impact on economic development Are the direct and indirect operating and _____ _____ and neighborhood preservation? maintenance cost projects accurate and realistic? What is project’s environmental impact? _____ _____ Have all capital costs been identiï¬?ed? Is project exposed to natural disaster risks (flooding, _____ _____ How does project affect revenues? earthquake, landslides)? _____ Have estimated cost savings been veriï¬?ed? _____ Is project eligible for debt ï¬?nancing? _____ What is project’s impact on the tax rate? _____ Is cash flow sufï¬?cient to ï¬?nance project? _____ What are project’s ï¬?scal impacts on other projects? Appendix 9 85 Checklist for engineering and architectural review _____ Is project design adequate? Have design alternatives been considered? _____ Have value engineering and life cycle costing been considered? _____ What is the status of project (planning, design, engineering, and construction)? _____ Are project’s speciï¬?cations adequate? _____ Are project’s cost estimates accurate and reasonable? _____ Is project operationally feasible? _____ Is project’s proposed scheduling realistic? _____ Which alternative project approaches been considered (repair, rehabilitate, and replace, abandon)? _____ What could be the extent of project’s potential service interruptions? Appendix 10. What Project Lenders or Grantors Can Request Illustrative Outline of a Loan or Grant Proposal 1. Introduction 2. General Information about the Project 2.1. Project description. 2.2. Background. 2.3. Justification of investment. 2.4. Project execution phases. 2.5. Institutions and municipal administration responsible for project. 2.6. Companies and consultants to be involved in project. 2.7. CIP. Does the LG have a development plan whereby the proposed project will be implemented? If so, give document name and planning schedule. 2.8. In case the city/municipality has no development plan, how were the needs, goals, and development priorities for the city/municipality defined? 2.9. What is the relationship between the city’s/municipality’s needs, goals, and development priorities and those of the county? Explain how the two sets of goals are linked. 2.10 Who were the interested parties who participated in defining the needs, goals, and development priorities? 2.11. List the 3–4 most important projects that the city/municipality currently is implementing and that are adjusted to the city’s/municipality’s defined needs, goals, and development priorities. 3. Project Technical Description 3.1 Proposed technical solution. 3.2 Description of works. 4. Project Impacts (Costs/Benefits) 4.1 What will be the proposed project’s impacts (quantity and quality) on the LG’s urban development (impacts on local neighboring community, municipality, or LG)? 4.2. What will be the project’s impacts (quality and quantity) on the environment? 4.3 Does the project contain any innovative elements or apply any innovative methods? List them. 4.4 How does the project contribute to existing programs and projects being implemented by the LG? List the projects/programs and explain the links. 4.5 Does the project contribute to the goals (achievements) of other municipalities and cities in the applicant’s neighborhoods? If so, explain the scope of the contribution. 86 Appendix 10 87 5. Project Financial Description 5.1 Project capital costs. Provide a basic project financial description. For this section, the LG can use the Excel spreadsheets provided as an addendum to this guideline. 5.2 Project operations and maintenance costs. 5.3 Project cash flow and other financial analysis, including expected revenues, if any, and the suggested funding sources and financing, including the loan/grant requested. 5.4 Sensitivity analysis. 5.5 Does the financing of the completed project include the introduction of a usage fee increase? 5.6 Who (which entity) will manage the project after its completion? 6. Background Analysis (Municipal Overview) 6.1 Geographic and human resource data. 6.2 Background on local economy. 6.3 Municipal infrastructure. 6.4 Investment in infrastructure during past four years. 