POST EXPRESS


Category: Business and Economy
Date of Article: 03/23/2000
Topic: How to Manage Privatisation for Optimal Results
Author: Michael Ikedianya
Full Text of Article:
A properly articulated valuation of the various public enterprises projects
and concerns shortlisted for privatisation under our current privatisation
exercise is an essential prerequisite as well as a sine qua non for any
meaningful, realistic, reliable, credible and dependable privatisation
programme. One really need to know in very precise and readily verifiable
terms the true and correct picture and worth of what he is privatising
before any meaningful, beneficial, reliable, credible, dependable and
sustainable privatisation programme capable of attaining significant
national and international credibility and respectability.
As privatisation of public enterprises is always a very delicate and
sensitive matter and greatly dependent upon a very carefully rationalised,
articulated and systematised optimal technical valuation methodology,
system, approach and work plan for its success, it is very essential and
pivotal that we take due cognizance of this obvious fact if we are to
achieve a worthwhile, successful, satisfactory and respectable privatisation
in this country. In this regard, direction and perspective, it is essential
that a high powered and virile technical valuation sub-committee be set up
to totally be in charge of planning, initiating, directing, coordinating,
supervising and monitoring the valuation of all public enterprises,
projects, concerns companies, banks, et cetera billed or shortlisted for
reactivation, revitalisation, privatisation, commercialisation,
rehabilitation, and liquidation throughout the country.
Such a high power and virile technical valuation sub-committee should
optimally be based under the presidency or under the Bureau for Public
Enterprises (BPE) and be given free hand. This is very important
particularly to ensure that it has requisite right atmosphere for enhanced
operational performance capability and effectiveness, an essential
prerequisite and a sin qua non for her achieving worthwhile and desirable
results. The high-powered and virile technical valuation sub-committee need
to have sub-offices directly under the governor's offices in the different
sates throughout the federation and also directly under the different
federal government ministers.
The technical valuation sub-committee should be made up of top-flight and
highly knowledgeable appraisal and valuation professionals with proven track
record from the specialist areas of project appraisal, valuation economics,
estate, surveying and valuation, accountancy, engineering, systems analysis,
finance and investment.
The various countries that have carried out nationally and internationally
successful, satisfactory and respectable privatisation programmes in recent
times, particularly Japan, India, Malaysia, France, Russia, Brazil and
Argentina, had been very careful to base their alternative privatisation
programmes upon alternative dependable optimal technical valuation
methodology, system, approach and work plan under the guidance, direction,
supervision and monitoring of alternative high-powered and virile technical
valuation sub-committees. Russia particularly has established a whole
ministry and appointed a fully fledged cabinet minister to be solely in
charge of privatisation and public enterprises in the country.
Over the years, defective valuation methodologies and systems had been very
widely adopted and used in appraising and valuing going concerns,
enterprises, projects, companies, property asset commodities for different
purposes. This most often has very widely resulted in arriving at highly
incredible and unreliable value figure estimates for the entities valued.
Since valuation essentially is fundamentally needed as a veritable guide for
rational and objective decision making and transactions, the defective and
unreliable value figures arrived at in the process have very unwholesomely
over the years led to regrettable and unpalatable decision making and
transactions.
The depreciated replacement cost method of valuation which very widely used,
without requisite adjustment in its primordial body fabric, by many
valuation professionals in alternative valuation situations fundamentally
has a lot of very readily identifiable in-built deficiencies for use as a
dependable tool and arriving at reliable value figure estimates. Very
unfortunate, many valuation professionals had over the years been given to
treating the valuation of alternative going concerns, enterprises,
companies, et cetera very simply as mere summation of the values of their
property asset commodities. This very clearly enough is not correct as the
value of a going concern is not necessarily equal to the sum of the values
of her various property asset commodities.
The case of the valuation of the Nigerian Railway Corporation as a going
concern for privatisation or commercialisation purposes, for merger,
consolidation, financing, joint venture and other purposes will serve a good
illustrative purpose. "Using the more familiar" asset valuation approach, in
the case of the valuation of the Nigerian Railway Corporation, largely
anchored around the depreciated replacement cost method of valuation, a very
conservative value figure estimate of the Nigerian Railway Corporation would
come within the neighbourhood of N800 billion (eight hundred billion naira).
But tell me any willing or prospective buyer in his or her right senses who
would offer as much as half that sum to buy the Nigerian Railway Corporation
if offered for sale rebus sic santibus in the open market.
Without mincing words and without any equivocation the real worth or value
of a going concern, an enterprise, a project or any property asset entity is
the highest bid price which can be obtained for the going concern of
property asset commodity if offered for sale in the open market from willing
buyers who are not under any undue pressure to buy and who know all the
facts surrounding the going concern or the poverty assets commodity equity.
Definitely, such willing or prospective buyers will relate their bid prices
more on their perceived performance efficiency or performance capability and
effectiveness of the going concern entity than the mass, size or quantum of
the going concern entity. What is true in the valuation of the Nigerian
Railway Corporation would equally to a larger or lesser extent apply in the
valuation of the various public enterprises in the country billed or
shortlisted for privatisation and commercialisation.
The use of the depreciated replacement cost method of valuation in its basic
primordial unadjusted format as a technique for ascertaining values is prima
facie wrong in its basic conception as cost is not necessarily equal to
value. Most often the cost of putting up or installing a built property, a
structure or facility may not be tantamount to what the built property,
structure or facility would subsequently sell at if offered for sale in the
open market. Professor Richard U. Ratcliff rightly pointed out: "The
appraisal fraternity has long suffered from indecision concerning the
relationship between cost and value. In some books the cost-less-accrued
depreciation approach is promulgated for general use, a process which
requires the assumption that cost new equals value new. Cost and Value are
not necessarily equal."
The two principal underlying fundamental assumptions upon which the
potential use of the depreciated replacement cost method of valuation as a
dependable tool for establishing value figure estimates had not been
sufficiently taken into due cognizance by many valuation professionals in
their various valuations. The two basic fundamental underlying assumptions
are that the physical property asset entity, improvement or facility
represents the highest and best use of the site in which it is located, and
that there is no interdependence or complementary role functional
relationship between the property being valued and any other property. In
other words, that the subject being valued like the runway of an airport,
the main or head dam of an irrigation project, the water intake or the
aeration network of an urban-regional water scheme or project, the general
hospital administration block and wards, et cetera can very exclusively and
independently truly be sold or purchased without any diminution in its
isolated unit value figures as would very readily be indicated by the
fractional unit by unit break-up depreciated replacement cost method of
valuation in its basic primordial format, without any adjustment whatsoever,
and secondly without any injurious affection to the values of associated or
contiguous property asset commodities e.g. the airport reception hall, the
main canals of an irrigation project, the water storage tank and
distribution network of an urban-regional water scheme, the general hospital
kitchen and mortuary, et cetera
Invariably, should the basic underlying assumptions fail to perfectly hold
under any valuation situation being carried out through the depreciated
replacement cost method of valuation, appropriate adjustment parameters and
coefficients like the Highest and Best Use copefficient (HBUc), the Marginal
Value Contribution parameter (MVCp), et cetera need to appropriately and
prudently be built into the valuation method for purposes of ascertaining
realistic, reliable and dependable value figure estimates for the entity
being valued.
An Illustrative Valuation
Depreciated Replacement Cost of a N80 billion
Built Property (unadjusted)
Highest and Best Use Coefficient .. .. .6
Fair Value of the Built Property of Facility==========
N48 billion

