    United Nations: Planning for Headquarters Renovation Is
    Reasonable; United States Needs to Decide Whether to Support Work
    (15-JUN-01, GAO-01-788).

    The United Nations' (U.N.) Headquarters complex clearly needs to
    be renovated, and the Secretary-General will ask member states to
    make key decisions in 2002 about the future of the renovation. As
    host country to U.N. headquarters, the United States needs to
    play a major role in making these decisions if the renovation is
    to proceed. However, the administration and the Department of
    State have not yet developed a comprehensive U.S. position on the
    renovation. Assuming the United States decides to support the
    renovation, it needs considerable lead time to examine the
    issues, including what scope of renovation meets U.N. and U.S.
    needs in the 21st century, what share of the renovation costs
    would the United States be willing to provide, and what process
    is needed to ensure that the construction is cost-effective and
    timely. One option for examining these issues would be to
    establish a team comprised of experts on construction management
    and U.N. issues, using appropriate administration resources from
    State, the National Academy of Sciences, and the General Services
    Administration.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-01-788
        ACCNO:   A01185
      TITLE:     United Nations: Planning for Headquarters Renovation Is
                 Reasonable; United States Needs to Decide Whether to Support Work
         DATE:   06/15/2001
      SUBJECT:   Construction costs
    	     International organizations
    	     Facility construction
    	     Facility repairs
    	     Cost analysis
    	     Strategic planning
    	     New York (NY)
    	     UN Capital Master Plan

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    GAO-01-788

    A

    Report to the Committee on Foreign Relations, U. S. Senate

    June 2001 UNITED NATIONS Planning for Headquarters Renovation Is Reasonable;
    United States Needs to Decide Whether to Support Work

    GAO- 01- 788

    Letter 3 Appendixes Appendix I: Background 16

    Appendix II: U. N. Planning Process 21 Appendix III: Financing Options for
    U. N. Renovation 32 Appendix IV: Key Efforts and Decisions for the U. N.

    Renovation 48 Appendix V: Role of the Department of State in the U. N.

    Renovation 50 Appendix VI: Comments From the United Nations 53 Appendix VII:
    Comments From the Department of State 54 Appendix VIII: GAO Contacts and
    Staff Acknowledgments 56

    Tables Table 1: U. N. Headquarters Buildings and Grounds: Date of
    Acquisition, Cost, and Source of Funding 18

    Table 2: Financing Options and Financial and Policy Implications for U. N.
    Renovation 32

    Figures Figure 1: Key Steps in the Process for Renovating U. N. Headquarters
    9

    Figure 2: United Nations Headquarters Complex 16 Figure 3: Site Plan of the
    U. N. Headquarters Complex 17 Figure 4: The Five Phases of Renovation
    Project Planning 19 Figure 5: U. N. Conceptual Planning Process 21 Figure 6:
    Stone Displacement Due to Effects of Age 24 Figure 7: Obsolete Electrical
    System 25 Figure 8: Insulation Contains Asbestos 26 Figure 9: Restricted
    Handicapped Access 27 Figure 10: The United Nations? Capital Master Plan
    Options and

    Their Cost Estimates 28 Figure 11: Development of Preliminary Cost Estimate
    30 Figure 12: Financing Option: Cash Payments 33 Figure 13: Financing
    Options: Interest- Free Loans and Voluntary

    Contributions 34 Figure 14: Financing Option: Commercial Bonds 36 Figure 15:
    Financing Option: Cash Flow for Paying U. N.

    Commercial Bond Debt Service 40

    Figure 16: Other Financing Possibilities and Financial Advisory Group 42
    Figure 17: New York City and New York State Make Contributions

    to and Receive Benefits From U. N. Presence 43 Figure 18: Key Efforts and
    Decisions for the U. N. Renovation 48 Figure 19: Role of the Department of
    State 50

    Abbreviations

    IBRD International Bank for Reconstruction and Development RFP Request for
    Proposal UNDC United Nations Development Corporation

    Lett er

    June 15, 2001 The Honorable Joseph Biden Chairman The Honorable Jesse Helms
    Ranking Minority Member Committee on Foreign Relations United States Senate

    The U. N. headquarters complex in New York City, built largely from 1949 to
    1952, is a well- designed and well- constructed landmark that is now aging.
    The buildings, particularly much of the original infrastructure, have
    exceeded their economic life expectancy. They are energy inefficient and

    no longer conform to current safety, fire, and building codes or to U. N.
    technologic or security requirements. U. N. officials have discussed
    renovating the 50- year- old complex for about a decade. (See app. I for
    information on the U. N. headquarters and construction project planning.)

    In June 2000, the Secretary- General presented to the General Assembly a
    Capital Master Plan, which provides options for a multiyear effort to
    renovate the headquarters. The Secretary- General?s preferred option was

    estimated to take 6 years and cost about $1 billion. In December 2000, the
    General Assembly approved $8 million for the Secretary- General to develop
    design concepts and associated cost estimates for the renovation and ensure
    that all viable renovation options had been considered.

    Because the United States is the largest contributor to the U. N. system and
    the host country for U. N. headquarters, the Congress is concerned about the
    reasonableness of the planning for the proposed renovation and its

    potential cost and financing. To address these concerns, you asked that we
    (1) assess the reasonableness of the United Nations? renovation planning
    efforts, including the initial cost estimate; (2) comment on the potential
    cost to the U. S. government, including financing options and issues; and
    (3) discuss the tentative time frames for key steps in the renovation
    process. Because the Department of State, through the U. S. Mission to the
    United Nations, is responsible for ensuring that U. S. interests at the
    United Nations are met, we also inquired into what role State had played
    thus far in the renovation.

    Results in Brief The planning efforts for the proposed renovation of U. N.
    headquarters in New York City have been reasonable and have conformed to
    industry best practices. U. N. officials have identified critical problems
    in the buildings

    that need to be remedied and developed options for correcting the
    deficiencies. They have also developed preliminary, but reasonable, cost
    estimates for them. It is too soon to determine the cost to the United
    States, because member states must still decide whether to support the

    work and if so decide on the scope of the renovation and the financing
    options. The key financing options being considered are cash payments by
    member states, interest- free loans provided by members, and a U. N. bond
    offering in the capital markets. Each of these options involves tradeoffs
    and will challenge member states to reach an agreement. Nonetheless, by the
    end of 2002, the U. N. officials plan to request that member states (1)
    decide on the scope of work for the renovation, (2) appropriate funds to
    complete the final design, and (3) reach a decision on financing

    arrangements. As the lead U. S. agency for foreign affairs, the Department
    of State has been listening to proposals about financing the renovation and
    following the planning efforts. However, according to State Department
    officials, a comprehensive U. S. position on support for the renovation has
    not yet been developed nor does the Department have a position on how the
    renovation should be paid for. Some member states and U. N. officials
    indicate that the U. S. position has to be decided soon because members will
    have to be prepared to make key decisions next year. In this report, we are
    recommending that the Secretary of State, in

    consultation with the appropriate administration officials, take the needed
    steps to develop a comprehensive U. S. position on whether to support the U.
    N. renovation.

    Project Planning Has The U. N. headquarters complex clearly needs to be
    renovated. For Been Reasonable example, the Capital Master Plan notes that
    ?users of the United Nations

    Headquarters site... have a lower chance of survival during a fire than they
    would at comparable modern buildings ? While still in its early stages, we
    believe that the renovation planning efforts to date, including the cost
    estimate, are reasonable. Our opinion is based on the following actions
    taken by U. N. officials, which are consistent with typical industry best
    practices for this phase of project development- the conceptual planning
    phase. 1 Defined the need for a renovation. About a decade ago, U. N.
    officials identified the need for a major renovation to provide member
    states a 21 st century headquarters. To define the technical needs, they
    competitively procured the services of a multidisciplinary team of
    consultants, who assessed the existing conditions of each infrastructure
    component. The assessments were based on visual inspections and selective
    probes of the buildings? structure and their electrical, mechanical,
    plumbing, and other systems. The assessment reports formed the basis for the
    Capital Master Plan conclusion that current building conditions render the
    headquarters unacceptable for continued long- term use.

    Defined U. N. project expectations. The Secretary- General defined the
    project expectation as follows: ?The United Nations facility should be safe,
    free of hazardous materials, environmentally sound, fully accessible to all
    persons and cost- efficient to operate.? The Capital Master Plan presented a
    framework of options that could meet this expectation and preliminary

    cost estimates ranging from $875 million to $1. 2 billion. The estimates
    were (1) developed using standard industry practices; (2) based on the
    condition assessments; and (3) included costs for labor and materials,
    project management, and contingencies- all adjusted for the New York

    City market and for inflation over the project duration. However, the
    estimates excluded some costs, such as (1) U. N. staff other than for
    project management; (2) furniture, fixtures, and equipment; or (3)
    additional 1 Ralph S. Spillinger, in conjunction with the Federal Facilities
    Council?s Standing Committee

    on Organizational Performance and Metrics, Adding Value to the Facility
    Acquisition Process: Best Practices for Reviewing Facility Designs, Federal
    Facilities Council Technical Report #139 (Washington, D. C.; National
    Academy Press, n. d.). The Council, a cooperative association of 21 federal
    agencies, identifies and advances technologies, processes, and facilities
    management practices that improve the performance of facilities over their
    life cycle.

    security measures. Based on standard estimating literature and our work
    looking at the planning efforts, it is our opinion that the preliminary cost
    estimate has a margin of error of 20 to 30 percent. The estimates will be

    refined after the scope of the renovation is decided and further design work
    is completed.

