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20 January, 2021 08:39:03 PM
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Worldwide shipbuilding finance

Shipping is cyclic having ups and down in income every now and then and at least four times fall in an operational life cycle, and shipbuilding cannot present firm yearly predictable earnings which is further complicated by the longer production cycle making shipbuilding financing idiosyncratic.
Dr Abdullahel Bari
Worldwide shipbuilding finance

Shipbuilding, which dates back to the pre-historic era was financed by the community, not in terms of money but in resources and in labour. The most formidable and ancient floats were built by old fallen logs fastened together by twiners, all collected from the forest. With propagation of habitats and civilization across the sea over time, shipbuilding was undertaken by the chief of the clan. Many new lands, trades and resources were discover, wealth was accumulated, the clan chief became the king. Shipbuilding progressed in different regions in varying ways but always under the auspices of authorities, be a ruler, a dynasty chief or a king. Not only the investment, then in fragile technology considered risky for an individual, the required capital was larger compared to the personal possession. Moreover, trades often needed to be protected against piracy by naval forces and shipping was in the risk of complete loss of the investment in the ship, commodities on board, and lives. The best recorded public finance of shipbuilding was in Imperial China during different dynasties. However, the most notable one was during the Ming dynasty over 1368 to 1644 when shipbuilding was primarily undertaken by the government and with state funds. Benefits of trades, such as, of treasure voyages were added to the state exchequer.

Indeed shipbuilding developed through constructing battle ships. Many conflicts and naval battles occurred resulting in destruction and demise of habitats, rise and fall of powers, and creation of kingdoms and empires. Those naval battles demanded robust construction of battle ships and at the same time speed and manoeuvrability. Accordingly, thrust for improvement of design and construction grew. Faster and ahead acquisition of shipbuilding skills bestowed regions, nations and particular people’s domination on the sea and lucrative trade routes. Shipbuilding had therefore been more or less always under public funding.

Privately financed shipbuilding: Privately financed shipbuilding and individual acquisition of ships commenced only when piracy free defined trade routes were established. The strong Athenian navy and Athen's domination on the sea had ensured piracy free lucrative trade routes first in the history. Accordingly, Athenian ships were built by private finances of a single wealthy owner or a group of owners in a temporarily formed partnership. Senators were not, however, allowed to invest in trading ships. Athens practiced structured financing in shipbuilding and shipping developing banks, lending contracts and commercial courts. Rome followed Athenian system of financing but making improvements by adding central bank, business corporations, limited liability companies, time value of money, cost of risks and use of business as a collateral. In Venice shipbuilding was entirely privately financed by hundred elites who were in the City Controlling Cabinat. Thus shipbuilding was under the control, in a way, of the government in disguise. Genoa became extremely rich by private shipping and therefore, shipbuilding. Where there existed risk covering companies, a sort of insurance was introduced in shipping for the first time in history.

In Britain and in other European maritime nations, shipbuilding in the eighteen century was privately financed and investments in shipbuilding and shipping were very lucrative. Colonies and colonisation were left to private companies and maritime trading also was an alluring prospect. On the other, flawless financial system were developed and adopted by large gradually developed corporates. Further, Lloyds Register of Shipping came into being ensuring quality shipbuilding. Therefore, private financing in shipbuilding and shipping became the norm of the day. Private financing in a style of a single ship company of an individual, or of a few individuals in a loosely formed partnership was adopted as far back as in the 13th century in Germany and it was found existing even in 2013.

