| by Victor Cherubim
Ben Graham in
his book “Intelligent Investor,” has observed:
“Price is what
you pay, value is what you get.”
( November 19,
2012, London, Sri Lanka Guardian) Every price is not value, as we know from an
understanding of the true value of a business.
 |
Every item we purchase, whether it be goods, services, stocks and shares, commodities or know-how, everything has an intrinsic value. What is required for sustaining strong economic growth as well as improvement in the investment environment in Sri Lanka, according to Moody’s the global credit rating agency is sustainability of price stability.In a business scenario, the acid test in valuation is the liquidation value. A deep value screen that values a company based on its current assets minus its total liabilities has to be evaluated in relation to its worst case scenario, which is what an investor would be able to liquidate a company and still emerge with a gain, with a 33 % margin of safety.
The slowdown in
Sri Lankan exports, the fiscal space and flexibility due to the government debt
and refinancing needs together with the GDP growth from a high of 8.3% in 2011
to a projected low of around 6.8% in 2012, have all been highlighted by Moody’s
to assess our vulnerability.
The
need for a valuation of investment finance
After the near
30 years of war, the world investment markets according to some sources had a
beady eye on Sri Lanka. To satisfy our impending thirst for infrastructure development
needs, they were prepared to invest in our infrastructure, but at a price. The
war had devastated the North and East and was starved of finance for decades,
but our economy was unable to sustain this development without foreign
investment. But was Sri Lanka competitive?
Sri Lanka had to
go with a begging bowl so to speak, to the world for investment finance. World
Bank, IMF, Asian Development Bank, Chinese, Indian and other foreign lenders
were all waiting, having researched our procurement needs ahead of the end of
war. They had all done their homework well ahead of May 2009 and were eager to
supply our infrastructure finance, but watched our competitiveness.
As we came out
of our war scenario, celebrating the trophies of a hard-won victory, we were
cajoled into resolving our many pressing issues of reconstruction and re
settlement of our IDP’s, our mine clearance and our readjustment to our
newfound peaceful life. We hardly had a readymade plain of action due to the
scale our problem. If however, we did have an action plan for our transition to
peace; our approach was thwarted from inside and outside. There were pressure
groups each with their own agenda. There was lobbying for a share of the market
for infrastructure management. One of the “legacies” of a protracted war is
planning for a return to normalcy. This was no easy task.
Risk
assessment
The measure of
relative value when a nation has to carry on the day to day functions of
administration and government as well as provide capital for infrastructure
management and simultaneously attend to the needs of readjustment of the lives
of all its citizens is an overwhelming burden, particularly when opinions are
divided on the way forward.
It is an equally
embattled experience when market conditions for infrastructure development
finance are restricted. United Nations and other world nations generally quick
to respond in times of national crisis or emergency situation, like the Tsunami
aid, are reluctantly slow in response. We knew it was quite a different matter
for development aid, when protracted negotiations and terms of credit had to be
agreed. Something that appears relatively cheap investment finance on basis of
relative value can still be overvalued in an absolute sense. We were unaware of
the stringent conditions of World Bank aid.
Comparison
between Company investment and National Development Capital
In a business
scenario, the acid test in valuation is the liquidation value. A deep value
screen that values a company based on its current assets minus its total liabilities
has to be evaluated in relation to its worst case scenario, which is what an
investor would be able to liquidate a company and still emerge with a gain,
with a 33 % margin of safety.
According to
Warren Buffett, the three most important words in investing are termed: “margin
of safety.” Seth Klarman defines this as being “achieved when securities are
purchased at prices sufficiently below underlying value to allow for human
error, bad luck or extreme volatility.”
The margin of
safety is always dependent on the price paid. It could be large at one price,
small at
some higher
price. Put it in other words, it is a form of risk assessment.
Borrowing
national development capital is a much more precise exercise and it is
necessary to research international markets for comparable development finance.
In our predicament, we had no choice but to go for cheap finance that was
available at the time of our need from the world. Perhaps, our BB credit rating
was no inducement.
International
Finance
The World Bank,
IMF and Asian Development Bank were our main providers as “Lenders of Last
Resort.” But friendly nations like China, Iran, and India, not forgetting,
other Commonwealth countries, also assisted.
China was our
largest provider with packages that bundled together finance from several
different government windows, some of it concessional and some of it at market
rate, usually promoting broad diplomacy objectives. It included grants, zero
interest loans and concessional (low, fixed interest) loans.
The construction
of the Magampura Mahinda Port at Hambantota, the construction of roads,
railways, stadiums, bridges, thermal power stations all are turn key projects
and operations from start to finish with Chinese materials, Chinese labour and
Chinese technology. China’s Defense Minister in late August ’12 signed a MOU to
grant Rs.1.56 Billion (Chinese Yuan 75 million) to construct a state of art
auditorium complex at Military Academy, Diyatalawa. India provided much need
aid for other projects, particularly construction of the railway from Vavuniya
to KKS as well as construction of houses for the displaced. Most of Indian aid
is a welcome addition, in the form of grants in aid and scholarships for needy
students and training facilities.
Differences in
quality and differences in price are characteristics to be taken into
consideration.
Warren
Buffett summed it up “When you build a
bridge you insist it can carry 30,000 pounds, but you only drive 10,000 pound
trucks across it.” In the same way, the preferred criteria for future investment
capital, is “the government’s commitment to and success in fiscal
consolidation”.