    Recognized the value of a project management plan to guide decisionmaking.
    U. N. project officials acknowledged the value of a project management plan
    that could include (1) a statement of project goals and

    objectives; (2) options for management of the project; (3) project
    implementation schedules; (4) details about how the renovation would affect
    day- to- day U. N. operations; and (5) observations about how U. N.
    stakeholders, including member states, employees, the city of New York, and
    others, would be involved in the process. As part of conceptual planning, U.
    N. officials are developing a new project management plan that updates the
    Capital Master Plan.

    Recognized a need to augment management capability. U. N. project staff
    recognize that while the Secretariat does have project management
    capability, it does not have the capability to manage a project as large and
    complex as the proposed renovation. While a decision regarding project
    management has not been reached, U. N. officials have identified options
    that could be implemented when funding is approved. These options range

    from directly hiring individuals with the requisite skills to contracting
    for such services. (See app. II for more detail about U. N. planning
    efforts, including the building assessments and the cost estimate.)
    Financing Issues Will

    Since the renovation planning is at a very early stage, it is too soon to Be
    Explored Further

    determine the potential cost to the U. S. government. The cost will depend
    on the design and scope of work selected and the decisions member states,
    New York City, and New York State make about how to finance and share in the
    cost of the renovation. The Capital Master Plan suggested that some
    voluntary and private contributions might be available but that the
    following three financing options are the most likely alternatives. A
    financial advisory group will be established to explore further these three
    and all other possible options.

    Cash payments by member states. While this is the most straightforward
    option, it would require member states to pay for the entire cost of the
    renovation during the construction period. Moreover, members would have to
    agree on individual assessment rates for every member.

    Negotiations over the assessment rates have been contentious in recent
    years. Interest- free loans provided by members. 2 Representatives from
    several member states said that their governments might consider providing
    an interest- free loan but the United States needs to take the lead in
    furthering such a proposal. According to Office of Management and Budget
    officials, the Congress would have to appropriate the U. S. share of an
    interest- free loan in full, and the funds would be obligated with outlays
    during the

    renovation period. Bond financing in the capital markets. According to the
    United Nations? financial consultant, the United Nations could raise funds
    in the commercial capital markets and could expect to receive a credit
    rating between AA (very high grade) and A (upper medium grade) for a
    commercial bond offering. A representative from at least one member state
    said his government would be opposed to such a proposal because some member
    states have a higher credit rating and could borrow the funds

    at a lower cost. Also, according to the financial consultant, the bond might
    have to be secured by the United Nations? regular operating budget, which
    could restrict the use of the regular budget funds for day- to- day
    activities. (See app. III for more detail about the financing options and
    financial and policy implications for members.)

    2 The United States provided the United Nations with an interest- free loan
    in 1948 to build the core U. N. headquarters buildings and was repaid from
    the regular U. N. budget over a 31year period.

    Some member states believe that the United States, New York State, and New
    York City derive net economic benefits from the presence of the U. N.
    headquarters in New York. Therefore, they say that these three entities
    should pay a larger share of the renovation costs than the U. S. share of
    the

    regular U. N. budget (22 percent as of January 2001). Both New York City and
    State have made contributions to the United Nations since its inception and
    incur annual costs associated with the U. N. ?s presence and the diplomatic
    community. In turn, New York City realizes economic benefits from being the
    host city to the United Nations, generating $3. 3 billion in economic
    activity as a result of the United Nations? presence, according to

    a 1994 study. 3 (See app. III for more detail on New York?s contributions to
    the United Nations and benefits to New York City due to the United Nations?
    presence.) Key Steps in the As of June 2000, the United Nations was
    finalizing the selection of an Renovation Planning

    architect and engineering firm to develop concept designs and ensure that
    all viable renovation options had been considered. In the spring of 2002,
    Process

    the Secretary- General plans to present the results of the design effort to
    member states. At that point, member states would consider the renovation
    options, the initial design concepts, and revised estimates of project
    costs. By the end of 2002, the Secretary- General anticipates member states
    would make key decisions determining the future of the renovation, including
    deciding on (1) a project scope of work, (2) the appropriate funds for the
    final design (estimated to cost about $37 million), and (3) the financing
    arrangements. (Fig. 1 depicts key steps in the process, app. IV describes
    key efforts for the renovation in 2001 and 2002, and app. I

    describes general phases the renovation will go through after 2002.) 3 New
    York City and the United Nations: Celebrating a 50- Year Partnership (New
    York: New York City Commission for the United Nations and Consular Corps,
    Sept. 1995). This study has not been updated since 1994. In addition, the
    study did not quantify the annual cost to the city due to the United
    Nations? presence.

    Figure 1: Key Steps in the Process for Renovating U. N. Headquarters

    Source: GAO analysis of information provided by U. N. officials.

    Role of the Department According to its mission statement, the Department of
    State is the lead U. S. of State in the

    foreign affairs agency and is responsible for developing and implementing
    the policies of the U. S. government within the United Nations. To date,
    Renovation

    State has primarily been in a listening mode with regard to U. N. renovation
    proposals, according to State and Office of Management and Budget officials.
    State has been following the renovation issues, according to the Assistant
    Secretary of State for International Organization Affairs; however, a
    comprehensive U. S. position on the U. N. renovation has not yet been
    developed. According to the Assistant Secretary, developing a

    comprehensive position would involve addressing questions, such as support
    for the renovation, what scope of work should be undertaken, and how much
    should the United States provide for the project. Moreover, no mechanism has
    yet been set up that could lead to the establishment of a team comprised of
    staff from State, and possibly other executive branch

    offices, with the necessary expertise in construction management and U. N.
    issues to ensure that U. S. interests are met in a project of this
    magnitude. 4 Representatives of other member states said that the United
    States, as the

    host country, must soon play a major role in the process if the renovation
    is to proceed and if decisions are to be made on a timely basis. New York
    City and New York State officials also said that the U. S. government needs
    to state whether it is committed to retaining U. N. headquarters in New York
    before New York officials or entities commit resources to the project. (See
    app. V for a discussion of State?s role in the process and U. N. member
    states? and New York City?s and New York State?s expectations.) Conclusions
    The U. N. headquarters complex clearly needs to be renovated, and the

    Secretary- General will ask member states to make key decisions in 2002
    about the future of the renovation. As host country to U. N. headquarters,
    the United States needs to play a major role in making these decisions if
    the renovation is to proceed. However, the administration and State have not
    yet developed a comprehensive U. S. position on the renovation. Assuming

    the United States decides to support the renovation, it needs considerable
    lead time to examine the issues, including what scope of renovation meets U.
    N. and U. S. needs in the 21 st century, what share of the renovation costs
    would the United States be willing to provide, and what process is needed 4
    Based on our work on construction projects, there are several U. S.
    government entities with the expertise to oversee construction management,
    such as the National Academy of

    Sciences and the General Services Administration.

    to ensure that the construction is cost- effective and timely. One option
    for examining these issues would be to establish a team comprised of experts
    on construction management and U. N. issues, using appropriate
    administration resources from State, the National Academy of Sciences, and
    the General Services Administration.

    Recommendation for We recommend that the Secretary of State, in consultation
    with Executive Action

    appropriate officials in the administration, take the steps necessary to
    develop a comprehensive U. S. position on matters pertaining to the
    renovation. Assuming the U. S. position is to support the renovation, the
    Secretary of State and appropriate administration officials should consider
    what mechanisms would be needed to obtain the necessary expertise in
    construction management, financing, and U. N. issues.

    Agency Comments We received written comments on this report from the United
    Nations and the Department of State. The United Nations and the Department
    of State

    have agreed with the information presented, and their comments are reprinted
    in appendixes VI and VII, respectively. In addition to their written
    comments, State and U. N. officials provided technical and clarifying
    comments, which we incorporated where appropriate.

