24. Recommendations concerning the choice of criteria for design optimization and investments evaluation in marine industrial activity

The ways of the criteria transformation to the value of the commercial vessel or other real asset of marine company, differing by the type of the initial indexes (MV₁=f₁-C/i-OC and MV₂=(I-C)×(1+i)/(i×(1+f₂))-OC, Chapter 23) should be considered as a form of the economic law characterizing proportionality of the profit and investments. And while transforming the value the initial criterion is deduced in limitation.
           The value of the commercial vessel, other real asset or the property complex of marine company, used as the optimality criterion, characterizes in common both comparative and general efficiency that is required by economic optimization, since the variant of investment chosen for the commercial order should be more preferable on the one hand than other comparable variants (available for the construction or acquisition at the second hand market), and on the other hand it should be better than the generalized estimation of investments efficiency in the macroeconomic environment.
           Economic criteria in the initial form, unlike the value to which criteria can be transformed, correspond only to one of the specified conditions depending on the fact of the criterion concerns either the number of indexes of the comparative or the general efficiency.
           The investments estimation in the form of the value used as the optimality criterion partially don’t have the methodological contradictions of the criteria in the initial form, and the value at the same time characterizes both the general and the comparative efficiency, since, in any form of transformation the value is a ratio of the comparative efficiency index (profit or the net operating income) to the general efficiency index – the internal rate of return (the capitalization rate or other).

24.1. Methodological contradictions of the economic criteria applied for optimization of vessel characteristics, other real assets or marine companies complexes for the commercial order