A going concern, an enterprise, a project, a corporate entity, etc. is a
living entity by its own right as distinct from any amalgamation or
summation of her property asset commodities. The value of a going concern
(VG) is not necessarily equal to the sum of the values of her various
property asset commodities (Vs). The going concern as an independent living
entity is made up firstly her spirit or spiritus, viz her performance or
operating efficiency level or coefficient (Oe), and secondly her tangible
physical body or corpus otherwise the aggregation of her various property
asset commodities.
The value of a going concern (Vg) is rightly a joint function of the
operating efficiency coefficient of the going concern (Oe), and sum of the
values of the various property asset commodities belonging to the going
concern (Vs), as appropriately determined through the use of a dependable
valuation approach or method, or in a simply mathematical format the value
of a going concern would be stated as follows:
Vg = Vs x Oe.
An illustrative modality of using the Operation Efficiency Approach or
Method in the valuation of an ailing cement company for reactivation,
rehabilitation, revitalisation or privatisation purposes could be sketched
as follows:
Sum of the values of the various property asset commodities belonging to the
going concern N8 billion
Operating Efficiency of the going concern 5
Fair/indicated value of the going concern
(Rebus sic stantibus) .. .. ... .. N4 billion

Ascertaining the overall operating efficiency coefficient (Oe) of a going
concern, an enterprise or a project as well as those of the various
sub-units into which these could comfortably be sub-divided would call for
the meaningful, realistic, reliable and credible determination by the best
that could be found in a highly qualified and knowledgeable valuation
professional expert. The valuation professional expert will firstly study in
depth the valuation report of the property asset commodity in question as
well as the project appraisal report on the subject going concern,
enterprise or project entity. Thereafter, reading the two reports side by
side and using appropriate tools of analysis for establishing operating
efficiency coefficients, in addition to his or her mature judgmental acumen,
will be in a position to effectively establish fair, credible and reliable
operating efficiency coefficients for (a) the project, enterprise and going
concern as a unified entity, and (b) for the various sub-units to which the
project, enterprise or going concern entity could reasonably and comfortably
be sub-divided.
Among the various tools of analysis appropriate for the ascertainment of the
operating efficiency coefficients of a going concern are the following: the
input-output analysts in mathematics and general management; efficiency
analysis in production economics And engineering; the probability analysis,
regression and correlation analysis, analysis of variance and analysis of
covariance in statistics; management science and quantitative analysis tools
and techniques like systems analysis and systems engineering, operations
research, game theory, simulation and linear programming.
- Prof Ikediaya wrote from Enugu

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