    Scope and To assess the reasonableness of the United Nations? planning and
    project Methodology development efforts, we reviewed U. N. records,
    including the original site acquisition documents; a sample of original and
    modification- related

    drawings and reports; and each of the building condition (needs) assessment
    reports. We also went on a site tour of the buildings and viewed the
    infrastructure and areas that are proposed for renovation, including the
    basement and interior structures. We discussed various

    aspects of the project with U. N. Secretariat and project staff and
    contractors, including the process by which the Capital Master Plan was
    developed, considered, and approved; the preparation of the condition
    (needs) assessment reports, including the cost estimate; the sequence and
    schedule of future project activities, including further design and
    construction efforts; and the United Nations? procurement process. To assess
    the reasonableness of the cost estimates, we looked at the assumptions
    supporting the preliminary cost estimates, as well as the

    methods used in constructing certain cost estimates. Specifically, we
    discussed with the estimator the basis for costs associated with the types
    of equipment and materials, the unit quantities, the unit prices, and other
    items of cost included in the estimate, as well as costs assigned to
    contingency, project management, and temporary space to house U. N. staff

    during renovation. We compared the United Nations? project planning efforts
    with best industry practices, as identified by the Federal Facilities
    Council. 5 To comment on the potential cost to the U. S. government and
    other financial and policy issues related to the implementation of the
    Capital Master Plan, we analyzed the proposed financing options and funding

    sources. In addition, we interviewed officials to obtain their views on the
    financing options and the potential policy issues that may confront member
    states. Specifically, we spoke with the J. P. Morgan financial consultant
    regarding the financing concept paper, which presents various financing
    options, including financing the renovation with a bond offering in the
    capital markets. We also discussed the financial aspects of the project with
    officials of New York City and State; the U. N. Development Corporation,

    which helps finance and construct facilities for the United Nations and the
    diplomatic community; and UNDC?s bond underwriter, Goldman, Sachs & Company.
    To gain an understanding of the proposed funding sources, we 5 Adding Value
    to the Facility Acquisition Process: Best Practices for Reviewing Facility
    Designs.

    reviewed U. N. historical documents, recent audited financial reports, and
    budget documents and spoke with knowledgeable staff in various U. N.
    offices. In addition, to address the policy implications of the financing
    options, we reviewed the United Nations? Charter, Financial Regulations and
    Rules, as well as applicable U. S. legislation pertaining to the United

    Nations. We also spoke with several representatives of member states who
    would participate in U. N. financing decisions. To discuss the tentative
    time frames for key steps in the renovation process, we reviewed U. N.
    reports, such as the Capital Master Plan, and focused on the essential steps
    in the project planning and development process. We subsequently spoke with
    U. N. officials to determine their current plans and time frames for
    developing and implementing a project management plan, preparing the initial
    design and design report, and

    establishing a financial advisory group to explore further the financing
    issues. We also met with officials of the State Department, the U. S.
    Mission to the United Nations, and the Office of Management and Budget to
    discuss administration efforts in monitoring the renovation planning. We
    similarly

    discussed these issues with several member state representatives. We
    conducted our review between January and May, 2001, in accordance with
    generally accepted government auditing standards.

    We are providing copies of this report to the Secretary of State; the Acting
    U. S. Ambassador to the U. S. Mission to the United Nations; the Director,
    U. S. Office of Management and Budget; the U. N. Secretary- General; and
    interested congressional committees. We will also make copies available to
    others on request.

    Please contact Mr. Johnson at (202) 512- 3540 or Mr. Ungar at (202) 512-
    8387 if you have any questions concerning this report. Other GAO contacts
    and staff acknowledgments are listed in appendix VIII.

    Harold J. Johnson Director, International Affairs and Trade

    Bernard L. Ungar Director, Physical Infrastructure Issues

    Appendi Appendi xes x I

    Background United Nations Figure 2: United Nations Headquarters Complex

    Headquarters Complex

    Source: United Nations.

    The U. N. headquarters is a New York City landmark built primarily between
    1949 and 1952 (see fig. 2). Located on the eastern shore of Manhattan
    Island, the headquarters district is under the control and authority of the
    United Nations. It consists of seven historically and architecturally
    significant structures 1 . In December 1946, John D. Rockefellar, Jr.,
    offered the United Nations $8. 5 million (equivalent to $75 million in year
    2000 U. S.

    1 According to the consulting engineer who performed the condition
    assessment, these buildings would have been designated historical landmarks
    many years ago if they were within the jurisdiction of any U. S. landmark
    regulatory agency.

    dollars) to purchase the site. In 1948, the United States provided an
    interest- free loan of $65 million (equivalent to $465 million in year 2000
    U. S. dollars) for the construction and furnishing of the complex. Both the
    city and state of New York contributed major improvements and alterations to
    the surrounding streets and infrastructure to create better traffic and
    pedestrian access.

    Figure 3: Site Plan of the U. N. Headquarters Complex

    Source: United Nations.

    Figure 3 illustrates the site plan for the headquarters complex, which was
    originally designed to accommodate the needs of up to 70 member states but
    currently supports the needs of 189 member states. At the U. N.

    headquarters location, the buildings support four major constituencies:

     member states? delegations that annually send more than 5,000 persons to
    New York for the annual sessions of the General Assembly;  Secretariat or
    U. N. staff offices, which number about 4,700 persons;  visitors and
    tourists, which number about 700,000 persons per year; and  journalists, of
    whom about 3,600 are permanently accredited while more than 10, 000 may be
    present during major meetings.

    Table 1 outlines the acquisition and expansion of the U. N. headquarters
    buildings and grounds to accommodate these groups.

    Table 1: U. N. Headquarters Buildings and Grounds: Date of Acquisition,
    Cost, and Source of Funding Date of construction or

    Cost of construction or Facility components acquisition acquisition Source
    of funding

    Site 1946 $8. 5 million John D. Rockefellar, Jr.

    Core complex

    General Assembly Construction started in January Total of $65 million for
    these four

    Interest- free loan from the 1949 and was completed in 1952. structures.
    United States, which was Secretariat building

    paid off in 1982. Loan was repaid over 31 Conference building

    years from the U. N. regular budget. Basement support area

    Subsequent buildings

    Dag Hammarskj�ld Library Dedicated November 1961 $6. 7 million Ford
    Foundation gift North lawn extension Construction completed 1981 $25.6
    million U. N. regular budget South Annex building Construction completed
    1982 $8. 7 million U. N. regular budget Unitar building Land purchased in
    1989 $4. 45 million U. N. regular budget

    Major expansions

    Conference building 1964 $3 million U. N. regular budget General Assembly
    1980 $15 milion U. N. regular budget

    Source: United Nations.

    Figure 4: The Five Phases of Renovation Project Planning

    Source: Adding Value to the Facility Acquisition Process: Best Practices for
    Reviewing Facility Designs and GAO.

    To assess the planning process the United Nations has begun, it is important
    to understand the general phases that any renovation project should go
    through. In our opinion, typical best practice in the design and
    construction industry is defined by the five phases of project planning.
    (See fig. 4.) 1. Conceptual Planning- The owner defines its needs and
    expectations,

    which leads to the development of the scope of work. During this phase,
    various feasibility studies are typically conducted to define the scope of
    work based on owner expectations for performance, quality, cost, and
    schedule. Further, the need for temporary space and the options for meeting
    this need are identified. Typically, several

    alternative design solutions are identified, and finally one approach is
    selected. 2. Design- This phase starts once the statement of work and
    preferred

    design approach have been developed. From this initial design work, the
    design matures into final construction documents comprising the drawings and
    specifications from which bids can be solicited. Also during this period,
    the need for temporary space becomes more

    definitive, thereby permitting the development of solicitation documents.
    Estimated cost and schedule issues receive increasingly intense oversight as
    this phase proceeds.

    3. Procurement- This phase refers to owner procurement of long lead- time
    equipment, such as unique or large electrical or mechanical equipment. 4.
    Construction- The services of a competitively procured construction

    contractor and specialty contractors and consultants are employed to execute
    the design. The biggest challenge of this phase is the management of changes
    resulting from the owner, design problems, or unknown conditions in the
    site. This phase is considered complete when the owner accepts occupancy of
    the building; however, work may continue for some time to identify and
    correct deficiencies in the construction work.

    5. Start- up- This phase is also referred to as ?commissioning.? It begins
    with occupancy of the building and entails the testing of individual and
    systems components to measure and compare their performance

    against the original design criteria.

    Appendi x II

    U. N. Planning Process U. N. Conceptual

    Figure 5: U. N. Conceptual Planning Process

    Planning Process

    Source: GAO analysis of U. N. data.

    To date, planning for the U. N. renovation project has taken place within
    the conceptual planning phase. We believe that the conceptual planning thus
    far has been reasonable and that U. N. project staff has applied typical
    best practices. Specifically, the United Nations has identified and
    documented the need for the renovation, investigated infrastructure
    conditions, and is

    reviewing whether the Capital Master Plan identified all alternative design
    solutions. U. N. officials also recognize that they do not have sufficient
    staff with the skills necessary to manage a renovation of this magnitude,
    and they acknowledge the value of developing a comprehensive project
    management plan. (See fig. 5.)

    In April 1998, the United Nations competitively contracted for consultant
    services to assess the condition of the headquarters buildings and grounds.
    A team of architects, engineers, and other consultants assessed existing

    infrastructure conditions in 1998 and 1999 and prepared condition assessment
    reports for each building as well as the site. The initial reports were
    provided to U. N. officials between the fall of 1999 and the spring of 2000
    with the final reports provided to the U. N. Secretariat in October 2000.
    The reports include detailed assessments of each building, including
    structural conditions and electrical, mechanical, and plumbing systems. The
    reports also detailed the changes needed to voluntarily comply with New York
    City and associated building codes and handicapped, environmental, and
    industry standards. For example, the consultants recommended that, to comply
    with codes, sprinklers be installed in the

    conference building where no sprinklers exist in the first basement through
    the fourth floor.

