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Abayomi Ibiyemi Valuation Model for Eco-Compliance in the Assessment of Value-in-Use For Going Concern Industrial Processes in Nigeria.

A.O. IBIYEMI, M.Sc (Env. Magt) ANIVS, RSV, MNIM [email protected] Lecturer, Dept. of Estate Management, Lagos State Polytechnic, Lagos. Tel: 0802.306.1260

Journal of the Nigerian Institution of Estate Surveyors and Valuers, 27 (1) March 2004, pp.15-24.

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Abstract: As enunciated at the Rio Summit in 1992, physico-economic development is a

subset of the ecosystem so much so that development process cannot be considered in isolation from environmental protection ) Against this background and the emerging trends in globalization, this paper seeks to update knowledge, by critically examining our conventional existing use value basis and method of valuing industrial processes as a going concern. Findings point to the conclusion that conventional valuation approach is not eco-compliant, and may have failed the first test of rationality by adopting ‘continuous existing use’ basis without accounting for the ‘continuous environmental damage’ resulting from that use. Our valuation sustains negative externalities by ignoring the cumulative social costs of private actions. Hence, Valuers are encouraged to build capacity to improve their value-interpretative ability, and enhance their credibility. The paper develops a valuation model that integrates an EcoFactor, measured as the product of average depreciation rate for Plant, Machinery and Equipment, and the degree of the Process’ non-compliance with Federal/States’ Environmental Protection Standards.

1.0

INTRODUCTION:

It is a basic law of ecology that everything is connected to everything else; everything affecting every other thing. Also that everything has to go somewhere because nature must take its course is trite law in that branch of study. No other creature on earth, except humans, operate in the environment in disobedience of these natural laws (Ibiyemi,2003) Human activities create disutilities which are thrown back into the environment. Examples include airborne effluents, such as sulfur oxides, carbon dioxide and carbon monoxide, which are emitted from the combustion of fossil fuels (Coal, oil, and natural gas) largely from industrial processes Siddayo (1993) emphasizes that even though developing countries may see environmental concerns as being of low priority because of survival problems and sheer ignorance, they cannot ignore environmental issues while striving for economic change. The process of economic and social development, and the implied generation of economic wealth are resource intensive. The increasing pace of socioeconomic development in most countries had led to the systematic depletion of

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their natural resources with particular reference to land, water and air, erosion, pollution and desertification (Egbon,1996) There is need for a greater rationality in economic decision-making that ensures an integration of both economic development and environmental protection in an efficient allocation of scarce resources. For instance, in economic theory, the pollution market is not a self regulatory system; if industrial processes do not bear costs involved in environmental damage, private and social costs will diverge and profit maximizing decisions are not socially efficient. Such divergence between private and social costs is the fundamental cause of pollution of all types (Olokesusi and Aregbeyan,1992) Economic development, which hitherto, was defined in terms of economic growth, increased gross national product, and per capita income alone, should be seen as complimentary or mutually interdependent with environmental quality, bearing that the quality of our life support - the environment - is not affected in any way whenever we are thinking of deriving economic benefits from it. Oduwaye (2003) concludes that environmental quality has great implications on the quality of life of the people and their neighbourhood values, while Ibiyemi [op.cit] noted that human activities in Nigeria are non-harmonic with environmental unity. The significance of the appraisal of environmental aspects in valuing industrial processes, among others, is to spur investors in industrial process operations to improve their projects environmentally, minimizing and mitigating, or compensating for possible adverse impacts. It also provides opportunities to address environmental issues and provide a forum for crusade against the injustice of compensating polluters at huge social costs.

2.0 OPERATIONAL DEFINITION OF TERMS Externalities - Beneficial or adverse effects imposed on others for which the originator of these effects cannot charge or be charged, as the case may be. Environmental Externalities - Changes in the well being of individuals within the area under the demand curve, due to change in environmental quality. It can be 3

positive or negative. Uncompensated side effects of human actions are negative externalities. Plant – An assemblage of machinery and equipment Machinery – Series of machines in the Plant Complex, each performing a specific function in relation with the other machines. Equipment – Ancillary assets that are supportive to the functioning of the entreprise. e.g office equipment 3.0 THE VALUER’S CREDIBILITY PROBLEM

