Why is Valuation of Assets always Problematic?

Public sector management

A Chronicle of Fiscal Follies and Controversial Transactions

By Prakash Neerohoo

The valuation of assets (tangible and intangible) is an important exercise that is intended to estimate the fair value of an asset at any point in time. However, in Mauritius, the valuation of assets by professional valuers, in government as well as in the private sector, always seems to be problematic. In many cases, assets have been either undervalued or overvalued at the time of transfer or sale. The latest example of sloppy valuation is the selling price of a used car (Porsche) that was sold by the government to the former commissioner of police upon his retirement.

The valuation of assets is guided by professional standards such as the “International Financial Reporting Standard (IFRS) No. 13 – Fair Value Measurement” that is in use in most countries or the Generally Accepted Accounting Principles (GAAP) that are in use in the USA. Although these standards are there to guide professional valuers, the valuation of assets in Mauritius over the years has become a practice full of pitfalls, causing controversy and even giving rise to disputes before a court of justice.

The IFRS No.13 defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Every public or private entity has a duty to assign a value to its assets that reflects their book value (historical costless depreciation) or Net Realizable Value. It might be argued that since government is not a profit-making entity, it should not care much about the value of its assets acquired or sold. But as a steward of taxpayers’ money, it has a duty to get the best possible prices for assets acquired or sold through an open market (public procurement) or a private deal (between one government body and a client).

Let us examine a few cases of asset valuation by government bodies that have gone awry, starting with the latest example.

* Undervaluation of a car sold to a retired public servant

For moveable property such as vehicles, which depreciate over time through wear and tear, the resale value is usually based on objective criteria such as Net Book Value (historical costless depreciation) or Net Realizable Value. The car sold to the former commissioner of police cost Rs 6 million in 2018. It was depreciated annually by 15% so that at the end of 2024, its Net Book Value (NBV) was Rs 2.3 million (see table below). However, the car was sold at Rs 415,000 instead of Rs 2.3 million, thereby providing a capital gain of Rs 1.8 million to the buyer (retired commissioner) and causing a capital loss of the same amount to the seller (government).

Certainly, the government is not a business entity that can write off the capital loss to a Profit and Loss Account, but the capital loss of Rs1.8 million is money foregone (manque à gagner) by the Treasury. The government has an obligation to get the lowest prices on its purchases of goods or services and the highest prices on its sales of assets.

It is alleged that the buyer might have resold the car at a much higher price than Rs 2.3 million, thereby reaping a greater capital gain of more than Rs 1.8 million. Since capital gains on property (both moveable and immoveable) are not taxable in Mauritius, which is contrary to the practice in developed countries, the buyer would have come out much richer after that resale transaction. In all fairness, the buyer should have paid at least the Net Book Value of Rs 2.3 million for the car.

How did the valuer come up with a valuation of Rs 415,000 is a mystery. Either the valuation method was basically wrong, which indicates professional incompetence, or there was a political decision to offer a price below the Net Book Value to the buyer, which goes against the principle of getting the best return. If the first hypothesis were true, the whole basis of valuation should be reviewed to ensure that Selling Price is equal to Net Book Value at least for used vehicles being sold to retired civil servants. If the second hypothesis were true, it would mean that politics has trumped sound administrative practices in this case.

Under a progressive income tax system, the capital gain of Rs 1.8 million to the buyer would have been a taxable benefit, as is the case in advanced social-democratic countries. In those countries, when the employer sells an asset to its employee or retired employee at a price below its Net Book Value or fair market value, the difference is treated as a taxable benefit. In Mauritius, if the capital gain on the purchase of a used car below its Net Book Value was included among taxable benefits in the Income Tax Act, the buyer would have had to pay 20% income tax on the capital gain of Rs 1.8 million, i.e., Rs 369,579.

This is the kind of fiscal policy which should be adopted in Mauritius to create a level-playing field for all employees and avoid favouritism for some well-connected people. Those countries also publish an annual handbook providing data on the values of used cars by make, model and age. The handbook is useful for tax authorities when assessing sales tax on used car sales or assessing income tax on capital gains arising from resale transactions. It is available in print and online for anybody to look up the value of a used car, irrespective of age.

* MIC’s investment in shares and land

The second example of faulty valuation is related to the funds used by the Mauritius Investment Corporation (MIC) to invest in companies and acquire assets during the Covid pandemic for a total amount of Rs 32.1 billion. This amount is broken down into: Rs 21.87 in convertible debentures, Rs 7.8 billion for the acquisition of land, and Rs 2.43 billion for the purchase of equity shares in companies.