    In June 2000, based on the initial condition assessment reports, the
    Secretary- General prepared the Capital Master Plan. The plan proposed a
    renovation to allow headquarters to carry out operations in the 21 st
    century and discussed a framework of options for the renovation (these
    options are discussed later in this app.). The plan outlined a potential
    scope of renovation that, among other work, could include (1) installation
    of a full sprinkler system and a complete fire alarm system; (2) replacement
    of the

    heating, ventilating, and air conditioning systems; (3) upgrading of
    electrical wiring and panels, some of which are so outdated that replacement
    panels are no longer manufactured; (4) upgrading technology infrastructure
    to support digital transmissions and data handling; (5) replacement of
    lighting and ceilings and removal of asbestos; (6) consolidation and
    modernization of data- distribution systems; and (7) installation of a
    complete, facilitywide, automatic building management system. In late 2000,
    when funding was approved for initial design work, the

    General Assembly instructed the Secretary- General to confirm that all
    renovation options had been identified and considered, not just those
    identified in the Capital Master Plan. In March 2001, the United Nations
    solicited proposals for the services of an architect/ engineer for ?the
    preparation of a comprehensive design plan and cost analysis, including all
    viable alternatives.? 1 The work is scheduled for completion in late 2001.
    U. N. officials have also recognized that within their existing project

    management capability, they do not have sufficient staff with the skills and
    experience necessary to manage a renovation of this magnitude. We discussed
    with U. N. project officials whether the project would require a

    team consisting of U. N. staff and externally recruited staff that could
    include a full- time project manager and staff with experience in major
    renovation projects to manage the day- to- day project functions. Further,
    they said that they do not have either the background or the time to devote
    to this project and that they recognize the United Nations will have to
    acquire additional experienced staff resources. According to the U. N.

    1 The solicitation noted that additional future services might include
    design development and construction documents, construction bid support, and
    construction administration and related general services.

    officials, they were currently considering when staff should be brought on
    board. However, given the current limited funding, such staff could only be
    short term. Also, they are considering whether staff could be found within
    existing U. N. architect/ engineer staff. However, they would likely have to
    complete a job description for the project manager and advertise the

    position externally to hire someone with the skills and experience needed to
    undertake the renovation. Additionally, as an alternative to hiring staff
    directly, U. N. officials are considering contracting for a construction
    manager and services.

    The United Nations is in full agreement on the importance, purpose, and
    content of the project management plan and agrees that this will be
    developed as part of the conceptual planning phase. It agreed that such a
    plan should be a living document that would provide design options and

    solutions and communicate to all stakeholders the approach to managing the
    project. U. N. officials acknowledged that such a plan should identify a
    disciplined decisionmaking process and include (1) a statement of project
    goals and objectives; (2) the management approach and team; (3) details

    about how the renovation would affect day- to- day U. N. operations; (4)
    observations about how U. N. stakeholders, including member states,
    employees, the city of New York, and others would be involved in the
    process; and (5) a description of key management tools to be employed, such
    as budget, schedule, and cost control measures. The project staff is
    developing a new project management plan that updates the Capital Master
    Plan.

    U. N. Building In the early 1990s, U. N. officials recognized that despite
    the normal Condition Assessment maintenance program, the buildings and other
    facilities continued to

    deteriorate due to age and extended use. Most of the building systems had
    passed their economic life expectancy. For example, the plumbing in the
    General Assembly building was installed in 1952- 49 years ago- and the
    typical life expectancy for chilled and hot water systems is 25 to 30 years.
    The electrical systems in the Secretariat building were mostly installed in
    1949- over 50 years ago; the life expectancy for electrical systems is 15 to

    25 years. The Capital Master Plan states that ?The current condition of the
    Headquarters complex renders it unacceptable for continued use over the long
    term.? Further, the plan states that U. N. structures ?no longer conform to
    current safety, fire and building codes.? As such, ?users of the United
    Nations Headquarters site, such as delegates, staff members and visitors,

    have a lower chance of survival during a fire, than they would at comparable
    modern buildings in New York City or other major cities in the

    world.? The following photographs present examples of the types of
    deficiencies identified in the assessment of the U. N. buildings. Figure 6:
    Stone Displacement Due to Effects of Age

    Source: United Nations.

    Figure 6 shows a northeast cornerstone alignment problem, a potential safety
    hazard, on the north facade of the library. The consultant report noted that
    the facade exhibits signs of water penetration, with a possible indication
    of serious deterioration of the anchorage system due to uncontrolled water
    infiltration. The report recommended that high priority be given to the
    marble on the east facade, since some of the stones show

    signs of failing anchorage as exhibited in the shifting of some stones.
    Further, the report said that a program of stone removal should commence
    and, that if the anchorage is deteriorated, it be replaced with stainless
    steel.

    Figure 7: Obsolete Electrical System Source: United Nations.

    The consultant report noted that a large part of the electrical system in
    the basement consists of equipment that was originally installed in 1949, as
    illustrated in the type of fuses shown in figure 7. In this regard, the
    report noted that the vast majority of the electrical distribution system
    should be

    replaced, since it is no longer manufactured or is in a state of disrepair.

    Figure 8: Insulation Contains Asbestos

    Source: United Nations.

    Figure 8 shows asbestos that was used on the interior surface of the walls
    below the windows in the U. N. Secretariat building. The original
    specifications, as cited in the consultant?s report, required that a
    sprayedon

    asbestos fiber coating be applied over an asphalt primer coat to provide
    insulation between the induction units and the outer facade. The report
    noted that this material is a health hazard to both maintenance staff and
    the building?s occupants.

    Figure 9: Restricted Handicapped Access Source: United Nations.

    Figure 9 shows a photograph of a restroom in the Secretariat building that
    is inaccessible to the handicapped. This situation is typical of restrooms
    in the Secretariat building. The existing U. N. buildings and site, as
    originally designed in the late 1940s, made no specific accommodations for
    handicapped access because there were no code or legal requirements at that
    time. The report noted that despite the United Nations? efforts to

    correct deficiencies, additional accessibility compliance work is still
    needed.

    The United Nations? The Capital Master Plan identified three renovation
    possibilities- 3- year, 6year, Capital Master Plan

    or 12- year plans- along with a reactive approach and demolition option.
    (Fig. 10 illustrates the cost estimates for these options.) Renovation
    Options

    Figure 10: The United Nations? Capital Master Plan Options and Their Cost
    Estimates

    a Amount does not include the undetermined cost of convening all meetings
    away from the U. N. headquarters. Source: United Nations.

    While the Secretary- General stated a preference for the 6- year plan, each
    option has advantages and disadvantages in terms of the costs and impact on
    operations of the headquarters. The planning decision considerations in

    the three options were as follows: minimize the total time spent in
    construction, control disruption and relocation, and cost less than other
    approaches. The Capital Master Plan noted that while the 3- year option
    would be the least costly, at an estimated $875 million, it would also be
    the most disruptive, with current planning envisioning about 50 percent of
    the headquarters facility and staff affected by construction at the same
    time. In

    contrast, while the 12- year option would be more expensive, at an

    estimated $1,054 million, it would be the least disruptive, with current
    planning envisioning about 10 percent of the headquarters facility and staff
    affected by construction at the same time. In considering the 6- year
    option, the Secretary- General stated his opinion that it was the most
    practical and desirable approach, considering the estimated cost of $964
    million, and that current planning envisions 33 percent of the headquarters
    facility and staff would be affected by construction at the same time. The
    Capital Master Plan also discussed two other options: (1) a reactive
    approach of continuing to maintain the buildings and facilities as needed
    and (2) a demolition and rebuild approach, which is an approach that may not
    be practical since the structures are landmarks. The report noted that there
    are serious disadvantages to the reactive approach. Foremost is that after
    $1,154 million in costs are incurred over 25 years, the organization will
    still have the same deficient buildings and facilities because the
    facilities would not be modernized or improved in any meaningful way.
    Further, the

    United Nations? energy costs would continue to rise because the major
    alterations required to reduce energy consumption would occur incrementally.
    Finally, many of the hazardous conditions would continue to exist despite
    the costs incurred. The Capital Master Plan report estimated the cost of the
    demolition option at $992 million. However, additional costs would be
    incurred for (1) relocating the entire Secretariat staff for a period of up
    to 5 years, estimated at $218 million; and (2) convening all meetings away
    from U. N. headquarters, at a substantial additional cost that has not yet
    been determined.

    Development of Figure 11: Development of Preliminary Cost Estimate

    Preliminary Cost Estimate

    Source: GAO analysis of United Nations? data.

    The cost estimate for the renovation was reasonable and was based on
    standard industry practices (see fig. 11). The cost estimator defined the
    renovation scope of work based on the recommendations in the condition

    assessments. The estimator noted that the $964 million estimate was
    preliminary because design work had not yet been completed. Nonetheless, the
    estimate covered each building and, within each building, included the costs
    of replacing or upgrading the structure and the primary mechanical,
    electrical, and plumbing systems. The estimator used

    reasonable allowances to estimate the cost of some of the work and, where he
    could be more precise, used industry average costs for replacing or
    upgrading a specific component, such as air handlers. The estimator noted
    that while the estimate covered the primary systems in each building,
    additional and generally more invasive investigation would be needed during
    the design phase. Further, the cost estimate would not be refined until
    member states agreed on a scope of work for the renovation and the formal
    project design provided more definitive information.

