Plant, Machinery and Equipment Valuation:

Challenges in Ethiopia

i
Plant, Machinery and Equipment Valuation:

Challenges in Ethiopia

Hailu Worku

Prof. Daniel Kitaw, Asfaw Regassa

Copyright © 2016 by Hailu Worku Obsse

All rights reserved. This book or any portion thereof may not be reproduced or used in any manner whatsoever
without the express written permission of the publisher except for the use of brief quotations in a book review
or scholarly journal.

First Printing: 2016

ISBN: 978-1-365-26786-4

LULU Publishers

iii
 Dedication

1998 to 2003 GC was different time in my life

This Book is dedicated to those who helped me pass those days

Yordanos Embaye Emru

Hailemariam Desalegn Boshe

Alemayehu Belayneh Bezabih

Anteneh Bekele

Ashebir Balcha

Meraawi Taye

Wondowesen Abuboker
 Contents

Acknowledgements .............................................................................................................. xi

Foreword ............................................................................................................................... xiii

Preface ..................................................................................................................................... xv

Chapter 1 ­ Introduction ..................................................................................................... 1

Background and Context ................................................................................................. 1

Statement of the Problem ............................................................................................... 2

Objective ............................................................................................................................... 3

Scope of the Book............................................................................................................... 3

Significance of the Study ................................................................................................. 4

Organization of the Book ................................................................................................ 5

Chapter 2 ­ State­of­The­Art............................................................................................... 6

The Art of PME Valuation ................................................................................................ 6

Basic Concepts in PME Valuation ................................................................................. 8

Current Approaches to PME Valuation .................................................................... 11

 The Amount and Role of PME Valuation in the Economy .................................. 19

Open Debate and Concern on Current Approaches............................................. 22

Summery ............................................................................................................................ 25

Chapter 3 ­ Methodology ................................................................................................... 26

Literature Review............................................................................................................ 26

Methodology description .............................................................................................. 27

Instruments and Tools Used ........................................................................................ 38

Chapter 4 ­ Finding and Discussion ............................................................................... 42

Demographics of Respondents ................................................................................... 43

Summary of the Analysis and Interpretation ........................................................ 66

Global Experience – Valuation Standards and Law ............................................. 66

Conclusion .......................................................................................................................... 69

Chapter 5 ­ Conclusion and Recommendation .......................................................... 70

Problem Statement and Methodology ..................................................................... 70

Summary of Main Findings and Conclusions ......................................................... 70

viii
 Recommendations .......................................................................................................... 72

Future Work ...................................................................................................................... 76

Appendix I. Questioner ......................................................................................................... i

Section – I: Demographics ................................................................................................ i

Section – II: Scaled Questionnaires ............................................................................... i

Section – III: Open Ended Questionnaires .............................................................. viii

Appendix II. Summary of Responses to the Questioners ..................................... xiii

References .............................................................................................................................. xx

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 Acknowledgements

This Book is the direct result of the thesis study which I did for my Masters’ Degree in
Industrial Engineering. I am highly indebted to many people who helped me to accomplish
with magnificent performance. I would first like to thank my mentor Prof. Dr. –Ing Daniel
Kitaw (Ph.D.), the head of the School of Mechanical and Industrial Engineering at Addis Ab-
aba University. The door to Prof. Daniel office was always open whenever I ran into a trouble
spot or had a question about my research or writing. He consistently allowed this Book to be
my own work but steered me in the right the direction whenever he thought I needed it.

I would also like to thank my project co-Advisor Mr. Asfaw Regassa (Ph.D. candidate)
who was committed to providing me with every answer to my questions. The support by Mr.
Kasu Jilcha (Ph.D. candidate) is beyond words to me. He always presents new challenges and
ignites new energy in me. The encouragement and support from Mr. Yitagesu (Ph.D.) Mr.
Haileluel (Ph.D. Candidate) and Mr. Gezahagn (Ph.D. candidate) are invaluable to me.

I would also thank Ato Solomon Afework, the President of the Ethiopian Chamber of
Commerce and Sectorial Associations (ECCSA) and his good office for the collaborative sup-
port they provided me.

I would also like to thank the experts and valuation engineers who were involved in the
survey for this research project: Mr. Birhanu Teferi, Mr. Abdulkerim Umer, Henok Tsegaye

xi
and all other in Ethiopian Banks, Insurance, and Revenue and Custom Authority offices. With-
out their passionate participation and input, the survey could not have been successfully
conducted.

I would also like to acknowledge Ashenafi Getachew as the second reader of this Book,
and I am gratefully indebted to his for his very valuable comments on this Book.

xii
 Foreword

Plant, Machinery and Equipment Valuation was a huge concern for me since the first day
of employment as a Valuation Engineer in one of Ethiopia’s big Banks because of many
things. First I had no sufficient training, second there was no valuation manual and so on.

Today many engineers in many countries do suffer from the same reasons. Some get in
to trouble because of miss-much between their estimated valuation and actual market price of
the Plant, Machinery and Equipment. Others do some illegal activity of over or underestima-
tion for sake of gaining corruption gifts or attacking investors. Investors like to pay tax and
the government wishes to collect it in a fair amount. However, the tax estimation engineers
play the game or game is played on them by others.

This Book which is the direct result of my thesis study; therefore shows how I have iden-
tified challenges of Plant, Machinery and Equipment and finally clustered problems in seven
categories. The Book is important first for students by showing them how a thesis problem
can be formally be established, data is gathered, analyzed and conclusion forwarded. Second,
policy makers can use it as a starting point for further national level Plant, Machinery and
Equipment Valuation related policy and program designs.

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 Preface

Unlike to its age in history and its role in the economy, Plant, Machine, and Equipment
(PME) Valuation remained challenging primarily due to its partial art and partially science
nature where the art side is playing more role. In theory, there are five methods of estimating
the value of PME and three of them are practiced widely in Banks, Insurances, Government
Offices, and Inland and Customs Authority. When it comes to the practical situation of Ethi-
opia, all of these methods, however, face an enormous amount of challenges. This Book aims
to investigate and identify the challenges of PME Valuation in Ethiopia. To achieve this ob-
jective, both qualitative and quantitative approaches were used. After critically investigating
the case the Book had identified and clustered problems in seven main categories.

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Plant Machinery and Equipment Valuation: Challenges in Ethiopia

Chapter 1 - Introduction

In all Ethiopian financial Institutions –Banks, Insurances as well as Inland Revenue Au-
thority, Plant Machinery and Equipment Valuation (PME) is conducted either in one or
combination of the traditional five methods. Three of them are very popular in among the
PME valuation engineers. The three broad approaches to valuation, which are usually applied
in Plant Machinery and Equipment Valuation, are:

x Income Approach

x Market Approach

x Cost Approach

These valuation methods are employed in arriving at the final estimated value of all
Plants, Machinery, and Equipment as well as vehicles in Industrial, Agricultural or Service
Enterprise.

Background and Context

Broadly speaking PME Valuation research frameworks stretches along a continuum. At

one end, investigators from the business field such as business accounting are primarily con-
cerned with financial issues; at the other, investigators from engineering field deals with it

1
from engineering economics perspectives. Of course, neither type research proceeds inde-
pendently of the other. Across this broad continuum of research, Damodaran (2006) showed
the dark side of Valuation in its associated practices and methodologies. The present book in
located in the middle and endeavors to shade light on the darkness by first – identifying critical
issues for dialogue as a base for collaborative effort both by governmental and non-govern-
mental bodies, second – organize and cluster problems under similar category and –finally
forward recommendations for creating fertile ground to solve the problems from industrial
engineering perspectives.

Statement of the Problem

Despite its role in the economy, current industry practice of PME valuation methodology
in Ethiopia has many challenges. A little attention is paid by concerned body –especially the
Government and Academia. There are quite few research works undergoing in the area.

Critical financial and legal actor organizations in the country such as Banks, Insurances,
Custom and Inland Revenue Authority, Private Investors and others bodies heavily depends
on Plant, Machinery, and Equipment Valuation. Even though PME Valuation is conducted by
Chemical, Electrical, Mechanical, or Industrial Engineer –no theoretical or practical training
provided in Ethiopian universities. As a result, the valuation reports produced usually lack the
quality to meet its intended objectives. Above all, the ethical concerns on PME valuation are
very high. These problems and challenges need to be enumerated and quantified systemati-
cally and scientifically so that concerned body can address. Due to their inherent
characteristics, the current problems demand national level dialogue.

The accuracy of currently practiced valuation methodologies is much below the interna-
tionally accepted practice. Therefore searching a new methodology or tool especially – that is

2
based on artificial intelligence is a timely issue for Ethiopia now. That methodology needs to
be with economically fair investment and technologically realistic.

Such newly developed technologies always demand a well-crafted and exhaustively

planned implementation strategy. Usually, in most developing countries the problem in ac-
quiring new technology lies on the implementation phase. In general, the statement of problem
of this Book could be summarized as:

x Where is PME Valuation in Ethiopia?

x What are the limitations of the Current Practices in Ethiopian context?

x What alternative methods can be applied to solve the problem?

Objective

The main objective of this study is to identify and enumerate current challenges of PME
valuation in Ethiopia and forward recommendation for actions that can help to improve PME
valuation in Ethiopia.

Scope of the Book

As described below; the scope of the Book covers four main achievements. First, the
Book Enumerates and quantify current challenges of the current industry practice of the Plant
Machinery and Equipment Valuation. Both primary sources such as –interviewing valuation
engineers and secondary data sources such as –scientific journals, periodicals and books were
consumed to identify, organize and analyze the current challenges of Plant Machinery and
Equipment Valuation.

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 x Investigate existing PME Valuation Challenges in Ethiopia

x Recommend actions to improve PME valuation in Ethiopia from Engineering

Perspectives

Significance of the Study

The significance of this study is enormous. Frist, assessing the existing practice of PME
Valuation in the country is broad but critical and timely issue. The findings and implications
are crucial to creating national dialogue in among government and non-government bodies
because –Policy makers can use it as an input, –the national bank can be convinced about the
importance of standardizing the sector, –academic institutions and the scholars realize the
need for research works and can come into agreement on development of new syllabus, –
courts can know benefits of resolving cases through standardized approaches, –Valuation Pro-
fessionals will begin to contribute better and harness what they deserve.

Second, Plant, Machinery, and Equipment valuation are very expensive and time taking
processes in Banks, Insurances, Courts, Inland Revenue and in the public sector as a whole.
Through the implementation of the proposed solution, it is possible to save a great deal of
time and money. Reducing the level of subjectivity in the critical issue to resolve the ethical
dilemma associated with the profession is a crucial achievement by that –Banks gets better
confidence in collateral values, –Investors get what they deserve out of their property.

Third, recently emerging environmental concerns are critically affecting the price of
Plants, Machinery, and Equipment in an unexpected way. Some Plants, machinery or equip-
ment can get obsolete while other get contemporary due to a ban from environmental policy
(Lorenz et al. 2008). Traditional methods have no means of comprehending with such newly

4
emerging challenges. The proposed method is capable of tackling such issues at a given time
for a given item during valuation.

Finally, the researcher is able to learn much from active engagement with banks, insur-
ances, consultant firms, tax authorities, and researchers. The stakeholders of the topic are quite
many in number; that enables to widen the perspective of the student as an active researcher.
Apart from enormous lessons learned by the researcher during the course of the study, the
data gathered for the study was suitable to write a number of articles on the topic.

Organization of the Book

This Book consists of four additional sections. In section 2, after placing the current study
in the context of related literature and then research methodology are established one after the
other. In section 2, the theoretical underpinnings of Plant, Machinery, and Equipment Valua-
tion are discussed to guide the inquiry. This includes a critical review of the known techniques,
current practice, and the place of the new PME Valuation in practice and standardization.
Section 3 deals with the methodology and research design, philosophical foundations, theo-
retical and procedural description of instruments used in the study to collect, present, and
analyze data.

In section. 4, the findings and results of data analysis of the current practice and chal-
lenges of PME Valuation in Ethiopia are covered. Last section contains the conclusions and
reflective evaluation of the study and implies further research agendas.

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 Chapter 2 - State-of-The-Art

As stated earlier, PME Valuation is critical to a nation by fostering or hindering the economic
activities of agriculture, manufacturing and service industries. Despite this critical role, the current
practice has enormous limitations and challenges.

This section presents the theoretical and empirical constructs of PME valuation from research
works of scholars and experts in six sections. The first sections introduce the art of PME valuation.
The second section presents the Basic concepts associated with PME valuation. The third section con-
tinues to explain the amount of PME valuation and its role in the economy. The fourth section shows
current concerns on current PME Valuation approaches. Section five presents a review of scholarly
works related to the application of artificial intelligence and a central database in PME valuation. Fi-
nally, the section concludes by summarizing the key implications of different scholars.

The Art of PME Valuation

As per Sahray (2009), Plant Machinery and Equipment valuation is a multi-disciplinary subject
involving Law, Economic, Accountancy, Insurance, Planning, Environmental science, Industry Pro-
cessing/Engineering and etc. over and above, techniques of valuation, the valuer has to work as a team
leader and he/she must possess the expertise to weigh appropriately all information collected from
various sources Budhbhatti(2002). Alico (1989) elucidated that Valuation of Plant, Machinery, and
Equipment may generally be required for many purposes including the following:

x Mergers and Acquisitions – Pre-Merger and Post Merger

x Financial Reporting under Indian GAAP, IFRS and US GAAP

x Banking( Lending against Assets)

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 x Impairment Studies

x Purchase Price Allocations

x Distress Assets / Nonperforming Asset

x Court & Litigation support

x Management information & Strategic Planning

x Insurancer

x Initial Public offerings

x Cost Investigations

x Disinvestment

Actually, the theory of valuations was started in early 1912 by the Hungarian mathematician Josef
Kiirschlik who formulated the valuation axioms as we are used today. In the following decades, we
can observe a quick development of valuation theory, triggered mainly by the discovery that much of
algebraic number theory could be better understood by using valuation theoretic notions and methods.
An outstanding figure in this development was Helmut Hasse. Independent of the application to num-
ber theory, there were essential contributions to valuation theory given by Alexander Ostrowski,
published 1934. About the same time, Wolfgang Krull gave a more general, universal definition of
valuation which turned out to be applicable also in many other mathematical disciplines such as alge-
braic geometry or functional analysis, thus opening a new era of valuation theory.

Millington (2013) indicated that the history of Property valuation dates back to early 17 th century.
The task of property assessment has existed in the United States since Colonial times, but it wasn’t
until the late nineteenth and early twentieth century that scholars and practitioners began to examine
the theoretical basis of property valuation (Moore, J. Wayne 2009).

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 Basic Concepts in PME Valuation

Basics of Value and Price in PME Valuation

In classical theory there are distinctions between the two kinds of price—market price (which can
be determined by demand and supply) and price of production (that can be determined based the labor
theory of value). According to Baumol et al. however, there is no such distinction in neoclassical theory
makes; it only recognizes market price. It is based on a comprehensible and consistent theory of value
and price. The value theory is psychological, or subjective, in nature; price theory is market orientated.
The neoclassical paradigm makes a distinction between the asset’s price of exchange in the market-
place and what an asset is ‘worth’ to an individual.