The valuation process has been the focus of recent debate and controversy both within and outside the profession. Cases are common of two or more valuers giving as many different capital values with wide margins of variation for the same property abound. Ogunba and Ajayi (1998) concluded that Nigerian Valuers are not consistent. Today, more than ever before, it is imperative for Valuers to be holistic in their technical valuation approaches. The Estate Surveying and Valuation profession is already facing stiff competition in all facets of its traditional areas of practice. Estate agency has become an “all comers” affair. Property management is carried out by Engineers and „Facilities Managers‟ Quantity Surveyors are agitating for Insurance valuation work, while Engineers want to be Plant and Machinery Valuers also. This problem is not limited to Nigeria. Internationally, Accountants, Management Consultants and Investment Managers are competing for Asset Management briefs (Onuorah,1998) In all of these, two reasons stand out: Firstly, the prevailing economic depression which makes it difficult to restrict professionals to their respective areas of specialization, and

secondly, inadequate training and dearth of continuing

professional development. Valuers must respond to the market and necessarily improve on long established practices in order to meet new challenges particularly in the area of valuation.

We must not continue to base our

valuations on a rigid set of methods without taking into account, local, national and international trends, consumer expenditure, demographic and environmental 4

factors. It is feared that some of these methods may soon become too irrational in the face of new property investment vehicles like securitization, unitization, etc (Onuora,1998) In the past, individual valuers have been faced with myriad of embarrassing situations that tested our credibility and the validity of our valuation approaches and methods. As a direct result of this arose the necessity for situational reassessment of our relevance in the prediction of accurate values. The accepted valuation accuracy seems to be around plus or minus five percent (Hager and Lord,1985)

Catalytic situations which tested Nigerian valuers

included the introduction of the Structural Adjustment Programme in 1986, Approach to Advance Rent Payment Characteristic in 1984, The Encounter with Accountants and Engineers in 1992 and the General Assessment of the degree of Accuracy of Valuations 1998. Okoye (1984) emphasized the need to review the capitalizing of estimated net income inflow while ignoring the rents payable in advance for the whole of the unexpired terms of leases and advised that valuers discontinue the practice of regarding advance rents as premium. In its place, he suggested that, as money in hand today is worth more than the same amount tomorrow. Valuers should treat advance rents as a capital sum to be added to the value of the future income for the remaining term in the usual way. Ikedianya (1992) proposed alternative approaches to valuation under a depressed economic situation, such as Inflation Indexation, Probability Coefficient, Inflation-adjusted Depreciated Replacement Cost and Functionally Conceptual

Approaches

with

their

appropriate

demonstrations

and

methodologies. Aluko and Ajayi (1992) while examining the conflict between Valuers and Accountants for Asset Valuations, studied 20 firms each of Estate Surveying and Accounting firms and recommended among others, the need for profitability testing when valuing assets. The focus of attention of Igboko (1992) was on valuation accuracy and the “weak grasp of valuation” among practitioners. There has been, also, the continuous focus on the seeming inability of the valuation methods to represent real market price or serve as a measure of security for bank loans. 5

The appropriate authority i.e. the Nigerian Institution of Estate Surveyors and Valuers, that is expected to adopt these new approaches and suggestions does not appear to have the zeal to review the available guidance notes to take account of some of these recommendations. According to Ogunba and Ajayi (1998) our conventional valuation methods are shrouded in mystery and indefensible to the extent that Valuers in Lagos are not interpreting their markets with anything close to the accuracy of Valuers in Britain. A Professor of Land Management, Baum (1998) raised his suspicion thus: “Property Valuation is now a mysterious art or science devoted to the practice of estimating market price subject to a series of often ridiculous assumptions. Property Valuers can no longer value property. None of this would matter if it had no impact on the market. But it does. And we increasingly realize that the property market affects the economy…..”

What will endanger the Valuers‟ reputation more than anything else is a belief that his methods are incorrect, illogical, and by deduction, capable of leading to inaccurate valuations. 4.0 VALUING GOING CONCERN INDUSTRIAL PROCESSES – BASIS AND

METHOD Industrial processes comprise of tangible and intangible assets.

Tangible

assets are definite, touchable and visible. Tangible assets are (i) Fixed assets, such as land, buildings and structures, plant, machinery and equipment, vehicles, furniture, and other chattels; and (ii) Current assets or Floating or Circulating assets i.e. assets held for a short period of time, such as cash in hand, cash at bank, stocks, stock of raw materials, work in progress, finished products, debtors, marketable securities, and bills. Intangible assets, on the other hand, are invisible; long-lived assets that are useful in the operations of an enterprise; not held for sale, and without physical qualities e.g goodwill (Ezeudu,2003) A going concern industrial process, according to Brown (1987) is an efficient, complete, well assembled layout and operational control system resulting in the most desirable synchronization of the merchandising, production, or distribution activities of the enterprise, and includes goodwill. Such an enterprise runs at adequate potential profitability. Going concern industrial processes have no