    The estimate included the labor and material costs associated with the
    project and also included types of costs that, in our opinion, are necessary
    for a reasonable estimate. These are costs associated with (1) professional
    services such as architectural and engineering, (2) project management, (3)

    contingencies for unforeseen events during both design and construction,

    (4) indirect costs for such items as project field offices and insurance,
    and (5) escalation to account for inflation over the duration of the
    project. The preliminary estimate contained all of these types of costs; for
    example, inflation was projected at 3.5 percent per annum to the midpoint of
    construction. We did note, however, that some costs, such as U. N. staff

    costs over and above those required for project management, and the costs
    for office furniture, fixtures, and equipment, were excluded from the
    estimate. Further, the preliminary estimate did include security work and
    associated estimated costs that were developed by a consultant working with
    U. N. security. The proposed security measures will be revalidated during
    the conceptual design work.

    The estimator used a national database to generate the costs for material,
    labor, and other services and adjusted these costs using a proprietary New
    York cost database. The estimator?s staff stated that they applied their
    judgment in adjusting the estimate for the affect of such factors as working

    conditions in the occupied buildings, access to the job site, the lack of
    mobilization space for contractors, and security requirements of the job
    site. Overall, the estimate reflects costs that were based on local and
    national data tempered by the professional judgment and experience of the
    estimating staff.

    In our opinion, a cost estimate at the conceptual stage of the project is an
    order of magnitude estimate and therefore is subject to a margin of error
    above and beyond the contingencies in the estimate. While some estimating
    sources indicate that a range of from 30 to 40 percent would be typical at
    this stage of project development, we discussed with the estimating staff

    what would constitute a reasonable margin of error given the building
    condition assessments and other work already completed. From these
    discussions and the level of detailed information about the infrastructure
    needs, it is our judgment that the initial cost estimate has a margin of
    error of 20 percent to 30 percent.

    Appendi x II I Financing Options for U. N. Renovation Three key financing
    options for the U. N. renovation were proposed in the Capital Master Plan as
    follows: cash payments by member states, interestfree loans by member
    states, and a commercial bond offering. Table 2 summarizes these options and
    the associated financial and policy implications.

    Table 2: Financing Options and Financial and Policy Implications for U. N.
    Renovation Financing option a Financing assumptions Financial implications
    Policy implications

    Cash payment by  Renovation is fully financed  Special assessment required

    General Assembly needs to agree member states with cash payment, which is
    Opportunity cost b of onetime payment on based on special assessment

    versus payment over renovation period  Member states could be  Onetime
    payment could accrue interest  Assessment scale assessed once or annually
    over until all payments are made to contractors,  Duration of assessment
    (if not the renovation period

    thereby reducing the total assessment lump sum)

     Payment over renovation period would lessen the annual financial burden on
    U. S. policy is that funds should not members

    be disbursed in advance of need. Interest- free loans  Renovation is fully
    financed

     Special assessment may be required General Assembly approval and from
    member with interest- free loans

     Opportunity cost of onetime loan payment agreement between
    SecretaryGeneral

    states  Member states are repaid with versus payment over the renovation
    and member states needed

    regular/ special assessment period on  Repayment of loan over a 25year

     Onetime payment could accrue interest period until all payments are made
    to contractors,  Loan payment and repayment thereby reducing total
    assessment terms  Repayment over the life of the loan would  Assessment
    scale and duration lessen the annual burden on member states

    U. S. policy is that funds should not be disbursed in advance of need.
    Commercial bond

     Renovation is fully financed  Special assessment required

    General Assembly/ Member states offering with taxable corporate bond
    Borrowing costs

    need to agree on obligation of the United Nations

     No onetime or relatively large payments  Debt service is assumed to be
    over the renovation period by member  Bond offering; bond trustee secured
    with regular budget states agreements and special assessments

     Bond proceeds accrue interest in  Assessment scale and duration  Annual
    debt service payment

    construction fund until all payments are over a 25- year period made to
    contractors

    Current U. S. legislation could  Debt service payment over life of bonds
    prevent the U. S. government from paying interest rate costs and arrears a
    The Capital Master Plan also proposed that the renovation cost could be
    financed with a combination of interest- free loans and commercial bonds. b
    Opportunity cost is the measurable advantage forgone as a result of the
    rejection of alternative uses

    of resources.

    Sources: Capital Master Plan, Report of the Secretary General (New York:
    United Nations, June 2000), J. P. Morgan?s Long Term Capital Master Plan
    Concept Paper (New York: Aug. 2000), and GAO?s analysis of these sources.
    Cash Payment by

    Figure 12: Financing Option: Cash Payments

    Member States

    Source: GAO analysis of U. N. information.

    The Capital Master Plan proposed that onetime or annual cash assessment be
    provided by member states during the renovation period. While the U. N.
    Secretariat views this option as the most straightforward method for meeting
    the cost of the renovation, it has never been used to finance construction
    or renovation projects and is considered challenging to implement. The cash
    payment would be based on a special assessment

    scale, and Secretariat officials believe it may be difficult for members to
    agree on a scale within the time frame to start renovation work proposed by
    the Capital Master Plan. 1 (See fig. 12.)

    Due to the anticipated high cost of the project, member states would be
    required to provide large cash payments up- front to pay contractors. The
    size of the annual financial outlay required from member states would depend
    on the total costs, the renovation period that members choose, and
    contractors? agreement with the United Nations. For example, based on
    expected construction progress payments and the Secretary- General?s
    preferred choice- an estimated renovation cost of about $964 million with
    payments spread out over 6 years- the annual cash outlay, excluding

    prerenovation cost, is estimated at $174 million in the first 3 years,
    diminishing to $101 million in the 6th year.

    1 Special assessments are typically levied for peacekeeping and
    international criminal tribunal activities. The United States is currently
    assessed at 30. 5 percent for peacekeeping and 25 percent for one- half of
    the criminal tribunal budget and about 30. 5 percent for the other half.

    If member states were to make a onetime payment, which the U. N. Secretariat
    prefers, there would be an opportunity cost (such as forgone interest
    earnings) as compared with paying installments over the renovation period. 2
    However, the U. N. Secretariat said that a onetime payment would accrue
    interest in a bank account until all payments were made to contractors,
    thereby reducing the cost to members. The Secretariat also prefers a onetime
    payment, as opposed to annual or biannual payments, because it would then be
    assured that the renovation would not be curtailed due to funding problems.
    With regard to the U. S. government, according to the Office of Management
    and Budget, U. S.

    executive branch policy states that funds should not be disbursed in advance
    of the need for such funds. In addition, the funds should not be disbursed
    so that the recipient can invest the proceeds.

    Interest- free Loans and Figure 13: Financing Options: Interest- Free Loans
    and Voluntary Contributions

    Voluntary Contributions

    Source: GAO analysis of U. N. information.

    Another option that the Capital Master Plan proposed is to have member
    states finance the renovation by providing interest- free loans covering the
    full cost of the renovation. The loans would be repaid over a 25- year
    period. In 1948, the U. S. government provided $65 million (about $465
    million in year 2000 U. S. dollars) in interest- free loans to construct the
    core buildings. Currently, interest- free loans are the preferred choice of
    several member states. As with the cash payment option, member states would
    be

    required to pay a large amount of money up- front to contractors. (See fig.
    13.) If member states were to provide interest- free loans, which would be
    repaid with a special assessment, this option essentially would be the same
    2 Opportunity cost is the measurable advantage forgone as a result of the
    rejection of alternative uses of resources.

    as providing a grant or a cash payment. 3 According to U. N. officials, some
    member states have indicated that they would provide interest- free loans if
    the United States were willing to take the lead in advancing this proposal.

    One suggestion is that key member states, including the United States, could
    provide the loan and then would be exempt from paying their share of any
    special assessment. The special assessment levied on other member states
    would be used to repay their share to the member states that paid the loan
    for all members up- front and could be repaid over a 25- year period. 4
    Based on the Secretary- General?s preferred option of $964 million and a

    renovation period of 6 years, debt service for the repayment of interest-
    free loans would be about $39 million per year over the 25- year period.
    However, whether the loan is provided up- front by key member states or by
    the entire U. N. body of 189 member states, member states must agree on

    the share of the total cost to be paid by each country and the repayment
    terms. 5 While the U. N. Secretariat does not anticipate that the project
    could be fully financed with voluntary contributions, U. N. officials have
    indicated that certain undisclosed sources have already expressed intentions
    to provide contributions. U. N. officials also hope to receive contributions
    from New York City and State. 6 However, according to these officials, no
    one will commit to either interest- free loans or voluntary contributions
    until the United States explicitly states that it is in favor of the
    renovation project. Some member states have suggested that because of the

    international scope of the organization, the United Nations should begin a
    global fund- raising campaign now.