According to French et al. (2004), in a perfect market, where every individual can access the same
information, worth and price should coincide. In practice, however, in a market where there is no
uniform access to information, it is more likely that the two figures will diverge. Furthermore, it is
important to recognize that the price of an asset in the property market will differ according to the use
to which the asset is to be put. Economic theory would suggest that where there is no demand for the
good, then property as a factor in the production of that good has no value. It may, however have a
value in an alternative form of production and the property would be redeveloped or reutilized accord-
ingly.

According to French et al. (2003), for any Plant, Machinery and Equipment Valuation Model to
be valid it must produce an accurate conjecture of worth or the market price of the property investment.
The model should, therefore, reflect the market situation at the time of the valuation. That means the
model should be a representation of the underlying fundamentals of the market. Adair and Alastair
(1996) had emphasized the important that the distinction between price and worth should not only be
recognized but also fully understood. However, according to Peto et al. (1996), there is an ample and
vocal contingent who does not take the assertion that there is a variance between ‘price’ and ‘worth’.
They simply believe that ‘worth’ is what an asset can be sold for and thus ‘worth’ must be the same as
‘price’. At first sight, this proposition appears to be reasonable, but it fails to recognize the primary
drive of any investment decision. Faugère and Christophe (2011) argue that a rational investor will

8
make the buying decision if the price of the asset in the market is reasonably equal to or below his/her
judgment of the present worth (at the required target rate of return) of the future cash flow which is
likely (or predicted) to be generated by that asset.

On the contrary, Dalo and Ray (2012) argues that all other things being identical, a conclusion to
sell will be triggered at a point where the price in the market is equal or greater than the individual
assessment of worth. That means, investors trade or retain on the basis of their own knowledge of the
future and consequently their own productivity requirements. Each of these will differ from investor
to investor. Otherwise, there would be no market. Thus, to state that ‘worth’ is the same as ‘price’ is
failing to appreciate the underlying motivation of all financial or properly markets.

As per Raban and Daphne Ruth (2004), in an ideal market where there is complete information
available to all players, and that information is analyzed in a uniform and regular manner by all mem-
bers, the divergence in estimation and insight will be significantly small. Therefore, there will be a
grouping of ‘worth’ and if the price is confirmed with reference to this consideration process, there
will also be a similar conformity in opinions of price.

According to Peto et al (1996), Market value is the best estimation of the trading price of an asset,
and appraised worth is the range of individual estimation of worth ‘to each appraiser’. Thus, price falls
in a wider set of possible values estimated by individuals (French, 2004; Damodaran, 2006). This
thesis attempts to avoid this wider chance of value being set by different valuators and reduces the
valuation uncertainties.

Terms’ Meaning and Definitions

Market Value: It is defined as the sum the property will fetch if it is sold in the open market
(Srivastava et al. 1997)

Book Value: According to Baumol and William J. (1971), Book Value shows the original invest-
ment of a Company on its assets, including properties and machinery less depreciation for the period
passed.

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 Salvage Value: Salvage value is the estimated resale value of an asset at the end of its useful life.
Salvage value is subtracted from the cost of a fixed asset to determine the amount of the asset cost that
will be depreciated. Thus, salvage value is used as a component (Douglas et al., 2015).

Scrap Value: It is also called as Junk Value or Breakup Value of Demolition Value. It will rep-
resent the value of old materials in a building less cost of demolition.

Disposal Value: According to Preinreich and Gabriel AD (1937). Disposal Value is defined as
the Value that can be realized if the assets were to be removed from the foundation and sold as separate
standalone items. Bond et al (1998), argues that during disposal value analysis, efficient management
of public sector assets demands correct evaluation criteria and techniques.

Insurance Value: Vanderhoof et al. (2012) defined Insurance Value is the value of the Plant,
Machinery or Equipment for which it is insured.

Sentimental Value: According to Anthony (2003); the extra price which is demanded by a Ven-
dor when he attaches certain sentiments to his property is known as Sentimental Value having no
relation with the Market Value.

Fancy Value: as defined by Simmel (1900) Fancy Value is called Desired Value. If the Purchaser
wants to have a property somehow since the procurement is an absolute necessity for him due to vari-
ous reasons, he is prepared to pay more sums when compared with others. He attaches a special desire
over the said property. The extra sum he is prepared to pay is called Fancy Value.

Depreciation Value: It is the reduction of Value of the Property due to age, deterioration; lack of
maintenance, obsolescence, decay, and wear and tear etc., Depreciation Value depends on the age and
its future life. Calculating depreciation value is well-assessed issue in the theory of valuation (Sharpe,
et al.1999).

Present Value: In economics, present value, also known as present discounted value, is the value
of an expected income stream determined as of the date of valuation. The present value is always less

10
than or equal to the future value because money has interest-earning potential, a characteristic referred
to as the time value of money, except during times of negative interest rates, when the present value
will be less than the future value (Sabbri, 2006).

There are many terms related to Values that are needed during Plant, Machinery, and Equipment
valuation. These are Liquidation Value, Intrinsic Value, Investment Value, Cost Value, Warranted
Value, True Value, Written Down Value, Going Concern Value, Commercial Value, Rental Value,
Exchange Value, Appraisal Value, Face Value, Utility Value, Use Value, Loss Value, Tax Value,
Economic Value, Sale Value, Condemnation Value, Cash Value, Future Value, Capital Value,
Mortgage loan Value, Forced Sale value, etc.,(Dalio, 2012; Raban and Daphne , 2004; Damodaran,
2006; French et al. 2004;Srivastava, et al. 1998;Baumol and William J., 1971;Gransberg, et al.,
2015;Preinreich and Gabriel AD, 1937;Bond, 1998; Vanderhoof et al. 2012; Hatzimoysis and An-
thony, 2003; Simmel and Georg. , 1900;Sharpe, et al. 1999)

Current Approaches to PME Valuation

According to Sabbri et al. (2006) the Plant, Machinery, and Equipment valuation often relies on
commonly applied, and industry-accepted, approaches to value — in particular, the cost, the income
and/or the market approaches to value. As MacDonald and Robert (2001) pointed out, there are situa-
tions, when a client (for whom the valuation is conducted –this are usually banks or insurance
companies) might seek additional information, evidence and support to verify that the cost and market
approaches produce reliable and accurate values. This is because, asset based lending and insurance

11
values are vulnerable to risk exposure during foreclosure1 or insurance coverage2. In addition, the cli-
ent might be concerned that certain company-specific situations or industry trends might not be
completely reflected or considered in the cost or market approaches.

Cost Approach

A. Definition

According to French (2003) the Depreciated Replacement Cost (DRC) is the estimated current
cost of replacement of the asset with a similar asset which is not necessarily an exact reproduction but
which has similar service potential and function (plus where applicable an amount for installation),
less an amount for depreciation in the form of accrued physical wear and tear, economic and functional
obsolescence.

The DRC is an acceptable surrogate method for arriving at a market-related value. The method is
commonly applied in a valuation situation involving an asset where there is no readily available or
otherwise dependable market data to analyze in developing a market value estimate (Sayce et al. 2001).

Specialized operational assets, by their nature, lack market evidence on which to base a market
value assessment and as a result, having particular regard to the deprival value concept, these require
a replacement cost valuation methodology (French, 2003). In line with, Connellan et al. (1993) also

1 Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower, who has stopped
making payments to the lender, by forcing the sale of the asset used as the collateral for the loan (Robert, 2001)

2 The amount of fund paid to the client during damage for replacement (Williams, 1985)

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clearly elaborated why the RICS Valuation Standard sub-categorizes such assets as replacement cost
based assets in and the market value calculated by a depreciated replacement cost approach.

B. Principles of Cost Approach

Hulten et al.(2002) shown that the cost approach is based on the principle that assets decrease in
value (or depreciate) through aging, changes in function utility, as well as from negative external in-
fluences. The underlying assumption is that an informed purchaser would not pay more for an item
than the cost of a substitute with the same utility and functionality. Methods under this approach
generally provide a meaningful indication of value for specialized items associated with a viable busi-
ness or justified by economic demand (Derry, 2008).

Korner (2009) noted that the cost approach can be applicable method when valuing property that
first is not traded, second market transactions of comparable items are not available, third data cannot
be extrapolated from larger transactions, fourth transactions are nonexistent and fifth there is lack of
financial data concerning the subject property or item. Thus is why, Korner (2009) stressed this ap-
proach is not without problems. Because this method has two critical setbacks; first there is huge
reliance on individual judgments of the engineer. Secondly as per Remsha and Michael J (2001) quan-
tifying economic obsolescence is not easy task.

Connellan et al. (1993) indicated in the cost approach, determining either the Replacement or
Reproduction cost is the first step. Thaler and Richard(2005) elaborated that the cost to replace or
reproduce a given plant, machinery or equipment with a new one, either identical or having the same
usefulness, justifies that a rational investor is likely to pay for new and unused property; provided that
both direct and indirect costs along with other fees are considered.

As Neilson and Dennis (1983) once said; it has been longer since the agreement for the existence
of three ethods to determination of Replication or Replacement Cost is reached. These methods are
direct pricing, trending and benchmarking.

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 As Catty and James (2010) noted the application of trending method presumes that the current
value of PME may be obtained from the original (historic) acquisition cost, which typically is recorded
records, through adjusting (multiplying) it by an appropriate price index. However, French et al. (2003)
indicated that the Trending Method can be applied reliably if and only if the Plant, Machinery or
Equipment is relatively new, located in a stable economy situation, sold in stable prices, and historical
data is available, which might not work with second hand assets.

The second method to calculate the Replacement or Replication cost is by Direct Pricing
(EKEOCHA and Rowland 2012). It is the process of applying current new unit prices to the catalogues
that provide the recent prices for case item, they have to be increased by transportation and installation
costs. However, availability of data major challenge of this method.

Kendrick et al. (1964) indicated prices for certain items may not be available at all (the item is no
longer manufactured, or the supplier is out of business). In some cases, as French (2004) pointed the
manufacturer may not be willing to disclose them and thus; an alternative version to direct pricing is
by adding the cost of material, labor, engineering, and other expenses needed to reproduce the item.
This is practical for individual specialized unit, except that it requires specific knowledge and expertise
of the particular industry. Therefore, the alternative method to the direct pricing is rarely used

Lastly, the replacement cost new can be arrived by using benchmarking techniques. In bench-
marking, the cost of an item is estimated from known prices of equipment with similar characteristics,
functionality, and utility. Some valuers may use 6/10 rules (Korner, 2009), and some may use battery
limits and rules of thumbs. The 6/10 is based on the assumption that the subject asset is at 40% lower
than the new market price for similar machine because the differences in technology and year built,
without considering physical depreciation. Provided that the 6/10 rules applies when the subject is
compared with the new similar machine in the market, it only applies if it have similar functionality,
even though different capacity. In battery limits technique, the subject is benchmarked against the total
needed to construct a production plant. Rules of thumb should not be given much weight, as they are
approximations, not estimates. Once the cost new is determined, it has to be adjusted to reflect any
form of depreciation. This is defined by IAS (2010).

14
 C. Limitation or Challenges of Cost Approach

A property from all causes including those resulting from physical deterioration, functional obso-
lescence and economic obsolescence (IVSCd as that part of physical deterioration and functional
obsolescence which is economically feasible to incurable 2010). Physical deterioration for plant and
machinery is the loss in value caused by wear and tear from operation and exposure to the elements,
including any lack of maintenance (IVSC, 2010). The term functional obsolescence. Friction, impact,
vibration, fatigue, deformation or distortion due to stress or force may cause physical deterioration,
and may arise from the passage of time, exposure to natural elements, or the impact of the operating
environment (Korner, 2009). Some indication of machinery physical deterioration includes product
rejection, waste of material, excessive maintenance needs and repair costs running far above similar
machine. In theory, physical deterioration can be measured objectively such as a machine can produce
X number of parts in its lifetime or a pump will lift Y cubic meters, and the physical deterioration can
be easily calculated. Unfortunately, such conditions do not exist in the real world. A valuer must rely
on how similar assets have performed in the past to make a judgement of the physical condition of the
subject. Therefore, determination of physical deterioration may be rather subjective. Improvements
and modifications made to the plant and machinery over time could actually increase the value or
extend the life of the item (Korner, 2009). The physical condition observed during inspection can be
verified by conducting discussions with operating, maintenance and engineering staff, review past and
present replacement, maintenance, analyzing production records and consulting industrial experts
(Maninggo, 2010 and MohdKhairuddin, 2008). An important fact to be taken into account is that two
machines of the same type, performing the same function but from different suppliers may differ not
only in price and quality of output but also in their ability to withstand use (Korner, 2009 and Derry,
2008). To depreciate them at the similar rates, based on the age and units produced, may lead to an
incorrect conclusion of value. Most authors agree that physical depreciation can be measured using
straight line depreciation (Maninggo, 2010; Abdul Rahman, 2010; Derry, 2008, MohdKhairuddin,
2008 and Budhbhatti, 1999). In practice, physical deterioration is most commonly estimated by the
economic or actual life/age methods; both are based on an accounting-like straight-line depreciation
model developed by dividing the actual or effective age by an estimate of the normal useful life. The
problem is that the depreciation rate is not derived from market evidence, and it assumes that all ele-
ments, parts, components or subsystems within the piece of equipment depreciate at the same, constant,

15
average rate (Korner, 2009; MohdKhairuddin, 2008 and Budhbhatti, 1999). Korner (2009) highlights
the basic equation of the age/life method that is: Total depreciation rate = effective age of property/
normal useful life

Some modifications that take into consideration the salvage value (if the property is sold for the
materials it contains or for an alternative use), at the end of useful life are:

As Scarrett (2008) showed the use of conventional cost-based valuation techniques can signifi-
cantly understate in-situ plant and machinery values in fixed asset intensive businesses, especially in
manufacturing and mining related assets. There are also important potential flow-on consequences to
other valuations where a top-down valuation methodology is used. Thus, Scarrett (2008) warns before
undertaking fixed asset valuations, the appropriateness or otherwise of the conceptual framework from
which the numbers are derived and their context should be carefully considered.

Income Approach

D. Definition and Principles of Income Approach

As the name implies, the income valuation approach focuses on the ability of Plant, Machine or
Equipment to generate future revenues for an entity that wishes to use it to create a product or service.
This implies that neither the manufacturing cost of the Plant, Machine or Equipment nor a comparison
of similar Plant, Machine or Equipment value available on the market need to be taken into account.

The income approach is only concerned with determining what amount of the future revenue of a
product or service would be achieved based only on the use of the Plant, Machine or Equipment. It
needs to focus only on the value added effects of the Plant, Machine or Equipment and remove any
exogenous components from the analysis of the proposed products or services.