6.5 Investment priorities. Appendixes I. Conceptual design. II. Long-term financial plan (creditworthiness report). III. Municipal asset management plan (if any). IV. Municipal representative body resolution. V. Municipal balance sheet/municipal budget (for past 3–4 years). VI. Additional documentation. A. Budget resolution for current year. B. Statement of loans and guarantees obtained. C. Preliminary design required for construction permit. D. Budget execution reports for past three years. VII. Other documentation (location permit, building permit, electricity, water supply, gas, traffic permits, and agreements). VIII. Environmental impact study and necessary permits. Appendix 11. Property Maintenance Guidelines Purpose of Property Maintenance The objective of property maintenance is to contribute to the achievement of the property owner’s goals through ap- propriate and timely repairs and improvements. Most owners seek to maintain and improve the value of their properties. However, government-use properties may seek an acceptable quality of accommodation at the minimum cost. In addi- tion, the goals may differ depending on their design, location, and condition. Examples: nâ–  A building needed for long-term use by the owner may require very prompt attention to deterioration, damage, and system failures with repairs accomplished by using modern technology and materials. nâ–  An historic building may require detailed attention to original construction materials and design to preserve its his- toric character. nâ–  A building in poor condition, perhaps inappropriately located and designed, may be intended for future demolition. In the meantime, it may be leased for a short term to generate any possible income and “milkedâ€? until no significant value remains. Because funds for repairs and maintenance are limited, priorities must be established. Expenditures for necessary main- tenance and repairs must be made only to achieve the owner’s goals and at the lowest possible cost, provided that the work is done promptly and correctly. Responsibility for Maintenance The occupancy of the property determines the party responsible for maintenance. If a governmental agency occupies the property for its own use, the agency should be directly responsible for maintaining the property. For public-use property, such as a public museum, the agency in charge of the property should either assign responsibil- ity for maintenance to its own staff members, have a contract with another agency, or outsource maintenance to a private company. Whichever organization is responsible for operations and maintenance (O&M), it must assign the responsibility and the authority to maintain each asset to one Property Manager. This individual responsibility ensures accountability and results in more timely and efficient actions necessary to protect the property and meet occupants’ requirements. Of course, that one Property Manager must be subject to the necessary oversight and supervision accompanied by levels of approval for financial and certain other decisions. Minor expenses and those within a previously approved budget may be approved by the Property Manager. Higher levels of approvals should be required for successively larger expenses and other decisions. To minimize the risk of malfeasance (corruption), no individual should have complete and unsupervised authority over expenditures. Occupants of the property must know the identity and contact information of the Property Manager so that when prob- lems arise, the occupant(s) can easily communicate the nature of the problem to the Property Manager. For example, if a window is broken, the occupant(s) must be able to contact the Property Manager and describe the problem. 88 Appendix 11 89 A Maintenance Supervisor may be assigned responsibility for overseeing repairs and preventive maintenance. This indi- vidual works under the supervision of the Property Manager. The Maintenance Supervisor should understand how a build- ing is constructed and how mechanical systems (air conditioners, generators) work. This individual also should recognize the importance of preventive maintenance. The Maintenance Supervisor should be able to work without close supervision while traveling alone to different buildings. Integrity is vital, because opportunities for corruption are present. Record of Needed Repairs and Completion A Maintenance Supervisor must make a record of each needed repair. A sample form, commonly called a Work Order, is attached as Exhibit A (Appendix 11). At a minimum, this record should include a clear description of the problem; the date and time of the inspection or receipt of the occupant’s complaint; and the action taken to correct the problem with date and time of completion. The form also should record the name of the person receiving notice of the defect, person or company responsible to complete the needed repairs, and cost of the repairs in money or hours of labor. This sample form also provides for approval by the tenant if this party is obligated to reimburse the cost of the work. If the cost is to be shared, the form should record the breakdown between the amount to be charged to the tenant (“Bill- ableâ€?) and the amount to be absorbed by the owner and not billed to the tenant. Experience with the Work Order form will produce ideas in the users to make it more relevant. The form should be modified to best meet the needs of those directly involved. It can be very helpful to summarize the information