Not all methodological contradictions of initial criteria from the point of view of their applicability as a part of optimality concept of the commercial vessel, other asset or the property complex of the marine company are eliminated by means of transformation of the criteria to value.
           In particular, for the criteria based on the costs accounting, in case of the transformation of the criteria to the value the following contradiction remains: the minimization of expenses in interests of one investor corresponds to minimization of incomes of the other investor that contradicts the interests of the second investor.
           In other words, the motivations to minimize the costs in case of systematic reproduction of these motivations can lead to the oppression of an economic environment. In essence, it contradicts the interests of each investor as well as co-investors to develop an economic environment.
           For the criteria based on the prevailing influence of incomes indexes, for example for the criteria in the form of profits, internal rate of return, profitability, etc., during their transformation to the value of the commercial vessel, other real asset or the property complex of the marine company the following contradiction characteristic as for each of these criteria in the initial form as well as for the criteria transformed to the value remains: the income maximization (or corresponding operations on the other criteria or the value, depending on the income) comes into conflict with motives to preserve and reasonable use the ocean resources which in a wide methodological sense is meant not only the water environment considered physically, but also the ocean as a reservoir in aggregate properties, including characteristics of a geographical location, climatic conditions, biological resources, minerals of ocean bottom, industrial potential of coasts, including demand for marine cargo transportations, and other characteristics which corresponds with economic or other interests of the investor in the marine environment.
           For the specified reason the purpose of maximization of incomes or corresponding operations on the indexes depending on incomes, in case of regular reproduction can lead to intensive expenditure and exhaustion of the ocean resources, that in essence contradicts the interests of the investor which motives, at first sight, is maximization of incomes, but in not to a lesser degree is interested in preservation of the ocean resources as a necessary condition of the marine company’s property complex efficiency which he owns. The methodological contradiction of the criteria based on maximization of the income, is predetermined, thus, by limitation of the ocean resources.
           If to designate the contradiction of the economic criteria based on minimization of expenses, as social and economic which is connected with oppression of the economic environment the contradiction of the criteria corresponding to maximization of the income and profit, and also dependent economic indexes can be defined as ecological, that is connected with the over–expenditure of resources, in wide understanding of the ocean resources.
           It should be noted, that the friendly attitude to marine wealth has the direct relation to economic efficiency estimation.
           In narrow definition the ecology usually means the research, measurement and preservation of natural resources. On the other hand, the listed subjects usually concern other scientific subjects (to physics, chemistry etc.) as well. And subjects of the natural resources preservation, are disconnected from an estimation of the extent of the resources use, usually have no solution as it is not quite clear, for whom the resources are saved.
           Apparently, for an ecological conclusions and recommendations there is a need for the systemic estimation of resources with the account their variety without reducing resources only to natural substances, and estimating the total needs of the investor in the marine industrial activity.
           It is possible to see the connection of economy with ecology, besides, they have related terms on the basis of the general root of the words – «eco», meaning the house, house–habitant.
           The example which has been discussed at the conference on the lake Baikal ecology is pertinent. To protect the lake Baikal wild life besides the ban of its industrial use the realization of environmental protection measures and financial investment are of great importance.
           The investment means the development of resources outside certain boundaries of the lake Baikal zone. All work and use of natural resources should be shifted outside the lake, in particular to make building materials, energy, to build communications, networks and the real estate, to develop the alternative manufacture and to move the population.
           Thus, preservation of natural resources of Baikal lake means an expenditure of other resources and it is necessary to define a parity of value of the wild life of the lake and other natural resources and to estimate, if a reasonable use of Baikal lake could be admitted and to what extent.
           It is clear, that the task of wildlife management of the lake Baikal obviously contains under itself an economic basis. The ecology issues in broad sense of preservation of the ocean wealth should be paid more attention when working out investment projects by the economic criteria.
           No doubts, that productive operation of the commercial vessel, other real asset or the property complex of the marine company and any economic activities in the ocean involve expenditure of the ocean resources in proportion to received incomes.
           Minimization of expenses, at first sight, corresponds to the ecology purposes in sense of preservation of the marine environment and resources, unlike the estimation of the criteria based on maximization of the income and profit. But actually the minimization of expenses does not have conditions and possibilities of the compromise of the investor’s needs with the account ecology requirements, since the motives of the ocean resources preservation without other motives formally lead to the curtailment of the marine industrial activity.
           In real estate economy it is known a solution concerning the compromise of the investor’s interests with the account ecology requirements. If the built up site value contribution to the total value of the real estate (as s part of building and the site) is estimated as the criterion of the real estate efficiency, the maximization of such a criterion, for example, when comparing the variants at the design stage, corresponds to reasonable use of resources – built up site.
           Certainly, it is true when the building site has to be redeemed, that is, the site estimation corresponds to the net present value of the investments consisting of expenses both for the building, and for the site acquisition. And the site value depends on all set of natural and climatic factors, as well as infrastructural and environmental factors, and on characteristics of the erected building.
           The rules of building based on a reasonable market payment for used natural resources, encourage investors to use sites rationally and to improve them.
           And in case of regular repetition of such approach the built up territories and used resources as a whole are favorable according to the ecological estimation in a broad sense, both as nature preservations and creation of conveniences encouraged by the motivation of investors to maximize the of natural resources value (in particular, the contribution of territory site value to the structure of the real estate value).
           This approach is widely accepted and used for the construction at the territories of the majority of the countries of Europe, economically developed East Asia and North America.
           It makes sense to define the methodological analogy in approaches to investments efficiency evaluation into the real estate where the balance with the account compatibility of estimations of economy and ecology of built up territories has been found to a certain extent, as well as in approaches to the estimation of investments efficiency into marine industrial activity to eliminate whenever possible methodological contradictions of the criteria based on minimization of expenses, leading to oppression of the economic environment, and on maximization of incomes and the profit, leading to the over–expenditure of the marine wealth.
           The recommendation to use the evaluation of the ocean wealth contribution into the total value of the complex including marine wealth and assets of the marine company at determination of the vessel characteristics (or other asset) can be a methodological analogy to evaluation of the investment efficiency into real estate.
           Such economic criterion will correspond to the net present value estimation of total investments provided that the access to the marine wealth is supervised and given for a reasonable market payment, for example as the tax or by the production sharing contract.

Test questions

1. Joint characteristic of the comparative and the general efficiency of commercial vessel when using the value as an optimality criterion or the economic criteria transformed to value.
           2. Methodological contradiction of the criteria based on expenses minimization (negative influence on the economic environment).
           3. Contradiction of the economic criteria based on maximization of the income and profit (the over–expenditure of resources).
           4. Economic motives in the environmental issues and protection of the marine environment.
           5. Preservation of the ocean resources with the account the investor’s motives for it reasonable use and increase of the marine wealth contribution into the marine company value.