Shipbuilding financing today: The decision whether to invest or not in acquisition or building a ship, which depends to a great extent on profiteering, creates a shadow "without the cash there is no ship". Therefore, one of the most essential activities in shipbuilding is raising the cash, i.e, arranging finances, especially the initiator's mobilisation of contributions. Methodology of raising ship finances in 20th century is in the form of either debt, equity, lease or government subsidies and any variation or combination of them. A ship finance is in turn financing shipbuilding. These days worldwide ship financing has got refinements and flexibilities. On the one hand, shipbuilding and shipping are of strategic importance for a nation, commercially rewarding as well as indispensable for economic activities to continue and on the other hand, shipbuilding is becoming everyday more and more important on account of the scope for exploring the blue economy of nearly infinite possibilities. Shipping is cyclic having ups and down in income every now and then and at least four times fall in an operational life cycle, and shipbuilding cannot present firm yearly predictable earnings which is further complicated by the longer production cycle making shipbuilding financing idiosyncratic. Thus raising shipbuilding finance is difficult. Often intermediaries play a vital role in raising finances. They maintain constant liaison with individuals, institutions and organisations having wealth and willingness to invest. They are match makers of buyers and sellers. They discover higher prices of assets and funds at minimum costs. Historically, thus, the shipping business has occasionally been flooded with exogenous funds making shipbuilding boundlessly vibrant. In 1936-41 highly leveraged finances on mortgaging a ship alone allowed owners without capital or inadequate equity to form a single ship company and indulge in shipping inflicting injuries to bonafide long operating shipping companies as well as to shipyards leading to bankruptcy. There are many organized sources of moneys. Banks, financial institutions, money markets, unused tax depreciation deposits, pension schemes, wealthy people hidden club, shipping companies' retained earnings, limited partnership, and funds in the form of direct and indirect subsidies from the government are some of the everyday utilized sources.

For debt financing, especially for loans from banks, a combination of a mortgage on the ship along with insurance proceeds and personal guarantee is the usual requirement. Rate of interest on borrowing shipbuilding finance is LIBOR plus 2.5% normally diminishing to 1% on the volume of loan as well as the volume of the client's involvement in shipping. Pledge on shares or/ and assignment of income and corporate guarantee may, in addition, sometime be needed in the environment of declining freight rates for ship financing. Leasing out a ship in basic design stage is also a method of raising finances partially. It is usually used to trade away tax advantages and as a collateral in the bank for securing main building loans. An equity finance is the participation for ownership or share holding. It stems from retained earnings, cash flows, sale of stocks and assets, borrowing from sources outside banks on harder terms i.e, forming limited project basis partnership.

Aggressive shipbuilding financing: Aggressive financing was observed in Japan over the period of 1950-1955 when investments were made in the replacing and modernisation of shipyards. Funds were pumped in shipping to carry very rapidly growing volumes of raw materials for feeding fast growing industries. The scope for building those domestic owners' ships was the boost for Japanese shipbuilding. Once again aggressive financing was noticed in Japan during 1972-1976 when Japan surpassed the total aggregate remaining world of shipbuilding.

Over the period of 1983-1986 shipbuilding was seen to be very vibrant mainly due to the investments in Japan and in South Korea.

The 1990s experienced fierce competition among banks keenly interested to finance ships and shipbuilding. Japan tried to maintain its supremacy, Europe to re-enter, South Korea considered shipbuilding as a strategic industry and China got on the platform. Such finances and wild speculations led private partnering companies and public offering to appearing and disappearing in successions resulting in many shipyards emerging and fading over the years.

These cited scenarios evolved due to government interventions, encouragements and fund injection.

Government interventions: The indulgence and intervention of authorities and governments in shipping and thus, in shipbuilding continued from the beginning of shipbuilding, of course, changing pattern with time. UK attempted public intervention in shipbuilding in 1935. Major EEC shipbuilding nations along with UK were injecting resources in their own style, i.e for example, by subsidising manufacture of supply chain items and with financial schemes on scrapping, etc.

The sector experienced quite massive inflow of public resources from 1950 in Japan, 1980 in South Korea and 1990 in China. These resources were in the form of policy support, up to 80% of ships' prices on 8 years or long term loans with minimum rate of interest for placing orders in the country and financing ships for national shipping lines. Other incentives, in addition, were extended for using nationally produced machinery, materials and equipment. The most important of all, however, was plan of possessing nation's own fleet to carry the import and export of the country. These resulted in Japan, South Korea and China capturing the highest position in global shipbuilding in 1964, 2000 and 2010 respectively where Europe had more than 80% of the shares before World War II.

Subsidies may be in many forms, such as, cash incentives to shipping companies and shipyards, allocation of suitable lands at nearly no cost for establishing shipyards, (presently these are initiated by Indra and Vietnam), reserve funds for issuing guarantees, compensated lower rate of interest for ship finance, lower or no tax incentives for shipyards, deferral payment, accelerated depreciation, tax free reserve and write-off. Subsidies may be also in the form of loans on favorable terms including longer grace and payback period and balloon payments in ending years of the loan tenure, etc.

