No missing assets

Apropos 8216;Missing assets and the power game8217; by Gajendra Haldea IE, July 2, the successful unbundling of Delhi Vidyut Board DVB and privatisation of distribution is the fruit of a massive, transparent collective effort involving many agencies and individuals, professional consultants and outside experts. Serious discussion and criticism are welcome, but frivolous and specious arguments and simplistic point scoring are out of place.

How should we value the assets of a running concern that is being disinvested? The Disinvestment Ministry publication, Disinvestment: Policy and Procedures describes four methodologies 8212; Discounted Cash Flow method, Balance Sheet Method, Transaction Multiple Method, Asset Valuation Method. It goes on to say, 8216;8216;While the first three are business valuation methodologies generally used for valuation of a going concern, the last methodology would be relevant only for valuation of assets in case of liquidation of a company8217;8217;. DVB8217;s distribution business has rightly been disinvested as a going concern, as its assets can only be used for the licensed business of electricity distribution. Therefore business valuation has been done essentially by the Discounted Cash Flow method, discounting future cash flows to present value, as Haldea in fact concedes, though without realising that it makes his concern with the value of physical assets irrelevant. But I am at a loss to understand how he got the impression that the valuation done on this basis has been reduced by Rs 733 crore by way of accumulated depreciation. This is completely untrue. Obviously, the value assigned to the generating and distribution companies formed out of DVB was deducted when arriving at the value for the distribution companies, which accounts for the difference between the total value assigned to DVB and the value assigned to the distribution companies.

Before DVB filed its tariff application with the DERC in January 2001, its consultants found that the capital works in progress had not been listed in the fixed assets for many years. Thus the works in progress in the same year appeared much in excess of the gross value of the assets, which was not the reality. Therefore, while applying to DERC, DVB decided to capitalise 80 per cent of the works shown in progress at the end of 1997-98. This stepped up the gross value of assets at the end of March 2002, as per the DERC tariff order, to Rs 5403 crore. But the conclusions that Haldea draws are fallacious, for the following reasons:

As Haldea admits, the value of assets based on potential earnings is the basis on which distribution companies have been disinvested. There is no correlation between this value and the cost of the asset or its book value. The latter is really irrelevant.

Even if such irrelevant comparison were to be made, it is the net, and not gross, value of assets that would be relevant since the gross value excludes depreciation. Had DESU and later DVB been capitalising the works in progress annually all along, then the value of Net Fixed Assets would have been reduced because they would have attracted depreciation; moreover, in the past, DVB had a low depreciation rate of 3.5 per cent while the DERC has permitted only a much higher average depreciation of 6.8 per cent.

We are confident that the valuation of DVB8217;s assets, and the whole process of disinvestment will stand any objective and fair-minded scrutiny.

The writer is CMD, Delhi Power Supply Co Ltd and former chairman, DVB