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 Hammarskjï¿½ld 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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GAO United States General Accounting Office

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Contents

Contents Page 2 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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