At the heart of this approach is the idea that some estimated future revenue derived for the use of
the PLANT, MACHINE OR EQUIPMENT can be converted into a specific amount (i.e. estimated
economic value – or actualized) that could be realized today.

16
 Because the income approach creates a framework for estimating future revenues, it is important
to focus on two key areas; the business environment in which the product or service in being offered
(market size, market growth, competition, etc.) and the length of time concerning the specific business
proposition. By relevant, we mean to incorporate factors such as technical obsolescence or time limi-
tations for Plant, Machine or Equipment protection such as the time that a patent has until expiration
of validity. Within this analysis is the discovery and quantification of various market related risk ele-
ments that may influence future income revenues. As with the market approach, the definition of a
valuation date will be used to anchor the calculations.

Income valuation relies on various sub-methods such as Direct Capitalization analysis or Yield
Capitalization analysis to determine the present value of potential future revenue generated by the
Plant, Machine or Equipment.

Independently of the sub-method used, relevant market, industry, manufacturing and market risk
components are used to calculate the potential income for one or more periods after the valuation date.

These are encapsulated within royalty increasing and decreasing ratings that will impact each
stage of the model.

The advantage of this approach is –as a projection of estimated future sales, the income approach
can be seen as always right (at the time of the valuation – present time). The disadvantages are –first
as a projection of estimated future sales, the income approach can be seen as mostly wrong (the crystal
ball is always right, as long as it is not carried forward in time). Secondly, Difficulty to extract the data
from the business plan only related to the Plant, Machine or Equipment subject to valuation; and
thirdly, Difficulties in the estimation of an appropriate discount rate or in the definition of the level of
uncertainty, risk in the forecast of the future incomes.

The benefit of the income approach is that it can be used for a wide variety of Plant, Machine or
Equipment. Facing the difficult issue of information asymmetry, the income approach only incorpo-
rates future potentials. The cost approach as well as the market approach to valuation depend on
information not necessarily available to the evaluator.

17
 E. Advantages and Disadvantages of Income Approach

In the case of Plant, Machine or Equipment valuation, all approaches have their own difficulties.
However, as it does not rely on the quality of prior available data, the income approach has the unique
benefit of virtuality: predicted revenues or impacting risk factors might not occur, but at the time of
valuation they are the only reliable estimation. In a sense, the crystal ball is always right, as long as it
is not carried forward in time.

According to Demirakos, et al. (2004) the income approach is the most widely used valuation
approach for valuing Plant, Machinery and Equipment in an Industry. However, good valuation based
on the income approach depends on the quality of the business plan, and the predictability and the
clarity of the economic environment. A miss evaluation of an asset is therefore not due (using the
income approach) to the evaluation practice as such, but relates directly to a poor business plan.

According to Manganelli (2014) in estimating the market value of a property –that includes land,
plant, machinery and equipment; by income approach, the determination of the capitalization rate is
ordinarily conducted through similarity analysis process; which is based on the identification of price-
earnings ratio of similar investments. The similarity refers to the risk and the duration of the invest-
ment. In practice, however, in most cases there still remains a rate of uncertainty that significantly
affects the final estimation of the property.

Market Approach

According to Boronico et al. (1997) the market approach is similar to sales comparison approach;
thus the valuation engineer is expected to know the current sales value of the Plant, machine and
equipment in order to use this approach. Similarly, French (2003) the RICS Valuation Standards adopt
the International Valuation Standards (IVS) definition of market value, namely:

The estimated amount for which an asset or liability should exchange on the valuation date be-
tween a willing buyer and a willing seller in an arm's-length transaction after proper marketing wherein
the parties had each acted knowledgeably, prudently and without compulsion(RICS VS 3.2).

18
 Generally, it is believed that the available sources of evidence to the valuer include:

— auction sale results

— Machinery dealers' advertisements
— classified advertisements in trade journals
— The 'jungle telegraph'.
'Open market value' is a generic term and, in reality, it covers several specific tiers of worth
which are, inter alia,
— Orderly sale value of the assets as a whole to remain in situ.
— Orderly sale value of the assets as a whole for removal.
— Orderly piecemeal sale value of the assets.
— Forced sale value of the assets as a whole to remain in situ or for removal.
— Forced sale value of the assets for piecemeal disposal.

However according to Meister (2012) finding evidence of valuation for the market approach in
non-transparent market is not an easy task.

The Amount and Role of PME Valuation in the Economy

As per the United Nations, Department Of Economic And Social Affairs, Financing for Develop-
ment Office, The Evolving Role of National Development Banks is shifting away from its traditional
expectancies in three critical areas.

First, National Development Banks are expected to Filling Gaps in Financial Sector Development.
To do that, these banks must work in Providing Long-term Financing; providing other Financial Prod-
ucts for Development; Building Inclusive Financial Sectors.

Secondly, national development banks are expected to work hard improving the business climate
of the country. This can be achieved by Promoting and Supporting SME development; Reducing Vol-
atility; and acting as a catalyst.

19
 Thirdly, national development banks should work in capacity-building; which can enable them in
improving prudential regulation and supervision; enhancing governance and management; and meas-
uring and monitoring results.

This also indirectly shows the amount of valuation works expected to be performed in small, me-
dium and large development projects. In the last five years, the amount of valuation work in DBE was
grown fivefold and reached three billion a year. (www.dbe.com.et)

PME Valuation and Privatization in Ethiopia

According to Getachew Regassa (2003) although privatization is a worldwide phenomenon in the

past two decades, it is a very recent experience in Ethiopia. As a result, of this short period in national
privatization process, the existence of many challenges were proved by taking sample of privatized
enterprises. The findings suggest that capacity there is significant shortage of capacity in among the
valuators was observed. This findings can be confirmed by observing the wider gap between the val-
uated amount and the actual selling price.

HAILU, H. (2005) reported that PPESA has privatized 214 enterprises in the last decade with 111
big enterprises remaining. The privatized enterprises’ are primarily includes manufacturing and pro-
cessing plants. This is huge amount of valuation work in the eyes of the valuator. Like the experience
of many countries, valuation was anticipated to be the key challenge of privatization in Ethiopia both
for the government and private sector (Tirfe Kuma 1994).

PME Valuation and Bank Credit Collateral

According to Anthony and Allen (2010) one of the most popular and frequently conducted type
of valuation is collateral valuation. The dictionary of Investopedia defines collateral value as the esti-
mated fair market value of an asset that is being used as loan security. In line with this definition; Barro
and Robert (1976) pointed that collateral value is determined by appraisal from a qualified expert. If
publicly traded securities are being used, then the current price of the securities is the collateral value.

20
Thus, according to Frye, Jon, et al. (2000) if this collateral value is found to be erroneous, then it is
considered as a source of systematic credit risk.

F. Collateral Value and Associated Risks

PME Valuation for Bank Collateral purpose is different from other types of valuations –because
Banks highly sensitive to collateral related risks. In most cases, Banks limit the amount of the loan
given not to exceed the collateral value of the assets, and will usually be less than its fair market value.
This is because most lenders will assess collateral property at its fair-sale value and not its actual cost
or current value. This is for both the borrower's and lender's protection.

According to Jokivuolle et al. (2003), if the borrowers default on a loan, a bank’s recovery may depend
on the value of the collateral PME. The value of Plant, Machinery and Equipment which are registered
as collateral, like the value of other assets, fluctuates with economic conditions. If the economy takes
a downturn, the lending bank can experience a double misfortune: many obligors default, and the value
of collateral is called damaged. Thus Banks strive to minimize collateral damage.

G. Reappraisal and Re-Valuation

According to Lucia and Joseph (1985) Reappraisal and re-valuation was major setback of US banks
which aggravated economic recession; and continues to explain why collateral needs to be revalued
on a regularly basis and why it needs to be monitored against the amount of outstanding debt. In most
US Banks, this regular re-valuation period is less than four months.

Similarly, as per the loan guideline of Development Bank of Ethiopia; for example re-valuation is
usually conducted once a years at minimum and once every three years at maximum. When the collat-
eral is re-valued the lender’s credit/ collateral balance table will be updated. This table shows:

 By facility; the original amount of credit extended and the loan proceeds outstanding.

 By collateral; the original collateral value, the latest collateral value, a haircut applied to the
value of the collateral (depending of the type of collateral and the perceived risk associated
with holding that asset) and the collateral value after the haircut

21
  The total unsecured balance which is the total of the loans outstanding less the total collateral
value after haircuts.

The reason why re-valuation period is prolonged is primarily ascribed to the expensive nature of the
process of re-valuation.

Open Debate and Concern on Current Approaches

The Accuracy of PME Valuation

Many researchers have disclosed that Valuation Variance and Valuation Inaccuracy are the frequently
quoted as issues of valuation error; especially in modern Plant, machinery and Equipment valuation
efforts (Babawale Gabriel 2013; Brown and Gerald, 1992; Parker and David 1998, Patrick McAllister,
1995); the former deals with the discrepancies in values found in the valuation when done by two or
more independent Valuation Experts; whereas, the latter deals with the inability of property valuation
to represent actual values in the property market. These errors might be attributed to many reasons –
such as variation of adopted valuation method; the efficiency of the market; the availability of data
and the Experts’ behavior and bias. As Otegbulu et al. (2011) described; unlike in other forms of in-
vestment such as stocks and bonds which are frequently traded and have sufficient data readily
available; the Plant, Machinery and Equipment market is characterized with its diverse goods, illiquid-
ity, high transaction costs, incomplete information and a lack of a central market.

There are many criticisms against current practices and the accuracy of PME valuation. In reactions to
such criticisms; Lizieri and Venmore-Rowland (2007) re-examined the statistical robustness of the
regression-based defenses and suggests that current practices are inconsistent. Then they proposed
some suggestions as to revised valuation practice. In contrary to this general notion, W.J. McCluskey
et al. (2013) had investigated the prediction accuracy of modern computerized valuation approaches
and found that these computerized approaches have better accuracy.

The recommendation for Paradigm Shift in Investment Property Valuation Theory and practice by
Babawale (2012) further strengths the assertion that the accuracy of PME Valuation should be ques-
tion.

22
 PME Valuation and Ethical Dilemmas

Achim (2015) after analyzing the ethical requirements of the field of plant, machinery and equipment
valuation, concluded that the ethical codes are very well defined and outlined and leave no room for
interpretation. Also, the various specialized documentation written by theoreticians and practitioners
in this field or beneficiaries of various valuation jobs, which has been quoted throughout the present
article, indicates the fact that the ethical principles applicable in the field of valuation constitute a
theme of great importance to it, not necessarily through the interpretation of the requirements of the
Codes of Ethics issued by the various valuation bodies, but through the necessity of constantly remind-
ing valuers how important it is that they be complied with.

Detecting potential threats against ethical principles of PME valuators has been a research topic for
many researchers (Achim, 2015; Levy et al., 1999, Kinnard et al., 1997). According to Achim (2015)
the threats that Romanian valuers are confronted with are similar to those encountered by plant, ma-
chinery and equipment valuers all around the world. It is also important to point out the fact that the
national and international studies the conclusions of which have been presented throughout his paper
have revealed the fact that practicing valuers are familiar with and, even more so, abide by the ethical
requirements of this field. This fact has been emphasized by the insignificant percentages associated
with any potential violations of the ethical principles and proves that the pursuits of professionals in
this field and the articles published by various authors have met their purpose.

As investigated and conformed by Amidu and Aluko ( 2007) the influence of clients is one among the
many challenges which can hinder the pursuits of professionals in the field of plant, machinery and
equipment valuation.

Education Demand of PME Valuation Engineers

As described by Sandy Bond (2003) in his paper titled Challenges Confronting Property Valuation
Practitioners in Australasia, exposed; the profession in Australasia is open to speculation but appears
to be pivotal on the following four moves. Frist, Establishment of risk reduction and risk management
processes including, mandatory self-audit functions; second, Introduction and enforcement of valua-
tion standards relating to methodology and reporting; third, Internationalization of services. Fourth,

23
raising the profile of the profession both nationally and globally and finally, raising fees. Until such
moves are instigated the future of the valuation profession remains in doubt.

Nasir, Mohd, et al. (2012) noted that there have been limited studies in plant and machinery area, either
by scholars or practitioners. The purpose of his paper was to determine and discuss on the plant and
machinery valuation syllabus for higher learning education in Malaysia to ensure the practicality of
the subject in the real market. Most papers highlighted the methodologies but limited papers discussed
on the plant and machinery valuation education. In that paper a qualitative approach via content anal-
ysis was conducted to compare international and Malaysian plant and machinery valuation syllabus
and suggest improvements for Malaysian syllabus. The paper had shown that there are few higher
education institutions in the world that provide plant and machinery valuation courses as part of their
property studies syllabus.

On further investigation it was revealed that on the job training is the preferable method for plant and
machinery valuation education and based on the valuers’ experience. The significance of such paper
is that to increase the level of understanding of plant and machinery valuation criteria and provide
suggestions to Malaysian stakeholders with the relevant elements in plant and machinery valuation
education syllabus.

Also, majority of the respondents strongly agreed that practical exercises in the field will facilitate
understanding of plant and machinery valuation and that more time should be devoted to practical
plant and machinery exercises in the field than lectures in the classroom. The study advocates for the
inculcation of more practical and field exercises into the curriculum of plant and machinery valuation
course and concludes that this will facilitate students’ understanding of the basic topics in plant and
machinery valuation at the university level.

Quayle (2010) strongly argues that modern strategic framework for engineering education should en-
compass valuation both in theory and practice.

National Valuation Evidence Database

According to S. Rowley et al. (1997) establishment of National Valuation Evidence Database (NVED)
is important; because good quality data is essential for accurate and reliable valuation. Apart from this
basic assertion, the findings suggest that NVED has many advantages. First, allowing all Professional

24
Property Service Providers (PPSP) access to a national database of private sector property comparable
evidence. Second, NVED allows fast and effective query searches thus reducing time spent on data
collection. Third, NVED helps to introduce a set of data quality standards for the recording of compa-
rable evidence to ensure data accuracy and uniformity. Fourth, NVED combined with other data sets
to allow on-line access to a wide range of property data. Fifth, NVED is important in promoting co-
operation through agreement to pool and share data. And finally, NVED permits an increased degree
of objectivity in valuations improving data analysis and increasing accuracy.

Summery

As stated in the introduction section of this earlier section, the issue of Plant, Machinery and Equip-
ment Valuation is critical both the government and the private sector. Both the government and the
private sector are keen to foster the economic activities of manufacturing industries. Despite this seri-
ous importance of PME in the economy, the current practice has enormous limitations and challenges.

As shown in the third section there are five general valuation methods and three of them are currently
more popular valuation techniques. The fourth section attempts investigates the amount and role of
PME in the economy. Despite the fact that privatization in Ethiopia has short history, the amount of
valuation conducted during privatization is significant; and that further justifies the importance of PME
valuation. Thus section four includes this significant work of PME valuation in privatization.

The fifth section presents the level of concerns attribute to the accuracy of PME valuations in the
current approaches. This is because the amount of PME valuation in terms of monetary value is huge
and the underlying ethical concerns associated with the current practices are also significant. This
justifies how crucial but venerable is the PME valuation work.