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market for which reference can be made by comparison, as in the case of gone concern, where equipment are ready to operate, but without a going business. Going concern value is the value of land and buildings, plant and machinery to a purchaser who is acquiring them for the purpose of the business for which they were designed, constructed, installed and used (NIESV,1985; Brown,1987) As may have been expected, this paper does not cover gone-concern industrial processes, in which case, each item of assets are often assessed separately from the firm by reference to the Open Market Value for alternative use i.e. the worth of each item if sold outside the business of the company on the basis of market comparison, by establishing Open Market Value as a percentage of new cost, or, by determining levels of realization of similar second hand machines when sold. The scope of this paper also do not consider any insurance cover valuation for insurance of industrial processes which are carried out in the basis of reinstatement cost of each item aggregated, with allowance for inflation. A concern is going when the value to the business is greater than the value of its tangible assets, and gone, when the business is under receivership, bankrupt, out of existence, or value to the business is less than the value of its tangible assets, irrespective of the business being in operation (Iredia, 1980)

Going

Concern Value reflects the potential uses limitations and represents the amount an owner of the operation using the property would be warranted in paying for assurance against being deprived of its use, but without premium for immediate availability. In other words Going Concern Value, Value to the Business and Deprival Value are synonymous in concept. Okoye (1986) rightly maintained that the true measure of value for specialized industrial proprietary land units or firms where there is no market, ought to be value of the asset to the owner of a functional firm of which the asset forms a part. Basis: From the foregoing, going concern valuations are normally on an existing use basis, subject to adequate potential profitability. Ideally, this basis should probably be “OMV for existing use” based on a comparison with similar properties, but where this is not possible (as is often the case) the Depreciated Replacement Cost basis is used (Okoye,1986)

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The Going Concern Value is premised on the assumption that the business has been, and will continue to be run in the current use within the framework of present management capabilities, reflecting its strength and weaknesses. As a corollary, the Plant, Machinery and Equipment (PME) is presumed to continue in their present existing use, in the business of the company. Method: The appropriate method relies on cost For Land, Buildings and Structures (LBS) - LBS as part of an established industrial business concern are rarely valued by reference to comparables because no market exists for such a property. Such properties are valued on the basis of Depreciated Replacement Cost (DRC) i.e current costs of acquiring the site and erecting the premises less an appropriate deduction for their present conditions. The technique of assessment are as follows: -Land – Estimated value of land as if vacant, by comparative analysis. -Buildings and Structures – Estimated current cost of reproducing or replacing the existing buildings and Structures. -Depreciation – The estimated accrued loss in value on account of physical deterioration, age, functional and economic obsolescence -Deduction of accrued depreciation estimate from current reproduction or replacement cost to arrive at an indicated value, -The addition of the land value to the indicated value For Plant, Machinery and Equipment (PME) – PMEs also are valued by the cost method using the DRC basis, except the PMEs which are out of use, surplus to the business or obsolete. DRC is the depreciated gross current replacement cost in order to reflect the value attributable to the remaining useful economic working life of each of the PME, taking due account of wear and tear, age and obsolescence, scarcity value and other relevant factors, including residual value at the end of the asset‟s useful life (Derry, 1991; Brown, 1991). The replacement cost (Gross value) of an item of the PME is the current cost to replace that asset with a new asset of identical or broadly similar specification, capable of providing the same output or service potential; the machine fully installed and operational i.e. including

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transportation and foundation, consultants fees and commissioning costs. Elements of betterment in efficiency are adjusted for. The existing use value of the PME is assessed by depreciating the Replacement Cost, taking account of physical, economic, functional and technological obsolescence that generally include the following: (i) age (ii) anticipated total economic life (iii) condition

(iv) reconditioning and

refurbishment (v) replacement parts (vii) residual value at the end of the period of ownership (viii) general and local over capacity (ix) incompatibility of individual PME (x) Poor plant layout (xi) Poor location of communications (xii) Poor condition of buildings housing the PME (xiii) Finite raw materials supply (xiv) Finite market (xv) Product obsolescence (xvi) Legislation and bye laws (xvii) The tenure of the land and buildings (xviii) Technical skills of operators (xix) Suitability of the PME for the use to which they are put and (xx) Strength of PME components. The procedure is as follows: - Estimate the replacement cost of each item of plant, machinery and equipment by reference to Landed Cost (Factory) plus cost of installation. Landed Cost (Factory) = C.I.F + Import duty + Surcharge on duty + Transportation to Factory + Installation = Replacement Cost C.I.F (Cost, Insurance and Freight) = F.O.B + Insurance and Freight F.O.B (Free on Board) = F.A.S + Loading Charges F.A.S (Free alongside Ship) = Ex-showroom price + Transportation to Port Deduct there from, depreciation allowance considering determinants (i) (xx) above. - The balance is the indicated existing use value of each item of PME. 5.0

