The Valuation of Assets as a Non-Monetary Contribution to a Water Management Company

Abstract

A large number of state-owned companies were privatized in the Czech Republic after the end of the communist regime, mostly through their transformation into joint-stock companies. The water management sector was no exception from this process. The ownership of infrastructure networks was transferred to individual municipalities, which are legally obliged to provide their inhabitants with water supply and sewerage disposal. Subsequently, the municipalities joined together in joint-stock companies to enhance their capacity to provide sufficient financial resources for the rehabilitation and development of water infrastructure and also to enable the implementation of sustainable water management strategies, which are key to environmental protection. Assets contributed to joint-stock companies in the form of non-monetary contributions serve as a basis for a proportionate allocation of shares, representing the shareholder’s share of participation in the company’s management. An analysis of the asset performance within these companies indicates the necessity of developing an optimized methodology for determining the number of shares allocated for such non-monetary contributions. This need arises from significant disparities in both profitability and cost-efficiency among municipalities, depending on factors such as population size (revenues) and the length and technical characteristics of the infrastructure networks (costs) contributed to the joint-stock companies. The authors of the article present the research project results, aimed at developing a methodological procedure for determining the price (value) of municipal infrastructure assets contributed as non-monetary capital to a joint-stock company that owns and operates water management networks, from which the secondary objective of determining the fair value of a municipality’s water management infrastructure assets based on the developed methodology is derived. The proposed methodological procedure is primarily based on establishing the ratio between the fixed and variable costs of the municipality.

A large number of state-owned companies were privatized in the Czech Republic after the end of the communist regime, mostly through their transformation into joint-stock companies. The water management sector was no exception from this process. The ownership of infrastructure networks was transferred to individual municipalities, which are legally obliged to provide their inhabitants with water supply and sewerage disposal. Subsequently, the municipalities joined together in joint-stock companies to enhance their capacity to provide sufficient financial resources for the rehabilitation and development of water infrastructure and also to enable the implementation of sustainable water management strategies, which are key to environmental protection. Assets contributed to joint-stock companies in the form of non-monetary contributions serve as a basis for a proportionate allocation of shares, representing the shareholder’s share of participation in the company’s management. An analysis of the asset performance within these companies indicates the necessity of developing an optimized methodology for determining the number of shares allocated for such non-monetary contributions. This need arises from significant disparities in both profitability and cost-efficiency among municipalities, depending on factors such as population size (revenues) and the length and technical characteristics of the infrastructure networks (costs) contributed to the joint-stock companies. The authors of the article present the research project results, aimed at developing a methodological procedure for determining the price (value) of municipal infrastructure assets contributed as non-monetary capital to a joint-stock company that owns and operates water management networks, from which the secondary objective of determining the fair value of a municipality’s water management infrastructure assets based on the developed methodology is derived. The proposed methodological procedure is primarily based on establishing the ratio between the fixed and variable costs of the municipality.