on the Work Order form in a spreadsheet so that the manager can sort the data and identify recurring problems and related costs. Such collated information can be used to improve the operations of the property. For example, a generator or air conditioner that requires frequent repairs could be replaced with new equipment to reduce future costs. This spreadsheet data also can be used to evaluate the efficiency and quality of the person, department, or company doing the work. A sample format for such a spreadsheet appears in Exhibit B. Additional information can be included as desired. Information collected should have a purpose and not be accumulated solely for the purpose of collecting it. If a form requests information that does not prove useful, the request for this particular information can be omitted in the future. Likewise, if additional information would be helpful, the form should be modified to include this information. Various computer software programs are available to control work orders. Software enables more efficiently entering the information regarding the problem, monitoring the repair, and controlling and accounting for the cost and any related reimbursement. Three highly regarded systems are: 1. 360Facility (www.360facility.com) 2. Angus Anywhere (www.angus-group.com) 3. Workspeed Management LLC (www.workspeed.com). Property Inspections Need for repairs may be discovered through inspection or occupant complaints. It is preferable for the Maintenance Supervisor to find a problem and initiate repairs before the occupants are inconvenienced or endangered by the defect. 90 Guidebook on Capital Investment Planning for Local Governments Inspections usually are conducted by the Maintenance Supervisor. Occasionally, the Property Manager also should in- spect each property, preferably randomly and without advance notice. Such ad hoc inspections are an important aspect of his/her overseeing the work of the Maintenance Supervisor. Lease contracts always should be drafted to permit both regular and ad hoc inspections. The frequency of inspections may be determined by the complexity of the property. A simple parking lot may require inspection only once per year. A more complex property with extensive mechanical equipment (generator, air condition- ers) should be inspected more frequently, perhaps quarterly or even monthly. More limited inspections for problems such as uncleanliness and inadequacy of toilet supplies may be conducted as often as daily. Regularly scheduled inspections often identify problems before they become more serious. Regular inspections also may reveal problems such as trespassing and dumping of trash, illegal occupancy (squatting), and environmental contamination. The guardian of a property or the agency to which the responsibility is delegated, always should be aware of the occupan- cy of the property. Inspections are a valuable tool in obtaining this information. Inspections may reveal that the original tenant has subleased or assigned the space to another occupant (subtenant). Subleasing may occur if the governmental tenant has surplus space or if the market rent is higher than the actual rent being paid by the commercial tenant in the governmental property. The guardian of the property could gain revenue if it permitted a tenant to sublease or assign its surplus spaces , in exchange for sharing with the guardian the payment for the surplus space the tenant received from the subtenant (for example, 50 percent). Photographs taken during inspections are useful to document problems that need repair or other attention and to create a record of the condition of the property over the course of time. These photographs should be identified to show at what location on the property and on what date they were taken. These photographs should be carefully filed for future reference. It also is useful to use a checklist or form (“Inspection Reportâ€?) to comment on the condition of various components of the property and the need, either immediately or in the foreseeable future, to make repairs. A sample Inspection Report form is attached as Exhibit C. This form is very thorough and is suitable for complex properties. The Inspection Report form should be adapted to the property and its characteristics. Irrelevant items can be deleted from the form. Advanced property management practices involve a different Inspection Report form for each different type of property (office, parking lot, warehouse). Copies of the completed forms with photos should be provided to all individuals involved in maintaining the property. These may include the Maintenance Supervisor and occupants. Defects discovered during the inspection should be given appropriate attention. A Work Order should be prepared and processed as described above so that