ENVIRONMENTAL

IMPACT

OF

INDUSTRIAL

PROCESSES. Environmental impact is any change, or alteration of environmental condition, adverse, harmful or beneficial, consequent upon ongoing or impending human induced activities (Munn,1979) Environmental impacts have to be

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measured in relation to human and natural systems that are likely to be affected such as: (a)

Extent of change in water quality, freshwater flow, ambient air quality, etc.

(b) Extent and duration of external disturbances - noise, smoke, dust, fume during operation and traffic movement. (c)

Extent of habitat loss and effects on biodiversity

(d)

Change in plant and animal productivity

(e) Loss in environmental service levels e.g waste assimilation, erosion control e.tc. (f) Health decline

(g) Aesthetics decline

(i) Loss of physical amenities (j) Loss of cultural and political identity. Human activities produce environmental impacts and industrial/Energy and Stationary Combustion processes are the chief sources of air, water, soil/land, noise, thermal and radioactive pollution (Munn, 1979; Egbon,1996) For consideration of the above, a sample of two effluent based processes have been randomly selected together with a general impact review of others as shown in Table 1 post. (a) Cement Processes: The basic raw materials are limestone, gypsum and clay. Industrial processes for cement emits dust, smoke, particulate, oxides of sulfur and nitrogen (SOx and NOx) traces of Carbon II oxide (CO) Hydrogen Sulfide (H2S) and Carbon IV oxide (CO2) 5% of the raw materials are suspended as raw material dust, raw meal dust, kiln dust, clinker dust and also, the loading section cement dust. These dusts contain carbonates, silicates, sulfates and chlorides (Makoju,1992).

The adverse impacts are (i) Nuisance dust which

affects personal comfort (ii)

Unsightly deposits on plants is unsightly (iii)

Repeated exposure to cement dust may cause cementosis or other respiratory related diseases (iv) Dust becomes acidic in streams and rivers posing danger to aquatic life.

(v)

Cement dust reduces visibility.

The positive environmental

impact of cement industrial process is that the kiln dust, being alkaline, reduces soil acidity and it is also an animal feed additive.

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(b) Paint Processes:- Paint effluents arise from (a) Solvent washing of plant and equipment (b) Water washing of plant and equipment

© Boiler water (d) Waste

chemicals arising from rinsing of containers and equipment. Effluents from paint process contain high suspended solids, 5 – 11pH acidic and alkaline wastes, Heavy metals (Zinc, Chromiun, Lead, etc) Low Dissolved Oxygen (DO). These effluents are harmful to man, plants and property (Makoju, 1992) In respect of paint processes, there is no positive impacts of operations on the ecosystem, but the finished products are of social and economic benefits to society (Ibiyemi, 1999). Table 1 - Summary of some Sources and Types of pollutants . Sources Pollutants released into the Environment. Aerosols

Gases

Vapours

Combustion Processes

Dust fume

NO2 , SO2

Organic acids

Fluoro and Electrometallurgical Process Mineral Processing

Dust, fume

SO2, CO, Fluorides

Organic

Dust, fume

Organic

Food & Feed operation

Dust

SO2, CO, Fluorides ___

Integrated Steel Mills

Dust, particulate, fluorides

CO, gaseous Fluorides, NH3

Petroleum Refining Chemical Processes

___ Dust, mist, fume, spray

SO2, CO, NO2, NH3, H2S CO2, SO2, NH3 , H2S

Odours

Aldehydes, Hydrocarbon Odour, acids, solvents, organics

Source: Adapted from Osibanjo (1992)

Environmental impacts arising from some pollutants are indicated in Table 2 below Table 2:- Some air pollutants in Nigeria and their environment impacts S/ Pollutants N o 1 Sulfur Dioxide So2

Environment

(a) Respiratory irritant (b) Corrodes metals and stone, (c) Damages textiles, (d) Toxic to plants, (e) Precursor of acid rain 11

2

Carbon II Oxide (Carbon Monoxide) Co

3

Hydro carbon HC- Gas Smoke

4 5 6 7

(a) Aggravates cardio-vascular diseases (b) Impairs mental processes (c) Reduces amount of oxygen carried in the blood stream (d) Causes mild headache and dizziness at low concentration, fatal at high concentration. (a) Precursor of ozone (b) Some cause cancer in humans.

