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Managing Nigeria’s Fiscal Challenges In Shipping

Managing Nigeria’s Fiscal Challenges In ShippingOver the years, the shipping industry and the maritime sector at large has continued to experience setback as a result of poor financing.

This has also led to the poor utilization of wide opportunities available in the maritime industry. The financial institutions (banks) have been turned to as a major source of funds for the shipping industry however due to the high interest rate and propensity of commercial banks to only support short term loans, access to credit in the sector has been minimal and too expensive.

Lack of funds for ship owners to acquire more vessels and maintain their businesses have seen the nation suffer grossly as foreigners dominate every aspect of shipping despite several laws developed to boost indigenous participation in the business such as the Cabotage law.

The Cabotage Vessel Finance Fund (CVFF) was developed to address this monetary burden for ship-owners by empowering commercial banks to provide loans at single digit interest rates but the CVFF hasn’t been disbursed since inception and ship-owners continue to wail.

Since the problem has led to fewer opportunities for cadets to get their mandatory seatime experience as ship-owners barely have ocean-going vessels, it is crucial to improvise other strategies through which this fiscal challenge could be addressed.

Alternative structured capital providers have evolved as an alternative to traditional bank lending. These capital providers are concerned about creative investment structures involving leasing structures and preferred equity in addition to more traditional debt structures.

Export Credit Agencies (ECAs) and private equity are opportunities that could be effectively maximized by ship owners.  ECA offers financing for domestic companies international export operations and other activities while removing the risk of exporting associated with exporting to other countries.

Although, ECAs have been involved in the ship finance industry by direct lending through bilateral transactions or co-financings or guarantees and insurance policies, private equity came into the shipping industry as a result of the global financial crisis.

A private equity fund provides joint ventures with ship-owners and is targeted at small and medium sized shipping companies.  Occasionally, it directly lend to these companies through primary or more typically, mezzanine financing.

Capital market is also another source of finance to the shipping industry. Many of these transactions involved the US and Norwegian capital markets with the Norwegian bond market have been seen as particularly favorable for shipping assets.

Also with funds been limited large shipping clients as a result of risk management consideration by traditional banks, small to medium-sized ship-owners are now becoming increasingly interested in considering structures such as high-yield bonds, convertible debt and capital and operating leases. It is also important to note that some Chinese banks and leasing companies have also diverted into the shipping industry and their involvement is expected to yield increase as a result of China’s One Belt, One Road (OBOR) Initiative. This is a Chinese economic and strategic agenda by which the two ends of Eurasia, as well as Africa and Oceania, are being more closely tied along two routes – one over land and one maritime – to create the modern adaptation of the Silk Road.

Ship-owners however have expressed concern over the perceived high rates of alternative finance as opposed to traditional bank debt. Regardless of this, these alternative capitals provide a great source of funding to the maritime sector and ensure development. They are expected to be long-term players within the shipping industry especially if funding by traditional commercial lenders continues to be restricted to large shipping clients.

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