25
 Chapter 3 - Methodology

The main objective of this study is to develop new engineering valuation tool based on Artificial
Intelligence (AI) for Plant, Machinery and Equipment Valuation. Specifically aim of this study is first
to identify and enumerate current challenges of Plant Machinery and Equipment valuation in Ethiopia;
second to Design, Develop and Validate New PME Valuation Models and lastly to forward recom-
mendation for actions that can help to improve PME valuation in Ethiopia. To achieve this objective
this paper has done (1) literature review, (2) Data collection, analysis, synthesis, interpretation and
experimentation, and (3) design, develop, test and validate artificial intelligence based PME valuation
Models. This chapter therefore presents details these items.

Literature Review

Literature review was conducted with five critical issues with the following requirements in mind.
First the review must logically organization. Second, critique on relevant studies must be ascertained.
Third gap in knowledge should be identified, and lastly there must be sound and coherence flow. The
five critical issues which the review had addressed are:

x Basic concepts of PME so that the theoretical foundations of the research be clear

x Overview of the currently parcticed PME Valuation Approaches

x The Eoconomic significance of PME Valuation in a country

x Public concerns on current Approaches

x PME Valuation and Artificial Intellegence

26
 Methodology description

General Research Question

The general research questions form the base upon which all further work is being done. The
question used is the same as in the aim of the project. The questions need to be investigated and an-
swered in order to fulfill the purpose of the project. The next step involves widening these questions
into several subjects.

x Where is Plant, Machinery and Equipment Valuation in Ethiopia?

x What are the limitations of the Current Practices of PME Valuation in Ethiopian context?

x What tools and valuation evidences are used for PME valuation analysis?

x How critical is the knowledge and skill gap in among the PME valutors in Ethiopia?

x How cronic is the level of Ethical Concerns related with PME valuation in Ethiopia?

Selecting Relevant Subjects

When selecting relevant subjects it is important not to focus on the consequences of problems or
to strictly answer the research questions. Instead this step involves trying to find the actual cause that
leads to a specific answer, i.e. it is not only of interest to answer how PME Valuation looks today but
also why and to investigate peoples opinion about it. The following questions were initially selected
as important to be able to fully understand the situation.

x Is there an acceptable level of uniform understanding of meaning of definition for Plant,

machinery and Equipment among the valuators in Ethiopia?

x Is it technically possible to use un-licensed internal valuator in Banks and Insurances is

appropriate?

x Do the valuators agree that property valuation is a professional carrier? If so they exert
sufficient energy to develop their carrier?

27
x Are the Plant, machinery and equipment owners cooperative enough and provide genuine data
for the assigned Engineers during inspection?

x Are the Instruction for valuation provided to Valuation Engineers free from any form of hidden
interest by any party?

x Do the plant, machinery and equipment owners have no power to influence the selection of
valuation engineer?

x Is sufficient data available in Ethiopia to apply sales comparison approach?

x Is over or under-invoicing is common challenge in Ethiopia?

x Can synchronization between banks, insurances and Inland Revenue minimize conflicting
values on invoices?

x Could companies who are not profitable be valuated using income approach?

x Should the PME valuators be liable for any loss as a result of their estimations?

x Can improving the reliability and credibility of valuation in Ethiopia impact the
industrialization process?

x Should the Plant, machinery and equipment valuation curriculum have to be highly practical
content and should be taught with practical examples and exercises approaches?

x Do the valuators had the opportunity to solve Practical exercises in the field that can facilitate
their understanding of plant, machinery and equipment valuation?

x What is the feeling to the idea that expression of uncertainties of the valuator should be included
valuation reports?

x Does the concept of uncertainty within a valuation is poorly understood and is it rarely
conveyed to the client in any coherent form?

x Do the valuation reports contain sufficient information for independent investigator to reach at
similar conclusions?

x Are the valuations reports unsupported with evidences and insubstantial?

28
 x Is the absence of strict requirement for valuation certification and professional license affects
ethical stand of valuators?

x Can the client company owners manipulate the selection and assignment of valuation engineers
to corrupt the system?

x Is the absence of national valuation standard and guideline in Ethiopia promotes un-ethical
professional practice?

x Is the reliability and credibility of valuations are under threat by unethical deeds of investors?

All these questions were then transformed into a list of relevant theories and subjects which was
later evaluated. In addition to these subjects the following aspects was considered relevant.

x How important is becoming Plant, Machinery and Equipment Valuation in the Ethiopia
economy especially in these days?

x Is it realistically possible to apply the traditional Plant, Machinery and Equipment Valuation
Approaches in Ethiopia in the current context?

x Are the Plant, Machinery and Equipment Valuation Analysis free from any form of
subjectivity? What is the level of uncertainity?

x Are the Property Valuation Engineers Equip with all the required knowledge and skill to
carryout valuation works? What can be done to the current education system ?

x Do the Reports prepared by Plant, Machinery and Equipment Valuation experts suffice both in
content and format for the intended objectives?

x Are there any ethical dilemmas in Plant, Machinery and Equipment Valuation in Ethiopia?

x Is it possible to find an artificially intelligent tool that can be used in Plant, Machinery and
Equipment valuation that can work with better efficiency on a reasonable investment?

Based on these selected subjects, the Research Design was consolidated to be executed in six steps
described below:

29
 x Literature Review

x Data Collection

x Fact Gathering, Discussion, Analysis, Interpretation of Data

x Artificial Intelligence based Model Development

x Prototype Test and Validation

x Forward Conclusion and Recommendations that can help to create fertile implementation
grund

Collection of Relevant Data

Data was collected using literature studies, Bank and Insurance Annual Reports, meetings and
observations. Best practice within Ethiopian Revenues and Customs Authority was analyzed with aid
from the Price Estimation and Tariff setting Plan and Program Development Directorate office visits.
Databases and journals served as a base for the literature study. Keywords were selected to fit the
relevant subjects defined above. Semi-structured interviews and meetings with Bank and Insurance
officers as well as private company leaders, were the main sources of information regarding the present
situation of PME valuation. By analyzing PME Valuation Reports the finding regarding the present
situation has been strengthened.

In semi-structured interviews the questions are formulated in advance, but the interviewer is al-
lowed to rephrase the questions during the interview (Merriam, 1994). The interviewer is also allowed
to ask more questions during the interview as a way of creating a better discussion (Bryman & Bell,
2007).

This approach makes the data analysis straightforward as the interviewees are asked almost the
same questions. However, important issues and unexpected topics may be missed due to the predefined
questions (Bryman & Bell, 2007). Because of this, semi-structured interviews were combined with
observations. This is, according to Bryman & Bell (2007), a good way of capturing unexpected events.

30
 The first days of the project were spent in Banks, Insurance and Courts performing non- partici-
pant observations. This refers to observations done by an observer not participating in the work
(Bryman & Bell, 2007). The observation was also unstructured, i.e. no schedule or plan was used
during the observations. In connection to the observations, unstructured interview was used to ensure
correct interpretation of the situation. Valuation Engineers (including those in private consultant com-
panies) and senior officers were interviewed. The information collected was documented continuously
and analyzed at the end of the day.

Following these first days, the project performed semi-structured interviews and literature study
concurrently. At this stage, the literature study was used to get a basic understanding of PME valuation
and the task of the project. PME Valuation engineers and managers from several fields of interest were
interviewed, such as Banks, Insurances, Inland Revenue, Private Companies and others. This was done
to ensure the whole encompassing perspective on the issue. The knowledge gained during this process
was continuously verified against the works of well-known experts of the field.

A. Site visits

The project has conducted based on visits to Bank and Insurance head office and contacting pri-
vate company owners. The commercial bank President was so helpful to arrange meeting with
engineering directorate.

The engineering directorate is composed of engineers from different fields. The concern was to
focus on PME Valuation Engineers. A copy of their valuation manual was collected during the discus-
sion. In similar manner visit to other financial institutions were conducted.

Three Textile Factory (–ELSE, –Akaki and –ETUR textile factories) were visited to capture actual
production machinery status and compare with valuation reports. During an initial meeting the agenda
for the day was introduced. Topics of interest were discussed and later shown in the factory. A round
trip was performed and the arranger had the opportunity to show the performance of actual production
machinery and description provided in the PME valuation report. Questions were asked during the

31
round trip to increase the understanding of why such discrepancy happened. The information was doc-
umented and later analyzed at the closing meeting.

To get a broader view of PME Valuation in Ethiopia, reports by Privatization and Public Enter-
prises Supervising Authority, Ministry Industry and Ministry Of Transport were also evaluated in
terms of PME Valuation. This was done using semi- structured telephone interview and e-mail con-
versation. The businesses were selected using discussion and the aim was to find businesses in which
problems in PME valuation severely create more variance between actual and market price of PME.

Table 1: Target Companies

1 Wegagen Bank 22 Africa Insurance Company S.C

2 Debub Global Bank S.C 23 Awash Insurance Company S.C

3 Abay Bank S.C 24 Global Insurance Company S.C.

Cooperative Bank of Oro-

4 25 Lion Insurance Company S.C
mia

5 Bank of Abyssinia 26 NIB Insurance Company

6 Bunna Insurance S.C. 27 Nile Insurance Company S.C

7 Bank of Abyssinia 28 Nyala Insurance Company S.C

32
8 Awash International Bank 29 The United Insurance S.C

Commercial Bank of Ethio-

9 30 Ethiopian Insurance Corporation
pia

Development Bank of Ethi-

10 31 Abay Insurance Company
opia

Construction and Business

11 32 Berhan Insurance S.C.
Bank

National Insurance Company of Ethio-

12 Dashen Bank 33
pia S.C.

13 United Bank 34 Oromia Insurance Company S.C.

14 Nib International Bank 35 Ethio-Life and General Insurance S.C.

15 Lion International Bank 36 Lucy Insurance S.C.

16 Zemen Bank 37 Tsehay Insurance S.C.

33
17 Oromia International Bank 38 NEXUS Investment Solution PLC

18 Bunna International Bank 39 EY Ethiopia

19 Berhan International Bank 40 Industrial Projects Service (IPS)

Addis International Bank Privatization and Public Enterprises Su-

20 41
S.C pervising Authority

21 Enat Bank S.C 42 Ministry of Transport

34
 B. Sample Size Determination

The first group of respondents are employees Banks, Insurance, main Custom office and
Courts. There are 322 Engineers working as Valuation, loss Assessors Engineers and related
works. Out of these only 6.7% are licensed. 3 The second group of respondents are officers in
the same banks, insurances, custom office and courts. The third group of respondents are peo-
ple working in the customer company. These people could be just employee or owners of the
customer company for whom the valuation is conducted. The fourth group of people are those
people who are working in the consultant companies working as valuation engineers.

Table 2: Respondents Group and Role

General Cate-
No Institution Respective Roles
gories

1 Consultant Office
Project Managers – from the very begin-
ning project inception up to project disposal,
including PME valuation
2 Engineers Client Company

3 Customs Authority Technical analysis and Tax Determination

3 National bank of Ethiopia, Annual Report - 2015

35
 Credit, appraisal and approval including
4 Banks
PME valuation

Damage Estimators, Loss Assessors in-

Insurances
cluding PME valuation

Design Curriculum, Educate, Certify Engi-

5 Higher Institutions
neers including PME Valuation Engineers

Credit, appraisal and approval Decisions

6 Banks
based on PME Valuation

Insurance Coverage, Loss and Damage de-

7 Insurances
termination based on PME Valuation

Officers

Tax determination based on PME Valua-

Custom Authority
tion

PME Related conflict resolution based on

8 Courts
PME Valuation

36
 Major Investment, Tax and Operation de-
9 Client company
cisions based on PME valuation

ே
According to Yamane (1967:886) sample size ݊ ൌ ଵାேሺ௘ሻమ where N is the population size,

e is the confidence interval. Therefore based on this the n is set to be 175. To meet this size,
total of 320 hard copy and 75 google form questions were distributed, out of which only 179
were successfully completed and retuned.

Data Interpretation

This step involves categorizing and classifying the data to make it more tangible. Prasad
used the approach of creating “concept cards” proposed by Glaser & Strauss, a common
method within grounded theory (Bryman & Bell, 2007). Concept cards are created by catego-
rizing pieces of information (referred to as elements) such as events and (parts of)
conversations into categories. The category is then given a meaningful common denominator
(label) which is used as the title of the concept card.

This project used a file structure to categorize and classify data. The following seven main
categories, derived from the project aim, were used (these can be seen as main concept cards).

x General Issues of PME valuation

x PME Valuation Practice in Ethiopia

x PME Valuation Approaches

x PME Valuation Analysis

37
 x Valuation Reports

x Ethical Concerns

x Valuation Standards and Global Experience

Notes from banks, insurance and court visits was then broken down to information ele-
ments and placed in the corresponding category. During this process, sub-categories were also
introduced to create better structure.

The second stage of data interpretation focuses on interpreting experiment results from
the two proposed Artificial Intelligence Based Models.

Instruments and Tools Used

The Literature Review

As shown in chapter two, an extensive literature review was conducted to clearly under-
stand the state of the art to construct scientific and factual foundations of the envisioned result.

Primary Data Collection Instruments

In this research both primary and secondary data was gathered from Banks, Insurances,
Inland Revenue Authority, Machinery Supplier and customs authority, privatization agency
and others –there is huge data related with plants, machinery and equipment value both when
estimated and when sold during fore-closure. Both paper based and online version of ques-
tioners were distributed to respondents. Especially, the online version – google survey
technology is much better than the paper based survey tools.

38
 Content of the Structured Questionnaire

The questionnaire was designed to have eight sections comprising closed-ended ques-
tions, and one section with open-ended questions.

Section 1 – Demographics

Questions regarding the respondents’ age, sex, Employer Company, qualifications and
employment status were included in this section. The aim of including this information was
to identify whether there was a relationship between the academic qualification data of valu-
ation engineers, job experience and correlation with current practices and challenges.

Section 2 – General issues of Plant, Machinery and Equipment Related Information

Questions in this section dealt with respondents’ intentions to leave South Africa to work
in other countries either permanently or temporarily.

Section 3 – Valuation Practices

This section consisted of items dealing with valuation practice in Ethiopia to assess what
challenges it face and what exacerbates the situation.

Section 4 –Plant, Machinery and Equipment Valuation Approaches

This section consisted of statements related to factors that might affect the quality of cur-
rent valuation approaches especially from the Ethiopian context

Section 5 – Plant, Machinery and Equipment Valuation Analysis

39
 This section consisted of items dealing with factors related to PME valuation
analysis. Respondents had to indicate their satisfaction or dissatisfaction with these factors.

Section 6 – Plant, Machinery and Equipment Valuation Education

Respondents were asked to respond about their feeling regarding PME related education
in Ethiopia; especially in the curriculum, practicality, industry attachment.

Section 7 – Plant, Machinery and Equipment Valuation Reports

The quality of valuation is expressed by the quality of the report produced at the end of
the process. Thus respondents are asked to react on issues related with the valuation report.