(a) Respiratory irritant (b) Toxic gasses (c) Carcinogens (d) Reduce Visibility Nitrogen Dioxide (a) Respiratory irritant (b) Reduces visibility (c) Toxic to plants No2 gas (d) Precursor of ozone (e) Precursor of acid rain Ozone 03 gas (a) Respiratory irritant (b) Corrodes rubber and paint (c) Toxic to plants (d) A green house gas in the troposphere Fluorides and (a) Forage contamination (b) Poisoning arsenical Source:Adapted from Nadakavakaren (1986)

6.0

ENVIRONMENTAL IMPACT AS A PROPERTY VALUE COEFFICIENT Perhaps some may argue that the social and economic benefits (impacts) derivable from end-production of industrial processes justify the resulting environmental damage. This is not so. One must note that environmental effects are persistent, often irreversible, and sometimes devastating. Disappointingly also, industrial process operations hardly have positive impacts on the ecosystem. Socio-economic impacts are transitory, and are soon to create wastes that are detrimental to the environmental media. As most environmental impacts are directly harmful to the ecosystem, attempts must be made to limit their occurence, whereas, socio-economic impacts create those conditions that may further harm the ecosystem. Here lies the difference. Of all environmental degradation factors that can result in loss of property values, such as siting errors, lack of consideration for climate in property decisions and construction, lack of use of plant materials, pollution has the greatest effects (Aina, 1992). Gaseous emission of CO2, SOX, NOX and halons, mix with water vapour and fall as acid rain. Acid rain has corrosion action on building materials such as marble, ferrous and non-ferrous copper, aluminium, zinc, leather, paper, rubber and ceramics. During the dry season, black sooth from industries, and particulate matter from asphalt and cement works settle in still air on properties

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as deposits to make their colour unattractive or present themselves on abrasive blasts in windy conditions. Okunola,(1990) reported that by 1986, Nigeria was flaring 16.8billion cubic metres of natural gas a year, resulting in annual emission of 2700 tonnes of particulate matter, 160 tonnes of SOX, 5400 tonnes of CO and 27 tonnes of NOX. At a flow station, gas flaring has led to 100% loss in the yield of all crops cultivated about 200metres from the flow station, 45% loss for crops 600m away and 10% for those 1km away. Pollution also affected the income on land by reducing the farm yield or impacting the health of the farmer Blasting of limestone affects building foundations and cause cracks on their walls (Okunola, 1990) In mining areas, pollution affects foundations, causing increases in cost–inuse arising from frequent repairs. Some industrial solid wastes exude obnoxious odour which is very repulsive to man. This may lead to immigration of poor classes and emigration of high class tenants in neighbourhood properties. When an area suffers loss in land value due to pollution, the value so lost may shift to the neighborhood community and enhance the land value in that area (Otegbulu, 1992). Pollution threatens groundwater quality and supply of drinkable water facilities to man and property. Noise pollution may result in hearing loss and its vibrations may threaten building foundations and walls (Asaju, 1992).

7.0 ECO-FACTOR Physico-economic development is undertaken at the expense of the environment and we cannot afford to look the other way. If we do, we invite grave consequences in the form of ecological disturbances and acute diseases. Valuers should play complementary and supportive, if not direct cardinal roles in environmental protection and management. One of such roles is to identify and incorporate in their valuations, measures which encourage industrial process investors to take pollution preventive measures seriously. If it is imperative for all humans to be environment conscious, then, it behoves on the professions too to

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step up the consciousness even on a wider scale, after all, our environment is irreplaceable. Adegoroye (1997) identified warped property valuation as a factor accelerating urban degradation. He said, “Lack of proper environmental considerations based on a chicanery in property valuation has resulted in over valuation of environmentally unsound properties. Victoria island sand filled plot, threatened by the sea surge, accessed by a single lane, rough pot hole rich road, flooded at every rain, deafened and poisoned by noise and fumes, to my mind, and in spite of unusual high demand prevailing, should be valued to reflect all its environmental disabilities in concrete terms”

It may also be added that, an industrial process that impact negatively on its immediate environment should not be assessed solely on the basis of its being well designed, its efficiency of operation and adequate potential profitability. „Smart‟ valuation approaches must adjust to the principles of environmental resource sustainability by moving away from the rigid “economism” of valuation. Development is not synonymous with destruction. For economic development to be meaningful, costs to the environment must be minimal. Allowance for Eco-Factor is predicated on the following principles (a) Measuring the ability of the industrial processes to minimize adverse impacts (pollution) in their immediate environment is termed

