Many companies have adopted Economic Value Added (EVA) as a superior financial measurement tool to evaluate and reward corporate performance. These companies find that it helps them better to communicate their strategy and allocate their resources more efficiently and satisfy customers and reward stakeholders effectively.

In Singapore, the forward runner to embrace EVA is the Singapore Government itself (i.e. the ministries and statutory boards).The Net Economic Value (NEV) framework (which has its roots from EVA) has already been introduced and adopted by the Ministry of Finance as a critical dimension of resource management for ministries and statutory boards. Even the Stock Exchange of Singapore (SGX) is considering to make shareholder value reporting as a statutory requirement in the Annual Report.

EVA is conceptually a more appropriate tool because it explicitly takes into account the company’s cost of as well as the risk of the investment. Besides providing a conceptual link between surplus earnings and capital share values, it is consistent with the rule of investing only in projects with positive net present value (NPV) in capital budgeting decisions.

In contrast, in the traditional accounting only the cost of debt is deducted to derive accounting profit. Hence, by ignoring the opportunity cost of equity, the real cost of doing business is understated, which may rise to give a wrong impression that equity capital is cheap or even worse still, free!

The Net Economic Value (NEV) framework has its roots in the EVA Framework. EVA is the financial performance measure that captures the economic profit of an enterprise. EVA is a performance measure which focus on value creation and maximisation of shareholders wealth. Similarly, NEV is a financial performance measure that captures how cost effective public agencies use public funds and resources in delivering products and services to the public. It is also a performance measure, which focuses on public value creation to maximise public value from the capital and resources consumed by the public service agencies.

The EVA framework adopted by the private sector is equivalent to the NEV framework for the public sector. However, these terms are not totally applicable in the context of public agencies, particularly the non-revenue generating ones. In the EVA concept, the word “Added” implies that the normal state of financial performance should be positive, whereas in the public sector, there are many activities where the EVA figures will perpetually be negative, because the activities serve a wider social, security or economic purpose.

The NEV application of the mathematical term and the methodology is essentially the same with the EVA concept. In other words, the computation of NEV figures, namely, computation of Net Operating Profit After Tax, cost of capital, cost of debt and cost of equity are derived from the roots of the EVA concept. Furthermore, the objectives of EVA and NEV are similar, namely, they promote operating efficiencies, improve cost awareness leading to improved resource allocation, provide clear and accountable links between strategic thinking, capital investment, daily operating decisions and re-engineering opportunities. An important tool used for this linkage is the EVA-drivers’ or NEV-drivers framework that determines whether the organisation is creating or destroying value.

The programme has been specially designed to enlighten the concepts and measurements of NEV. Various aspects of NEV are discussed – what it is, why is it important and how organisations can improve on their NEV.