26. The steps in evaluation process and quality of the economic estimation of investments in the marine industrial activity

The evaluation and the economic efficiency estimation of investments quality can be evaluated by the reliability and accuracy criteria. For maintenance of appraisal quality it is more important to have available and effective system of a quality inspection rather than its activity. And bureaucratization of the system of the quality inspection survey strongly harms the purposes of inspection and appraisal, as that.
           When there is bureaucratization of the system of the quality inspection survey of economic estimations the methodology and professional survey, critical and at the same time unbiased and joint is usually superseded, becomes impracticable.
           The same usually occurs, if the inspection is done by the unauthorized person or if there are any procedural infringements, for example, if the documents to be inspected come from a doubtful source if the documents are not filed completely if there is a pressure on the surveyor or inspected expert, etc.
           The advisory counts in the self–regulatory organizations as a rule control the quality of the economical expertise, conformity to ethics standards and resolve of probable contradictions arising between experts.
           Besides the research of the formal conformity in checked expert works, the inspection of their quality is carried out to measure (characterize) the methodological and ethical concepts in the judgments of the professional economical expertise with the concepts of the self–regulatory organization.
           Leaving outside specifications, the aim of advisory councils is to protect the professional environment where assets can be evaluated on the basis of substantiation of calculations and external data. The purpose of substantiation of calculations is the estimation of investments: the value (and its types) and the separate indexes of market value determined by independent approaches, the indexes of efficiency, the depreciation and obsolescence, the income, the operation costs, the net operating income, the commercial risks, and also the indexes which all in aggregate are determined depending on identification signs of the evaluated vessel or other asset of the marine company and on data.
           Used external data, for example some price (monetary) indexes which cannot be experimentally measured, are evaluated by the expert approaches. The source of data for an expert economic estimation is to the full materialistic only regarding measured physical characteristics.
           Since it is impossible to construct any substantiation of a value index without expert monetary data, the monetary data cannot be a result of substantiation of calculations. Therefore any economic evaluation contains the expert monetary initial data accepted without substantiation of calculations also in the case when the expert uses the network information and this way he shifts the responsibility for the expert data reliability to the other person.
           Even if monetary data are based on preceding bookkeeping entries (records), it is necessary to consider, that the preliminary decision about the monetary transactions was made by the authorized person expertly.
           The reference to the source of monetary initial data, for example, determined from the Internet network or from publications, is not a negation of expert sense of these initial data. It is a question only about shifting of responsibility for initial data to the other person who has published them, but also had no possibility to measure the monetary initial data objectively and only assume their values by the expert opinion.
           Application of the initial data in expert economic value estimation is necessary and in itself does not serve as critical judgment about reliability of an expert evaluation. Much depends on a methodological correctness of operations on expert data and on detailed development of data.
           The level of detailed development of data would correspond to economic model of an evaluated vessel, other asset or the property complex of the marine company. The detailed elaboration of the model to the extent at which the influence of the asset (vessel) characteristics, data and parameters on the value is defined, leads to formation of the sets of these values and dependences between them.
           Resultant value itself or the basic economic indexes (that is resultants indicators) can not be the initial data for estimation since from the system point of view it is required to reflect the influence of the basic identification characteristics of asset or the property complex on the value and other economic indexes.
           The general guidance of detailed elaboration of expert initial monetary data for the economic evaluation of the commercial vessel, other real asset or the property complex of the marine company can be the following:
           – Detailed elaboration of economic model of evaluated object (or object detailed elaboration) to the extent when there will be a possibility to neglect the influence of accuracy of separate monetary initial data on the general result of economic evaluation;
           – Integration of economic model, more correctly, the object integration when evaluating by a uniform model.
           The integration of economic model, in particular, leads to its detailed elaboration if, for example, in case of evaluation of the marine company’s property complex the uniform model covers also the evaluation of its assets, instead of applying the data concerning assets which are evaluated by the expert opinion separately.