“Environmental

Pollution Prevention Capacity” (EPPC) (b)

The measuring pollution prevention standards shall be in accordance

with the provisions of FEPA‟s National Environmental Protection (Pollution Abatement in Industries and Facilities Generating Wastes) Regulations of 15th of August, 1991. c) The Eco-Factor is based on measured EPPC of the industrial processes represented as the product of the percentage of non-compliance expressed as a decimal, and the average rate of depreciation for Plant, Machinery and Equipment (PME) E-Factor = Average depreciation rate for PME multiplied by (1 – x) Where x = Rate of Compliance 100 (1 – x) =

% of Non-Compliance expressed as a decimal. 14

The E-Factor is the estimated rate of environmental obsolescence i.e. the rate at which the operation of an industrial processes is likely to impact adversely on the immediate environment. (d) There is correlation between adverse environmental impacts and Environmental Pollution Prevention Capacity (EPPC) That is, as EPPC increases, environmental impact possibilities are likely to decrease in degree and effect. (e) The rate of depreciation of PME has over bearing effect on the degree of environmental pollution. That is, older PME will pollute more than the newer ones. Hence there are linkages between the normal depreciation parameters (see 3.0 (i – viii) for valuing going concern industrial processes and degree of environmental pollution generated by PME. For example, old age, bad condition and intensity of use may increase pollution possibilities. (f) Grading of the pollution prevention parameters is based on best of judgement and long-standing experience in pollution prevention, control and management (see Table 3 post) (g) The Eco-Factor shall apply only to the processing PME as land and buildings have insignificant impacts on the ecosystem. (h) Total estimated economic life of PME is not sustainable when they impact adversely on their immediate environment. The degree by which they do this should be a factor in determining their real economic life spans. THE MEASURING STANDARD

The measuring standard is the National Environmental Protection (Pollution Abatement in Industries and Facilities Generating Wastes) Regulations of 15th of August 1991. Table 3 S FEPA Regulations: / N

Facilities Required

1 Pollution Monitoring Unit within the industrial premises with

Scaling

15

15

responsibility for Pollution Control assigned to a person or body corporate accredited by FEPA 2 Submission of a list of chemicals used in the industrial process, including details of stored chemical and storage conditions, to the nearest FEPA office

10

3 Possession of Pollution Response Machinery and Equipment . which are readily available to combat pollution hazards in the event of accidental discharges

15

4 Contingency Plan approved by FEPA

5

5 Facilities for Collection, Treatment, Transportation and final Disposal of waste generated by the industry

10

6 Availability of FEPA discharge Permit (Form B) discharging into public drains, rivers, lakes, sea, etc.

before

10

7 Installation in its system, of Pollution Prevention Equipment that reduce release of gaseous, particulate, liquid or solid untreated substances

20

8 Evidence of preparation of Environment Audit Report

10

Total

100

Source: Modified FEPA Regulations (1991)

Valuers are simply to inspect pollution abatement facilities and requirements as above, along with their normal inspection of land and buildings, PME, etc. and scale accordingly. Proposed Adjustment technique Suppose a prosperous industrial process comprising of LBS, and PME operating in the suburb of a town complied with other regulations but lacked pollution prevention equipment, has no monitoring unit, no contingency plan and pollution response machinery, and the average depreciation rate is 30% for all PME. Let us assume that the value of land and buildings is N20m and the DRC of PME is N180m. Deficiencies (See Table 3 ante) Pollution prevention equipment Monitoring Unit

% 20 15

(0.20) (0.15) 16

Pollution response machinery No contingency plan

15 5

(0.15) (0.05)

Rate of non-compliance Rate of compliance

55% 45%

(0.55) (0.45)

(y) (x)

100% (1.00) E-Factor

=

Where x = E-Factor =

Average depreciation rate for PME X

(1-x )

Rate of Compliance 100

30 x (1 – 45/100 ) = 30 x 0.55 = 16.5% or 0.165

Alternatively, E-Factor =

Average depreciation rate for PME (1 - 100 – y / 100)

X

Where y = Rate of Non-Compliance E-factor = 30 x (1 – 100-55 / 100) 30 x (1 – 0.45) 30 x 0.55 = 16.5% or 0.165

An assessment of this industrial process as a going concern will be considered eco-compliant if the total business value of the PME is derated by 16.5% to take account of environmental obsolescence. An eco-compliant value of the going concern will then be as follows: (a) Value of LBS (b) Value of PME less: Eco-Factor @ 0.165