Section 8 – Ethical Dilemmas in Plant, Machinery and Equipment Valuation

This section offers an opportunity for respondents to express their feeling on Ethical di-
lemmas related with PME valuation and associated practices.

Section 9 – General Comments on Plant, Machinery and Equipment Valuation

At the end of the questioner, eight open ended questioners are provided for respondents
to express their belief, reaction, comment and/ or any other idea that they have.

1.1.1.1. Pretesting of the Questionnaire

Before implementing the study the researcher had to ensure that the measurement proce-
dures and the measurement instrument had acceptable levels of reliability and validity. The

40
researcher developed the instrument after an in-depth literature review. The theoretical frame-
work for the research, property valuation theory, was incorporated into the construction and
formulation of items in the questionnaire.

After finalization of the questionnaire a pretest was undertaken. Ten development bank
of Ethiopia (both engineers and non-engineers) were asked to complete the questionnaire and
comment on the questions and instructions given on the questionnaire. These ten bankers did
not form part of the research sample. The purpose of pretesting the questionnaire was to
ensure that respondents would understand the questions, and identify possible problems with
the completion of the questionnaire. Minor problems were identified and revisions to the
questionnaire were made. The following suggestions were implemented:

Item 1 of section I - the age group was categorized in 5 category. The first category
was 16 to 25 age group. However, in Ethiopian labor law, any person younger than
18 years could not be employed.

Item 1 to 8 in section IX – the space provided for respondents to express their idea
was very narrow.

Item 5 of section I – the list of organization is not exhaustive and the drop down menu
for the online version does not provide an option to insert the respondents’ organi-
zation in case it is missed.

41
 Chapter 4 - Finding and Discussion

According to Dr Maxwell Mutema (2016), property valuation challenges in Africa are

multi-dimensional, multifaceted and interlinked. The main ones include absence or poor val-
uation education and training, absence of institutional professional representation (voice),
absence of orderly constituted or structured continuous professional development regulations,
lack of professional standards and property market price information asymmetry or lack of
transparent property price information, among others.

After conducting a survey and observational analysis on the existing PME valuation sit-
uation in Ethiopia, list of challenges were identified. This section focuses on the data analysis
of this study. In achieving objective 1 of the study, the tool used is the content analysis via
literature review on the international plant and machinery valuation parameters as discussed
in detailed in Chapter 2; as well as survey and observational analysis. Objective 1 focuses to
establish the common valuation concepts, awareness as well as the application of valuation
methodology and valuation process for plant and machinery valuation in Ethiopia is based on
qualitative and quantitative approach. The first part presents Findings of the survey and doc-
ument content analysis. The second part of the document presents data analysis and
interpretation.

42
 Demographics of Respondents

In analyzing the demographics of the respondents, six key areas were assessed. These are
age, gender, service years, job position, education and company. The coming paragraphs pre-
sent the findings of these demographic issues.

Age Group

To simplify the analysis, five age groups were created. As can be seen in Figure 1, it is
found out that the targeted case companies has younger staff. Around 78.21% of the randomly
selected respondents are less than 50 years old.

Figure 1: age distribution of respondents

Gender Distribution

In analyzing the gender distribution, two codes were used (1=male and 2=female). Out
of the randomly selected respondents, around 27.93% were female and 72.07% male.

43
 Figure 2: Gender distribution of respondents

Respondents’ Educational Level

The respondents educational level is 8.38% diploma, 49.16 bachelors’, 39.67% masters’
and less than 3% Ph.D; and the dominant group are Bachelors’ level. This shows that most of
the respondents are academically capable to understand and respond to the research work.

Distribution of Respondents by Employing Company

The target respondents work in nine companies. As shown in Figure 3, most of the re-
spondents work in Insurance company and Banks where most of the PME valuation is
conducted next to customs office.

44
 Figure 3: shows distribution of Respondents by employing Company.

Service Years of Respondents

Six category were created to classify the service years of the respondents. As shown in
Figure 4, the mode is category 2 which is service years of 3 to 5 years. The classification was
not uniform, because, the current classification was found to be best suitable to depict existing
distribution service years of the staffs.

45
 Figure 4: Service Years of Respondents

General Issues of Plant, Machinery and Equipment Related Infor-

mation

With regards to the general issues of PME Valuation in Ethiopia, six questions were for-
mulated. These questions assess the licensing process, common understanding, using
unlicensed valuators, and perception towards the profession, self-development and govern-
ment attention. The findings then summarized in Table 4.

This first section assesses six general issues of Plant, Machinery and Equipment Valua-
tion. These are: (1) Qualification and licensing, (2) Definition of market value, (3) Extension
of market value, (4) Purpose of valuation, (5) Types of property and (6) Legal ownership.

A. Qualification and Licensing

As per the Monetary and Banking Proclamation No. 83/1994 and Article 25 of the Li-
censing and Supervision of Insurance Business and Proclamation No. 86/1994 Power is vested

46
on National Bank of Ethiopia is act on licensing and supervision of qualified valuation engi-
neers, loss assessors and loss adjusters in Banks, Insurance Business. As per the guide line of
this Bank, there are five minimum requirements that applicants should fulfil during applica-
tion for professional licensing. The first one is that the applicant shall be an Ethiopian
National. This automatically hinders foreign citizens from conducting any form of valuation,
loss assessing or loss adjusting in the country.

Second requirement is that an applicant must hold a minimum of diploma in the field
from institutions acceptable by the Bank and sufficient experience in the field he/she is apply-
ing for valuation or loss assessor license. As per the national Banks understanding of
sufficiency of experience is that professionals could not conduct all sorts of valuation by the
title valuation engineer. Currently available forms of license are three; namely – motor, fire
and manufacturing. Practical situations actually disagree with this. In development Bank of
Ethiopia for example, valuation engineers value both motor and manufacturing.

Thirdly, the applicant must hold a diploma from The Chartered Institute of Valuation,
Loss Adjusters or institutes with similar status who provide professional qualification in the
valuation, loss adjusting for loss adjusting license. Practically this requirement has not yet
been fulfilled in practice. Even though, almost all of the licensed engineers do not fulfil this
requirement, it is stated as requirement.

The fourth requirement is that if organized in the form of general partnership having un-
limited liability. This requirement limits individuals to establish partnership as a form of
business type; because the liability is unlimited. To date the number of companies established
in partnership business setting is none.

47
 And finally, maintaining professional indemnity insurance cover for Birr100, 000 is
needed. However, none of the banks in Ethiopia demand valuation engineers to have profes-
sional indemnity insurance. The survey results depicted in Table 4, shows 24.0% of the
respondents disagreed to the assertion that the qualification required to get professional license
of Valuator in Ethiopia is appropriate, 30.7% remained neutral and 45.3% disagreed. The
number of population who agree is 47% higher than those who disagree. It is possible to de-
duce that:

The qualification required to get professional license of Valuator in Ethiopia is not

appropriate.

B. Definition of Market Value

In many countries especially those who have adapted the standard by the International
Valuation Standards Council (IVSC), valuations based on market value shall adopt the defi-
nition and the conceptual framework settled by nationally authorized standard setting body or
IVSC. For example, IVSC defines as the estimated amount for which an asset or liability
should exchange on the valuation date between a willing buyer and a willing seller in an arm’s
length transaction after proper marketing and where the parties had each acted knowledgeably,
prudently and without compulsion.

Absence of clearly defined meaning of market value is disputable issue in Ethiopia. Sim-
ilarly, the absence of nationally organized database of actual market value is also another
major national challenge.

As shown in Table 4, 17.9% of the population agreed to the assertion that there is an
acceptable level of uniform understanding of meaning of definition for Plant, machinery and
Equipment among the valuators in Ethiopia, 24.6% remained neutral and 57.5% disagreed.

48
The number of population who disagree is much higher than those who agree. This findings
does agree with findings by other researcher (A. Olawore, 2011).

Commercial Bank of Ethiopia and Development Bank of Ethiopia have developed inter-
nal database to store market value of machinery. Most of the private banks and insurance
companies don’t have such database.

In connection with the definition of market value, absence of Plant, Machinery and equip-
ment definition and classification is an equally unresolved issue. The depreciation rate of
machine and equipment set in the tax regulation of Ethiopia has 5% gap –which is significant
as the size of the projects gets larger. In short it is logical to deduce that

There is no acceptable level of uniform understanding of meaning of definition for

Plant, machinery and Equipment among the valuators in Ethiopia

C. Purpose of Valuation

As described in section 0, Plant, machinery and equipment valuation could be conducted

for many purposes. In Ethiopia, it is a big challenge to know which valuation purpose is more
predominant –because of transparency and data availability. The nineteen banks conduct the
valuation, primarily for collateral and foreclosure purposes. In some cases valuation could
also be done by the banks for export guaranty purposes. The credit policy of most banks de-
termines that valuation has to be conducted every year. Similarly, seventeen Insurance
companies conduct valuation to assess losses and damages during compensating. Ethiopian
Revenues and Customs Authority conducts valuation for the sake of determining associated
tax amount. Privatization and Public Enterprises Supervising Authority (PPESA) conduct val-
uation during privatization of state owned companies.

49
 Apart from these institutions, valuation is conducted –in the courts following verdicts, -
in government offices for financial reporting purpose and –at the private companies’ level for
unification or disintegration.

In the current practice there is distinction in the valuation approach irrespective of

its purpose.

D. Types and Amount of Property

According to the Directives by National Bank of Ethiopia, which may be cited as “Asset
classification and Provisioning” Directives No SBB/43/2007; the real property can be classi-
fied as land, building, plant, machinery and equipment. This classification is slightly similar
to many classifications such as RICS or IVSC. However, unlike these well-known interna-
tional standards, Ethiopian classification luck depth to clearly indicate which is which.
Irrespective of the amount of property a client have; banks and insurance companies assign
unlicensed valuator. However, as shown in Table 3, 25.1% of the population agreed to the
assertion that using un-licensed internal valuator in Banks and Insurances is appropriate,
24.6% remained neutral and 50.3% disagreed. The number of population who disagree is sig-
nificantly higher than those who agree.

The licensing process is not considering the amount of impact the valuators have in
the economy as a result little attention is paid for the need to have license to work as
valuator.

E. Legal Ownership and PME Valuation Data Credibility

Unlike many countries, to date Ethiopia does not have a unified property valuation stand-
ard. Many banks, insurance and custom authority companies utilize an in-house property

50
valuation and credit policy and guideline which demand legal ownership of properties in gen-
eral. The challenge comes when actual practice of conforming legal ownership is sought.

It is a public secrete, known to many but impossible to justify; that many ownership cer-
tificates kept in Banks and insurances as a collateral document luck legitimacy one way or
another. One reason for this dangerous event is the paper based recording keeping system in
most transport authority offices both at national and regional states.

As shown in Table 4, 40.8% of the population disagreed to the assertion that Plant, machinery
and equipment owners are cooperative and provide genuine data for the assigned Engineers
during inspection, 26.8% remained neutral and 32.4% agreed. The number of population who
disagree is higher than those who agree.

Data provided to valuators during and after site and factory inspection is not credi-
ble to base valuation activities.

F. Valuer’s Liability

The agreement between a client and a valuator is expected to set the valuator liable for
any loss as a result of the valuation in the given time span –for example in UK the span is 30
years. This is not the case in Ethiopia in the current situation. Moreover, the survey result in
Table 4, shows that 27.4% of the population disagreed to the assertion that valuators should
be liable for any loss as a result of their estimations, 17.9% remained neutral and 54.8%
agreed. The number of population who agree is 27.4% higher than those who disagree.

51
 Valuators are not liable in any form for the loss associated with their valuation esti-
mations they set. Absence of liability has a role on the negligence and unethical deeds
of valuators.

Valuation Practices

To accesses the valuation practice in Ethiopia, six assertions were formulated and were
included in the third section of the questioner. These questions asses owners cooperativeness,
PME inspection legitimacy, field note standardization, hidden interests, owners’ influencing
power and depth of investigation. The findings are summarized in Table 4.

In this section, four concerns regarding valuation practice are examined. These are – the
valuation process, – the valuation instruction when valuation process will be started, – onsite
and in factory inspection and finally the field note issues.

A. Valuation Process

Many countries have established national property valuation standard by which valuators
execute valuation process and produce valuation reports. Many research works were also con-
ducted on such issues. McParland (2002) for example conducted a research to compare
standards in four European countries. The findings concluded that valuation processes must
be conducted under a uniform well defined approach in a legitimate manner by a legally au-
thorized valuator so that results become accurate and reliable.

Levy et al. (2005) found out that clients with expertise and a high level of knowledge of
the property market are able to influence valuers by way of expert and information power.
Opportunities to exert influence are afforded by the control the client has over the valuation

52
process including the common practice in New Zealand of permitting clients to review draft
valuations prior to their formalization.

From the finding as well as from this analysis it would be logical to deduce that
absence of any national PME valuation standard and procedure manual are affect-
ing the PME valuation process.

B. Instructions and Assignment of PME Valuators

Depending on the purpose of valuation, instruction for valuation and valuator assigning
could be varied. In countries like Ethiopia, where there is no legally established and published
property valuation standard; instructions for valuation could be simply done by Client Com-
pany; because the outputs of the valuation process are actually taken as advising input. In
other countries like the UK, valuation outputs are done beyond that –thus why clients can
claim on valuation variation.

As shown in Table 4, 41.9% of the population disagreed to the assertion that PME in-
spection is conducted by legitimately assigned Engineers, 29.1% remained neutral and 29.1%
agreed. The number of population who disagree is 44.0% higher than those who agree. This
contradicts with the fact that the validity of instruction for valuation as well as the legitimacy
of the process are high intact with the purpose of valuation. Moreover, as shown in Table 4,
52.0% of the population disagreed to the assertion that Instruction for valuation provided to
Valuation Engineers are free from any form of hidden interest by any party, 30.2% remained
neutral and 17.9% agreed. The number of population who disagree is almost three times higher
than those who agree. Thus, from these two findings it is possible to deduce that:

53
 PME inspection is conducted not by legitimately assigned Engineers, and the in-
struction for valuation provided are not valid and are not free from hidden agenda.

C. Inspection and Field Notes

Site inspection consists of photographing the property, taking notes of the general condi-
tion, state of repair and services. In addition, the valuer checks that there is consistency
between the plant, machinery and equipment’s documents such as drawings and actual situa-
tions. This includes conforming actual capacity during inspection. In the majority of cases,
clients communicate the capacity to the valuers who rely on this information for valuing. As
valuers do not tend to use their stop watch, their valuation reports include a clause stating that
the capacity are subject to confirmation by a production technician.

In almost all banks and many insurance companies there is no habit of requesting clients’
confirmation for validity of information during inspection –such as stamping on field notes.
The field notes are also nonstandard –creating opportunity for anybody interested to change
actually captured data and affect legitimacy. In contrary with this, as shown in Table 4,
54.75% of the population disagreed to the assertion that having standardized field note format
could be important to capture all relevant data during onsite inspection, 27.93% remained
neutral and 17.32% agreed. The number of population who disagree is more than three times
higher than those who agree.

