Enhancing ship financing in Nigeria
Shipping as a service industry constitutes an invaluable component of the national economy, with a significant contribution to the Gross Domestic Product (GDP). Shipping also creates a lot of jobs.
In Nigeria, shipping is an industry with the potential to be a major revenue earner for the country. But unfortunately, the country has not been able to tap the full potential of this industry for the simple reason that activities in the industry are dominated by a few foreign companies. However, the federal government has made some interventions that are expected to correct this imbalance. They include direct funding for shipping through the Ship Acquisition and Ship Building Fund (SASBF), Cabotage Vessel Financing Fund (CVFF), and the Cargo Reservation and Outright Cabotage legislation. Despite these efforts, the shipping industry is still dominated by foreign companies that rely on the traditional method of ship financing – bank financing.
Until recently, the idea of alternative ship financing seemed unattractive, as it was considered too limited. In the wake of the global economic crisis of 2008, however, there arose a compelling need to look for new and alternative means of ship funding.
In order to fully understand what ship financing entails, it is important to look at the different businesses that comprise maritime shipping. These include shipbuilding, ship ownership, ship operation (container ships), ship financing, and ship scrapping. Others are ship classification, ship registration, ship insurance (protection and indemnity), as well as seafarer supply and port operation (container terminal operators). All the aforementioned shipping activities have prospects for growth. What has remained a major challenge is finding an appropriate financing solution for them. This has to do with the capital-intensive nature of shipping, a situation made worse by the absence of a dedicated financing bank for shipping in Nigeria. There is, therefore, a compelling need for an alternative ship financing solution in Nigeria.
Before the enactment of the Cabotage Act to address the challenges associated with shipping in Nigeria, the maritime sector was in a precarious state, characterized by ineffectiveness. The act was therefore introduced to stimulate, empower and reposition indigenous shipping companies for active participation in sub-Sharan shipping transactions.
In addressing the challenge of shipping financing, many options are open as possible sources. These include commercial banks, mortgage finance institutions, mezzanine finance (top-up finance); bond market, and equity market (IPOs and follow-on equity offerings). Others are private equity, which is becoming a growing trend of medium-term investment into shipping; leasing, which has a tax-efficient structure; insurance market, with its historical involvement in the tanker industry – like RV insurance; ECA, which is government-supported financing to clients of local exporters, like shipyards, as well as insurance.
Bank lending has proved to be one of the most reliable and sustainable sources of ship financing. Although shipping is a cyclical industry, bank financing has been consistent, even during periods of economic slowdowns. It is easy and convenient for shipping companies to obtain bank loans using vessels as collateral, and for decades, they have been using this option of financing. However, this source of financing seems to have dried up in recent times. The financial crisis of 2008 literally battered the banking sector, drastically reducing banks’ lending capacity and resulting in a situation in which many of them gradually pulled out of the shipping industry. By 2012, the total global industry debt was put at $500 billion, 80 percent of which was financed by European banks.
In order to enhance easy shipping financing in Nigeria, the exercise must be private sector-driven, devoid of political influence, interference, and undue government control, which are all capable of stifling banking operations. Ship acquisition and fleet expansion through debt financing provided by banking institutions should be encouraged. Financial facilities should be provided to support the exercise. This would enable indigenous shipping companies to derive maximum benefits from the Cabotage Act.
There is, therefore, an urgent need for the establishment of Maritime Bank of Nigeria to address the challenges shipping companies face in obtaining financing from commercial banks. A maritime bank is an absolute necessity because of the capital-intensive nature of the industry. Having the bank in place would also enhance shipping operations, and also attract local and foreign investors into the industry.
There is also the option of capital market financing. The capital market is critical for the promotion and enhancement of the growth of the shipping industry. Apart from the capacity to create corporate value, it acts as a qualified intermediary in providing funds needed to finance new investments and also enhance growth. The capital market remains a viable financing alternative for shipping companies. The market gives the added advantage to shipping companies by issuing debt with longer maturities and fixed interest.
Another financing option for the shipping industry is leasing. This is a process by which a company obtains the use of certain fixed assets for which it must pay a series of contractual, periodic tax-deductible payments. The lease payment covers the entire cost of the asset, plus return on investment on capital to the lessor. There is also the option of financing through sectoral intervention in form of cash support channeled through a vessel leasing company. This calls for the establishment of a vessel leasing company that would have five percent of the CVFF. The company should be an asset acquisition company for all maritime assets using Government-to-government and the Export Credit Agency as guarantors for the acquisition of assets. The vessel leasing company should be publicly quoted on the Nigerian Stock Exchange, to ensure stability and sustainability.
Dr. Bashir Jamoh is the Director-General and Chief Executive Officer of the Nigerian Maritime Administration and Safety Agency