 

24.2. Estimation of investments efficiency by the criterion of the ocean resources contribution into the structure of the vessel’s value or the value of the marine company complex of assets

To determine the optimum combination of the characteristics of the vessel, other asset or the property complex of the marine company from the investor’s point of view there is an initial statement, that the object in process of optimization can be evaluated only in a complex with the marine wealth which development is its function.
           The object of optimization by the economic criterion has a comprehensive complex character, that is includes interacting elements: investor, marine wealth, asset or the property complex studies to estimate the value or efficiency.
           The marine engineering complex value in the definition used in case of optimization from the investor’s point of view is influenced by utility of both components evaluated in common as a part of a complex, – the engineering and the marine wealth.
           The measure of utility of the contribution of the marine wealth to the complex object can be evaluated as an optimality criterion of the commercial vessel, other real asset or the property complex of the marine company.
           The evaluation of the contribution which is made by the marine wealth to the value of commercial vessel, other real asset or the property complex of the marine company, is called further «the ocean resources contribution».
           The ocean resources contribution represents a difference of the value MV_I, evaluated by the factor of the annual income I (16.12 – 16.14), in the assumption, that the income corresponds to the functional characteristics of the commercial vessel (or other asset), on the one hand, and the value MV_C, on the other hand, evaluated by the factor of expenses (16.7 – 16.9) provided that expenses C correspond to the functional characteristics.
           The methodological basis for the estimation of the ocean resources contribution is the rights of the investor. Property rights concerning marine wealth are received or accepted according to the rights for commercial vessel (other asset or the property complex of the marine company).
           The financial constrain and condition of the commercial vessel economic optimality (for the commercial order for manufacturing or purchase), other real asset or the property complex of the marine company by the criterion of the ocean resources contribution also are formulated as:

MV [MV] ,  MVI – MVC∏ max,

(24.1)

where MV – the value of the vessel (other real asset or the property complex of the marine company); MV_I, MV_C – the values as a measure of utility by the factors of the annual income I and the operating costs C; MV_I – MV_C – the ocean resources contribution to the value as a measure of utility of the commercial vessel, other real asset or the property complex of the marine company; [MV] – the boundary value – the financial constrain of the investor.
           The values which characterize the investments and a part of optimality concept (24.1) are their present values on the date of estimation. The given explanation is important, since the investments can be done not at a time, but according to a certain plan or a contract.
           As a part of the criterion function of the ocean resources contribution MV_I – MV_C (24.1) and limitations MV  [MV] the components (MV, MV_I  and MV_C) are functions of optimized variable characteristics, of parameters and external data – X, Y and Z.
           Apparently, for the estimation of economic efficiency of the commercial vessel, other real asset or the property complex of the marine company at an innovative stage of the project from among the considered conditions the limitations of financial assets for the manufacture of marine engineering are more important, and for the sufficient level of marine industrial activity development more important condition is limitation of the ocean resources.
           Between innovative and financial stages of the investment project, when the degree of intensity of the ocean resources development corresponds to functional characteristics of the marine company assets, conditions of optimality, when there is no limitations, can correspond to a transitive stage.
           In the expanded form the condition of economic optimality (24.1) of vessel, other real asset or the property complex of the marine company is formulated as:

MV+OC×i/R≤[MV], I/RI - C/RC - MV×R/RC - OC×i×(1/RI+1/RC)∏ max.

(24.2)