    3 An alternative source of funding is the regular budget assessment, which
    has been the traditional source for funding U. N. building construction and
    renovation projects. From 1973 to December 2000, the U. S. rate of regular
    budget assessment was 25 percent. The

    United States is currently assessed at 22 percent for the regular budget. 4
    Another option is that the countries that provide the loan could withhold
    from their annual regular budget assessment the portion that is to be paid
    by those countries that did not provide a loan up- front but would be
    providing their share over the 25- year period to the United Nations.
    However, the use of this option would not allow a complete separation of the
    regular budget account from an off- budget account, which is preferred for
    the

    renovation by U. N. officials and several member states. 5 With respect to
    the U. S. government, according to the U. S. Office of Management and
    Budget, the full U. S. share of the interest- free loan would be
    appropriated and obligated upfront with outlays over the renovation period.

    6 A discussion of the contributions made by New York and benefits received
    as host to the United Nations is presented later in this section.

    Commercial Bond

    Figure 14: Financing Option: Commercial Bonds

    Offering

    Source: GAO analysis of United Nations? financial consultant information.

    The United Nations could also finance its building renovations with a
    longterm bond offering in the capital markets at market interest rates. A
    bond offering would allow the Secretariat to secure all of the funds needed
    for the project before the renovation begins. In addition, although
    borrowing at market rates presents significant interest costs, it would
    enable member states to pay for the cost of the renovation over the life of
    the financing rather than through a large outlay of funding upfront, as
    would be required

    if it were financed with cash payments or interest- free loans. However, the
    United Nations has never borrowed from the commercial capital markets. The
    United Nations engaged a financial consultant to examine the viability

    of commercial borrowing, and the consultant suggested that a U. N. bond
    offering, issued as a taxable corporate obligation of the United Nations,
    would be possible. There are several concerns surrounding the bond offering:
    (1) the potential credit rating, (2) the potential use of the U. N. regular
    budget to secure debt service, and (3) existing legislative restrictions.
    (See fig. 14.)

    Credit Ratings The financial consultant advised that the United Nations
    could expect to receive a rating from credit rating agencies in a range
    between AA (very

    high- grade, high- quality) and A (upper medium grade). However, a key
    member state representative suggested that his country would not support a
    bond offering with lower than a AAA rating, which is the highest rating
    given to a borrower on long- term debts. 7 The United Nations? potential
    cost of borrowing would be influenced by the credit rating. The United
    Nations? cost of borrowing could be substantially higher than that of some
    of its members, including the United States, but could be lower than that of
    its other member states. The financial consultant stated that the United
    Nations could enhance its credit rating by limiting the number of member
    states whose assessment payments were used to satisfy the debt service to
    the high credit rating of some members, thus lowering the overall cost of
    borrowing. In addition, the financial consultant suggested that a AAA

    rating could be achieved if the United Nations were to purchase additional
    bond insurance. The benefits to be achieved from acquiring a AAA rating
    should outweigh the cost of paying the additional bond insurance premium.

    Potential Implications for According to the financial consultant, some
    mechanisms that would be the Regular Budget required to obtain the expected
    credit rating and secure the bonds were (1) linking the regular budget
    assessment to the debt service payments and (2) establishing a bond trustee
    and a debt service (lockbox) account.

    7 According to the financial consultant, the United Nations? goal would be
    to convince the credit rating agencies to treat the borrowing as ?quasi-
    sovereign? for credit rating purposes. The obligations of certain
    organizations, such as the World Bank, are defined as quasisovereign by the
    credit rating agencies. Like the World Bank, the United Nations? budget
    assessment payments are obligations of member states, and, according to the
    financial consultant, the United Nations? obligations would probably be
    defined as quasi- sovereign.

    Another concern with the proposed bond offering is that certain member
    states do not pay their regular budget assessments until the second half of
    the calendar year, and the regular budget assessment would be linked or be
    used to secure the debt service payments. 8 According to the financial
    consultant, based on recent trends, 50 percent of the total regular budget
    assessment are collected in the first and second quarters. 9 The third and
    fourth quarter collections are less predictable and include payments from
    some large member states. This situation would make it difficult for the
    United Nations to secure the debt service on the bonds early in the

    calendar year, and investors would be forced to rely on uncertain cash-
    flows. Therefore, according to the financial consultant, to achieve a high
    to medium- grade credit rating, investors may require two and one- half
    times

    the amount of annual debt service to be secured early in the calendar year.
    10 8 Regular budget assessments are due on January 31 of each year and are
    considered to be in arrears if they are not paid by December 31. The United
    States is the single largest contributor, and it does not pay its regular
    budget assessment until the last quarter of the calendar year. 9 The rating
    agencies would evaluate the United Nations on various criteria, including
    the predictability and collectability of the regular budget assessment. 10
    According to the financial consultant, by providing debt service in excess
    of required debt service, the United Nations would provide a ?cushion? to
    protect investors from potential

    declines in revenues available for debt service, thus raising the
    creditworthiness of the loan and lowering the interest costs.

    Based on the financial consultant?s proposal, while a special assessment
    would be levied to pay the debt service on the bonds, the payment of the
    debt service would be linked to the payment of the regular U. N. budget
    assessment. According to the financial consultant, this arrangement would be
    needed because member states would likely pay their regular U. N.
    assessments first to keep the United Nations functioning rather than paying
    the special assessment for the debt service on the bonds. 11 While payment
    of the regular budget assessment presents some uncertainty, it still would

    be perceived as more predictable than projected revenues from a special
    assessment for the renovation, which has no collection history. For
    instance, some member states, faced with limited funds or with legislative
    restrictions, could decide not to contribute to the U. N. renovation or to
    pay the interest rate costs associated with the bond offering. 12

    In addition, according to the financial consultant, member states would have
    to establish a bond trustee and a debt service account (lockbox) on the
    regular budget to assure bondholders of the return of their investment. Such
    a trustee would manage the cash flow to pay the debt service on the bonds.
    Figure 15 illustrates how the regular budget assessment mechanism would be
    linked to the lockbox to secure the debt service payments. For example, as
    the trustee receives member states? assessments, the trustee would put the
    first 20 percent of each assessment into a debt service

    account (lockbox) and send the remaining 80 percent to the United Nations?
    regular budget. 13 This cash- flow diagram assumes a 100- percent commercial
    bond offering and the requirement that all debt service funds be collected
    in the first quarter of the calendar year.

    11 Most of the regular budget assessment, about 80 percent, is used for
    staff and staff- related expenses. According to the financial consultant,
    investors would be sensitive to the impact of any debt service set aside on
    the daily operations of the United Nations. Setting aside too little may
    result in a shortfall when debt service comes due. However, if too much is
    set aside, the United Nations may not have the funds to meet operating
    needs.

    12 According to U. N. officials, the regular budget assessment could be
    increased to include debt service obligation. 13 According to the financial
    consultant, based on a multiyear review of regular assessment collections,
    if 20 percent of the assessments made were set aside for debt service, all
    of the required debt service would be collected within the first quarter.

    Figure 15: Financing Option: Cash Flow for Paying U. N. Commercial Bond Debt
    Service

    Source: GAO?s analysis of United Nations? financial consultant information.

    Legislative Restrictions The Secretary- General does not have the authority
    to borrow funds from sources that are external to the United Nations. A
    General Assembly approval would be required, as well as individual
    agreements between the bond trustee and each member state, if bond financing
    were approved. 14 Further, if the commercial bond offerings were approved by
    the General Assembly, under current U. S. law, funds appropriated to the
    Department of State for contributions to international organizations would
    not be available for payment to the United Nations for the U. S. share of
    interest costs incurred through external borrowing. 15 Similarly, under the
    United Nations Reform Act of 1999 (commonly known as ?Helms- Biden?), in
    order

    to make the second and third installment of U. S. arrears, the Secretary of
    State is required to certify that the United States has not paid any
    interest costs incurred by the United Nations through external borrowing. 16
    14 Based on Articles 17 and 18 of the Charter of the United Nations,
    budgetary matters require a two- thirds vote of the General Assembly. 15 See
    Public Law 106- 553- Appendix B, 114 Stat. 2762A- 93. This is an annual
    appropriation restriction that may not be made applicable to future
    contributions. 16 See Title IX of Division A of H. R. 3427, enacted into law
    by Public Law 106- 113.

    Other Financing Figure 16: Other Financing Possibilities and Financial
    Advisory Group

    Possibilities and Financial Advisory Group

    Source: GAO analysis of U. N. information.

    The U. N. Secretariat considered other financing possibilities, including
    commercial loans guaranteed by member states, borrowing against the assets
    of the United Nations, and borrowing from the World Bank (International Bank
    for Reconstruction and Development (IBRD)). 17 Commercial loans were not
    considered practical, since they would require

    individual member states to act as legal guarantors of a loan granted to the
    United Nations. Outside borrowing against the United Nations? assets was not
    considered viable because the United Nations? assets cannot be used as
    collateral and are generally immune from litigation. As for borrowing from
    the IBRD, the United Nations has not begun to explore the possibility with
    bank officials, but in 1947, it was concluded that a loan by the IBRD was
    considered impracticable because the IBRD can only lend to a member

    nation or to a business, industrial, or agricultural enterprise on the
    guarantee of a member. 18 (See fig. 16.)

