Economic study of the annual rent of the water company

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Economic study of the annual rent of the water company

Karel Nedbalek PhD., MBA, editor-in-chief „Veda a perspektivy“, doc. JUDr., Ing.,Slusovice

Abstract

In the article, the author will try to define and show the possibilities of determining the net annual rent of a large water company with a complex water infrastructure of VodalA in the Czech Republic, which is owned by municipalities with different shares, and another company owned by a private company called Voda2B, which has a water infrastructure leased for 30 years. It is necessary to work with correct economic indicators and to consider the extremely high inflation rate in 2022. One of the economic indicators the ROE Profitability, which tells us about the ratio between funds that flow from equity. The return on ROA is a monetary indicator that indicates the ratio between the funds that flow from all our assets that we have allocated in some way. Finally, the ROS profitability is a monetary indicator that tells us about the ratio between the funds that flow from all our sales. Given that the calculation used to obtain reliable statistical data of a similar nature, and in parallel sufficient safety coefficients were applied, the yield method also gives reliable data and can be considered and considered as a value corresponding to the market value. The author is inclined to the upper limit of the calculations, which is graphically marked and in the licitation spread.

Keywords: lease of water company, ROE, ROA, ROS, licitation spread.

Introduction

Problem statement. In the article, I will try to define and show the possibilities of determining the net annual rent of a large water company with a complex water infrastructure, the company called VodalA in the Czech Republic, which is owned by municipalities with different shares, and another company owned by a private company called Voda2B and has leased the water infrastructure for 30 years.

The Constitution Constitutional Act No. 1/1993 Coll. Constitution of Czech Republic, Art. 99-101, guarantees municipalities the right to own property and to dispose of it. The municipality, like any other owner who, if he owns a thing, takes care of such a thing properly, maintains it and manages it effectively, especially for his own benefit. However, municipalities as a public corporation, i.e., a subject governed by public law, must meet certain specifics that are prescribed by the state and the law when dealing with property. Territorial self-government together with state administration serves to exercise public authority in the state in the form of public administration, public authority is the administration of public affairs held in the public interest. Such exercise of public authority is imposed on the public authority by law, specifically in the case of territorial self-government, this power is delegated to it. The municipality is a public corporation. The municipality takes care of the all-round development of its territory and the needs of its citizens; In the performance of its tasks, it also protects the public interest. Law of Czech Republic No. 128/2000 Coll., about municipalities The obligation of municipalities arises precisely in connection with their status in the form of a public legal entity, i.e., that the management of municipal property must be as transparent, effective, and accessible to the public as possible. Supreme Court of Czech Republic, ruling No. 28 Cdo 3297/2008 of April 8^th, 2009 It regulates the creation, status, content and functions of the budgets of territorial self-governing units, which are municipalities. It also lays down rules for the management of the funds of local authorities. It also regulates the establishment or establishment of legal entities with the share of territorial self-governing units. The provisions of this Act also govern the management of voluntary associations of municipalities. Law Czech Republic No. 250/2000 Coll., on budgetary rules of territorial budgets

Analysis of recent research and publications. In the event that a large common property is managed, the obtained data on specific assets of Voda1A are analyzed and compared, i.e. financial resources, incomes, expenditure on simple reproduction, any resulting rent, determined according to the bidding band, to administer the property for the benefit of all citizens concerned. The aim is for municipalities to have the lowest possible prices for water-related services, including the cost of wastewater disposal at treatment stations. Last but not least, we need to consider the possible dividend profit resulting from the ownership of shares.

The aim of the article is to show how it is possible to determine the lease of large assets to another entity under conditions where there is no large diversion of funds from public sources to private companies, while determining inadequate rents. Voda1A for CZK lease the listed infrastructure for CZK 156 million per year to Voda2B and our goal is to determine whether this amount is correctly determined.

Picture 1 Water, the foundation of life Basic information about the leased property

Based on 2021 VodandlA's annual report. The company's goal is regular renewal of assets and the process of continuous services, namely the supply of quality drinking water and wastewater solutions in the spirit of environmental rules, in accordance with the quality environment.

Company VodalA, it owns the vast majority of the infrastructure, i.e., about 2500 kilometers of water and sewerage pipes, two hundred water management objects, pumping stations, water tanks, 7 wastewater treatment plants, boreholes and wells for pumping water. It leases the listed infrastructure for CZK 156 million a year to Voda2B, which has taken over 170,000 water customers. Annual Report of the year 2021, Voda1A. All the input fresh water is in the hands of the state, which means that fresh water is purchased from the state, in our case from a state-owned enterprise, where 1 m³ of surface water is purchased for about CZK 8. In 2022, after water treatment, supply through distribution pipes and subsequent purification of used water in treatment stations, the final consumer will pay CZK 94.44 per 1 m³ (1,000 liters). The difference of these prices is the margin, the gross profit of the water companies.