The key finding is that respondents do agree with the importance of inspection field not
for PME valuation process that should be dually signed both by the field data collector as well
as the owner.

54
 The absence of standard inspection field note format is affecting quality of field data.

D. Source of Evidence

In the current practice of valuation in Ethiopia, the source of evidence for valuation anal-
ysis are commercial invoice, custom declaration, tax certificate, offer by supplier for similar
item, searching online sources of information such as Alibaba.com, Indmart.com and so on.
However, on the one hand; as shown in Table 4, 17.88% of the population disagreed to the
assertion that Over or under-invoicing is common challenge, 24.0% remained neutral and
58.1% agreed. The number of population who agree is three times higher than those who
disagree. On the other hand; as shown in Table 4, 60.3% of the population disagreed to the
assertion that purchase invoices, tax declaration and other documents submitted by PME own-
ers could be used as a source of data during valuation; considering the existing situation,
21.2% remained neutral and 18.2% agreed. The number of population who disagree is three
times higher than those who agree. These two findings implies that documents used as source
of evidence in Ethiopia luck reliability.

There are attempts by some banks and insurances to establish in-house database to ad-
dress the shortage of data to conduct valid and legitimate valuation. According to Meister,
(2012) in countries that have transparent market through the establishment of the Gu-
tachterauschuss, the German property market, finding relevant and legitimate evidence of
value is not challenging.

55
 Data that can be used for source of evidence for valuation is critically in shortage in
the country.

PME Valuation Related Education

To access the Plant, Machinery and Equipment Valuation Education, six assertions were
formulated. These question are designed to investigate the practicality of the curriculum,
quantitative skills of PME valuators, practical exercises, relevance of engineering economics
course, challenge of PME to engineers, induction tanning, class room training and sufficiency
of engineering economics for PME valuation. Except to the second and last question, the re-
spondents have agreed with all the remaining the assertions. In general, the findings are
summarized in Table 7.

In Ethiopia there is no institution that provide PME Valuation for Chemical, Electrical,
Industrial and Mechanical Engineers – as these are the one actually conducting the PME Val-
uation in Banks, Insurances as well as Inland Revenue and Custom Authority. There is
however short term training provided to civil engineers as part of real property valuation.
Systematic review on many thesis done by these engineers in Ethiopia shows that PME valu-
ation has not appeared to be a research concern to many of them. On the contrary, apart from
thesis works, there are many active research institutions in African countries such as Kenya
and Uganda.

As shown in Figure 5, many of the respondents agree to the assertion that Plant, machin-
ery and equipment valuation curriculum should have highly practical content and should be
taught with practical examples and exercises approaches?

56
 Figure 5: PME valuation curriculum should have highly practical content

As shown in Figure 6, the number of people who disagree to the assertion that current
valuators are equipped with all quantitative skills are necessary for solving plant and machin-
ery valuation problems is higher than those who agree.

Figure 6: current valuators are equipped with all quantitative skills are necessary for solving plant and machin-
ery valuation problems

57
 The level of education and training demand is very high because the level of skill and
knowledge gap is wide in Ethiopia.

PME Valuation Approaches

To access the PME valuation approaches, six questions were framed. These questions are
intended to address the availability of comparable PME, validity of invoices, means to reduce
impact of over or under invoicing, validity of evidences of valuation used by the valuators,
applicability of income approach and training need and emerging challenges. The findings are
summarized in Table 5. Moreover, to further analyze the valuation approaches, four points of
investigation are raised. These are: – the sales comparison approach, – the cost approach, –
the income approach, and finally – the extension of all the above approaches.

A. Sales Comparison Approach

The Sales Comparison Approach (SCA) relies on the assumption that a matrix of attrib-
utes or significant features of a property drive its value. This approach had wider acceptance
in Ethiopia. However, many experts in the field disagree in the actual practice –because there
are many limitations in doing the comparisons. In principle, apple has to be compared with
apple; if the comparison ought to be fair. The level of compliant with regards to this practice
is much higher, because the level of associated subjectivity is higher.

B. Cost approach

While PME valuation frequently rely on the Sales Comparison approach, researching an
opinion of value takes an interesting turn when we value items for which there is not an active
market. When a piece of specialized equipment cannot be compared to an item of similar
utility, it is possible to find a value by using the Cost Approach, known in the PME spheres
as “Trending and Bending”. At its most elementary, Cost Approach involves calculating the

58
RCN of the subject asset (“trending”) and then reducing the RCN by all procedures of depre-
ciation (“bending”). The three forms of depreciation that need to be considered — and in this
order — are physical deterioration, functional obsolescence and economic obsolescence.

The easiest way to arrive at the RCN is to take the cost of the subject when new (original
cost) and then trending it up to the RCN using an index. In the best case scenario, the client
can confirm what the original cost was. Otherwise, we have to re-engineer the subject and
calculate the resulting cost. That certainly adds a layer of complication, but sometimes it’s the
only way to get a number we can work with.

C. Income approach

The most convenient and applicable method in income approach is Discounted Future
Cash Flow. Because, this method applies to investment and general-use properties where there
is an established and identifiable rental market or where a specific measurable stream of ben-
efits may be attributed to the case PME. In applying this method to plant, machinery and
equipment, consideration is given to either the income-generating or the cost-savings potential
of the item and the associated risks and uncertainties. The income approach is suitable to be
used if the plant, machinery and equipment economic life span can be determined or the ter-
minal value in the end of useful life is known. The benefit/income capitalization method
presents a number of obstacles. Some notable obstacles are as follows:

1. For most PME, the potential earnings (benefits) cannot be reasonably separated
from those of overall business and often the information regarding their respec-
tive operating costs is unavailable (Korner, 2009).

2. It is difficult to develop one of the most critical factors: The discount rate
(Korner, 2009 and Derry, 2008).

59
 3. The risks of specialised items or those involving unique technologies are typi-
cally higher than for units alternative uses because of PME is not as liquid as
current assets and lacks comparable market data (Budhbhatti, 1999). Therefore,
the risks and returns associated with plant and machinery are higher than those
for current assets.

The findings in Table 5 and the analysis in previous paragraphs shows that there are cer-
tain challenges to practice this approach. Frist there is huge information challenge to know
possible income or quantifiable benefits from a given PME. Second there is no synchroniza-
tion in among banks, insurance and tax authority in capitalizing income of PME directly or
indirectly. And finally, the need for training on using different valuation approaches including
the income approach.

All the valuation approaches can be applied in the Ethiopian context with lower level
of validity.

PME Valuation Analysis

To access the PME Valuation Analysis, six questions were articulated. These questions
can help to investigate availability of PME Database, legal liability of valuators, impact of
credibility and reliability, pressure on valuators, freedom of valuators and level of information
secrecy. The findings are summarized in Table 6.

To investigate the validity of a valuation report, a thorough analysis has to be conducted

on the presented report from a historical as well as current market context. This is important
because it can help to see the merits and potential risks associated with the decision based on
the PME valuation report. As a result, due to its impact as well as due to its challenging nature,

60
valuation analysis has to be conducted by professionals on factual ground based on well doc-
umented information resource as well as case studies.

However, the findings in Table 6, suggest that, the current practice does not promote
quality valuation analysis because of many reasons. First there is huge shortage of information
resource and associated skill gap in among the valuators and their supervisors to conduct val-
uation analysis. Second, the need for valuation analysis less perceived action in among the
potential owners, lenders, investors as well as the government offices. Third, the impact of
luck of credibility and reliability of valuation reports is also not a hot issue among the valua-
tors and officers. Fourthly, the level of external pressure on valuators is significantly higher
which diminishes the need for factual based investigation of valuation irrespective of the in-
terest of the pushing external body.

The valuation analysis procedures are affecting the quality of the final valuation re-
port.

PME Valuation Reports

To access the PME Valuation Report, seven enquiries were formulated. These enquiries
are designed to investigate expression of uncertainty, PME valuators’ understanding of uncer-
tainty, standard expressions, sufficiency of content, national standard guideline, freedom of
professionalism, reliability and credibility of valuation, national database and ethical di-
lemma; and the findings are summarized in Table 8.

To examine the Valuation Reports in Ethiopia, three key issues that have to be assessed.
These are – the Content of the report, – the Disclaimer clauses and –the Professional indemnity
insurance.

61
 A. Content and Formats

All valuation reports are supposed to follow a more or less standardized report layout or
format – with the underlying assumption that the reports by the virtue of its content will effi-
ciently meet the intended objectives. Uniformity needed as part of reporting factual
information concerning the PME. This normally is manifested in:

1. A description of the assignment and directives including the purpose of the valu-
ation, also information regarding the client’s position;

2. A description of all the underlying documents with reference dates and a short
commentary on each;

3. A description of the area where the object is situated;

4. A description of the actual site of the object and a description of the buildings on
the property, together with a schedule of actual floor areas;

5. A brief account of the official regulations regarding the property and the sur-
rounding area, together with reference to any future planned developments for
the area;

6. A summary of the various valuation methods employed;

7. A listing of limitations and conditions under which the value is given;

8. Various enclosures such as commercial and tax invoices, photographs, copy of

ownership certificates, drawings, drawings, official injunctions and development
plans.

In some banks and insurances, for vehicles and generators extensive use is made of stand-
ard forms. These forms, of which there are two types, have been in use for a number of years

62
and are virtually unchanged. The layout follows a number of logical steps including the re-
porting of all relevant facts and descriptions of the property. A specific page of the report were
supposed to contains elements of the calculation of capitalized income and depreciated re-
placement costs, and the valuer’s conclusion –however, no such contents exist.

Both market value and lending value is reported. Comparable market prices are not men-
tioned in the form, but there is an increasing tendency for the valuers to report any such figures
under the item of miscellaneous information.

B. Disclaimer clauses

The absence of disclaimer clauses in the valuation reports critically affects the end users
in many ways. Frist, end users assume absence of the clause shows absence of any related
limitation and take the estimated value as final and for granted. Secondly, investors and deci-
sion makers in the financial institutions tend to assume unspecified warranty associated with
the report. As a result the level of damage that can occur is very dangerous. Apart from these
reasons, the International Valuation Standards Council guideline for valuation strictly recom-
mends the inclusion of the disclaimer clauses (IVSC, 2010).

C. Professional Indemnity Insurance

Except employees in few insurance companies, almost all other valuation engineers in
banks, custom authority and private consultant companies in Ethiopia are not insured and
don’t have professional indemnity insurance.

The quality of PME valuation report in Ethiopia are critically poor and luck credi-
bility by private investors. The government’s effort for national investment

63
 development programmes must be backed up by support from the scholars in the
academia.

Ethical Dilemmas in PME Valuation

To assess the level of ethical concerns with regards to OME valuation, eight questionings
were formulated. These questions were designed in such way that help to investigate ethical
issues in certification, PME owners capacity to manipulate, national standard of Valuation,
pre-text actions against ethical valuators, . Accordingly the findings are summarized in Table
9.

As discussed in the literature review chapter, the dark side of valuation is highly inter-
mingled with two critical issues when it comes to ethical dilemmas. One of these issues is the
conduct of the valuer and the other once is ethical standards action both in terms of rewards
and punishments following the incidence of the ethical issues.

A. Valuer Conduct

In the Ethiopian context, the PME valuators conduct cannot be free from the influence of
the project promoters as well the organization they work for. In addition to this influence, the
qualification system and job assignment process impact the way the valuators react to issues
related with ethical values. The findings do agree with this findings.

B. Ethics

As shown in section Table 9, firstly, 5.5% disagree while 73.8 agree to the proposition
that absence of strict requirement for valuation certification and professional license affects
ethical stand of valuators. Secondly, 15% disagree while 55% agree to the proposition that
client company owners can manipulate the selection and assignment of valuation engineers to

64
corrupt the system. Thirdly, 12% disagree to the assertion that absence of national valuation
standard and guideline in Ethiopia promotes un-ethical professional practice; while 55%
agrees.

Fourthly, 18% disagree to the assertion that freedom of professionalism in valuation en-
gineers can be abused by the management with a pretext of internal promotion, international
travel and/or disciplinary actions while 49% agrees. Fifth, the percentile of respondents’ who
agree with the assertion that reliability and credibility of valuations are under treat by un-
ethical deeds of investors is 62% which is triple of those who disagree.

Hoyt (2002) said the code of conduct for valuation in many countries sets ethical rule that
in turn sets the requirements for integrity, impartiality, objectivity, independent judgment, and
ethical conduct.

Seifu (2009) found out that the Customs Valuation System in Ethiopia is highly subjective
because it does not provide fair, unbiased and consistent valuation. Seifu (2009) also con-
cluded that the valuation system does not effectively safeguard traders from risk of arbitrary
valuation by the customs officers. There is also risk of revenue loss to the government primar-
ily because of under invoicing by the traders since governing mechanisms such as Post
Clearance Audit (PCA) are not sufficiently developed.

From this findings, it is possible to extract four critical assertions. Frist, the level of sub-
jectivity in the valuation process; secondly the ethical concerns related with the valuation
officers; thirdly, the ethical concerns of the traders; and finally, the level of loss both to the
government and the traders.

Levy (1999) had identified the primary factors affecting the extent to which clients influ-
ence valuations are four. These are the type of client, the characteristics of valuers and

65
valuation firms, the purpose of a valuation and the information endowments of clients and
valuers. In similar fashion, Ethical issues in Ethiopian PME valuation are expected to be de-
pendent on similar or more factors.

The level of ethical concerns on PME valuation is affecting the investment decisions
of potential investors to relay on valuation reports.

Summary of the Analysis and Interpretation

According to Dr Maxwell Mutema (2016), property valuation challenges in Africa are

multi-dimensional, multifaceted and interlinked. The main ones include absence or poor val-
uation education and training, absence of institutional professional representation (voice),
absence of orderly constituted or structured continuous professional development regulations,
lack of professional standards and property market price information asymmetry or lack of
transparent property price information, among others.

After conducting an observational analysis on the existing PME valuation situation in

Ethiopia, list of challenges were identified. Based on the list of challenges, an investigation
framework having seven pillars was constructed.

Global Experience – Valuation Standards and Law

A careful analysis of the findings shows that in Ethiopian PME Valuation practice there
is lesser valuation accuracy, lower reliability, higher ethical concern and legal and technical
guide line. All these and other problems described in this chapter conjures up pragmatic stud-
ies of learning other countries experience. In spite of the absence of benchmarking framework
for PME valuation, this paper attempts to investigate global experience in Valuation Standards

66
and Law. This section therefore presents some internationally known bodies that set standards
and legal frameworks of valuation.

RICS

The Royal Institution of Chartered Surveyors (RICS) is a professional body that accredits
professionals within the land, property and construction sectors worldwide. Members holding
RICS qualifications may use the following designations after their name: MRICS (Member),
FRICS (Fellow), AssocRICS (Associate). Those with the designation MRICS or FRICS are
also known as chartered surveyors.