    The Secretary- General plans to establish a five- member financial advisory
    group, comprised of financial experts and eminent persons, to assist him in
    examining and exploring all viable financing options, as well as identifying
    possible sources of voluntary contributions. As of May 2001, the advisory
    group had not yet been established.

    17 The Capital Master Plan also proposed that a combination of interest-
    free loans and a bond offering be explored. 18 In addition, the United
    Nations had also considered borrowing from the IBRD in 1994- 95 when the
    United Nations was faced with a financial crisis, but the United Nations did
    not

    explore the proposal with the IBRD.

    New York Makes

    Figure 17: New York City and New York State Make Contributions to and
    Receive Benefits From U. N. Presence

    Contributions to and Receives Benefits From U. N. Presence

    Sources: United Nations Development Corporation, the United Nations, and GAO
    analysis.

    Some member states believe that the United States, New York State, and New
    York City derive net economic benefits from the presence of the U. N.
    headquarters in New York. Therefore, they believe that the United States,
    New York State, and New York City should pay a larger share of the
    renovation costs than the U. S. share of the regular U. N. budget (22
    percent as of January 2001). 19 (See fig. 17.)

    19 This was also the position of member states in 1947 when it was decided
    that the headquarters complex would be located in the United States. In
    addition, it was also acknowledged that almost the entire cost of
    construction would be spent in the United States. For example, it was stated
    that U. S. labor would be used to construct the buildings and that the bulk
    of the material would be purchased in the United States. We have not

    determined the extent to which the United States benefited from the original
    construction spending.

    No systematic cost- benefit study has been undertaken on this issue, but
    there are costs and benefits associated with being host to U. N.
    headquarters. 20 Both New York City and State have made contributions to the
    United Nations since its inception. As part of its contribution to the
    United Nations, New York City undertook extensive commitments valued at
    about $20 million 21 (equivalent to about $143 million in year 2000 U. S.
    dollars) to make alterations in the surrounding streets and land to create a
    continuous and uninterrupted U. N. site. In addition, New York City incurs
    annual costs of providing the routine security and safety detail involving
    the United Nations and the diplomatic community. 22 The city also provides
    public schooling for some of the children of U. N. diplomats.

    In addition, to be responsive to the growing needs of the United Nations and
    the diplomatic community, in 1968 the New York State legislature established
    a public benefit corporation, known as the United Nations Development
    Corporation (UNDC). UNDC was mandated to create more office space, hotel
    accommodations, housing, and other facilities in the

    immediate vicinity of the U. N. headquarters. Between 1973 and 1987, UNDC
    issued tax- exempt municipal bonds to finance the construction of buildings
    on behalf of the United Nations community. 23 The first long- term, tax-
    exempt bonds issued by UNDC to finance construction of office space

    for the United Nations were secured in part by the ?moral obligation? of the
    state of New York- that is, by a special reserve fund to which state money
    could be appropriated if required. Subsequent bonds were secured in part or
    in full through revenues generated by leasing space in the buildings.

    20 On March 6, 2001, we requested information from the New York City
    government on the annual costs and benefits to the city due to the United
    Nations? presence. As of May 31, 2001, we did not receive this information
    from city officials. 21 This information was obtained from President Harry
    S. Truman?s official files dated February 10, 1948. 22 According to an
    official in the State Department?s Office of Diplomatic Security, the
    federal

    government reimburses New York City for extraordinary costs (about $7
    million annually) associated with providing security for the United Nations.

    23 State and local governments achieve considerable interest cost savings in
    debt financing as a result of the tax- exempt status of municipal bonds.
    Investors are willing to accept the lower yields because they also gain
    advantages from the tax exemption. The interest income on municipal bonds
    has historically been exempt from federal income tax, and,

    frequently, municipal bonds are exempt from state and local income taxes as
    well.

    One issue that affected the UNDC?s capacity to aid the United Nations was
    the loss of its ability to issue tax- exempt municipal debt on behalf of the
    United Nations. Based on the Tax Reform Act of 1986, the United Nations is
    treated as a private business, and its offices are ineligible for tax-
    exempt financing. In 1997, New York City urged the President and the
    Congress to restore the UNDC?s ability to issue tax- exempt bonds for U. N.
    office buildings. In his request, New York City?s Mayor emphasized the
    benefits of the United Nations and its affiliated agencies to New York and
    the United States. 24 Also, according to the city, one of the major
    incentives offered by

    other nations to the United Nations and its affiliates is rent- free office
    space. In the past, the cost of U. N. office space in the United States has
    been reduced, because the office space has been financed with tax- exempt
    bonds. 25 The Congress did not enact legislation to restore UNDC?s

    authority to issue tax- exempt bonds for the United Nations. 24 New York
    City 1997 Federal Program (New York: New York City government, 1997). 25 To
    prevent the United Nations International Children?s Emergency Fund from
    relocating to another country, in 1994 UNDC renegotiated and restructured
    its original lease, which resulted in fixed annual rental payments extending
    to 2026.

    In turn, both New York City and State realize economic benefits from being
    the host to U. N. headquarters. On the basis of a study that was prepared by
    New York City in 1995, 26 the city reported that in 1994, the U. N.
    headquarters, agencies, missions, and consulates directly spent
    approximately $1. 5 billion in the New York City metropolitan area. In
    addition, the U. N. headquarters, agencies, missions, and consulates
    directly employed 16,400 people. 27 The study further reported that in
    addition to the direct economic impact of increased economic activity and
    jobs,

    spending by the United Nations? extended system and its employees creates a
    ?ripple effect? of related economic activity, thus channeling a total of
    about $3.3 billion into New York City?s economy. 28 This study has not been
    updated.

    As part of its plan to renovate the headquarters complex, the United Nations
    hopes that New York City and UNDC would contribute temporary space to house
    U. N. staff during the renovation. On the basis of the Capital Master Plan,
    the United Nations? temporary space options include leasing from UNDC or
    from the commercial sector, adding floors to existing on- site buildings,
    and possibly constructing a new building off- site or on- site. The Capital
    Master Plan cost estimates for temporary space range from $62 million to $91
    million, which includes leasing or constructing a new building. The $62
    million option, which would involve leasing through UNDC, is reflected in
    the Capital Master Plan cost estimates. However, the Secretariat states that
    construction is a better option, in terms of economy and anticipated future
    space needs. According to U. N. officials, they are currently interested in
    a plot of land, which is owned by New York City, as a possible site to
    construct a building for temporary space, as well as to satisfy permanent
    office space needs. City officials state that if the

    Congress were to restore the tax- exempt financing status on behalf of the
    26 New York City and the United Nations: Celebrating a 50 Year Partnership.
    (New York: New York City Commission for the United Nations and Consular
    Corps, Sept. 1995). 27 The report also stated that the U. N. extended system
    employs a total of 30, 700 people directly and indirectly, and that the
    extended system pays a total of $850 million in salaries annually. The total
    amount of direct and indirect salaries generated in the New York City
    metropolitan area by the U. N. extended system and its ripple effect is $1.
    2 billion annually.

    28 Procurement by U. N. headquarters only in the United States was about
    $200 million in 2000, or about 28. 5 percent of total headquarters
    procurement. Russia was the second highest country of procurement volume by
    country, with about $91 million, or 13 percent.

    United Nations, UNDC could issue tax- exempt bonds to construct the
    building.

    Key Efforts and Decisions for the U. N.

    Appendi x V I Renovation Figure 18: Key Efforts and Decisions for the U. N.
    Renovation

    Source: GAO analysis of U. N. information.

    Based on discussions with the project staff, the following sections explain
    our understanding about the project schedule in 2001 and 2002 (see fig. 18).

    Key Efforts for 2001 Evaluate project management plan and staffing needs. U.
    N. staff are in the process of considering different project management
    approaches. Also, according to the U. N. staff, they are currently
    considering when additional staff with the requisite skill and experience
    should be brought on board and

    whether staff could be found within the existing U. N. architect and
    engineering office. Two key positions they are considering are a project
    manager, who would be a U. N. employee and represent overall U. N.

    interests, and a construction manager, who would be contracted to handle
    day- to- day project activities.

    Complete U. N. initial design work. In a Request for Proposals (RFP) dated
    March 22, 2001, the United Nations solicited proposals for ?the preparation
    of a comprehensive design plan and cost analysis, including all viable
    alternatives, to be performed in this preliminary phase.? The work is
    scheduled for completion in late 2001. Further, the RFP noted additional

    future services, which may include ?the remaining services of the Design
    Phase (design development, construction documents), the services of the
    construction phase (construction bid support and construction
    administration) and the related General Services of portions.? Establish the
    financial advisory group. The U. N. Secretary- General has

    proposed to establish a financial advisory group, comprised of prominent
    individuals with expertise in finance and fund- raising, to explore the
    financing options and to begin a fund- raising campaign. The Secretary-

    General is considering several experts at this point, and U. N. officials
    anticipate that in the spring of this year they would devote full attention
    to this matter and establish the advisory group shortly thereafter.

