For joint ventures (JVs), which is a public-private partnership (PPP) modality, what would you prefer—a sharing on the gross or net income? What are the advantages of each option?
Definition of Terms. “Gross revenue” is defined as the total receipts from sales or services rendered, while “gross profit” is total sales less discounts (i.e., net sales) less cost of goods sold. “Net income,” on the other hand, is equal to the net earnings or profit calculated as sales less cost of goods sold, general and administrative expenses, operating expenses, depreciation, interest, taxes and other expenses.
Differentiation based on Income Statement. Depending on what is deducted (or added back), gross and net can mean different things or levels. Gross revenue less cost of goods sold is gross profit. If general and administrative expenses and operating expenses are deducted, then this becomes “earnings before interest and taxes” (Ebit). If depreciation and amortization are considered, then this is called “earnings before interest, taxes, depreciation and amortization” (Ebitda). Taking out interest expense, then this is net profit before taxes, and after deducting income taxes, net profit results.
Perspectives. It may be surmised that the public sector in a JV would prefer a share that is based on any of the gross—gross revenue; while the private sector proponent-co-venturer would prefer any of the net—net profit, over Ebitda, over Ebit.
Why gross for government? There are many reasons cum benefits why the public-JV partner would want to derive its share from gross revenues or profit. First, it’s a matter of getting more. If based on the “topline,” the public agency is assured of a positive or bigger share since deductions will not be imputed. If it’s based on net, then it might be possible that government will not get anything due to the expenses and deductions. Second reason, which is related to the first, is ease of computation. There are only two multipliers needed to determine gross revenues and there are no addends and subtrahends. You only need two figures, i.e., the amount/value and the volume/quantity.
Third, by always being entitled to a positive share, the public sector will always be at a revenue advantage. Therefore, when hailed to the Ombudsman, the public officials can defend their action by saying that they entered into a grossly and manifestly advantageous contract, especially if the government agency will get a much higher share than what it contributes into the JV.
Fourth, since there are no deductions and expenses, which must be taken into account like operations and capital expenditures, there are fewer instances of adverse findings or disallowances by the Commission on Audit. The COA need not scrutinize the expenses because the public partner will get its rightful share regardless. Fifth, if topline-based, the instances of debate and conflict between the JV partners concerning the necessity and prudency of expenditures would be minimized.
Assuming the public sector pushes for gross and the private sector net, the debate can be heard, discussed and hopefully, resolved in bid conferences or negotiations in competitive challenges.