Main data of the financial statements of Voda1A

Assets: CZK 1 496 862 479 Liabilities: CZK 1 496 862 479 Fixed assets: CZK 1 446 020 542 Equity: CZK 1 350 945 701 Current assets: CZK 50 685 491 External resources: CZK 135 442 014 Other assets: CZK 156 445 Other liabilities: CZK 10 474 763 Revenue: CZK 154 037 829 Costs: CZK 143 021 433 Economic result: CZK 11 016 396 monetary rent infrastructure czech

Distribution of profit for 2021 to Voda1A

Profit after tax: CZK 11 016 396 Allocation to the reserve fund: CZK 550 820 Dividend payment: 0 CZK Retained earnings: CZK 10 465 576

Voda1A suggested that profits should not be distributed and that the company's funds should be cumulated taking into account the planned investments and costs of maintaining and restoring the water infrastructure and ensuring its sustainable condition and ensuring a sufficient rate of its renewal.

Graph 1: Economic result of VodalA, 2014-2021

Graph 2: s own investment, of VodalA, 2014-2021Calculation of reproduction resources

The company's discretionary funds are insufficient to cover investments and their financing is therefore dependent on the income of 2022. The generated profit must be reinvested in the planned investments and thus ensure the guarantee of their execution. Large projects are partially financed by a loan. Complete internal financing of the planned investments is not realistic with regard to the company's annual turnover. The company does not achieve the recommended water infrastructure renewal rate of 2% as recommended by the Ministry of Agriculture, so it is necessary to invest the maximum of the company's resources in the restoration and not to pay the dividends. The Ministry, as the competent body of public water supply and sewerage administration pursuant to Section 25(d) of Act No. 274/2001 Coll., on water supply and sewerage for public use and amending certain acts, is a regulatory and supervisory body of state power. The value of assets (objects and infrastructure) at the replacement purchase price of VodalA is recorded according to the VUME database. VUME (Database of Ministry of Agriculture of the Czech Republic), selected data from property records Data source: Database of Ministry of Agriculture of the Czech Republic (VЩME).

Table 1: Assets by group of VodalA,⁷ CZK 12 946 864, 337 thousand for 2019 CZK 18 424 668,189 thousand for 2020

The significant year-on-year increase in the value of assets is caused by the revaluation of the value of assets in VUME based on the methodological instruction of the Ministry of Health ref. no. 14000/2020-15132-1. Guideline of Ministry of Agriculture Czech Republic for approximate indicators of the calculation of the (updated) acquisition price of objects in sejected data of property records of water mains and sewers. The calculation made by J. CECH, Director of the Department of the Office of the Minister of Agriculture Czech Republic. Ref. MZE-28051/2022-15161 with May 11^th, 2022.

Table 2: Annual adequate funding for the restoration assets of VodalA9

Percentage year 2020 = 187 / 12 947 = 1.46%

Percentage year 2021 = 265 / 18, 425= 1.44%

In addition to the above, it should be emphasized that in addition to the above- mentioned planned investments, retained earnings finance other costs of the company, unexpected, forced investments or major repairs.

Rent means the amount for which the company VodalA, leases the water management property to the operator, the company Voda2. For 2021, the rent is approximately CZK 151.8 million. The level of rent does not represent enough funds for the renewal of infrastructure.

In addition, the following may be recognized as economically justifiable costs: Ministry of Finance of the Czech Republic, Ref.: M7-19349,2021/1601-2 and in Notice No. 01/VODA/2022 of 12 July 2021 on price regulation in the water supply and sewerage sectori, pursuant to Section 10 of Act No. 526/1990 Coll., on Prices, stipulates the goods and the method of their price regulation for all salesabutterici in the field of water supplyu a kanalizaci for the period 2022-2026.

Rent. Economically justified expense is the rent for the lease of infrastructural water management assets (movable and immovable property) which is used exclusively for the supply of drinking water from the waterpipe or for the removal of water through sewers. Rent (rent) can be negotiated up to the amount corresponding to the aggregate:

1. depreciation on leased infrastructure assets,

2. the costs incurred by the owner for repairs and maintenance of the infrastructure assets,

3. overheads associated with the management and leasing of infrastructure assets,

4. interest on loans taken out for the implementation of the renewal plan of the leased infrastructure assets,

5. a reasonable profit associated with those activities.