           Probably, it is possible to manage without detailed elaboration of economic model, if there is a task to evaluate some batch objects for which applied instructions are available, and economic methodology itself is not applied. But such simplification is hardly applicable concerning marine commercial vessels, other assets or the marine companies’ property complexes.
           Detailed elaboration of the economic model of the commercial vessel, other real asset or the property complex of the marine company, which helps to reduce subjectivity of the evaluation, considering, that there is no possibility to do without using the expert initial data of monetary indexes and without them it is impossible to find monetary result, leads to the fact the evaluation of similar objects should be fulfilled by the methods of mathematical programming.
           When the expert study is carried out by the methods of mathematical programming, the function of the expert are not calculations, but working out of an algorithm and a program. Used data, intermediate calculations and results further should be transferred into a narrative part of the expertise.
           The expert economic evaluation itself by the methods of mathematical programming is carried out in one step after the algorithm finishing.
           The estimation of both value result, and monetary initial data determined expertly (which cannot be determined by physical measurements) by the methods of mathematical programming is made simultaneously, and there is a possibility to estimate the influence of each of monetary data on the general result in order to research the relevance of assumptions in case where the data estimated expertly and to study if the degree of model detailed elaboration is quite acceptable or not.
           Apparently, monetary initial data determined expertly can not be estimated most strictly and systematically with the account the analysis of their influence on the general result if the evaluation is not made based on methods of mathematical programming, that is if calculations of the general result of the value or other economic indexes are made manually in the narrative part of the expertise.
           Thus, the methods of mathematical programming for expert economic evaluation of rather complex (single or not batch – made) objects, such as commercial vessels, other assets or the marine companies’ complexes of the assets, one should understand as a modern systematic approach allowing to estimate as correctly as possible monetary initial data, expert economic results and to research about adequacy of used methods and algorithms rather than a possible alternative, along with other possibility – «the manual calculations». There are no such possibilities if mathematical programming is not used.
           On the other hand, the algorithm and used methods should be reported in depth in a narrative part of the appraisal and of there should be enough transferred from mathematical algorithm in a narrative part data and results to carry out the evaluation and if it is required, to reproduce the algorithm.
           At the same time the narrative part of the expertise is not equal to the available mathematical algorithm. On the one hand, the narrative part contains the analysis, explanatory and comments that the working algorithm can not contain, and other hand – the narrative part does not possess the functions of the working algorithm allowing reproduce an expert economic evaluation and possible variants in one step.
           The applied expert evaluation in the algorithmic form with the account methodological and algorithmic compatibility will be done based on methods of mathematical programming in the long view in a global network.
           In spite of the fact that the general prospects are rather clear, it should be noted that practical possibilities to change the expert work substantially and to direct it to a general analysis of the evaluated object, that, of course, will affect the structure and the form of the expert work, are far from widespread application, since there is a need for working out of corresponding methodology and, probably, the software product.
           The economic evaluation based on methods of mathematical programming opens a possibility of the electronic reporting in appraisal that promotes improvement of the quality of the economic expertise.
           There should be confusion that the electronic report means that the expert can avoid making a narrative appraisal. The narrative part of the electronic report is not an expert evaluation, but its description. The evaluation itself is thus carried out based on methods of mathematical programming in the algorithmic form and is a part of expert work along with the narrative description.
           It worth repeating, that the basic advantage of evaluation by mathematical programming methods is not that they make the expert’s work easy, but it is an additional possibility to carry out the work in one step after finishing the algorithm that allows to estimate simultaneously the economic result and monetary initial data which cannot be estimated differently but by the expert opinion. This estimation should be made within the operating algorithm general for all expert work and the algorithm should be estimated if it is correct and in its turn elaborated sufficiently.
           It allows rather objectively determining the value or indexes of efficiency of complex objects, such as vessels, other assets and the marine companies’ complexes for which there are no batch analogues and which can not be evaluated differently than by methods of mathematical programming using the rough assumptions that influence the result of expert evaluation.
           The detailed elaboration of the economic model should not be too excessive when with a small set of data in the model the capacious files of the information are generated, and when the result usually presented by single index of value or economic index is determined the information files vanish.
