Valuation methods

There are many methods that can be used to value natural resources assets, which most commonly are divided into market methods, income methods and cost methods. Due to the different characteristics of various natural resources, some methods lack comprehensiveness and accuracy. Therefore, adjustment coefficients have been applied to correct the value of various resources, to make up for incomplete characteristics. This has resulted in the following methods.

(1) Valuation methods of the land resources Land resources refer to natural land resources.

Based on the second national land survey (the classification system of land-use status (GB / T 21010-2007)), the study explored valuation methods for five types of natural

land, including cultivated land, garden land, woodland, grassland, water area and water conservancy facilities. These methods are:

• Market comparison method. According to the principle of substitution, the market comparison method compares the land to be valued with a similar piece of land that has been traded in the market on the valuation date. Applicable corrections are made based on differences in characteristics of the land to the transaction price in order to estimate a proper land price.

• Income reduction method. The income reduction method refers to the method of land price estimation whereby the future normal annual net income (government rent) of the land is reduced to a certain land reduction rate. It is based on principle of expectation. This method is more commonly known as involving estimating the value of an asset based on the net current and future benefits derived from that asset, given a certain discount rate and discounting period.

• Cost approximation method. The method of cost approximation is mainly based on the sum of the objective costs incurred in the development of land, plus objective profits, interest, taxes payable and land value-added income to determine the land price.

• Benchmark land price coefficient correction method. The benchmark land price coefficient correction method is a method by which the results of an urban benchmark land price, along with its correction coefficient table, are used to compare the regional conditions. Individual land conditions are evaluated with the conditions of the benchmark land price according to the substitution principle. The price of the land is then obtained in the valuation period.

(2) Valuation methods of water resources Water resources assets are the measurable water resources that can bring economic benefits to economic entities, including groundwater and surface water. The study explored various methods for water resources valuation. These methods are:

• Shadow price model. This model values water resources using the constraint optimization approach²⁴ and takes the maximization of economic benefit and profit of resources as the target value and makes use of a quantitative analysis of resource use value by adjusting a unit amount of resources, holding all other things equal, to calculate the marginal income of resources. Water price in this case is the marginal income. Different resources have different marginal incomes, which characterize the shadow price of resources. For consumers, it expresses the consumer’s willingness to pay and reflects consumer’s marginal payment ability for the product needed.

• Affordable water price model. The present water price is relatively low in China. A proper adjustment of the water price can incentivize users to save water and relieve the prominent problem of shortness of supply. An important consideration regarding water price reform is user affordability.

• Supply and demand pricing model.

According to the relationship between the demand and supply of water resources, the price of water resources is obtained after deducting the production cost and profit inherent in the process of water resources development.

• Fuzzy mathematical model. There are many factors that affect the value

of water resources, including water availability, water quality, and the degree of exploitation. When these factors are used to evaluate the value of water resources, they are regarded as fuzzy events. In the fuzzy mathematical model, key indicators are assigned and modelled to quantify the value of water resources which are used to obtain the price of water resources.

• Computable general equilibrium model.

Combining linear programming, input-output tables, and econometrics, this method describes the relationship between quantity supply and demand and price changes. To a large extent, this method relies on the input-output method.

The calculation process includes multiple optimization methods that ensure that the supply and demand of commodities, factors, and capital markets reach a balance. The water price is determined by this method.

The shadow price model can reflect the equilibrium price of supply and demand within the range that is set for the China water resources endowment, which the range is three to five percentages for domestic water use and 20 to 30 percentages for agriculture water use. From the perspective of utilization, it can meet the utility of the user. From the perspective of supply, the water supplier needs to obtain the water supply service.

The minimum reward is an equilibrium price.

Compared with other value methods, the shadow price model can reflect the true value of water resources to some extent. Under the conditions of a complete market economy, the shadow price of a commodity is equal to its market price. Therefore, this study proposes the shadow price model to calculate the value of a unit of water resources assets.

. . . .

24 Under constrained optimization approach, the shadow price is the change in the optimal value of the objective function of an optimization problem obtained by relaxing the constraint.

(3) Valuation methods of forest resources National governing bodies, such as forestry enterprises and public institutions own and/

or control the property rights of some areas of forest resources in China. This produces economic benefits for these governing bodies as these resources can be measured monetarily and they are listed in forest resource asset accounting. In the study, forest resources are divided into forest resources and forestland resources. Forestland resource accounting methods mainly include the market transaction comparison method, the forestland expected price method, the annuity capitalization method and the forestland expense method. Forest tree resource accounting methods mainly include the market method, the income method and cost method.

• Market transaction price comparison method. The market transaction comparison method refers to the method of evaluating the value of forestland. This is done by selecting more than three reference transaction cases with the same or similar conditions based on the current market price and comprehensively considering the representativeness, suitability and accuracy of evaluation data and evaluation parameters.

• Forestland expected value method. In order to estimate the value of forestland assets, this method refers to the method of discounting and accumulating the net earnings in infinite rotation periods under the initial state of afforestation on non-forestland. The sustainable use of forest resources is considered as a precondition and the same revenue and expenditure on the forestland in each rotation period is the assumed condition,

• Annuity capitalization method. The annuity capitalization method solves the value of forestland assets according to a proper rate of return on investment, which

is calculated by taking the realization of sustainable use of forest resources as the precondition and the annual stable revenue of the evaluated forestland as the return on capital investment.

• Forestland cost value method. The method of determining the monetary value of forestland is based on the cost required to obtain the forestland and maintain the existing state of the forestland unchanged.

• Market approach. A market approach means that the forest resource values are estimated using market prices, where the actual price of forest resources as traded in markets is taken as the value of a unit of forest resource assets. This kind of method is only suitable in areas with complete or mature timber markets.

• Income approach. The income approach is an approach that predicts the normal net income of forest resources in the future, selects a proper rate of return on investment and conducts summation operations after discounting to the date of valuation, so as to estimate the value of forest resource assets.

• Cost approach. A cost approach is an approach that regards the cost to be spent in maintaining the quality of forest resources unchanged as the value of the estimated forest resource assets. In forestry, the replacement cost approach is usually used, namely, the cost needed to re-create a forest resource asset similar to the estimated forest resource asset according to the present labour cost and production level. These costs are taken as the basis for estimating the value of the target forest resource asset.

In order to calculate the value of forestland resources, SEEA-2012 recommended the market price method and the net present value method. However, the difficulty is that the forestland market in China is not a perfect

market owing to barriers to market entry and the fact that the market transactions are not representative. Hence, it was argued that the market price method is not suitable for the national conditions in China. It was also noted that the “Technical Specification for Forest Resource Asset Evaluation (2015)”, which is currently used by the forestry industry in China as a baseline for valuation, selected an annuity capitalization method owing to its consistency with the principle of the net present value method, which is recommended by SEEA-2012 for forestland value accounting.

Regarding the calculation of the value of forest resources, the value of forests is calculated according to the three types of arbor forests, economic forests and bamboo forests. The valuation method of arbor forests is mainly based on the market method and the income method. The annuity capitalization method is adopted, and the replacement cost method can be adopted for new immature bamboo forests.