Following are cited straight from the most famous work in the field of naval architects and marine engineers only to bring the same to the eyes of those who may help Bangladesh by supporting shipbuilding in this country.

Financing Assistance From Government Sources

Liquid Assets

Taxation Incentives

Loan Terms

Miscellaneous 

Special Structure

-Government Loans

-Subsidizing Interest Rate

-Cash Grant to Ship-owners

-Cash Grant to Shipbuilders

-Cash or Credit to allied industries

-Operating Subsidies tied to Shipbuilding agreement

-Lower or no taxes

-Deferrals

-Write-offs

-Accelerated depreciation

-Tax-free reserves

 

-Low interest rates

-Long grace period

-Little or no down payment

-More than 40 percent financing

-Repayment out of profits only

-Long loan term

-Ballon payment at end of loan

-Little or no security required

-Guarantees

-Write-off of previous losses

-Moratoria on debt repayment

-Training funds

-Custom duties waived on imported materials

-Shipbuilding research and development funds

-Vessel Scrapping Subsidies

-Convertible debt

-Debt with warrants

-Three-tiered limited liability partnerships

-Tax incentive systems for small investors

-Blocked currency schemes

-Barter-trade deals.

Source: Ship Design and Construction: Written by an International Group of Authorities; Editor: Thomas Lamb; Volume I. Published in 2003: The Society of Naval Architects and Marine Engineers, U.K.

 

Special shipbuilding financing: Islamic banking abiding Shariah-laws, rules and principles stemming from the Quran, Sunnah, Hadid and Fiqha has been growing since 1990. The business volume in shipping and shipbuilding has exceeded 2.00 billion in 2020. During the last credit crunch when shipping and shipbuilding had been continuously sliding down with free falling freight and charter rates, Islamic banks extended finances in shipping and shipbuilding in the form of Musharaka i.e, profit and loss sharing, Ijara i.e, leasing out a ready ship to a newly formed single purpose company (SPC), a bank's agent managing the SPC fixing a periodic rent payment at covenants, and Sukur or Sukuk Al Ijara i.e, forming a special purpose vehicle (SPV), a trust of investors holding certificates of a face value granted by the bank. Islamic banking may evolve as a financing source of global shipping and shipbuilding. However, keeping in view the volume of finance of some USD 470.00 billion in the shipbuilding market, it may not supply more than 1% of the required finances in the foreseeable future.

Shipbuilding financing in Bangladesh: Bangladesh is a new and the latest entrant in global shipbuilding arena. It entered in 2008, exported 30,000 gross tonnage of ships, exported more than 40 ships and vessels to four different continents, earned more than USD 180 million and made Bangladesh known as a shipbuilding nation. The sector offered the country lighterage vessels to keep the economy flourishing, tankers for keeping the power plant running, dredgers to keep waterways navigable as well as to preserve the water and the environment. It saved more than USD 300 million by import substitutions.

Government patronises the sector and the Shipbuilding Policy 2020 may now be approved by the Cabinet any day. However, it faces at present the most difficult hurdles among all industries in the country. Shipbuilding needs nearly double the financing than the value of the job under execution and the execution cycle is very long which nobody recognises. It is to provide immovable security of nearly double the value of any loan in funded or non funded form. It pays very high money cost, nearly 22% of the project value annually. The sector has been severely affected by world recession, global political unrests and presently by the Pandemic COVID-19, however, it is still vibrant, resilient and progressing. Thanks to Allah, the Almighty, and the people oriented pro-industrial government which always are with this infinitely potential and prospective sector.

The writer is Chairman, Ananda Group and President, Association of Export Oriented Shipbuilding Industries of Bangladesh

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Editor : M. Shamsur Rahman

Published by the Editor on behalf of Independent Publications Limited at Media Printers, 446/H, Tejgaon I/A, Dhaka-1215.
Editorial, News & Commercial Offices : Beximco Media Complex, 149-150 Tejgaon I/A, Dhaka-1208, Bangladesh. GPO Box No. 934, Dhaka-1000.

Editor : M. Shamsur Rahman
Published by the Editor on behalf of Independent Publications Limited at Media Printers, 446/H, Tejgaon I/A, Dhaka-1215.
Editorial, News & Commercial Offices : Beximco Media Complex, 149-150 Tejgaon I/A, Dhaka-1208, Bangladesh. GPO Box No. 934, Dhaka-1000.

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