the necessary repairs are completed promptly and efficiently. Routine Maintenance Mechanical equipment requires routine maintenance such as lubrication and filter replacement. The manufacturers of the equipment provide operating manuals that include recommended maintenance schedules. To prolong the life of the equipment, assure optimum performance, reduce time out of service for more serious repairs, and minimize future repair costs, it is important to carefully follow the recommended schedules for that maintenance. Appendix 11 91 An individual should be assigned responsibility for ensuring that these schedules are followed, and a supervisor should be assigned the responsibility for confirming that the work was, in fact, performed. Cost Controls Repair costs can be minimized by requesting bids from qualified private-sector contractors for larger repairs. Examples include replacing a roof, reconstructing a car park, or replacing air conditioning equipment. Similarly, bids can be requested for recurring smaller repairs. For example, air conditioning equipment requires periodic lubrication and filter replacement as noted in Routine Maintenance above. Bids can be requested for completing this work for a certain period, perhaps one year. It is important that the Maintenance Supervisor and Property Manager ensure that work is completed properly before payment is made. If the repair or other work is so extensive that it requires more than two months to complete, it is common to make interim progress payments. Commonly, the payment is proportionate to the work completed. If 50 percent of the work is complete, then 50 percent of the payment can be made. However, it also is common to hold back or retain 10 percent or more of the payment to ensure that the contractor continues toward completion of the work. For instance, if 50 percent of the work is complete, 45 percent of the price will be paid. This amount equals 90 percent of half of the cost, with 5 percent of the total (10 percent of the half completed) held back for payment after completion of the work. The retained amount usually is paid 30 calendar days after comple- tion. During these 30 days, inspections and tests are conducted to ensure that the work truly has been completed and to discover any additional work that was missed or needs to be redone. The process of contracting for repairs and supplies is at risk for corruption. It is necessary to have procedures to limit this risk. Precautions can include sealed bidding by contractors, with the bids received until the last minute, when they are opened publicly so that all can see who offered the lowest price. Multiple approvals, audits, and other procedures can limit but not completely remove this risk. A second way to control costs is to make repairs promptly before additional damage occurs. As a simple example, a roof leak may be inexpensive to repair. However, failure to make that repair can further damage the structure because water corrodes and rots rafters and other structural members. The result of delay is more extensive, and expensive, repairs. Budgets It is customary to prepare an annual operations budget for each property. Preparing a budget requires planning for activi- ties that result in revenues and expenses. 92 Guidebook on Capital Investment Planning for Local Governments These activities could involve revenue perhaps from leasing space to a private enterprise such as a food vendor. Related to this future revenue may be expenses such as refurbishing to ready the space for the new use. Preparing the budget involves evaluating the necessity for upcoming repairs. Some defects occur as the year passes, such as an air conditioner failing midway through a budget year. Other expenses can be predicted from regularly inspecting the property and from studying the record of previous expenses. Because an old air conditioner has been failing fre- quently and requiring expensive repairs, the budget may include replacing the old air conditioner with a new and more efficient model. Work Orders and Inspection Reports offers valuable information that supports the property maintenance and repair plan for the coming year as that plan is developed during the budgeting process. Summary A system to control and monitor the identification and correction of property defects is essential to the successful opera- tion of buildings and other real estate. Work Orders and Inspection Reports are useful tools in this process. Because of the wide variety of assets, forms and schedules should be modified to most effectively meet the maintenance needs of each type or class of asset. Appendix 11 93 Exhibits Exhibit A. Work Order Work Order for [Building or property] Work Order no. [Numbered sequentially] Part 1 Received: [Date] [Time] Priority: [High/Low] Requested