Naam, Afdeling Naam, Afdeling 07/01/2009
Financial information on feasibility of
land development by Dutch local
authorities
Introduction
• Financial data?
• Experiences with Mega Projects and other large projects
• Land Development in the Netherlands
• Local Government finance
• Costs and revenues of Land development
3
Financial data?
• A financial value is a value
• Accountancy rules construct facts from these values
• Example of such a rule: a foreseeable loss has an immediate effect
on equity, a profit only after it has been realised
• Operationalization: certain loss: directly in books • Uncertain, but likely loss, provision to be taken
• Loss is not likely to happen, but there are risks. Not to be taken
directly
• So, how much equity an organisation has. How much money it owns depends on interpretations values: fact or value?
• The credit crunch has shown that that financial data are fluid, based on interpretations and values
Book value vs. market value
• So, it is attractive to account based on book value
• Prices paid in past (facts) • Interest
• Depreciation (value, taxation rules) • However,
• Market value is based on future revenues and costs. • There are no objective data about future values
• Planners and developers are optimistic.
5
Experience with Mega Projects
• Costs higher, benefits lower than expected
• Valid for: railroads, tunnels, airports, highways, bridges, power plants, dams, water projects, concert halls, museums, sports arenas, convention centres, information technology systems, oil and gas extraction projects, aerospace projects, and weapons systems. (Flyvbjerg, 2007)
• Error or lie? (Flyvbjerg et al. 2002)
Land development by local
authorities
• Direct development by local authorities
• Buy land
• Service it, i.e., on site and off site infrastructure provision
• Sell plots to development companies housing associations, end users
• Bear financial risks
7
Finance of local authorities in the
Netherlands
• Taxes, like property tax, are of minor importance.
• Municipal Fund: based on objective criteria
• Negative: property tax base
• Positive, dwellings, population, area, density, etc.
• Specific funds: central government provides means to implement their policies
• Other own income, like sale of utility companies, and land development
Sources
• Local authorities make every year an estimate for next year, and an account of last year.
• Accounting on accrual basis and not on cash basis.
• So expenses of buying land are at the same time earnings of
having more assets available, and
• revenues of selling land involves expenses of lower value of
land portfolio
• Two main exceptions
• Shortage expected a reservation is made (expenses without
earning) (up front)
• Profits that have been realised (earnings without expenses)
Costs infrastructure provison 2005 in € mln (CBS) 0,001 0,01 0,1 1 10 100 1000 0,001 0,01 0,1 1 10 100 1000 re al iz ed
Revenues infrastructure provision 2005 in € mln (CBS) 0,001 0,01 0,1 1 10 100 1000 0,001 0,01 0,1 1 10 100 1000 re al iz ed
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Estimates minus results per
municipality(CBS)
Realised minus estimated result 2005 2010
Over - € 10 million 1.4% 6.5%
Between – € 10 and - € 5 million 1.1% 6,1%
Between - € 5 and - € 2 million 5.3% 13,6%
Between - € 2 and - € 1 million 3.1% 9,2%
Between - € 1 million and € 0 22.1% 26,2%
No difference 3.1% 1,5%
Between € 0 and € 1 million 40,2% 22,3%
Between € 1 and € 2 million 9,8% 8,0%
Between € 2 and € 5 million 9,2% 3,2%
Between € 5 and € 10 million 2,5% 2,9%
Over € 10 million 2,2% 0,5%
Some outliers
2010 results in € mln estimate realized
Amsterdam 196 31 Rotterdam -8 -163 The Hague 11 -52 Utrecht -1 42 Apeldoorn 1 -48 Groningen -3 -41 Haarlemmermeer 12 29 Leiden -7 -38 Tilburg 0 -33 Westland 6 -32
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Discussion
• Before credit crunch:
• Cost overruns were compensated by higher earnings • Earnings is not the same as benefit
• Credit crunch
• Error or lie?
• Flexibility, option value
• Data for land development:
• Valuations of projects change