           In case of excessive detailed elaboration the economic model which thus is not researchable in essence becomes as though «inflated» by lot of the internal information. And the information (initial data) that come into the model from the outside is not great, also as well as the information that goes out of the model (the value result of an estimation which is single index).
           At first sight, there can be an incorrect impression, that excessively detailed economic model is more exact. Actually it can be considered as uncertain. The excessive detailed elaboration of economic model can be defined when correlating the initial data files and the results, on the one hand; with a file of intermediate calculations, on the other hand.
           If the model is rational, harmonious and researchable and corresponds to the complexity of evaluated object the specified files should be proportional.
           Excessive detailed elaboration as a drawback of the economic model structure corresponds to the excess of intermediate calculations file in comparison with data and results.
           It should be noted that in estimations of economic indexes above mentioned drawback of excessive detailed elaboration of calculation models is rather widespread and can worsen the quality of expert evaluation and reduce the trust to it.
           For example, when estimating the investments efficiency indicators for business plans with use of some packages offered for experts, from three to ten values are used as data (the income, the operation cost, rates of taxes, the currency exchange rate, some other), the result is the evaluation of the internal rate of return (or payback period), and intermediate calculations are kept within tens multi–digit tables, which cannot be checked up even if to put them in a narrative part of expert’s report.
           To avoid the excessive detailed model elaboration, even a rather complicated one, such as economic model in case of the system evaluation of the commercial vessel, other real asset or the property complex of the marine company, when working out the economic model an expert should adhere to the concepts when the files of initial data and results, on the one hand, and the files of intermediate calculations, on the other hand, correspond with each other as proportional.
           When using the Internet network to determine the data on prices of vessels or marine engineering and ocean technology one should to understand the symbols and to be familiar with the professional terms.
           Besides, it is necessary to know the symbols of various monetary units and dimensions, and also to understand the rules of conventions at record of numerals, etc. In other words, to use the information databases for the evaluation of the vessel and other assets of the marine companies’ one should have a certain erudition.
           Conformity of the data presented in a graphic form in expert’s report with the data received from the Internet on the computer screen in the form of the Internet pages can not characterize the data as reliable ones, and even there can be a doubt concerning excessive efforts of the expert to reproduce the external conformity of his report with the data presentation form of the Internet. The similar possible requirements – to issue in expert work data according to the design of the Internet page – some times can arise in case of superficial checking that doesn’t concern the essence of the expert’s report. Such requirements are not quite serious.
           The data should be transformed to a general uniform format of the expertise narrative part, which is the structured document, considering, that in process of transformation the data become a part of expert’s work of estimation of the value and economic efficiency of investments in the marine industrial activity.
           Anyway, if the data from the Internet network are presented in a format of expert’s report instead of the Internet page, there is a confidence, that when transforming the data and editing the text the expert has at least read them, that is not always obvious, if the data are enclosed to the expert’s report from the computer screen.
           Unlike the spent efforts of the expert to transform the data to a format of appraisal (with preservation of electronic addresses and possibilities to research the information in essence), it is the negligence and data presentation in the row form copied in the Internet format, without sufficient processing of format, without studying and the analysis of data, that can be a substantial drawback of the appraisal report.
           It is necessary to consider that the possibility of the checking of the data, received from the information network, has a probabilistic nature and depends on the duration of checking. It is not quite logical verify all the data used in expert’s report in the Internet network. It is necessary to check the basic part of the data which should be enough, for verification of the general tendencies essential to the evaluation.
           Eventually the possibility of data checking is lost, and the information in the network varies. If data are doubled by the different analogues or sources also there is an address for a feedback the probability of verification of the data basic part is better, and check is a verification of the majority of the data (not all ones).
           In some cases the advantage of the expert work on appraising of a vessel, asset or the property complex of the marine company is a simplicity and brevity of a statement. Really, the laconicism is a positive characteristic.
