Controversial La Trinidad mall

BEHIND THE SCENES
Alfred P. Dizon

(Here is the Tribal Edge’s take on the proposed mall to be built at the town center of La Trinidad, Benguet which has generated controversy):

Numbers have their meaning, the same way equations are interpreted within context and experience. Disappointingly, what is on paper often emphasises mathematics and technique to the detriment of economic reasoning, which otherwise ignores genuine social scenarios.

In plain words, the La Trinidad mall has an investment of 260 million pesos over 3900 square meters for a project life of 25 years. It is capital intensive, therefore recovery of sank cost is determined on a long term basis.

The theoretical valuation of opportunity cost is at a constant (k) of 10 percent, to quantify the present value of such investment; a hurdle rate of 15 percent is marked (National Economic Development Authority correspondence with Councilor Kipas).

Liquidity shows positively in the forecast baseline cash flow with all expenditures carried. Financial simulations between the baseline and optimal notch find the hurdle at 15 percent attainable on competitively priced rent at full facility utilization.

In concept, the opportunity cost defined at a constant 10 percent is simply to ascertain the element of risk for taking on such investment. In practice, the cost of opportunity is an arbitrary, volatile value on how well a firm conducts its very business, all the more since many external factors change during the course of project life.

When a high hurdle rate is long-term and capital intensive like the project, there are consequences. First, a high capital cost discourages investment and economic growth.

A high hurdle rate directly relates to profit. It raises shareholders expectation and increased revenue target. The majority of facility cost of operations, or expenditure, is dictated by spatial configurations in the technical design.

Reducing these values to increase net cash flows would mean to sacrifice the quality of services rendered during operations, and which could not be right. The other way around would be to increase revenues, if not from rent. And high rent could not be afforded by the community.

When a facility operator is led to set out with the mindset of absolute gain; this encourages sketchy space valuation, at times induces instantaneous cash-in through prepaid rent or leasehold rights arrangements. In return the facility occupants are coerced into pricing irregularities and other forms of malpractices because it is expected that the use of space shall generate revenues enough to pay a pricey rent.

In such situation, absolute gain turns out to be harmful to consumers. To insist upon taking projections well off mark with a high hurdle rate, can result to indebtedness and fuels poverty.

By traditional theory, a negative wedge on NPV would mean that the company is overinvesting because funds do not generate recovery of sank cost.

This conclusion is inconsistent in the Age of Globalisation where firms are urged to respond strategically on non-pecuniary factors that opt for growth as opposed to profit maximisation, such as operating leverage, competitive positioning, increased capacity and increased market share.

Critically, an investment should be afforded by the community to which the mall draws upon. Business should grow in stride with community advancement.

Where liquidity shows positively with all expenditure carried, the discipline to persevere sustainable growth is also an indication of corporate ethics. A well practiced investor acts in a forward looking manner, knowing that investment typically creates new opportunities for further investment, resulting in sequential spill over and multiple options.

In developed nations, it is an acceptable practice to hurdle a sank cost at a rate of 8 percent on PPP or PFI initiatives, for the reason that these infrastructure investments bring forth social equity returns, a higher economic value of return.

Typically, developing countries calculate hurdle in reduced notches to result in a broader range of investment projects and support domestic capital accumulation.

The disquieting high hurdle imposed as a project prerequisite by government raises the question whether there is moral foundation given these numbers or sustainable development is warped. Either way, the result of institution overconfidence can undermine public trust.

The paper PPP/Infra/Municipality of La Trinidad and JARCO is archived with the International Journal of Scientific and Engineering Research Paper ID I069053. Email: tribaledge@gmail.com.