Valuation Of The Right To Use Sea Areas

Investments in the use of maritime space resource are usually uncertainty, irreversible and can be delayed, thus giving an option time value to the use of sea areas. However, the popular valuation methods based on discounted cash flow does not consider the above situation and the option time value. Maritime resources have the value of space resources and the value of ecosystem resources as well as non-use values like the bequest value. Current valuation methods fail to take into consideration the bequest value which contributes to intergenerational compensation and sustainable development. The above two aspects lead to severe consequences such as underestimated valuation of the right to use sea areas, which in turn gives rise to serious sea pollution, frequent environmental disasters, vulnerability of off shore ecology, etc. To maintain sustainable development of marine economy, this author tends to leave the rational development and utilization of sea areas to the guidance of proper price leverage, by applying the option value and bequest value compensation to the valuation of the right to use sea areas.As early as1980s, while uncertainty, irreversibility and delayability were taken into consideration in valuation of the right to use sea areas abroad, such kind of study was, and even is very rare in China. As discounted cash flow can not reflect the option time value and causes the problem of underestimating, this paper tries to apply real options approach to marine space resources pricing. The attempt to price the space resources used to raise sea cucumber in cofferdam in Langya, Huangdao District reveals that the discount cash flow method has under-priced the space resources by RMB5,200per mu than has the real options method. Meanwhile, the investment of raising sea cucumber in cofferdam is not optimal in2013, because the project value is lower than the critical value and results in a space resources price RMB66,000per mu lower than that of the critical value. The price of marine space resources and of the right to use sea areas based on real options approach is helpful to establish more reasonable fees for the use of sea areas, which will not only increase the cost of using sea areas, cut down investment not reaching the critical value, lead to higher productiveness, reduce excessive demand and the big gap between supply and demand for sea areas, but also assure the collection of all resource incomes belonging to the government. The real options analysis reveals that the price of marine space resources used to raise sea cucumber in shrimp pond in Langya is equivalent to the result of the discount cash flow method, for the project value is higher than the critical value and the option time value is zero. Accordingly, only when the project value is higher than the critical value, the discount cash flow method is suitable. However, the discount cash flow method cannot determine the optimal investment rule and critical value thereof when investments are uncertainty, irreversible and can be delayed. In addition, the big difference of more than RMB50,000between prices of marine space resources used to raise sea cucumber in cofferdam and shrimp pond indicates the necessity to pricing of the right to use sea areas by different aquaculture mode. The parameter sensitivity indicates that as the price of space resources is very sensitive to the uncertainty of the project value, the discount rate and the payout rate, the grasping of the optimal opportunity and the pricing of the right to use sea areas could achieve a satisfactory precision when the computation is based upon market change. Nevertheless, the discount cash flow method cannot reflect the influence of changes in project value and market conditions.As overseas research decides the bequest value of marine resources in subjective methods such as contingent valuation method, some doubts have been raised as to its various biases. Meanwhile, quantitative research is seldom the focus of domestic studies. With present limitations of subjective method in deciding bequest value, the author believes that overlapping generations (OLG) model and dynamic modeling method can be introduced to decide the minimum compensation for bequest value. To establish a model of minimum bequest value compensation for marine resources that will suit China’s present situation, the paper has improved Valente’s renewable natural resources intergenerational transfer model based on OLG model in resource ownership hypothesis, population composition hypothesis, the tracing of intergenerational distribution of resources endowment and the source of budget revenue used for marine resources intergenerational transfers, etc. The model shows that the lowest compensation for Langya’s project is RMB2,000to5,000per mu, a fairly big sum of compensation, which is likely to undervalue the price of the right to use sea areas when neglected.Under the guidance of the total economic value of environmental resources theory, land price theory and sustainable development theory, this paper has established a pricing model for right to use sea areas, which is based on real options approach and covers the minimum bequest value compensation, in the idea that the composition of the right to use sea areas consists of at least three parts, space resources price, ecological value compensation and bequest value compensation. The model shows the price of Langya’s project in2013by current model is lower than that of the model proposed in this paper by RMB1,800to10,500, an annual average of RMB100to500per Mu. The fee for the use of sea areas to raise sea cucumber will be undervalued RMB1.5to9million which is2.5-15times as many as all the fees for aquaculture in former Jiaonan (a county-level city that govern Langya) in2013. Obviously, the model proposed in this paper is more rational and scientific in that it takes into consideration the option time value and bequest value compensation while the prevailing model does not. The comparison between the result of the model and current standard of the fees for the use of sea areas shows the big difference of RMB20.46to70.1million which is34-116times as many as all the fees for aquaculture in former Jiaonan in2013. The excessively low collection standard not only decreases the revenue from resources owned by the government but also leads to the waste and extensive use of sea areas. The results are of positive meaning and have application value to the policy of valuation the right to use sea areas.This paper is innovative in three aspects. Firstly, by applying the foreign method of real options to the valuation of the maritime space resource, this paper has established the maritime space resource pricing model in the case of situational uncertainty. Thus the problem of under-pricing, resulted from the option time value being neglected by discounted cash flow method, is avoided. Secondly, from the perspective of sustainable development, the paper takes into account the bequest value of marine resources in pricing the right to use sea areas, and comes up with the concept of compensation for bequest value, which is introduced into the valuation model of the right to use sea areas to avoid unsustainable development of ocean economy. Thirdly, by improving on renewable natural resources intergenerational transfer model based on OLG model, the paper has defined the lowest compensation for bequest value with dynamic modeling method, an approach that is certainly objective, and more effective in reducing the deviation from subjective evaluation. By proposing a new paradigm of studying bequest value and valuation of the right to use sea areas from the perspective of OLG model, this paper has successfully brought in a new perspective for related studies.