           At the same time excessive simplification of expert work is a drawback since the object is rather complex and its evaluation should contain certain sections, at least:
           – Definition of object and an estimation subject, proceeding from the purpose by the contract;
           – Description of limitations and assumptions;
           – Characteristic of evaluated property rights;
           – Description of the vessel’s characteristics and particulars (or other asset of the marine company), allowing to identify her unequivocally;
           – Description of used calculation models which should allow estimating the basic economic indexes and the value on the basis of identification signs used as initial data;
           – Data of marketing researches and statistical generalizations;
           – Calculations which could be reproduced, using a narrative part of checked expert work or can be check up by other available way;
           – Data, allowing to establish the person, authorship, qualification and the relation of the expert to subject of estimation (estimation under the contract, under the duty regulations according to employment, under the court decision, other) and to object of an estimation (who is the proprietor and in what relations he is with the expert).
           Usually excessively short expert reports of «the simplified content» on the value or efficiency estimation of a commercial vessel, an asset or a property complex of the marine company met in practice do not contain even a correct statement of the task, leaving aside the solving of the task.
           When checking the expert’s report the basic subject is the correctness and system based character of economic indicators and value estimation in dependence on variables, parameters and data.
           The typical methodological errors, except arithmetic errors and orthographic ones occurred in expert’s reports on estimation of commercial vessel, other real asset or the property complex of the marine company are usually as follows:
           1. Object of evaluation is defined incorrectly methodologically and inaccurately in respect of physical or time borders, as well as in the set of property rights.
           2. Subject of evaluation – the value standard that is a purpose for which the value is determined, which choice is subordinated to the evaluation purposes, is defined incorrectly.
           3. Independence of methodological approaches is broken – the independence of the data in the basis of standard approaches of the value estimation, applied also in a corresponding part of expertise when estimating efficiency.
           4. There is a discrepancy of approaches – the discrepancy of assumptions in approaches.
           5. Results of estimation of the value or efficiency do not depend on identification signs, that is the causal relationship is broken, and the essential characteristics of evaluated vessel, other asset or property complex of the marine company are not used or not completely used in the evaluation.
           6. If the value that is evaluated not a market, but other one, an error can be the deviation from concept of the market value as a basis of evaluation, that is, the definition of other types of the value not through the market value in the methodological or algorithmic sense is erroneous.
           7. Errors of the double accounting of data are.
           The list of the specified widespread methodological errors does not include arithmetic errors. To except the arithmetic errors in expert’s reports on the value and economic efficiency estimation the following ways can be recommended:
           – To carry out the expert work so that the calculations can be reproduced, to duplicate calculations (to repeat);
           – To simplify calculations and to represent calculations in completed form – the formula with symbols, the formula with substitution of values, the result;
           – To avoid unreasonable complication of calculations and excessive detailed elaboration of economic models;
           – To detail the algorithms of the estimation of the value and economic efficiency according to degree of object’s complexity;
           – To fulfill the expert estimation of the value and efficiency based on methods of mathematical programming;
           – Not to carry out calculations with intermediate rounding off «in a manual mode» when typing the text document.
           Typing errors, which do not lead to distortion of the results of the estimation of the value or economic efficiency, and do not lead to distortion of identification signs of evaluated asset or to distortion of methodological concepts of evaluation, for example, the value concept, and so on, are not considered to be errors.
           While estimating the economic indexes of efficiency or the value under some circumstances it is necessary to determine the error of the results. The error is not an error, but is a natural property of the results of estimation which have a probabilistic nature.
           The system reasons of estimation error of economic efficiency indexes and the value are the following:
           – The error of data which in the evaluation of commercial vessel, other real asset or property complex of the marine company characterize the methodological connections with a more general system than the evaluated object which is a part of this system;
           – Error of assumptions, in particular, the values of parameters accepted by the expert opinion, which characterize methodological connections with local subsystems of the commercial vessel or other asset of the marine company concerning which the error of economic indexes is evaluated;
           – The discrepancy (that is an expert or subjective nature) of methodological connections between the factors which influence the basic economic indexes, that is the approximate character of interrelation of factors of conformity of economic model with the laws described by it.
           To estimate the influence of an inaccuracy of data or parameters the alternative calculations of value or economic efficiency indexes for various values of data or the parameters varied within error limits are required.