    Key Decisions for 2002 Project scope of work. In the spring of 2002, the
    Secretary- General plans to present the results of the initial design work
    to member states for their consideration. The initial design work would
    provide all viable renovation options. Based on these options, member states
    would decide on a scope of work for the project, whether to go forward with
    the total package or various component options, and a time frame for
    construction. The Secretariat hopes these decisions could be made in 6
    months.

    Decide on funding for the final design. Work on the final design cannot
    start until members decide on the project scope of work and appropriate
    funds, estimated at about $37 million, for the effort. The Secretariat
    currently anticipates that the funding would be available beginning with the
    2003 to 2004 biennium budget, which starts in January 2003. According to U.
    N. officials, the Secretary- General does not plan to request the funds as
    part of the 2002 regular U. N. budget but is considering requesting the
    funds for a separate construction account.

    Negotiate financing arrangements. Member states will need to begin
    negotiating the financing arrangements. The Secretariat hopes that member
    states could reach a decision on the financing during calendar year

    2002. Although the final design and firm cost estimates would not be
    completed, U. N. officials hope an agreement on how the renovation would be
    financed can be reached.

    Role of the Department of State in the U. N.

    Appendi x V

    Renovation Figure 19: Role of the Department of State

    Source: Department of State.

    According to the Department of State?s strategic plan and public summary of
    its activities, the Department is the lead U. S. government institution for
    the conduct of foreign diplomacy; leads representation of U. S. policy at
    international organizations; conducts negotiations with international
    organizations; and, through the Bureau of International Organization Affairs
    and the U. S. Permanent Representative to the United Nations, ensures that
    U. N. activities and actions advance U. S. interests. To this point, State
    has been in a listening mode with regard to U. N. renovation proposals and
    has been following the planning phase, according to State

    officials. According to the Assistant Secretary of State for International
    Organization Affairs, the administration and Secretary of State have not yet
    developed a comprehensive U. S. position on the renovation. (See fig. 19.)
    Moreover, no mechanism has yet been set up that could lead to the
    establishment of a team with the necessary expertise to oversee the
    renovation. Such a team, according to State officials, might be comprised of
    experts on construction management, building renovation, U. N. financing and
    negotiation, and U. N. budgeting. The Assistant Secretary also said
    stakeholders in the renovation assume that U. N. headquarters will remain in
    New York, but a decision on the U. S. position would have to be

    made by the Secretary of State, other executive branch officials, and New
    York City and State policymakers. Representatives of several member states
    said member- state involvement in the renovation process was needed now to
    ensure that timely decisions could be made. They also expect the United
    States to play a major role in making key decisions about the renovation,
    including scope of work and financing choices. For example, according to U.
    N. officials, some member states would consider providing interest- free
    loans to finance the project

    but, they need the United States to take the lead in advancing this
    proposal. Some member state representatives have also expressed interest in
    being the host country for U. N. headquarters, if the renovation does not
    proceed. According to a State official, member states expect the U. S.
    government to articulate a position on whether it wants the U. N.
    headquarters to remain in the United States. Similarly, New York City and
    State governments could

    help finance the renovation, but they would like the U. S. government to
    articulate a position on whether it wants the United Nations to remain in
    New York. Some member states further expect the United States, as the host
    country, to help monitor the project. The United Nations has never
    undertaken a single construction or renovation project of this scope, and
    representatives of member states have expressed doubts about the
    Secretariat?s ability to

    manage this project. The United Nations? Office of Internal Oversight
    Services acknowledged that it does not currently have the expertise to
    perform this specific oversight role but has agreed that it would assume
    this responsibility by hiring people with the necessary skills.

    In response to such expectations, officials from State?s Bureau for
    International Organization Affairs and the U. S. Mission to the United
    Nations told us they have overall responsibility for developing and
    implementing U. S. policies within the United Nations. However, since the
    Secretary- General has not yet requested the funding for the renovation,
    State has not budgeted and requested any funds for the renovation in fiscal
    year 2002. Nonetheless, the Secretary- General plans to request funds

    (estimated at $37 million) to complete the final design work in the spring
    of 2002 and likely will request members to appropriate the funds in a
    separate construction account for use in 2003. In addition, the Secretary-
    General plans to request that member states decide on the scope of work for
    the renovation and negotiate financial arrangements during 2002. Thus, for

    timely budgetary consideration of these requests by the Congress and the
    executive branch, State would need to begin work on these issues. According
    to State and U. S. Mission to the United Nations officials, to thoroughly
    cover the issues, a team with expertise in construction

    management, building assessment, U. N. negotiations and financing, and U. N.
    legislative affairs would have to be assembled from within State and
    possibly elsewhere in the executive branch.

    Based on our review of the U. N. planning to date and key steps remaining in
    the project development process (see apps. I, II, III, and IV), if the
    overall

    U. S. position is to support the renovation, such a team could perform the
    following tasks:  Ensure the Secretariat develops a comprehensive project
    management

    plan. U. N. officials acknowledged that such a plan should identify a
    disciplined decisionmaking process and include a statement of project goals
    and objectives; the management approach and team; and a description of key
    management tools to be employed, such as budget,

    schedule, and cost control measures.  Review the Secretariat?s conceptual
    design report, particularly to ensure that it confirms that all viable
    renovation options have been considered.

     Ensure that a functional space analysis has been conducted, which lays out
    the best and highest use of existing building space. This review would also
    take into consideration plans for temporary space to house U. N. staff
    during the renovation, as well as determining whether additional permanent
    office space may be required.  Ensure that an appropriate financial
    advisory group has been

    established. The advisory group members would include prominent individuals
    with expertise in finance and fund- raising and would explore the financing
    options and begin a fund- raising campaign.  Analyze the cost estimates and
    their assumptions to determine their

    reasonableness.  Analyze the financing options and their associated
    financial and policy

    implications for the U. S. government.  Conduct the necessary work to
    negotiate an appropriate share of U. S.

    costs for the renovation. One aspect of this work could be to follow up with
    New York City and State officials to obtain their views on the proposed
    renovation and to advance a study of the annual costs and benefits to the
    United States and New York of being the host to U. N. headquarters.  Ensure
    that the funds to be provided by the U. S. government are

    budgeted and appropriated at the right time.

    Appendi x VI Comments From the United Nations

    Appendi x VII Comments From the Department of State

    Appendi x VI II

    GAO Contacts and Staff Acknowledgments GAO Contacts Tetsuo Miyabara, (202)
    512- 8974 Ronald L. King, (202) 512- 5248 Staff

    In addition to the names above, Barbara Shields, Thomas Johnson, Maria
    Acknowledgments Edelstein, Lisa Wright- Solomon, Carolyn Black- Bagdoyan,
    Mark Speight, Lynn Cothern, and Rona Mendelsohn made key contributions to
    this report.

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    Page 1 GAO- 01- 788 U. N. Headquarters Renovation

    Contents

    Contents Page 2 GAO- 01- 788 U. N. Headquarters Renovation

    Page 3 GAO- 01- 788 U. N. Headquarters Renovation United States General
    Accounting Office

    Washington, D. C. 20548 Page 3 GAO- 01- 788 U. N. Headquarters Renovation

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    Appendix I

    Appendix I Background

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    Appendix I Background

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    Appendix I Background

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    Appendix I Background

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    Appendix II

    Appendix II U. N. Planning Process

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    Appendix II U. N. Planning Process

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    Appendix II U. N. Planning Process

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    Appendix II U. N. Planning Process

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    Appendix II U. N. Planning Process

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    Appendix II U. N. Planning Process

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    Appendix II U. N. Planning Process

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    Appendix II U. N. Planning Process

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    Appendix II U. N. Planning Process

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    Appendix II U. N. Planning Process

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    Appendix III

    Appendix III Financing Options for U. N. Renovation

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    Appendix III Financing Options for U. N. Renovation

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    Appendix III Financing Options for U. N. Renovation

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    Appendix III Financing Options for U. N. Renovation

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    Appendix III Financing Options for U. N. Renovation

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    Appendix III Financing Options for U. N. Renovation

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    Appendix III Financing Options for U. N. Renovation

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    Appendix III Financing Options for U. N. Renovation

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    Appendix III Financing Options for U. N. Renovation

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    Appendix III Financing Options for U. N. Renovation

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    Appendix III Financing Options for U. N. Renovation

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    Appendix III Financing Options for U. N. Renovation

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    Appendix III Financing Options for U. N. Renovation

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    Appendix III Financing Options for U. N. Renovation

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    Appendix III Financing Options for U. N. Renovation

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    Appendix IV

    Appendix IV Key Efforts and Decisions for the U. N. Renovation

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    Appendix V

    Appendix V Role of the Department of State in the U. N. Renovation

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    Appendix V Role of the Department of State in the U. N. Renovation

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    Appendix VI

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    Appendix VII

    Appendix VII Comments From the Department of State

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    Appendix VIII

    United States General Accounting Office Washington, D. C. 20548- 0001

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