The RICS was founded in London as the "Institution of Surveyors" after a meeting of 49
surveyors at the Westminster Palace Hotel on 15 June 1868. The inaugural president was John
Clutton (who founded Cluttons, a property firm still in business today). RICS has occupied
headquarters on the corner of Great George Street and Parliament Square since then. 4 It re-
ceived a Royal charter as "The Surveyors' Institution" on 26 August 1881. 5

4 RICS. 2014. Retrieved 27 September 2014.

5 "The Institution of Surveyors". The Times (The Times Digital Archive). 10 September 1881. p. 12. Retrieved 27 Sep-
tember 2014.

67
 The Surveyors' Institution became the "Chartered Surveyors' Institution" in 1930. 6 In
1946, George VI granted the title "Royal" and in 1947 the professional body became the
“Royal Institution of Chartered Surveyors”. 7

IVSC

The International Valuation Standards Council (IVSC) is an independent, not-for-profit,

private sector standards organization established in the USA and with its operational head-
quarters in London, UK. The IVSC develops international technical and ethical standards for
valuations on which investors and others rely.

The IVSC is responsible for developing the International Valuation Standards and asso-
ciated technical guidance. To ensure that the public interest is effectively protected it also
engages with other bodies active in the regulation of the financial markets to ensure that val-
uation issues are properly understood and reflected. The IVSC works cooperatively with
national professional valuation institutes, users and preparers of valuations, governments, reg-
ulators and academic bodies, all of whom can become members of the IVSC and play a role
in advising the Boards on their agenda priorities.

6 "Chartered Surveyors". The Times (The Times Digital Archive). 15 November 1930. p. 8. Retrieved 27 September
2014.

7 "Royal Institution of Chartered Surveyors". The Times (The Times Digital Archive). 28 May 1946. p. 8. Retrieved 27
September 2014

68
 In developing its standards and technical guidance the IVSC follows a process of issuing
discussion papers and exposure drafts for public comment. The Standards Board and Profes-
sional Board meetings are open to observers.

Conclusion

The document content and survey result analysis show PME valuation practice in Ethio-
pia is at its lower level of credibility to the investors, banks, insurances, revenue and custom
authority, client manufacturing companies and other stakeholders. The currently applied val-
uation approaches are not as effective as they have to be because many reasons. Valuation
analysis and reported results luck quality and strive to meet expected requirements. The level
of ethical concerns with regards to PME valuation is enormous. The effort to identify and
enumerate current challenges of plant. Machinery and equipment valuation in Ethiopia is can
be executed with the investigation framework which is made-up of seven main pillars that was
used to formulate the questioner attached in the annex.

69
 Chapter 5 - Conclusion and Recommendation

This section summarizes the most important conclusions of the research, and the paper
answered the research questions as stated in section 1.2. Next to that, the paper forwards rec-
ommendations both to improve the PME Valuation in the country both by implementing the
recommendations and developed models. Finally, the paper identified future research works.

Problem Statement and Methodology

As already stated in section 1.2, the PME Valuation in Ethiopia have quite enormous
problems that could be summarized in to seven categories. This paper had used both qualita-
tive and quantitative techniques to shade light on these problems. After investigating the
existing problems, the paper had identified and clustered problems under seven category.

Summary of Main Findings and Conclusions

This paper has investigated the current challenges of PME valuation in Ethiopia. Through
critical investigation and analysis of data gathered from primary and secondary sources, the
paper had justified the existence higher level of concern in PME valuation in country. More-
over, the findings clearly show that there is a need for new and better valuation method –both
in terms of error minimization and time saving.

70
 Ethiopian PME Valuation practice present a number of peculiarities that have been out-
lined in chap. 4; in particular, the lack of market transparency due to difficulty in obtaining
reliable information regarding prices, the luck of consistency and uniformity as a result of
national uniform standard, higher level of ethical concern because of absence of code of con-
duct, higher gap in knowledge and skill primarily due to absence of relevant education, huge
uncertainty in Banks, Insurances and other financial intuitions because of poor quality and
unreliable valuation reports, poor tax system and to the high risk level that is typical of indus-
trial project investments. These raises the need for a new and comprehensive action by all
concerned body.

First Objective

The first objective of this paper is to identify and enumerate current challenges of plant.
Machinery and equipment valuation in Ethiopia. As shown in section 4 & 5, the paper had
identified key challenges, issues and concerns of PME valuation in Ethiopia using both qual-
itative and quantitative methodologies.

Second Objective

The second of this paper is to forward recommendation for actions that can help to
improve PME valuation in Ethiopia. The main objective of the current chapter is to fulfil this
third objective. Thus, relevant recommendation and set of future work remarks are forwarded
in the coming sections.

71
 Recommendations

The paper has recommendations to many concerned bodies such as the regulatory body,
higher institutions, Banks, Insurances and other governmental and non-governmental bodies
in Ethiopia.

Recommendation for the Regulatory Body

A. Qualification and Licensing

Many Banks, some Insurance companies as well as the Revenue Authority are using un-
licensed internal Valuators to carryout PME valuation. As conformed by the investigation,
many of these internal valuators had never took any course that can enable to conduct the
valuation. The Regulator body is therefore recommended – first to see the legal framework of
PME valuation in such a way that there is no door for unlicensed and unqualified valuator –
secondly to control these institutions for employing unlicensed and unqualified valuator and
ascertain order; and thirdly to open its door for collaboration with higher institutions espe-
cially Engineering Faculties in the country – fourthly to establish a mechanism by which legal
claim on loss as a result of PME Valuation could be raised against Valuators.

B. Establishing National PME Valuation Standard

The ultimate goal of PME Valuation is always to estimate and report the market value of
the PME. Establishment of National PME Valuation Standard (NPMEVS) is critical to fulfill
this goal by: first – setting forth the valuation in a clear and non-misleading manner. Second
– ensuring that the estimate is reached using the appropriate, widely accepted methods and
techniques. Third – providing sufficient information to permit those who read and rely on the
report to fully understand its data, reasoning, analyses and conclusions. Forth – complying

72
with the requirements of the standards and reporting. Five – defining the value being esti-
mated; state the purpose and intended use of the valuation, the effective date of valuation and
the date of the report. Six – identifying clearly and describe the PME, and ownership rights or
interests being valued. Seven – physically inspecting the plant and describe the scope and
extent of the work undertaken, and the extent to which the plant was inspected. Eight – stating
clearly the assumptions and limiting conditions upon which the valuation is based. Do not
unquestioningly accept the data collected in an “as is where is” form, but also consider all
pertinent market evidence, trends, recent transactions, etc. Nine – explaining completely the
valuation basis and approaches applied and the reasons for the applications and conclusions.
Lastly - including a signed compliance certificate attesting the valuer objectivity, professional
contribution, unbiased opinion, non-contingency of professional fee and other compensation
as well as applicability of standards and disclosures.

Because of the absence of standardization in Ethiopia, property valuation is less reliable,

highly inaccurate and difficult to raise claims against damages that occur as a result of errors
in estimated value.

Recommendation for the Higher Institutions in Ethiopia

A. Education, Training and Certification

As elaborated earlier, PME valuation is needed in many areas of business activities –in
banks PME valuation is conducted to determine loan collateral value of PME, –in insurances
as damage estimation, –in merging as value determination, –in custom as tax estimation and
many more areas of critical economic activities (A. Millington, 2013). Property Valuation is
a professional activity that has to be conducted by a formally trained professional valuators
so that the industry requirements could be well fulfilled (Poon and Brownlow, 2014). S Źróbek

73
and C Grzesik (2013) argues that if valuers have to provide proper advice that could poten-
tially affect investments, then valuators must get education at a university level in programmes
that could prepare and equip them with all necessary skill and knowledge. Similarly Baxter
(2007) emphasizes that property education needs to be greater engagement by academic and
teaching staff to more actively engage in mainstream university teaching pedagogy.

As per Nasir Mohd, et al (2012) on job training is crucial to valuation engineers if these
engineers have to be able to conduct reliable valuation that could realistically estimate the
market value. Such approaches could be suitable to Ethiopian PME Valuation.

In Ethiopia, property valuation, especially PME valuation is conducted by engineers

whose specialization is chemical, electrical, mechanical, and industrial engineering. The cur-
rent syllabus of these streams does not contain materials that can help PME valuators with the
required level of competency. Thus this paper recommends higher institutions in the country
first – to incorporate PME valuation in to review current engineering course curriculum from
to illustrate the need for property valuation education in Ethiopian context especially in chem-
ical, electrical, mechanical, and industrial engineering specializations.

B. The Need to Benchmark Global Experience

Higher institutions in Ethiopia must play their leading role in observing the global expe-
rience and trend in PME valuation. As per Alastair Adair (1996) the UK has been a leading
country to offer Property Valuation Related specialization in Education. Germany, France,
Australia and USA, Uganda, and Kenya have already joined the stream decades ago. This
paper, therefore recommends Ethiopian higher institution to Benchmark the global experience
both in terms of curriculum and policy frameworks.

74
 Recommendations for Banks, Insurances and Custom and Inland Au-
thority

A. Using Comprehensive Database

Good quality data is the essential for accurate and reliable valuation works. The currently
available data in most Banks, Insurance and Revenue Authority are highly incomplete, disor-
ganized and quite un-suitable for the application of artificial intelligence in valuation. Thus,
this paper recommends Banks, Insurances and Custom and Inland Authority – first to establish
national level database and keep records on time; – secondly, to design the database in such a
way that detailed attribute values for the asset could be saved for future analysis. Such detailed
attribute values could include color, photograph, and maintenance history and so on.

B. Gathering data by Looking the Future Ahead

In most institutions including Banks, Insurances and Custom and Inland Authority there
is chronic level of data shortage. The chronic level of data deficiency in PME market seriously
erodes confidence of lenders, abuses tax system and creates door for corruption. Moreover,
almost all artificially intelligent applications including this paper’s models cannot function as
intended without sufficient data. Therefore, Banks, Insurances and Custom and Inland Au-
thority are recommended to – first to realize chronic level of data deficiency in PME market;
– secondly to gather data aggressively by looking the future ahead; and – thirdly to avail that
data for concerned body and bit the battle against luck of transparency.

C. Collaborative Effort and Open Data Exchange

Banks, Insurances and Custom and Inland Authority demand PME valuation critically.
Quality and Reliability of the reports is a paramount concern in these bodies. That is why
these bodies have to collaborate and operate interdependently if highly reliable PME valuation

75
is needed. Therefore, in addition to the establishment of central database, there must be a
collaborative effort for Open Data Exchange in among Banks, Insurances and Custom and
Inland Authority.

Resolving Ethical Issues

As shown in section four the level of concern is higher both to the government and private
investors. The existence of concern especially from ethical point of view is harmful to all
stakeholders –namely the government, banks, insurances, custom authority, private investors
and professional valuators. Therefore, it is recommended that this issue be resolved. The pro-
cess of resolving the ethical issues encompasses many activities. The first step is establishing
national code of ethics for valuators. The second step is providing training and creating aware-
ness in among the practitioners so that valuators strive to keep their personal and professional
integrity. Following this, the third step is creating clarity through sensible and visible manners
so that valuators know rewards for ethical and punishment for unethical individuals.

Future Work

The paper had identified many challenges of the current PME valuation in Ethiopia. The
paper had never attempted to mitigate many of these problems apart the challenges. This ne-
cessitates further research works.

76
 Appendix I. Questioner

Section – I: Demographics

How do you describe your self

Age Group † 18-25 †26-36 †37-50 †51-60 †>60

Sex †male †female †unspecifie

d

Year Of Ser- † 1-2 †3-5 †6-10 †1 †16-20 †>20

vice in 1-15
Valuation

Management †Trainee † †Officer † Senior †Principal †Above

Level Junior

Organization †Consulting †Insurance † Bank † Court † Legal Firm

Firm

†Inland Rev- †Manufacturing †Chamber † Custom of-

enue Office Company of Commerce fice

Education † Ph.D. †M.Sc. †MBA †B †B.Sc. †Diploma

Level A

Section – II: Scaled Questionnaires

Meaning of the scale: 5 –strongly agree, 4 – agree, 3–neutral, 2 –disagree, and 1 – strongly disagree

i
General issues of Plant, Machinery and Equipment Related Information

No Re-
sponse

Do you feel that the qualification required to get professional license of

A.1 5 4 3 2 1
Valuator is appropriate in Ethiopia?
†††††

Do you agree that there is an acceptable level of uniform understanding

A.2 5 4 3 2 1
of meaning of definition for Plant, machinery and Equipment among the
†††††
valuators in Ethiopia?

Do you feel that using un-licensed internal valuator in Banks and Insur-
A.3 5 4 3 2 1
ances is appropriate?
†††††

Do you agree that property valuation is a professional carrier?

A.4 5 4 3 2 1
†††††

Do you agree that property valuators exert sufficient energy to develop

A.5 5 4 3 2 1
their carrier?
†††††

Do you agree that the government of Ethiopia had paid sufficient attention
A.6 5 4 3 2 1
to the development of valuation as a key facilitator of trade and invest-
†††††
ment?

ii
 Valuation Practices

No Response

B.1 Plant, machinery and equipment owners are cooperative and provide genuine 5 4 3 2 1
data for the assigned Engineers during inspection †††††

B.2 Plant, machinery and equipment inspection is conducted by legitimately as- 5 4 3 2 1

signed Engineers †††††

B.3 Having standardized field note format could be important to capture all rele- 5 4 3 2 1
vant data during onsite inspection †††††

B.4 Do you feel that Instruction for valuation provided to Valuation Engineers are 5 4 3 2 1
free from any form of hidden interest by any party? †††††

B.5 Do you feel plant, machinery and equipment owners have no power to influ- 5 4 3 2 1
ence the selection of valuation engineer? †††††

B.6 5 4 3 2 1
Do you feel that Valuation Engineers investigate manufacturing layout, man-
ufacturing capabilities, operating characteristic, maintenance program in † † † † †
conducting their analysis?

iii
Plant, Machinery and Equipment Valuation Approaches

No Response

C.1 Do you feel that data is available to apply sales comparison approach? 5 4 3 2 1
†††††

C.2 Do you feel that over or under-invoicing is common challenge? 5 4 3 2 1

†††††

C.3 Do you feel that synchronization between banks, insurances and inland 5 4 3 2 1
revenue can minimize conflicting values on invoices? †††††

C.4 Do you feel that purchase invoices, tax declaration and other documents 5 4 3 2 1
submitted by Plant, Machinery and Equipment owners could be used as †††††

a source of data during valuation; considering the existing situation?