The purchase price of land paid by MIC was said to be overvalued as no reasonable valuation was provided. The valuation method used by appraisers hired by the MIC was not known. The basis of the valuation for equity shares at the time of purchase was not known either. Most likely the shares were overvalued to the benefit of private corporations.

The convertible debentures are worth much less now than at the time of issuance. The private corporations can buy back the debentures at any time, but the MIC can only convert them after nine years while getting a low annual coupon rate of 3% before conversion (when the policy interest rate of the Bank of Mauritius is 4.5%). The whole funding policy of the MIC has been to the benefit of private corporations.

The MIC invested Rs 25 billion (amounting to a share ownership of 49%) in Airport Holdings Ltd (AHL), the parent company of Air Mauritius Ltd., while the government owns 51% of shares. However, the initial investment of Rs 25 billion was already marked down by Rs 1.778 billion in the financial year 2023-24 due to an impairment loss (caused by the losses of AHL’s subsidiaries).

For the year 2024-25, the MIC Annual Report is not yet available. It would be safe to presume that the balance of investment in AHL of Rs 23.2 billion (Rs 25 billion less Rs 1.8 billion) as of June 30, 2024, was further eroded by another markdown in 2024-25 on account of continuing loss by AHL’s subsidiaries.

It is obvious that the shares acquired in AHL were overvalued at the time of purchase. If the MIC were to sell its shares in AHL now, it would incur a substantial loss as it would not find buyers ready to pay the shares at their book value, considering the poor financial position of companies owned by AHL.

* Air Mauritius’ sale of aircraft

In September 2021, after 17 months of voluntary administration, Air Mauritius sold four aircraft at a staggering capital loss of Rs 3.377 billion (net book value of Rs 3.650 billion less proceeds of sale of Rs 273 million). That was a sale at bargain basement prices to get rid of unused aircraft, but it demonstrated a lack of foresight as subsequently the company had to lease aircraft when business picked up with the end of the Covid pandemic.

Who did the valuation of aircraft for the company at the time of sale?  Was a valuation ever done or were the aircraft just sold to the first taker? That is a matter for the Financial Crimes Commission (FCC) to investigate to hold the decision makers accountable for their poor planning. It is incredible that the company paid Rs 100 million to the two voluntary administrators, including Mr Sattar Hajee Abdoula, the former chairman of SBM Holdings Ltd., when its corporate interests were not appropriately safeguarded.

* Medpoint clinic overvalued

The Medpoint clinic, a property owned by the brother-in-law of the former Prime minister, was sold on December 29, 2010, at Rs 144 million to the Labour-MSM government when the initial valuation was Rs 75 million. Why was the valuation increased so much? Nobody knows. The government valuer, when he was questioned in Court proceedings, said he could not remember why the valuation was revised. He had sudden amnesia.

The former PM was prosecuted by the ICAC for conflict of interest under the Prevention of Corruption Act (POCA), and he was convicted by the intermediary Court. However, the conviction was overruled by the Supreme Court. When the DPP appealed the latter’s ruling to the Privy Council, the ICAC changed its position radically, abandoning its previous charges against the former PM. Consequently, the Privy Council upheld the Supreme Court’s decision.

It seems that when government purchases or leases assets from private parties there is always a measure of over-valuation to the benefit of sellers. We know of buildings that are rented by ministries from private lessors at higher-than-normal prices. It is a situation where taxpayers always lose (by coughing out more money than needed) while private sellers win. Not only the sellers or lessors get overvalued prices for their assets on sale or lease, but they also do not pay any tax on capital gains upon the resale of property.

We should recall that the contract for the sale of Medpoint clinic was signed on December 29, 2010, a few days before the introduction of the capital gains tax on real property on January 1, 2011, under section 10A of the Income Tax Act,1995 (titled “Gains on Immovable Property”). The seller shrewdly escaped that tax, which was abolished on November 5, 2011, by the Labour-MSM government. Since then, no government has had the courage to reintroduce a Capital Gains Tax on the sale/resale of immoveable property.

An attempt was made in the budget 2025-26 when the government proposed to levy a capital gains tax of 30% on the resale of real property by non-citizens under various property development schemes, but it was abandoned under pressure from property developers. The Finance Bill 2025-26 did not include that proposal. Is this government beholden to local capitalists? It’s a legitimate question to some observers.

Mauritius Times ePaper Friday 22 August 2025