           To estimate the accuracy of methodological connections between the factors it is required to use independent approaches of estimation of the value and the basic economic indexes.
           The error of estimation of economic indexes or value is determined by the absolute size (in monetary units) by alternative calculations or on the basis application of independent methodological approaches.
           The error should be estimated by the relative value or on the basis of relation with a base indicator. The dimension of the error is thus eliminated or the error is compared to the index of the same dimension.
           The base of error estimation should be defined from the point of view of the systematic approach. For example, the base of error estimation can be the value of a growing business of the working marine company or the constant value of business of the company–bankrupt, equal to the sum of assets values.
           If the durability of the object is limited, as, for example, the life time of a commercial vessel (or other isolated asset), unlike life time of the property complex – sets of assets, in some cases the base of error estimation from the point of view of the systematic approach can be the sum of the vessel value and depreciation at the present value, for example, the reproduction cost (or replacement cost) rather than the vessel value (or other asset).
           It should be considered, that the market value of the commercial vessel with the limited life time decreases from the reproduction cost to zero. Thus the error of the value estimation in the relative value will go to infinity if the value decreasing to zero within vessel life time is accepted as a base of error comparison.
           On the other hand, it should be taken into consideration that over the time a vessel (or other isolated asset) in relation to the reproduction cost collects the depreciation, which in economic sense is an index of the market value decrease. Therefore, if to assume, that the estimation error by the relative value not should grow boundless by with the vessel years when the market value decreases to zero, hence, the error of evaluation should decrease to zero by the absolute measure (monetary) – to proportionally to be depreciation of the vessel value applied as a base for the estimation of the relative error.
           But thus there is a system contradiction which is in the fact that by the monetary measure the error of the value estimation is also an error of determination of the depreciation collecting over the time of commercial vessel within the life time, and the error of estimation of depreciation cannot be equal zero by relative and absolute size.
           Hence, the market value of the commercial vessel (or other isolated asset of the marine company), becoming cheaper to a zero within life time, cannot be a base of comparison for determination of a relative error of its estimation. The same is true concerning the error estimation of other general economic indexes of the commercial vessel or other isolated asset of the marine company.
           Thus, as a base for determination of the error of value estimation of the commercial vessel (or other isolated asset) by the relative value it is reasonable to accept any economic index which is not connected with life time and does not essentially vary over the time. As a base it is possible to accept:
           – Reproduction cost;
           – Operation costs or the annual income, and also some other indexes which are formalized by the operation costs and the income, for example, the value estimated based on income approach in the assumption of the big residual life time of the commercial vessel (or other asset);
           – Criteria of efficiency used to express one economic index or another which error of determination is estimated by the relative value, considering that criteria are usually evaluated for a constructed or relatively new vessel and depended on life time insignificantly.
           It can be illustrated by an example. Let us admit that by the cost approach the value of not a new vessel is estimated 100 thousand US dollars, based on income approach – 250 thousand US dollars, based on comparable sales approach – 550 thousand US dollars, and reproduction cost (the cost of a new vessel structural analogue manufacturing in present market prices on the date of the estimation) is 15 million US dollars.
           Despite the apparent spread of values (100, 250, 550 thousand US dollars, on the average 300 thousand US dollars) the vessel value estimation by the independent approaches in comparison with the reproduction cost of the commercial vessel (15 million US dollars) or in comparison with the accumulated depreciation which is almost equal to the reproduction cost, is quite a satisfactory approximation of zero estimation, and the spread of values is acceptable and is a prompt that the estimation corresponds to the residual liquidation value of the commercial vessel.
           For the conditions of a similar example concerning the checking of the accuracy the evaluation of not a new vessel can cause much more doubts if spread of the results of evaluation by the independent approaches is: 290, 300, 310 thousand US dollars that means an incredibly high accuracy of the evaluation in comparison with the commercial vessel reproduction cost (15 million US dollars) or in comparison with the accumulated depreciation and leads to an incorrect general conclusion, that the vessel value is equal to 300 thousand US dollars whereas actually the value corresponds to zero or residual liquidation value, and the sum of 300 thousand US dollars is an error of the estimation, that is visible according to the initial example.