Limitations of the investments as a part of optimality concept depend on ways of manufacture financing.
           Concerning unlimited possibilities of financing, for example the use of the extra capital, are more characteristic for large enterprises and for steady economy when the basis for loan granting are cash flows in an company’s turnover rather then earlier saved up money resources or property,. Nevertheless, cash flows are, in their turn, the sign of the assets capitalized before.
           In the circumstances of the insufficient stability of economy or the enterprise the assets accumulated before as a rule are used as a pledge. Thus, the earlier accumulated capital, anyhow, is the financial constrain when investing. Use of the extra capital does not mean cancellation of financial constrain when determining the characteristics of the commercial vessel or other asset of the marine company for the commercial order, and financial constrain usually is referred to integral preconditions.
           When formulating an optimality in many cases the limitation is carried out in the form of equality MV = [MV]. Due to the reason, that the increase of the investments MV in the maximum limits [MV] leads to improvement of economic indexes, usually investments are equal to limiting values and limitation is carried out as equality.
           The financial limitation for the investor MV  [MV] in case of conformity of a supply and demand can be carried out in the form of equality for the following reasons.
           From the buyer point of view the net present value NPV of the commercial vessel or other real asset of the marine company is equal to NPV₁= MV– [MV], and from the point of view of the seller – NPV₂= [MV] – MV.
           The necessary compromise between the buyer and the seller interests is reached by the requirement of NPV₁=NPV₂(= 0.0), thus MV= [MV], that is a financial constrain is carried out in the form of equality.
           The supply of physically and technologically realizable variants of commercial vessel or other marine company real asset can be considered unlimited when the demand is satisfied with the economic possibilities of the investor.
           To illustrate the financial limitation and its influence on the characteristics of the vessel construction there is the model of reproduction cost (articles 5, 5.1, 6) used for the formulation of the function, that is, a surface where the financial limitation can be plotted and then the range of definition of the vessel characteristics within the financial limitation can be determined.
           The example of the function of reproduction cost, characterizing the need for investments, with financial constrain and its projection to characteristics of a fishing vessel planned to be constructed is presented on the figure (fig. 24.1).
           The limitation of the ocean resources by estimated maximal annual income [I]  proportional to the capacity of the ocean resources available for development, in case of determination of characteristics of the commercial vessel or other asset of the marine company for the commercial order is formulated as I/R_I ≤ [MV_I] или I ≤ [I] , поскольку [MV_I] =[I]/R_I .
           In case of limitation [I] of available marine wealth the condition of optimality of characteristics of commercial vessel or other asset of the marine company for the commercial order looks like:

I ≤ [I], I/RI-C/RC-MV×R/RC -OC×i(1/RI+1/RC)∏ max .

(24.3)

The concept of optimality of commercial vessel characteristics or another asset of the marine company for the commercial order (24.1–24.3) reflects the investor’s preferences.
           To estimate the financial (or functional) limitations and their influences on the characteristics of an asset of the marine company’s property complex, for example, the vessel characteristics, there should be an economic model (concerning the fishing vessel see article 15) used for the formulation of the function – a surface where the functional limitation is plotted in order to receive the range of definition of characteristics.
           The example of the functional limitation and its projection to characteristics of a fishing vessel planned to be constructed is presented on the graph (fig. 24.2).
          The methodological limitations, such as those that are shown in illustrative examples, form a field of definition of the cargo vessel optimal characteristics.
           At the same time, since in case of available innovative strategy and sufficient resources (ocean biological, cargo traffics and other marine wealth) the value of the strategy exceeds the values of financial assets, the financial credit is reasonable for investor, and the financial markets become open. The investor’s structure thus becomes complicated (articles 18, 18.2), and there are partnership of the marine companies with creditors and other parties.

The financial and the resource constrains thus lose their urgency, and the economic optimality becomes an own internal property of the marine company asset, in particular a vessel planned to be purchased or to serial manufacturing which characteristics are optimized when there are no limitations in the assumption, that there are enough financial resources, and functional needs (for trade productivity or for carrying capacity a vessel) are not limited.
           The example of the criterion function of the ocean resources contribution to the value of the cargo vessel, when there are no limitations, is presented on the graph (fig. 24.3).
           The surface of the criterion function in the form of dependence of the ocean resources contribution on fishing vessel characteristics for the autonomous operation, determined by test calculations for the accepted values of initial data, is presented graphically (fig. 24.4).

 

Test questions

1. Complex property of the object of an estimation of efficiency – the vessel (or other asset of the marine company) – and the ocean resources contribution to the value and efficiency.
           2. Concept of an economic optimality on criterion of the ocean resources contribution (the formula derivation).
           3. Financial constrain at an innovative stage of the project of investments into the marine company.
           4. Limitation of the ocean resources by the estimation of the maximal annual income as a part of an optimality concept.
           5. Financial constrain of the investor, carried out as the equality.
           6. Partnership of the marine company with the creditor as the factor of the strategy value of the marine company, exceeding the value of the extra financing.
           7. Optimality as internal property of the asset planned for the commercial order, for example, of the commercial vessel, in case of when estimation of strategy of the company exceeding the value of the loan.