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Public Private Partnerships: A licence to print money … or value for money?

Author - Raymond Turner


 


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4 What is ‘value’?

Again, the Concise Oxford English Dictionary (2003) defines value as:

1. the regard that something that is held to deserve; importance or worth; material or monetary worth. The worth of something compared to its price, at €2.00 it is good value. 2. values principles or standards or behaviour 3. numerical amount denoted by an algebraic term, a magnitude, a quantity or number etc.

In identifying the value of any asset; it is measured in accounting and economic terms which is clearly possible with respect to tangible assets. In today’s world, how does one measure the benefits accrued to the public of an intangible public asset such as a park? How does one place a ‘fair value’ on the benefits of intangible assets?

Traditionally assets are considered to be real, physical entities such as plant, equipment buildings, etc. however there are also intangible assets such as licences, goodwill, reputation, copyrights and patents.

Reilly and Schweihs (1998) state that there are assets which are both tangible and intangible and that an intangible asset has the following defined characteristics.
  1. Specific identification and recognizable description
  2. It should have a legal existence and be protected legally
  3. It should have the right of private ownership in whole or part
  4. There is tangible evidence or manifestation that it exits
  5. Evidence that it came into at a specific time
  6. It will decay at a specific date.

A PPP agreement meets all of the above criteria.

According to FRS No. 3, the ‘Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Where the fair value of the asset is not able to be reliably determined using market-based evidence, depreciated replacement cost is considered to be the most appropriated basis for determination of value.’ The debate about what ‘fair’ actually means can be difficult and challenging.

It is important to note that the value of an asset is not necessarily the cost of the creation of the asset, or the sum of the total quantitative benefits derived from the consumption of the asset, both tangible and intangible. There are specific tools, techniques, methodologies guidelines and standards as to how to value an asset. It is often the assumptions and application of these clearly defined methodologies that result in an asset been assigned the wrong value. What is important in starting the evaluation of any asset is to determine: What is the purpose and who is the audience? It is accepted that the value of an asset is measured by applying three separate methodologies – market, cost and income – under a defined set of accounting and financial reporting standards (Reilly and Schweihs 1998).

There is the accounting value or ‘book’ value of an asset and then there is the market value of an asset. There is also the economic value of an asset. Wikipedia describes the economic value of something as how much a desired object or condition is worth relative to other objects or conditions. The internet search engine, Google, defines economics as the study of how people use limited resources in an attempt to satisfy unlimited wants (http://investor.cisco.com/glossary.cfm). The economist uses another measure called the ‘economic added value’ (EAV) of an asset. This is how much additional value is added by an asset.


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