17th London Group Meeting
Stockholm, Sweden
13-15 September 2011
Valuation of water resources
and water infrastructure assets
in Australia
Peter Comisari, Lilina Feng and
Brendan Freeman
Link: http://unstats.un.org/unsd/envaccounting/londongroup/meeting17/LG17_12.pdf
Session overview
• Background
• Water resource valuation study
• Valuing water infrastructure
• Appropriate water infrastructure valuation methods
• What the International Statistical Standards say
• Recommendations
Background
• Both the 2008 SNA and SEEA-2003 recommend monetary
valuation of water resource stocks, but provide only limited
insight as to how this could be achieved.
• Why value water resources?
• Water has several special characteristics
– Trading is only possible where gravity supports bulk movement
– Water is an essential product
– Water exhibits public good characteristics
• Australia’s water supply business has unique characteristics
– Water prices are tightly controlled by state and territory governments
(IPART, ESC, ERA etc…)
– Australia’s urban water stocks are large by international standards
Study: The value of water resource
stocks for selected entities
• A total of 13 water suppliers were profiled – five urban,
eight rural, and two hydro-electricity suppliers
• Valuations for the water resources owned by the selected
firms were attempted using a methodology based on NPV
of expected resource rents
• Gross Operating Surplus (GOS) was used as a starting
point from which to calculate resource rents
• Hydro-electricity suppliers were included in the review as a
point of comparison
Results – Urban Suppliers
•
Negative resource rents are indicated with the ‘-’ sign
Results – Rural suppliers
•
Negative resource rents are indicated with the ‘-’ sign
Findings
• Negative resource rents were generated for the majority
of water suppliers.
• Average Rates of return (RoR) on produced capital for
water suppliers was comparatively low to the market;
Urban – 4.6%, Rural – 1.3%
• Net operating surpluses for many water suppliers were
low relative to the value of the water infrastructure assets
used in the production process
• Average RoR on produced capital for Hydro-Electricity
firms was considerably higher at 15%
– Higher RoR likely due to the greater degree of autonomy hydroelectricity firms have in setting the prices they charge
Issue: valuing water infrastructure
• Determining the most appropriate valuation basis for
water infrastructure assets is critical to the process of
valuing water resource stocks.
• The choice of valuation approach can result in
significantly different valuation figures for the same
assets
• The SEEA-2003 and SEEA Water provide no direct
guidance on the question of water infrastructure asset
valuation
• The ABS is committed to publishing annual water
accounts and the inclusion of values for Australia’s water
infrastructure assets has been proposed
Why value water infrastructure
(WI) assets?
• Measure the net worth of a water producing
business
• Establish a sale price for WI-Assets
• Determine a replacement cost for WI-Assets
• Generate estimates for returns on WI-Assets
• A basis for generating ongoing measures of
productivity
How to value water infrastructure
assets
• ‘Fair value’ (revaluation) preferred to ‘Historical Cost’
– Reflects the true economic worth of the asset
• Fair value defined by the Australian Accounting
Standards Board
“The amount for which an asset could be exchanged, or a
liability settled, between knowledgeable, willing parties in an
arm’s length transaction.” (AASB 1 First-time adoption of the
Australian Accounting Standards, para.23)
“If there is no market-based evidence of fair value because of
the specialised nature of the item of property, plant and
equipment and the item is rarely sold, except as part of a
continuing business, an entity may need to estimate fair value
using an income or a depreciated replacement cost approach.”
(AASB 116 Property, Plant and Equipment, para. 33)
Viable fair value valuation bases
• Observed Market valuation (OMV)
Value is determined using market based evidence
• Net present value (NPV)
The present value of future cash flows expected to be
derived from an asset or cash-generating unit
• Depreciated replacement cost (DRC)
The current replacement cost (cost to construct an asset
that performs the same functions today) net of
accumulated depreciation
Functionality of each basis
• Market valuation (OMV)
The highly specialised nature of water infrastructure
assets means a market price is unlikely to exist
• Net present value (NPV)
Preferable if the future economic benefits (commercial
return) of the asset are primarily dependent on its
ability to generate a net positive cash inflow
• Depreciated replacement cost (DRC)
Preferable if the benefits expected from holding the
asset are not reflected in the income stream of the
water supplier
International statistical standards
and the valuation of fixed capital
• SEEA-2003 and SEEA Water
Provide no direct guidance as to the appropriate method of
valuing water infrastructure assets
• 2008 SNA
In the absence of an OMV, an asset valuation equivalent to
the DRC is recommended
• IMF – Government Finance Statistics Manual (2001)
Provides clear support for a valuation based on DRC, in
the absence of observable market prices
• ASNA
Uses the Perpetual Inventory Method (PIM). The principles
and techniques contained in the PIM are consistent with
the DRC method
Observations made of the water
supply business in Australia
• Water suppliers operate under a regulatory regime, which
aims to ensure low water prices
• As such, much of the benefits of using the WI-Assets are
not reflected in the expected future income streams of
water suppliers
– Many of the economic benefits of WI-Assets in fact reside in their
ability to provide a cheap, safe & reliable water supply
• Businesses in the water industry, therefore, usually
generate minimal or no profit – although they view
themselves as for-profit
Recommendations
• It is recommended that water infrastructure
assets be valued on the basis of DRC
• The DRC Method provides a meaningful basis for
deriving estimates of the full return on investment in WI
• Adoption of the DRC method is entirely consistent with
the principles underpinning the preferred valuation
basis of the SNA 2008 and, therefore, Australia’s
official economic statistics
• DRC is also consistent with the methods set out in the
SEEA-2003. Therefore, it provides the preferred basis
to value WI-Assets with the ABS water Account
Contact details:
Peter Comisari:
Lilina Feng:
Brendan Freeman:
peter.comisari@abs.gov.au
lilina.feng@abs.gov.au
brendan.freeman@abs.gov.au