Determining the value of specialised public sector assets can be a tricky task. It is vital that a common approach is agreed and the unique circumstances of public service provision are taken into account
How should public bodies value assets such as specialised buildings, structures, equipment and land used to provide transport, utilities and social, cultural and recreational services?
There have been concerns for some time that different approaches have been adopted by public sector entities in the valuation of these specialised assets. Some may be similar to those used for commercial purposes, but many are unique to the service provided and thus create difficult valuation challenges.
To address this issue, the International Valuation Standards Council has issued guidance through an exposure draft, Valuations of specialised public service assets. As vice chairman of the IVSC Professional Board, I led the project and drew on the expertise of a working group of experts from around the world.
To ensure good governance and stewardship of public funds it is important that the value of assets held to provide public services is properly recognised. Our aim is to reduce diversity by identifying and promoting best practice.
Valuations are required for a wide range of purposes including, but not limited to, financial reporting, internal transfers and for the regulation of pricing by monopolies. There is often confusion as to the valuation criteria, and the extent to which social objectives can or should be reflected.
The exposure draft focuses on the valuation of the asset itself and distinguishes market or fair value from social value. Because social value provides a measure of the impact of an asset on other assets owned elsewhere or on the wider community, it is inconsistent with the concept of a ‘valuation’ within the scope of the International Valuation Standards (IVS) Framework.
The application of market value to many specialised public service assets is sometimes challenging because these assets are rarely, if ever, exchanged between willing sellers and buyers, and therefore market participants cannot be identified. However, the IVS Framework indicates that the present owner is included among those who constitute a willing buyer. As a consequence, there is deemed to be at least one buyer in the market.
Highest and best use is a concept that can also provide challenges in the context of specialised public service assets. As a fundamental concept, market value reflects the highest and best use of an asset. But many specialised public service assets may appear to be put to uses that are sub-optimal.
By way of example, the highest and best use of land in a national park may appear to be for mining. However, the discussion in the IVS Framework makes it clear that determination of the highest and best use requires consideration of uses that are physically possible, legally permissible and financially feasible.
Consequently, although mining in a designated national park may be physically possible and economically feasible, it would not be legally permissible because of the statutory protection. The potential for mining should therefore be ignored in the determination of the highest and best use.
When considering the highest and best use in the context of a public service asset it is important to note that most entities providing public services are mandated or directed to continue to provide the services for which the asset is required. This means that there is often a stronger presumption that the public service use of such an asset will continue to the exclusion of potentially higher-value uses than would be the case with private use.
The valuation of long-lived public infrastructure assets such as roads, water and wastewater services can also be tricky. Technical guidance on measurement methods often refer to ‘consumption of service potential’ as a means of determining value. However, quantifying and measuring the consumption of service potential and its impact on value can be open to subjective judgement. The level of componentisation/aggregation and other valuation inputs required in the valuation process can also be subject to wide interpretation.
These are just a few of the challenges faced by valuers when valuing specialised public service assets. There are certainly more, and we would be very interested to hear your views on the issue.
Roy Farthing is vice chairman of the International Valuation Standards Council Professional Board and is a partner in Ernst & Young’s Valuation & Business Modelling team. General comments and responses to the specific questions raised in the paper are welcomed and can be submitted by email to [email protected]. The deadline for submissions is 1 March 2013