Graph 4: Depreciation of assets of Voda1A, 2014-2021

Depreciation of tangible and intangible fixed assets has been increasing in the long term. The reason is the increasing value of the property due to extensive investments. At the same time, depreciation generates funds that the company can spend in the future on the renewal of the existing water and sewerage network.¹¹

Depreciation of assets necessary for the supply of water or for the collection or treatment of wastewater or demonstrably serving to ensure the continuity and security of the supply of drinking tap water, up to the amount applied for the year in question, is governed by the accounting legislation and generates financial resources.

Some economic indicators of Voda2B that have some connection withe of VodalA

Table 3: indicators, 2006-2014, of Voda2B¹¹ Annual report Year 2021 of VodalA.

Table 4: indicators 2015-2021, Voda2B Indicators of economic success

Profit maximization involves a large number of ways of acting. To assess their success, a number of indicators are used, such as profit, profitability, economy, productivity and the like. Profit appears most significantly in business practice in the form of balance and calculation profits.

Balance sheet profit is measured as the positive difference between income and expenses of the period. It is an expression of the interest on equity.

The calculation gain is calculated within the planning and budgeting of costs as the positive difference between the calculation revenue and the calculation cost in the quantification of the calculation profit. A year's return on equity would represent a minimum return, sometimes the minimum return is calculated on the capital share. In the calculations, we also take into account the average wage.

The profit target can be formulated either:

> absolute as the difference between income and expenses in the financial year,

> relatively, as the proportion between the profit thus quantified and the capital employed in its formation.

Depending on whether the return on equity or total capital or the return on turnover is assessed, we distinguish:

1. return on total capital,

2. return on equity,

3. return on turnover.

The return on total capital is determined by dividing the sum of profit and capital. Return on capital indicates the amount of interest on the invested total capital for a given period. Years paid from foreign capital are an expense item.

Profitability of companies operating in water management:

We evaluate according to the following indicators: Return on equity (ROE), return on sales (ROS), or return on assets (ROA).^12,13,14

On the website of the Czech Statistical Office there are the following data: ROE (sic) Return On Equity. ROS (sic) Return On Sales. ROA (sic) Return On Assets.

Table 5: Profitability of selected indicators15

Equity income relates the profit made over the period to equity. This indicator informs about the amount of interest this time on equity.

The return on turnover is based on the ratio of profit to turnover, i.e. to the monetary value of services sold over a given period. It expresses what percentage is the profit from the achieved revenues for the monitored period. All of the above quantities are ratio indicators of a value character. The following productivity indicators, on the other hand, have a material, volumetric character.

Economy means the relation between the return expressed in money and the number of factors of production expended, again valued in money. If the calculated proportion is equal to one, the yield obtained covers the costs. If it is greater than one, a profit has been made

Table 6: Acquisition price assets of Voda1A's

Table 9: Share capital of VodalA, Annual Report 2021

Table 10: Breakdown s revenues of VodalA', Annual Report 2021

Calculation

Return on equity (ROE)

Return on equity (ROE) is a monetary indicator that tells us about the ratio between the funds that flow equity. Further, we assume that it is the entire property of the company, at the same time it represents the company's equity, then the resulting profit from the profitability of the equity will be.

By calculating we get absolutely credible data on the profit that a given device representing capital would produce in a year. Profitability is based on average statistical data in similar services in the Czech Republic. NEDBALEK, Karel. Ujma, Skoda v CR a SR, Prakticky nastin vypoctu. (Injury, damage in the Czech Republic and Slovakia, Practical outline of calculation) [monography] Slusovice: CIBE, a. s., law firm Mgr. Karel Nedbalek and father, as its 5^th publication, 2021. ISBN 978-80-908245-2-2, s. 64-65.

ROE [%] = ZPoZ / VK x 100 => ZPoZ = ROE x VK / 100 ROE = return on equity, Table 2 = 6,55%

ZPoZ = profit after tax VK = equity = 1 350 945 701 CZK Closing financial statement, Balance sheet, liabilities, Equity (year 2021) ZPoZ = 6,55 / 100 x 1 350 945 701= 88 486 943 CZK Return of assets (ROA)

Return of assets (ROA) - profitability calculated based on assets - is a monetary indicator that tells us about the ratio between the funds that flow from all our assets that we have allocated in some way or are tracking. In this case we only look at the return on assets, called ROA. If we take into account that tangible and intangible fixed assets are simply the sum of the value of the production technology and the value of real estate and are thus equal to the funds of production, then the resulting profit will result from the profitability of the production funds. By calculating, we get absolutely credible data on the profit that the asset equipment would produce in a year. The profitability of production funds is based on average statistical data in similar services in the Czech Republic.