by: Name: [Person reporting problem or needed work] Phone: Location: Job location: [Location within property where work to be done] Entered by: [Person preparing] Assigned to: [Department/Contractor] Type: [For example, emergency Subtype: Type of work: repair call] Work: Part 2 Start date/Time: [Date/Time] Finish date/Time: [Date/Time] Comments: Part 3 Labor cost summary Employee Description Account Hours Rate/Hr Cost Carpenter Fix shelves 208000 1.25 Yr … Yr … Total summary Total labor Yr… Total materials Yr… Total other costs Total Yr… Approved by: [Tenant name if billable] Date Signature: Billable: Nonbillable: Total 94 Guidebook on Capital Investment Planning for Local Governments Recommendations for use: Part 1: To be completed by the individual receiving the repair request. The Work Order should be numbered sequen- tially, for instance, by using either a preprinted form or a rubber stamp designed to advance to the next number each time it is used. Part 1 describes the problem and identifies the party to whom the work is assigned. This party receives a copy of the Work Order and completes Part 2. Part 2: To be completed by the individual doing the work. Dates and times the work was started and finished are noted, and comments about the work are added. These comments may include recommendations for additional work, predictions regarding future problems, methods to reduce future costs, and anything else the repairperson feels is im- portant. Part 3: To be completed by the person completing the repair, a supervisor, or another individual with the necessary information. The completed form is returned to the Property Manager for analysis and filing. Relevant information is entered in the Work Order Log (Exhibit B). Experience in using these Work Order and Work Order Log forms will lead to ideas for improving them to reflect local property management and maintenance circumstances. Appendix 11 95 Exhibit B. Work Order Log WORK ORDER LOG Work Cost/time Order Date Time Location of Type of Date work Time work By period no. reported reported problem problem completed completed whom [currency) Examples (Address/ Broken 1001 25-Jan-11 15:30 room) window 27-Jan-11 11:15 (Name) …yr Trash in 1002 28-Jan-11 10:00 (Address) parking lot 28-Jan-11 16:45 (Name) 1 hr 96 Guidebook on Capital Investment Planning for Local Governments Exhibit C. Property Inspection Report PROPERTY INSPECTION REPORT Name: [Building/Property address or identifier] Date: Inspected by: [Name] nâ–  All items that rate “Poorâ€? must be accompanied by a narrative explaining the reason for the poor condition, a solution, and approximate [currency] amount for the repair. nâ–  Attach a site plan of the building to each inspection form if necessary and highlight the areas that need repair. nâ–  All are tenants in the property identified in the property records? nâ–  Rate each item as follows: Satisfactory Poor Immediate Attention Required N/A–Not Applicable Exterior Location/Problem Rating Comments Roof: Gravel stop Coping Flashings Roof membrane Stone ballast coverage Drains Debris/Litter Access hatch Air conditioning: Equipment curbs Power feeds Condensate drains Access panels Exhaust fans Other Building: Sidewalks Pavers Precast wall panels Caulking/Expansion joints Painted surfaces Storefronts/Glass/Caulk Hose bibs Grounds: Trash containers Handrails/Railings Steps/Ramps Perimeter fence Lighting/Electrical: Pole lights functionality Pole lights appearance Sofï¬?t/Under-canopy lights Wall units Ground lights Other Parking lot: Appendix 11 97 Interior Location/Problem Rating Comments Life safety: Exit signs Exit doors Door panic hardware Fire extinguishers Fire hose drops Windows Guardrails-electric panels Safety rails-rails docks Fire suppression system: Alarm panel Pump controller Risers/Valves/Flow alarms Inspectors test drains Spare sprinkler heads Fire pump certiï¬?cation Room appearance Office/Room: Ceiling tile Walls Doors/door hardware Floor/carpet/tile Windows Washroom Ceiling Walls Door/Door hardware Floor tile Plumbing ï¬?xtures Light ï¬?xtures Appendix 12. References and Useful Resources World Bank’s Relevant Urban Programs and Instruments Suzuki, Hiroaki, Arish Dastur, Sebastian Moffatt, Nanae Yabuki, and Hinako Maruyama. 2010. Eco2 Cities: Ecological Cities as Economic Cities. Washington, DC: World Bank. http://www.worldbank.org/eco2 World Bank. Disaster Risk Management Program (DRM). http://www.gfdrr.org/gfdrr/ _____. Urbanization Review Framework (URF). http://siteresources.worldbank.org/INTURBANDEVELOPMENT/ Resources/336387-1265151743414/6759249-1267460071913/Lall.pdf _____. World Bank Urban and Local Government Strategy http://web.worldbank.org/WBSITE/EXTERNAL/ TOPICS/EXTURBANDEVELOPMENT/0,,contentMDK:20158153~menuPK:337184~pagePK:148956~p iPK:216618~theSitePK:337178,00.html Local Capital Budgeting and Finance City of Shoreview, Minnesota. 