• 2017 May 29

    River finances are looking for balance

    Russia’s strategy for the development of inland water transport till 2030 implies the construction of over 13,500 river ships and ships of mixed sea/river navigation. Implementation of those plans still faces a number of challenges including a tariff policy that lacks balance between different types of transport and a vague package of measures for financial support of ship owners.

    Reaching synergies

    As it is known, development of inland water transport of Russia was hindered by three major blocks of problems: infrastructure limits, absence of “long” and cheap money and lack of balance between different types of transport. To deal with the first problem it was planned to build the Bagayevsky and Gorodetsky hydrosystem s with only partial solution found for other problems.

    As for the competition between different types of transport, imbalance in favor of road transport had been felt until recently with no infrastructure payments from carriers. As of today, this problem has been settled with introduction of the “Platon” system. Meanwhile, the competition between inland water transport and railway transport is still tough. At the general meeting of the Russian Chamber of Shipping held in Moscow in March 2017, Roman Trotsenko, member of RSPP administrative office and chairman of AEON Corporation BoD, said that the decision of Russian Railways to provide a 25-pct discount for transportation of oil products during the river navigation season contradicts the decisions of the State Council on the development of inland water transport and can destroy the industry. According to estimations of Roman Trotsenko, 30% of cargo can leave river transport because of that discount though Russian Railways will gain of only 0.8% of liquid bulk cargo transshipment and additional profit of RUB 1.5 bln.

    However, inland water transport has a number of advantages including environmental friendliness (as compared with road transport), safety (according to Ministry of Economic Development, number of incidents involving water transport is 178 times lower as compared with road transport and 13 times lower as compared with railway transport), efficiency (energy consumption per ton-km is 6 times lower as compared with road transport and 2 times lower as compared with railway transport), relatively low requirement for maintenance of infrastructure, stability at peak loads. Besides, river transport has no alternatives in some remote regions.

    In his turn, Russian Railways President Oleg Belozerov, called on looking for balance between railway and water transport. When speaking at the meeting of RSPP Committee for Transport and Transport Infrastructure in May 2017, he also said the key problem is in competition with pipeline transport. Liquid bulk cargo which is the subject of competition between river transport and railways shifts to pipelines. Yet, there is a deficit of railway capacity in certain directions so more or less balanced distribution of cargo is in the interests of railways. “Synergies should be reached”, said the President of Russian Railways.

    River innovations

    Another range of problems is associated with a need of large scale fleet renovation. Average age of cargo ships in the sector of inland water transport exceeds 30 years (age of more than 2,700 vessels exceeds 40 years). According to the data mentioned in the strategy, the number of cargo vessels decommissioned over the recent 5-6 years was 20 times as high as the number of newbuildings put into operation. Experts say more than 80% river ships and ships of mixed sea/river navigation will be out of operation by 2020.

    Here comes the need for “long” and cheap money as even large shipping companies cannot afford construction of new ships on their own as large investments are required and the payback period is very long. Considerable support was ensured by the measures foreseen by RF Government Decree dated 22.05.2008 (No 383) on granting subsidies to Russian transport companies and shipping lines to compensate for 2/3 of the cost of interest on loans obtained to acquire vessels built at Russian shipyards. However, this measure was not extended for a new period. Experts say, Russian shipyards therefore see a 13-pct reduction of orders versus their expectations. 

    One more measure expected to support shipbuilding is the introduction of utilization grants. However, those obtaining utilization grants cannot use other measures of state support and utilization grants cover only a 3-year period while payback period is estimated at 8-10 years. 

    The third measure which is under discussion today and which has not been submitted to the Government yet is the programme of preferential leasing (Read more in one of recent articles of IAA PortNews >>>>). Leasing is one of the most popular financial instruments in transport industry worldwide. Russia has also tried it when building vessels for inland water ways. 

    Among the examples is the cooperation of Marine Oil & Gas Projects (MNP Group) and State Transport Leasing Company (STLC). STLC has an extensive experience in implementation of leasing projects for different types of transport in water transport. As Dmitry Khritin, Director General of MNP Group, told IAA PortNews, cooperation of MNP Group and Krasnoye Sormovo shipyard with STLC started in summer 2015 with the pre-contract work on the order for construction and delivery of tankers of mixed sea/river navigation (Project RST27) for BF-Tanker, the leaseholder. The contract was signed in September 2015. 

    “I’d like to emphasize, by that time we had an extensive experience of cooperation with different financial institutions for construction of vessels including Russia’s leading leasing companies, - says Dmitry Khritin.  – The approach of STLC to the draft contract, the level of their professionalism, understanding of specific features typical for shipbuilding and general commitment to specific results deserve appreciation.”  

    According to the head of MNP Group, in their relations with a leasing company, ship owners set high value on prompt response to problems. 

    “Tankers contracted in September 2015 were delivered in the first half of 2016 in full compliance with contract obligations and even slightly ahead of schedule, - tells Dmitry Khritin. – That delivered benefits: the interaction continued in autumn 2016 at a larger scale. Under three-party agreements signed in December 2016 (with STLC acting as a customer and a leasing company) the shipyard is currently building two series of ships: 5 chemical tankers of improved Project RST27 for BF-Tanker and 5 bulk carriers of Project RSD59 (deadweight – about 7,500 t) for Paula Rise. Vessels of both series are to be delivered in 2017-2018. More pre-contract negotiations are underway.”

    Such examples demonstrate the interest of ship owners in fleet renovation. If the programme of preferential leasing is approved, domestic shipbuilding can see a boom bringing a corresponding multiplicative effect. Meanwhile, it is important to prevent monopolization of the industry as it can bring to naught the competitiveness of Russian shipbuilding and result in return of old problems.

    To summarize, we can say that not all problems related to the development of inland water transport have been solved so far. Considerable state investments into expansion of river infrastructure will be effective if ship owners have a possibility to renovate their fleet and stand fair competition with other types of transport. A unified and clear tariff setting policy is needed for that as well as comprehensive system of state support ensuring the access of ship owners to “long” and quite cheap finances.

    Vitaly Chernov