C.5 Do you feel that companies who are not profitable could be valuated us- 5 4 3 2 1
ing income approach? †††††

C.6 Do you feel that valuators must get training on new valuation methodol- 5 4 3 2 1
ogy to comprehend with emerging challenges? †††††

Plant, Machinery and Equipment Valuation Analysis

iv
No Response

D.1 Do you feel that Valuation Resources such as price database and compar- 5 4 3 2 1
ison information are easily available to valuators in Ethiopia? †††††

D.2 Do you agree that valuators should be liable for any loss as a result of 5 4 3 2 1
their estimations? †††††

D.3 Do you think that improving the reliability and credibility of valuation in 5 4 3 2 1
Ethiopia can impact the industrialization process? †††††

D.4 Do you agree that valuators should do their estimations to the best of their 5 4 3 2 1
knowledge free from any form of pressure from anybody? †††††

D.5 Do you agree that valuators are independent and they do their duty free 5 4 3 2 1
from any form of influence from anybody? †††††

D.6 Do you agree that valuators are disclosing all relevant legal and technical 5 4 3 2 1
assumptions, conditions and source of evidence they used to reach at the †††††

final conclusion?

Plant, Machinery and Equipment Valuation Education

v
No Response

E.1 Do you agree that Plant, machinery and equipment valuation curriculum 5 4 3 2 1
should have highly practical content and should be taught with practical †††††

examples and exercises approaches?

E.2 Do you believe that current valuators are equipped with all quantitative 5 4 3 2 1
skills are necessary for solving plant and machinery valuation problems? †††††

E.3 Do you assume that current valuators had the opportunity to solve Prac- 5 4 3 2 1
tical exercises in the field that can facilitate their understanding of plant, †††††

machinery and equipment valuation?

E.4 Do you agree that more time should be devoted to practical plant, ma- 5 4 3 2 1
chinery and equipment valuation exercises in the field than lectures in the †††††

classroom if valuation education is started in Ethiopia?

E.5 Do you agree that most examples in Engineering economics provide to 5 4 3 2 1

engineers by lecturers in the classroom are abstract to relate it with actual †††††

plant, machinery and equipment valuation duties?

E.6 Do you accept that conducting Plant, machinery and equipment valuation 5 4 3 2 1
is difficult for engineer with no additional training? †††††

E.7 Do you believe Trainers should get practical experience and training be- 5 4 3 2 1
fore they start training valuators with plant and machinery valuation? †††††

E.8 Students should be given real life problems in plant and machinery val- 5 4 3 2 1
uation to solve in the classroom †††††

E.9 Do agree that lessons provided in Engineering economics are sufficient 5 4 3 2 1

to conduct Plant, machinery and equipment valuation in Ethiopia? †††††

Plant, Machinery and Equipment Valuation Reports

vi
No Response

F.1 Do you feel that expression of uncertainties of the valuator should be in- 5 4 3 2 1
cluded valuation reports? †††††

F.2 Do you agree that the concept of uncertainty within a valuation is poorly 5 4 3 2 1
understood and is rarely conveyed to the client in any coherent form? †††††

F.3 Do you feel standard approach to uncertainty expression are important, 5 4 3 2 1

not only for the valuer’s peace of mind, but in order to offer the best pos- †††††

sible service to the general public?

F.4 Do you feel that valuation reports contain sufficient information for inde- 5 4 3 2 1
pendent investigator to reach at similar conclusions? †††††

F.5 Do you feel that valuations reports in many cases are unsupported and 5 4 3 2 1
insubstantial? †††††

F.6 Do you agree that the assumptions are relevant and appropriate with le- 5 4 3 2 1
gitimate intention? †††††

F.7 Do you feel that conclusions, in most cases, are based on invalid assump- 5 4 3 2 1
tions? †††††

Ethical Dilemmas in Plant, Machinery and Equipment Valuation

vii
No Response

G.1 Do you feel that absence of strict requirement for valuation certification 5 4 3 2 1
and professional license affects ethical stand of valuators? †††††

G.2 Do you sense that client company owners can manipulate the selection 5 4 3 2 1
and assignment of valuation engineers to corrupt the system? †††††

G.3 Do you feel that absence of national valuation standard and guideline in 5 4 3 2 1
Ethiopia promotes un-ethical professional practice? †††††

G.4 Do you agree that freedom of professionalism in valuation engineers can 5 4 3 2 1

be abused by the management with a pretext of internal promotion, inter- †††††

national travel and/or disciplinary actions?

G.5 Do you feel that reliability and credibility of valuations are under threat 5 4 3 2 1
by un ethical deeds of investors? †††††

G.6 Do you agree that absence of national database is allowing misconduct of 5 4 3 2 1

valuators to present unreliable valuation amounts? †††††

G.7 Do you feel that the ethical dilemmas in Ethiopia are significantly wide 5 4 3 2 1
for a concerned body to set dialogue up on remedy actions? †††††

G.8 Do you agree that banks level of nonperforming loan has any relation 5 4 3 2 1
with ethical standards of valuation engineers? †††††

Section – III: Open Ended Questionnaires

viii
Comments on Plant, Machinery and Equipment Valuation

ix
No

H.1 What comments do you have on availability of Central Database of Plant, Machinery
and Equipment prices at national level?

H.2 What comments do you have on Standardizing Plant, machinery and Equipment Valu-
ation in Ethiopia?

H.3 What comments do you have on need for new course or establishment of new depart-
ment for Plant, machinery and Equipment in Ethiopia?

x
H.4 What comments do you have on the Current Approaches of Plant, Machinery and
Equipment Valuation–cost, market and income approaches?

H.5 What comments do you have on Ethical Issues related with the current Plant, machinery
and Equipment valuation in Ethiopia?

H.6 What comments do you have on Qualification and Licensing Process of Valuation En-
gineers by National Bank?

xi
H.7 What comments do you have on Factory or Site inspection works and related issues?

H.8 What general comments do you have on Plant, Machinery and Equipment Valuation in
Ethiopia? (Legal, ethical, policy, education, technological or any sort ….)

xii
 Appendix II. Summary of Responses to the Questioners

Table 3: General Issues of Plant, Machinery and Equipment Related Information

% % % Std.
CODE QUESTION Mean Mode
Dev
Disagree Neutral Agree
Do you feel that the qualification required
A1 to get professional license of Valuator is ap- 24.02 30.73 45.25 3.35 3.00 1.15
propriate in Ethiopia?
Do you agree that there is an acceptable
level of uniform understanding of meaning
A2 of definition for Plant, machinery and 57.54 24.58 17.88 2.35 2.00 1.05
Equipment among the valuators in Ethio-
pia?
Do you feel that using un-licensed internal
A3 valuator in Banks and Insurances is appro- 50.28 24.58 25.14 2.61 1.00 1.35
priate?
Do you agree that property valuation is a
A4 24.02 26.26 49.72 3.36 4.00 1.23
professional carrier?

Do you agree that property valuators exert

A5 34.64 37.43 27.93 2.97 3.00 1.05
sufficient energy to develop their carrier?

Do you agree that the government of Ethio-

pia had paid sufficient attention to the
A6 58.66 28.49 12.85 2.36 2.00 1.16
development of valuation as a key facilita-
tor of trade and investment?

Table 4: Valuation Practices in Ethiopia

CODE QUESTION % % % Mean Mode Std.

xiii
 Disagree Neutral Agree Dev
Plant, machinery and equipment owners
are cooperative and provide genuine data
B1 40.78 26.82 32.40 2.92 3.00 1.28
for the assigned Engineers during inspec-
tion
Plant, machinery and equipment inspection
B2 is conducted by legitimately assigned En- 41.90 29.05 29.05 2.79 3.00 1.29
gineers
Having standardized field note format
B3 could be important to capture all relevant 54.75 27.93 17.32 2.51 2.00 1.14
data during onsite inspection
Do you feel that Instruction for valuation
provided to Valuation Engineers are free
B4 51.96 30.17 17.88 2.51 3.00 1.21
from any form of hidden interest by any
party?
Do you feel plant, machinery and equip-
B5 ment owners have no power to influence 42.46 33.52 24.02 2.63 3.00 1.17
the selection of valuation engineer?
Do you feel that Valuation Engineers in-
vestigate manufacturing layout,
B6 manufacturing capabilities, operating char- 55.31 24.02 20.67 2.44 2.00 1.13
acteristic, maintenance program in
conducting their analysis?

Table 5: Plant, Machinery and Equipment Valuation Approaches

% % % Std.
CODE QUESTION Mean Mode
Disagree Neutral Agree Dev

Do you feel that data is available to apply

C1 60.34 21.23 18.44 2.36 2.00 1.08
sales comparison approach?
Do you feel that over or under-invoicing is
C2 17.88 24.02 58.10 3.60 4.00 1.21
common challenge?
Do you feel that synchronization between
C3 banks, insurances and inland revenue can 12.85 20.11 67.04 3.81 4.00 1.15
minimize conflicting values on invoices?

xiv
 Do you feel that purchase invoices, tax dec-
laration and other documents submitted by
C4 Plant, Machinery and Equipment owners 25.70 21.23 53.07 3.36 4.00 1.33
could be used as a source of data during val-
uation; considering the existing situation?
Do you feel that companies who are not
C5 profitable could be valuated using income 13.41 26.26 60.34 3.65 4.00 1.14
approach?
Do you feel that valuators must get training
C6 on new valuation methodology to compre- 11.17 26.82 62.01 3.70 4.00 1.04
hend with emerging challenges?

Table 6: Plant, Machinery and Equipment Valuation Analysis

% % % Std.
CODE QUESTION Mean Mode
Dev
Disagree Neutral Agree
Do you feel that Valuation Resources such
as price database and comparison infor-
D1 53.63 25.14 21.23 2.55 2.00 1.21
mation are easily available to valuators in
Ethiopia?
Do you agree that valuators should be liable
D2 27.37 17.88 54.75 3.39 4.00 1.35
for any loss as a result of their estimations?
Do you think that improving the reliability
D3 and credibility of valuation in Ethiopia can 10.06 21.79 68.16 3.87 4.00 1.03
impact the industrialization process?
Do you agree that valuators should do their
estimations to the best of their knowledge
D4 5.59 25.14 69.27 3.94 4.00 0.99
free from any form of pressure from any-
body?
Do you agree that valuators are independent
D5 and they do their duty free from any form of 59.78 22.91 17.32 2.39 2.00 1.09
influence from anybody?
Do you agree that valuators are disclosing
D6 23.46 30.17 46.37 3.32 3.00 1.28
all relevant legal and technical assumptions,

xv
 conditions and source of evidence they used
to reach at the final conclusion?

Table 7: Plant, Machinery and Equipment Valuation Education

% % % Std.
CODE QUESTION Mean Mode
Agree Dev
Disagree Neutral
Do you agree that Plant, machinery and equip-
ment valuation curriculum should have highly
E1 5.03 22.91 72.07 3.97 4.00 0.90
practical content and should be taught with
practical examples and exercises approaches?
Do you believe that current valuators are
equipped with all quantitative skills are neces-
E2 47.49 29.05 23.46 2.67 2.00 1.19
sary for solving plant and machinery valuation
problems?
Do you assume that current valuators had the
opportunity to solve Practical exercises in the
E3 48.04 28.49 23.46 2.65 3.00 1.23
field that can facilitate their understanding of
plant, machinery and equipment valuation?
Do you agree that more time should be de-
voted to practical plant, machinery and
E4 equipment valuation exercises in the field than 8.38 32.96 58.66 3.74 3.00 1.09
lectures in the classroom if valuation educa-
tion is started in Ethiopia?
Do you agree that most examples in Engineer-
ing economics provide to engineers by
E5 lecturers in the classroom are abstract to relate 32.40 28.49 39.11 3.00 3.00 1.26
it with actual plant, machinery and equipment
valuation duties?
Do you accept that conducting Plant, machin-
E6 ery and equipment valuation is difficult for 15.08 36.87 48.04 3.39 3.00 1.09
engineer with no additional training?

xvi
 Do you believe Trainers should get practical
experience and training before they start train-
E7 8.94 25.14 65.92 3.82 4.00 1.00
ing valuators with plant and machinery
valuation?
Students should be given real life problems in
E8 plant and machinery valuation to solve in the 4.47 35.20 60.34 3.77 4.00 0.93
classroom
Do agree that lessons provided in Engineering
E9 economics are sufficient to conduct Plant, ma- 54.75 24.02 21.23 2.55 2.00 1.19
chinery and equipment valuation in Ethiopia?

Table 8: Plant, Machinery and Equipment Valuation Reports

% % Neu- % Std.
CODE QUESTION Mean Mode
Disagree tral Agree Dev

Do you feel that expression of uncertain-

F1 ties of the valuator should be included 23.46 30.17 46.37 3.23 4.00 1.16
valuation reports?
Do you agree that the concept of uncer-
tainty within a valuation is poorly
F2 40.78 26.82 32.40 2.86 3.00 1.22
understood and is rarely conveyed to the
client in any coherent form?
Do you feel standard approach to uncer-
tainty expression are important, not only
F3 for the valuer’s peace of mind, but in order 32.96 22.35 44.69 3.07 4.00 1.25
to offer the best possible service to the gen-
eral public?
Do you feel that valuation reports contain
F4 sufficient information for independent in- 53.07 24.02 22.91 2.58 2.00 1.12
vestigator to reach at similar conclusions?
Do you feel that valuations reports in many
F5 13.41 34.08 52.51 3.56 3.00 1.11
cases are unsupported and insubstantial?
Do you agree that the assumptions are rel-
F6 evant and appropriate with legitimate 43.58 28.49 27.93 2.83 2.00 1.12
intention?

xvii
 Do you feel that conclusions, in most
F7 15.64 26.26 58.10 3.63 4.00 1.06
cases, are based on invalid assumptions?

Table 9: Ethical Dilemmas in Plant, Machinery and Equipment Valuation

% % % Std.
CODE QUESTION Mean Mode
Disagree Neutral Agree Dev
Do you feel that absence of strict require-
ment for valuation certification and
G1 5.59 20.67 73.74 3.96 4 0.88
professional license affects ethical stand of
valuators?
Do you sense that client company owners
can manipulate the selection and assign-
G2 14.53 30.17 55.31 3.57 4 1.11
ment of valuation engineers to corrupt the
system?
Do you feel that absence of national valua-
G3 tion standard and guideline in Ethiopia 12.29 32.4 55.31 3.64 4 0.97
promotes un-ethical professional practice?
Do you agree that freedom of professional-
ism in valuation engineers can be abused
G4 by the management with a pretext of inter- 17.88 33.52 48.6 3.41 4 0.99
nal promotion, international travel and/or
disciplinary actions?
Do you feel that reliability and credibility
G5 of valuations are under treat by un ethical 22.35 15.64 62.01 3.44 4 1.22
deeds of investors?
Do you agree that absence of national da-
G6 tabase is allowing misconduct of valuators 17.32 27.93 54.75 3.54 4 1.18
to present unreliable valuation amounts?
Do you feel that the ethical dilemmas in
Ethiopia are significantly wide for a con-
G7 8.38 26.82 64.8 3.73 4 0.95
cerned body to set dialogue up on remedy
actions?
Do you agree that banks level of nonper-
G8 forming loan has any relation with ethical 33.52 31.84 34.64 2.98 3 1.12
standards of valuation engineers?

xviii
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