N 20,000,000 N180,000,000 N 29,700,000

N150,300,000 N170,300,000

The going concern value of the industrial process will then be N170,300,000 instead of N200,000,000= 8.0

CONCLUSION AND RECOMMENDATIONS

Development policy makers have become more aware that failing to take costs of environmental damages into account will prove to be inefficient, and then, ineffectual in raising incomes and the well being of citizens (Morvaridi,1996) 17

Due to the failure of the market to take care of the interests of those being hurt, it is necessary for policy framework for environmental management and the promotion of development to be cognizant of factors such as the role of industrial and commercial properties, the manner of articulating and enforcing public interests and legal arrangements for enforcing liabilities, among others. Environmental impacts of industrial processes affect property values. Our valuation of going concern industrial process do not provide for obsolescence arising as a result of adverse environmental impacts of the industrial process operations which impose huge social costs on the people. The Eco-Factor input is required to account for these impacts. Accordingly it is recommended to the Nigerian Institution of Estate Surveyors and Valuers, through the Professional Practice Committee, to study all previous valuation approaches and fine tune to make them relevant to present day demands. Environmental protection by industrial process investors is not reflected through the price mechanism but manifests as increased private costs to other people and increased social costs to the community in general, without corresponding social benefit to them.

This scenario presents negative

externalities which should be „taxed‟ to internalize them, not subsidized as is the case today.

Follow-up researches on the

necessity for valuation to be

environment-friendly is very necessary now, for this is trend of the new environment order. Finally, environmental obsolescence is a necessary valuation factor input that will enhance valuers‟ credibility and sustain their relevance in this decade and beyond. Other professional bodies such as Nigerian Society of Engineers, Nigerian Institute of Quantity Surveyors, Nigerian Institute of Town Planners, and the Nigerian Institute of Surveyors are enjoined to examine areas in their practice where adverse impacts on the environment can be identified and accounted for . REFERENCES

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Adegoroye, „Goke (1997): Environmental considerations in Property Design and Urban Development and Renewal “ in Osuntokun, A (ed) Dimensions of Environmental problems in Nigeria, Published by Davidson Press, UI, pp 12-25 for Environmental Society of Nigeria in Association with Friedrich Foundation, Lagos. Aina, E (1992): “Environmental Consideration in the Valuation of Properties, Monuments & Artifacts & expectations of FEPA for Estate Surveyors & Valuers” The Estate Surveyor & Valuer, Vol 16, No. 2 Journal of NIESV, July 1992. Aluko, B. T. and C. A. Ajayi (1992), “The Estate Surveyors‟ & Valuers/ Accountants‟ Perspectives on Company Assets Valuation in Nigeria” The Estate Surveyor & Valuer, Vol. 16, No 2, July 1992, Journal of the NIESV pp 28. Asaju, A.S (1992) : “Environmental Consciousness as the Key to Sustainable Development: The Nigerian Situation” A paper presented at the conference of the NIESV. Port-Harcourt, 1992 Baum, A.E. (1998): “Forward” in Ajayi, C.A. (1998) Property Investment Valuation & Analysis. De Ayo publication, Ibadan pg VI -IX Brown, J.D (1987) : “Going Concern Value in the Congregate Care Industry & R41C” as quoted by Iloabuchi, K.O (1990) in “The Contribution of the Estate Surveyors & Valuers to Privatisation and Commercialisation of Public Companies” The Estate Surveyor and Valuer, Vol. 15No.2, 1991 Derry, C & N.R.Brown (1991) “ Knowledge content in Valuation of Plant & Machinery” and “Manufacturing Processes on Sequence in Plant & Machinery” A CPD Workshop organized by the ESVARBON in October 1991 at the CIBN, Victoria Island, Lagos. Egbon, P.C (1996): “Environmental Policy Analysis: The Case of Nigeria” in Egbon, P.C and B. Morvaridi (eds) Environmental Policy Planning, NCEMA, 1996, pp.29-31 Ezeudu C.U (2003):- “The place of intangible Assets in valuation on management “ The ESV Vol26, No.1, March 2003. pp 33. FEPA (1991) : National Environmental Protection (Pollution Abatement in Industries and Facilities Generating Wastes) Regulations, August 15, 1991, Official Gazette dated 20.8.91 Okunola, P, (1990) – Guardian Newspaper, June 15, 1990 Hager, D.P and D..J.Lord (1985) : “The Property Market, Property Valuations and Property Performance Measurement” Journal of the institute of Actuaries Alden Press, Oxford, UK pp1-27 Ibiyemi A.O (1999): “Environmental Audit Report on Olusosun Tip site Operations” An M.Sc seminar paper presented to the Center for Environment and Science Education, LASU. December, 1999. Ibiyemi, A.O (2003): “Land Resources Conservation in Nigeria: Towards Sustaining Resource Exploitation-Quality of Life Balance for Man‟s Survival” The Built Environ. A journal of the School of Environmental Studies, Lagos State Polytechnic, Vol.1, pp.47 Ibiyemi: op. cit ; pp.49 Igboko, N. P. (1992): Research Project on Valuation Methods in Nigeria with special reference to YP. Research report for the NIESV. pp 1-43