2008. 2009 Comprehensive Infrastructure Replacement Plan and Policy. Department of Finance. Shoreview, MN. December. www.shoreviewmn.gov/.../comprehensive-infrastructure-replacement- plan.pdf GFOA (Government Finance Officers Association). Various years. Best Practices and Advisories: Committee on Economic Development and Capital Planning. http://www.gfoa.org/index.php?option=com_content&task=vi ew&id=123&Itemid=133 _____. 2000. “Best Practices in Public Budgeting.â€? CD-ROM. http://www.gfoa.org/services/nacslb/ Hatry, Harry, Annie P. Miller, and James H. Evans. 1984. “Guide to Setting Priorities for Capital Investment.â€? “Guides to Managing Urban Capital Series.â€? Vol. 5. Urban Institute, Washington, DC. http://www.urban. org/url.cfm?ID=401580 Ministry of Finance, British Columbia, Canada. Capital Asset Management Framework. http://www.fin.gov.bc.ca/tbs/ camf.htm Multi-Year Capital Planning. 2006. Nova Scotia, Canada. http://www.nsmfc.ca/component/option,com_docman/ Itemid,76/gid,39/task,cat_view/ Municast. http://www.gfoa.org/index.php?option=com_contentandtask=viewandid=943andItemid=417 Municipal Data Management and Technical Assistance Bureau. 1997. “Developing a Capital Improvements Program. A Manual for Massachusetts Communities.â€? March. http://www.mass.gov/Ador/docs/dls/publ/misc/cip.pdf Office of the New York State Comptroller. 2009. “Local Government Management Guide. Multiyear Capital Planning.â€? http://www.osc.state.ny.us/localgov/pubs/listacctg.htm#capplanning Ontario Ministry of Municipal Affairs and Housing. 2008. “Municipal Capital Budgeting Handbook.â€? Queen’s Printer for Ontario, Canada. http://www.mah.gov.on.ca/Page232.aspx Peterson, George E. 2009. Unlocking Land Values to Finance Urban Infrastructure. Washington, DC: World Bank. Peterson, George E., and Patricia Clark Annez, eds. 2007. Financing Cities. Washington, DC: World Bank. Schaeffer, Michael. 2000. “Municipal Budgeting Toolkit.â€? World Bank, Washington, DC. http://www-wds.worldbank. org/external/default/WDSContentServer/ WDSP/IB/2000/11/10/000094946_00102705411650/Rendered/ PDF/multi_page.pdf 98 Appendix 12 99 Urban Institute. 2006. “Sample Kit for Municipal Infrastructure Investment Planning.â€? Washington, DC. Vogt, John. 2009. “Capital Budgeting and Finance: A Guide for Local Governments.â€? ICMA (International City/ County Management Association),Washington, DC. Westerman, Nicole. 2004. “Managing the Capital Planning Cycle: Best Practice Examples of Effective Capital Program Managements.â€? Government Finance Review (June). http://www.entrepreneur.com/tradejournals/ article/118493602_1.html Asset Management/Life Cycle Costing CMHC (Canada Mortgage Housing Corp.). 2008. “Life Cycle Costing Tool for Community Infrastructure Planning.â€? http://www.cmhc-schl.gc.ca/en/inpr/su/sucopl/licycoto/index.cfm Government of Nova Scotia. 2009. “Nova Scotia Implementation Guide to Tangible Capital Assets for Municipalities.â€? Vers. 5. (February) http://www.gov.ns.ca/snsmr/muns/manuals/PDF/guide_tangible_capital. pdf InfraCycle: http://infracycle.com/index.php?option=com_contentandview=articleandid=37 Kaganova, Olga. 2008. “Integrating Public Property in the Realm of Fiscal Transparency and Anti-Corruption Efforts.â€? In Finding the Money: Public Accountability and Service Efficiency through Fiscal Transparency, ed. Gábor Péteri, 209–22. Budapest: Local Government and Public Service Reform Initiative/Open Society Institute. http://www.urban.org/UploadedPDF/411821_integrating_property.pdf Kaganova, Olga, Ritu Nayyar-Stone, Sally Merrill, and George E. Peterson. 1999. “Municipal Real Property Asset Management: An Overview of World Experience, Issues, Financial Implications, and Housing.â€? Urban Institute for the World Bank, Washington, DC. http://www.urban.org/publications/409112.html Lufkin, Peter. 2008. “Trends in Facility Cost Models.â€? Whitestone Research Briefings. Presentation, Washington, DC. October 15. Lufkin, Peter, Anand Desai, and Jay Janke. 2005. “Estimating the Restoration and Modernization Costs of Infrastructure and Facilities.â€? Public Works Management and Policy 10 (1):40–52. National Institute of Building Sciences. “Life Cycle Cost Analysis: Whole Building Design Guide.â€? http://wbdg.org/ resources/lcca.php “Metro Vancouver Canada. 2010. North Shore Integrated Resource Recovery Study.â€? Prepared by Asset Strategics Ltd. for Metro Vancouver, Canada. February. Vancouver. www.sequelirm.com/northshore Whitestone Research. 2010a. Facility Maintenance and Repair Cost Reference 2010–2011. 15th ann. ed. Santa Barbara, CA/Washington, DC. http://www.whitestoneresearch.com/products/references/maintenance_and_repair/ index.htm _____. 2010b. Facility Operations Cost Reference 2010–2011. 