           Thus, to determine the error of the value estimation of the commercial vessel (or other asset of the marine company) one should the correctly determine the base of the relative error from the point of view of the systematic approach when the vessel is evaluated not in itself, but in a context of all cycle (manufacturing, equipment, productive operation and utilization) and in structure of all connections – in the property complex, as a batch production output, as a result of investment and as an object of an efficiency evaluation within the limits of the corresponding innovative project, as an object in classification of the commercial vessels and assets etc.
           The important factor of reliability and quality of the estimation of commercial vessel, other real asset or the property complex of the marine company is the independence of the expert from the parties concerned in evaluated objects.
           The expert participation in a self–regulatory professional organization opens the possibility of his independence from the parties and the customer of evaluation service that is problematic under other circumstances.
           The independence of expert estimation of the value or efficiency of investments follows from the mutual obligations of participants of the self–regulatory professional organization, only one of which in each separate case fulfills the estimation by the contract with the customer, but in approaches he is guided by the general rules and other participants of the self–regulatory organization who in this case do not make the evaluation and are independent.
           If the expert does not participate in the self–regulatory organization he is dependent on the customer or other party, since the independence of the expert is a relative concept.
           The parties and the customer should not influence the independence of the expert (concerning the conditions of payment or otherwise), therefore the following condition are considered to be inappropriate and are not quite lawful:
           – Conditions in contracts for estimation, establishing the influence of the customer on the expert concerning evaluation methodology;
           – Participation of other party in expertise of value or efficiency, except the expert which by the contract can influence the expert or the estimation;
           – Instruction to the expert to use the methodological conditions and assumptions or the rules of evaluation differing from professional specifications and standards of the self–regulatory organizations;
           – Evaluation of the commercial vessel, other real asset or the property complex of the marine company by the «internal» expert who is the employee of one of the concerned parties.
           Estimating the independence of the expert as a factor of quality of estimation of the value or efficiency of investments, it is necessary to consider the rationality of approaches to accreditation of the appraisal and consulting companies with corporate customers of expert services.
           According to the accepted practice for accreditation the expert organization usually should correspond to a certain set of requirements (the value of assets, the company’s staff, the insurance of the professional responsibility and so on). The question is in rationality of corporate customer requirements for accreditation of the expert or the company.
           Apparently, the most proved criteria for accreditation can be the signs of the expert’s (or the company) compliance with the strategy of the self–regulatory professional noncommercial organization, defined as a form of the expert participation in the self–regulatory professional organization or as the most effective organizational form of the expert company.
           Thus, the accreditation of the expert (or the company) with the corporate customer in case of the rational approach of the customer to a choice of the expert is, actually, the partnership or the associated participation of the corporate customer in the self–regulatory professional noncommercial organization.
           On the other hand, in case of the customer’s partnership with the self–regulatory professional organization the independence of experts is not broken otherwise it can be doubt if the expert is directly accredited at the corporate customer, that also essentially influences the quality of the evaluation and the economic efficiency estimation of vessels, other real assets or the marine companies’ complexes of the assets.

Test questions

1. Quality of the evaluation and the economic efficiency estimation of investments by the reliability and accuracy factors.
           2. Data accepted by the expert opinion for the evaluation.
           3. Probabilistic nature of data verification in the information network.
           4. Basic subject of verification of expert report of estimation of the value or economic efficiency.
           5. Widespread general methodological errors made in process of evaluation of the commercial vessel, other real asset or the property complex the marine company.
           6. Recommendations how to avoid arithmetic errors in the estimation of value or efficiency.
           7. System causes of an error of estimation of the value and basic economic indexes.
           8. The base of the estimation of the error and spread when estimating the value or when determining the economic efficiency index.
           9. Independence of the expert as a factor of economic evaluation quality.
           10. The relative nature of the expert independence and the importance of his participation in the self–regulatory professional organization.