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Ikedianya, M. C. N. (1992): “Alternative Approaches to property Valuation under a Depressed Economic Situation” The Estate Surveyor & Valuer, Vol. 16, No 2, July 1992. Journal of the NIESV pp 36. Iredia, J.U (1980) – “Going Concern Valuation” Department of Estate Management Lecture series, Auchi Polytechnic, Auchi, June 1980 Makoju, J.O (1992): “The Cement Industry and Air Pollution Control in Nigeria” in Aina, E.O.A & N.O Adedipe (eds) Towards Industrial Pollution Abatement in Nigeria. FEPA, Monograph 2, Lagos, pp. 50 - 95 Morvaridi, B (1996): “Sustainable Development: The Environment and Development Debate” in .Egbon,P.C and B. Morvaridi(eds) Envronmental Policy Planning, NCEMA, 1996, ppvii - 6 Munn (1979) : Environmental Impact Assessment Principles and Procedures. Scientific Committee on Problems of the Environment of the International Council of Scientific Unions. Scope Reports, Wiley 1979 Nakadavakaren, A (1986) : Man and Environment – A HealthPerspective (2nd edition as quoted by Olaniran, N.S, E.A Akpan, E.E.Ikpemes & G.A. Udofia (1995) Environment and Health, NCF – Module 11, pp.29-32 NIESV (1985) : Guidance Notes on property valuation. A publication of the NIESV 1985. First Edition. Oduwaye, Leke (2003): “Structures of Land values in Selected Residential Neighbourhood of Metropolitan Lagos” The Built Environ. A journal for the School of Environmental Studies, Lagos State Polytechnic, Lagos. Vol. 1, pp.32 Ogunba, O.A. & C.A. Ajayi (1998): “An Assessment of the Accuracy of Valuation in the Residential Property Market of Lagos” The Estate Surveyor & Valuer, Vol. 21, No.2. July 1998. Journal of the NIESV. Pp 19. Okoye, C.S.O. (1984): “Valuation of Property Investments with Rents Payable in advance characteristic” The Estate Surveyor & Valuer, Vol .8, No 1, July 1984 Journal of the NIESV. pp 24. Okoye, C.S.O (1986): “Valuation of industrial proprietary land units which no mkt. Exist in Nigeria “ The Estate Surveyor & Valuer. A Journal of the NIESV, Vol. 10, No 2, pp 22, July 1986. Okoye: op. cit; pp.23 Olokesusi, F and J. Aregbeyan (1992): “Economics of Industrial Pollution Control in Nigeria” in Aina, E.O.A and N.O. Adedipe (eds) Towards Industrial Pollution Abatement in Nigeria, Monograph 2, FEPA, Lagos. Osibanjo O (1992): “Standards for Industrial Pollution Control and Monitoring” in Aina, E.O.A and N.O Adedipe (eds) Towards Industrial Pollution Abatement in Nigeria, FEPA Monograph 2, Lagos pp 283 Otegbulu, A.C (1992) : ” Environmental Pollution: The Ecosystem and Land Values” Environmental Pollution and Property Values – A paper presented at the Conference of NIESV, Portharcourt, 1992. Rio Summit (1992) – “Principles 4 & Agenda 21” United National Conference an Environment & Development Earth Summit, Rio De Janeiro, Brazil. June 1992

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Siddayo, C.M (1993): “Energy Investments and Environmental key Issues in Developing Countries” in C.M.Siddayo (ed) Energy Investments and the Environment, EDI Technical Materials, Washington D.C, The World Bank, pp.1-16 The Estate Surveyor & Valuer (1998): “Property Valuation & The Credibility Problem” An editorial comment. Journal of the NIESV. The Estate Surveyor & Valuer, Vol. 21, No 2, July 1998.

Abayomi Ibiyemi

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