4th ann. ed. Santa Barbara, CA/Washington, DC. http:// www.whitestoneresearch.com/products/references/operations_cost/index.htm Creditworthiness Freire, Mila, and John Petersen, eds. 2004. Subnational Capital Markets in Developing Countries: From Theory to Practice. New York: World Bank and Oxford University Press. Peterson, George E. 2000. “Building Local Credit Systems.â€? Municipal Finance Background Series. World Bank, Washington, DC. http://www.developmentfunds.org/pubs/Building%20Local%20Credit%20Systems.pdf Peterson, George E. 1998. Measuring Local Government Credit Risk and Improving Creditworthiness. World Bank. http://siteresources.worldbank.org/INTMF/Resources/339747-1251914038224/tools.pdf 100 Guidebook on Capital Investment Planning for Local Governments Project Preparation for External Funding and Finance European Commission. 2002. “Guide to Cost-Benefit Analysis of Investment Projects.â€? Prepared for Evaluation Unit, DG Regional Policy. Brussels. http://ec.europa.eu/regional_policy/sources/docgener/guides/cost/guide02_ en.pdf TRT (Trasporti e Territorio) and CSIL (Centre for Industrial Studies). 2008. “Guide to Cost-Benefit Analysis of Investment Projects, Structural Funds, Cohesion Fund and Instrument for Pre-Accession.â€? Final Report Submitted by TRT and CSIL to European Commission. Brussels. http://www.eurosfaire.prd.fr/7pc/ doc/1215583204_costs_benefits_analysis_guide_2008.pdf USAID (United States Agency for International Development). 2005. “Case Studies of Bankable Water and Sewerage Utilities.â€? Washington, DC. August. http://pdf.usaid.gov/pdf_docs/PNADE148.pdf World Bank. 1998. “Handbook on Economic Analysis of Investment Operations.â€? Washington, DC. http:// siteresources.worldbank.org/INTCDD/Resources/HandbookEA.pdf Public-Private Partnerships CDIA (Cities Development Initiative for Asia). 2010. “PPP Guide for Municipalities.â€? Metro Manila, Philippines. June. http://cdia.asia/wp-content/uploads/PPP-Guide-for-Municipalities-FINAL-100609.pdf PPIAF (Public-Private Infrastructure Advisory Facility ). Toolkits. http://www.ppiaf.org/ppiaf/page/toolkits “PPP Training Resources and Toolkit.â€? _____. PPP Training Resources. http://www.ppiaf.org/ppiaf/page/ppp-training-resources UNDP (United Nations Development Programme). “Toolkit on Pro-Poor Municipal PPP.â€? UNDP Regional Bureau for Europe and the Commonwealth of Independent States (RBEC), New York. http://europeandcis.undp.org/ governance/lgdc/show/0080EA38-F203-1EE9-B82318136F639713 Light Rail http://www.ppiaf.org/ppiaf/sites/ppiaf.org/files/publication/WB%20-%20PSP%20LightRail%20-%20CMandri- Perrott.pdf Urban Bus http://www.ppiaf.org/ppiaf/sites/ppiaf.org/files/documents/toolkits/UrbanBusToolkit/index.html Water http://www.ppiaf.org/ppiaf/sites/ppiaf.org/files/FINAL-PPPsforUrbanWaterUtilities-PhMarin.pdf Previous knowledge papers in this series Lessons and Experiences from Mainstreaming HIV/AIDS into Urban/ Water (AFTU1 & AFTU2) Projects Nina Schuler, Alicia Casalis, Sylvie Debomy, Christianna Johnnides, and Kate Kuper, September 2005, No. 1 Occupational and Environmental Health Issues of Solid Waste Management: Special Emphasis on Middle and Lower-Income Countries Sandra Cointreau, July 2006, No. 2 A Review of Urban Development Issues in Poverty Reduction Strategies Judy L. Baker and Iwona Reichardt, June 2007, No. 3 Urban Poverty in Ethiopia: A Multi-Faceted and Spatial Perspective Elisa Muzzini, January 2008, No. 4 Urban Poverty: A Global View Judy L. Baker, January 2008, No. 5 Preparing Surveys for Urban Upgrading Interventions: Prototype Survey Instrument and User Guide Ana Goicoechea, April 2008, No. 6 Exploring Urban Growth Management: Insights from Three Cities Mila Freire, Douglas Webster, and Christopher Rose, June 2008, No. 7 Private Sector Initiatives in Slum Upgrading Judy L. Baker and Kim McClain, May 2009, No. 8 The Urban Rehabilitation of the Medinas: The World Bank Experience in the Middle East and North Africa Anthony G. Bigio and Guido Licciardi, May 2010, No. 9 Cities and Climate Change: An Urgent Agenda Daniel Hoornweg, December 2010, No. 10 Memo to the Mayor: Improving Access to Urban Land for All Residents – Fulfilling the Promise Barbara Lipman, with Robin Rajack, June 2011, No. 11 Conserving the Past as a Foundation for the Future: China-World Bank Partnership on Cultural Heritage Conservation Katrinka Ebbe, Guido Licciardi, and Axel Baeumler, September 2011, No. 12 101 Knowledge PAPeRS This publication has been financed in part by the Cities Alliance. For more information about the Urban Development Series, contact: Urban Development and Local Government Unit Sustainable Development Network The World Bank 1818 H Street, NW Washington, DC 20433 USA Email: Urbaninfo@worldbank.org Website: www.worldbank.org/urban/cipguidebook October 2011, No. 13