ROA [%] = ZPoZ / A x 100 => ZPoZ = ROE x A / 100 ROA = return on assets, Table 2 = 3,96%

ZPoZ = profit after tax

A = assets, from general meeting data = CZK 1 496 861 000 Closing financial statement, Balance sheet, assets, Total assets (year 2021) ZPoZ = 3,96 / 100 x 1 496 861 000= 59 275 696 CZK

Return on Sales (ROS)

Return on Sales (profitability) is a monetary indicator that tells us about the ratio between the funds that flow from all our sales that we monitor. Voda1A has revenues more or less only from the lease of infrastructure equipment, which does not generate adequate revenues with this property. These corresponding revenues have the company that has leased this property, and that is Voda2B. Thus, we can calculate this return on sales, called ROS.

The return on sales is based on average statistical data in similar services in the Czech Republic.

ROA [%] = ZPoZ / TRP x 100 => ZPoZ = ROS x TRP / 100 ROE = return on sales, Table 2 = 5,78%

ZPoZ = profit after tax

TRP = presumed revenues, Table 5 = CZK 569 303 000 ZPoZ = 5,78 / 100 x 442 377 000 = CZK 25 569 391

Rent

The rent (rent) is equal to the value intended to cover the renewal of the leased infrastructure assets under the water and sewerage renewal financing plan and the overheads and wage costs resulting from the 2021 profit and loss account of VodalA.

Table 11: Rent calculated from ROE

Table 20: Loss of profit with different capitalization (inflation)

The calculated lost profit with a capitalization of 5% amounts to CZK 34 207 651 The calculated lost profit with a capitalization of 10% amounts to CZK 77 995 146 The calculated lost profit with a capitalization of 15% amounts to CZK 121 782 641

Net annual rent determined in several ways

Table 21: Results of determining Net annual rent of the property in several ways

References

2. Law of Czech Republic No. 128/2000 Coll., about municipalities

3. Supreme Court of Czech Republic, ruling No. 28 Cdo 3297/2008 of April 8^th, 2009

4. Law Czech Republic No. 250/2000 Coll., on budgetary rules of territorial budgets

5. Annual Report of the year 2021, Voda1A.

6. VUME (Database of Ministry of Agriculture of the Czech Republic), selected data from property records

7. Data source: Database of Ministry of Agriculture of the Czech Republic (VUME).

8. Guideline of Ministry of Agriculture Czech Republic for approximate indicators of the calculation of the (updated) acquisition price of objects in selected data of property records of water mains and sewers.

9. The calculation made by J. CECH, Director of the Department of the Office of the Minister of Agriculture Czech Republic. Ref. MZE-28051/2022-15161 with May 11^th, 2022.

10. Ministry of Finance of the Czech Republic, Ref.: M7-19349,2021/1601-2 and in Notice No. 01/VODA/2022 of 12 July 2021 on price regulation in the water supply and sewerage sectori, pursuant to Section 10 of Act No. 526/1990 Coll., on Prices, stipulates the goods and the method of their price regulation for all salesabutterid in the field of water supplyu a kanalizad for the period 2022-2026.

11. Annual report Year 2021 of Voda1A.

12. ROE (sic) Return On Equity.

13. ROS (sic) Return On Sales.

14. ROA (sic) Return On Assets.

15. CSO - CZECH STATISTICAL OFFICE, Water supply: activity related to s wastewater, waste and remediation, [online] [cit. 2021-1-6], available on the Internet: <https://www.czso.cz/documents/ 10180/142757770/1501412105.pdf/e6441b97-104a-4dcc-8fe9- b8d704674a3c?version=1.1>.

16. Annual report of Voda1A (year 2021)

17. NEDBALEK, Karel. Ujma, skoda v CR a SR, Prakticky nastin vypoctu. (Injury, damage in the Czech Republic and Slovakia, Practical outline of calculation) [monography] Slusovice: CIBE, a. s., law firm Mgr. Karel Nedbalek and father, as its 5^th publication, 2021. ISBN 978-80908245-2-2, s. 64-65.

18. Closing financial statement, Balance sheet, liabilities, Equity (year 2021)

19. Closing financial statement, Balance sheet, assets, Total assets (year 2021)

20. Closing financial statement, Balance sheet, passive Equity (year 2021)

21. Closing financial statement, Balance sheet, passive Equity (year 2021)

22. Closing financial statement, Balance sheet, passive Equity (year 2021)

23. NEDBALEK, Karel, Expert na usly zisk, hypoteticky zisk a ujmu (Expert on lost profits, hypothetical profits, and damages) [monography] Slusovice: ClBE, a.s., law firm Mgr. Karel Nedbalek and father, as its 13th publication, 2022. ISBN 978-80-908245-0-0. 189 s.

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