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2017 April 18

Financing of shipbuilding projects

Eternal problem of Russian economy is the inaccessibility of "long" and cheap money, which has the highest impact on industries with long payback periods. Shipbuilding is among them. Starting from 2009, the problem has been handled through subsidies provided to cover the leasing interest rates, budget financing of manufacturers and leasing companies with preferential interest. Now the discussion has unfolded around an even larger leasing program.

In search of support

The existing state support measures have had a positive impact and led to securing of fairly large orders for the construction of new vessels by Russian shipyards. However, the extent of the problem cuased by rapidly aging fleet is so great that it requires more substantial measures. The development of inland waterways and fleet renovation was brought up at the meeting of the State Council chaired by Russian President Vladimir Putin in August 2016. Following the meeting, the President gave relevant instructions. They covered the measures to ensure long-term state support for the construction of civilian ships, particularly through extension of the shipbuilding support program implying partial covering of interest on loans to purchase ships and lease payments. It was also recommended to analyze the efficiency of the USC program on leasing for civilian vessels and the reasonability of its prolongation. Some of the instructions covered the introduction of a ship utilization grant.

According to Marine Engineering Bureau, from the beginning of the century Russia has seen the construction of 100 self-propelled cargo ships of Volgo-Don Max class and 65 vessels of other classes for rivers and mixed sea/river navigation. The most popular ships are Volga-Don Max ships designed to meet the dimensions of the Volga-Don canal and intended to replace the famous Soviet Volgoneft and Volgo-Don series. All in all, 112 ships of that class account for 56% of cargo ships built over the mentioned period. Russian shipyards delivered 81 dry cargo carriers and tankers of this class (72%), Turkish - 15, Ukrainian - 10 and Chinese - 6. For other segments of cargo fleet Russia built 53 vessels, Turkey - 16 and China - 8.

As provided by the state program "Development of shipbuilding and engineering for the development of offshore fields in 2013-2030", production of civil vessels and marine facilities by domestic shipbuilding and ship repair enterprises should grow by 6 times in monetary terms (vs 2013). Annual output of shipbuilding industry should reach 450,000 t of displacement, which is almost 4 times more than today.

According to the Civic Chamber of the Russian Federation , half of Russia’s cargo vessels are more than 40 years old today and they should be decommission in the next 5-7 years as their further operation is unsafe and economically unprofitable due to high cost of repairs. Average age of self-propelled dry cargo vessels is 41 years; non-self-propelled dry cargo vessels - 35 years; self-propelled tankers - 41 years; non-self-propelled tankers - 33 years; passenger ships - 35 years; tugboats involved in maintenance of non-self-propelled dry cargo ships and tankers - 38 years. The number of vessels is decreasing by about 2% per year. Over the past 15 years, the number of decommissioned ships has exceeded the number of newly commissioned vessels by 13 times. If this trend continues, Russia will finally lose its fleet and all related industries and enterprises.

Experts say that key customers of new vessels for inland water transport require 527 units worth RUB 75 bln by 2030. That is, it is necessary to build about 35 vessels per year. "Leasing is essential for water transport," Gennady Yegorov, General Director of Marine Engineering Bureau, said in an interview with IAA PortNews.

Meanwhile, market participants say the average payback period of a river/sea vessel exceeds 10 years if the cost of loans does not exceed 5-7% per year. It is clear that with the current economy in Russia it is a utopia to find such conditions in the open market.

What is offered?

The United Shipbuilding Corporation (USC) has developed a leasing financing program that requires RUB 33 bln of budget finances for construction of up to 180 ships. The proposed scheme implies an expansion of the authorized capital of USC with the mentioned amount and reinvestment of repayable funds from lessees in the same amount. According to USC President Alexei Rakhmanov, the advantage of leasing from USC is a narrow specialization in shipbuilding, which guarantees targeted use of funds. When speaking about the multiplier, Alexei Rakhmanov commented: "Each ruble of budget funds will return two or three rubles of newbuildings’ cost”.

Goznak-Leasing  CJSC (a subsidiary of USC) specializes in shipbuilding. In 2016, the share of the company in the market of water transport leasing was 9% (in terms of new business volume).

United Shipbuilding Corporation (USC OJSC) is the largest shipbuilding company in Russia. It was set up in 2007 with 100% federal ownership. The holding comprises 40 companies and organizations (major shipbuilding and shiprepairing companies as well as leading design bureaus). Currently, USC consolidates the bulk of the domestic shipbuilding complex. The Russian market is the main focus of the state corporation though it also exports its products to 20 countries worldwide.

From 2008 to 2016, USC allocated RUB 6.4 bln for leasing programs, which allowed to finance the construction of ships for a total of RUB 11.8 bln. This period saw keel-laying of 34 ships including 13 ships laid at shipyards that are not part of USC. According to USC, the value of the multiplicative effect of this program is as high as two - one budget ruble invested brings investment of two rubles in the construction.

The State Transport Leasing Company (STLC) also presented its proposals. The STLC program is estimated at RUB 33 bln. As compared with USC, STLC has greater possibilities for attracting off-budget funds because it boasts three international credit ratings. STLC says that each budget ruble will let it raise 3 off-budget rubles. Therefore, the total amount of shipbuilding financing will exceed RUB 100 bln. This will make it possible to build much more ships in Russia as compared with the USC program. Part of the ships are to be built by USC shipyard.

State Transport Leasing Company (STLC) is one of the leading companies in the Russian leasing market. Its share in terms of new business volume is about 70%. The fleet of STLC numbers 55 vessels of different types. In 2016, the company entered into leasing contracts for the supply of 18 units of Russian-made vessels, including dry cargo ships and oil tankers. The construction of ships is carried out at Krasnoye Sormovo, Nevsky Shipyard, Okskaya Shipyard and Nefteflot. The company is also implementing a programme on development of Vanino-Holmsk ferry line to ensure uninterrupted transport services at the Sakhalin island. Federal budget investments to co-finance the construction of two auto-railway ferries for the Vanino-Kholmsk line total RUB 5.5 bln. The first tranche of RUB 3.6 bln equity investment was received in 2016, the second – RUB 1.978 bln – in 2017.

According to industry experts, USC cannot cope with all the orders alone. Statistics says, 213 self-propelled vessels were built by Russian shipyards in 2000 – 2016. USC shipyards, Krasnoye Sormovo and Lotus, accounted for 95 vessels, which is only 40% of the total amount. In the segment of Volgo-Don Max ships, that are in demand today, the capacity of USC shipyards covers only 38% of the total, say the experts. The remaining 62% fall on non-USC shipyards.

Experts - for freedom of choice

The proposals of the Civic Chamber of the Russian Federation are aimed at diversifying the budget allocations for leasing shipbuilding programs. The federal executive authorities are recommended to ensure the conditions for the competitive environment in Russian shipbuilding and the opportunities for shipowners to freely choose shipyards and financing organizations when placing orders for construction vessels. The Russian Chamber of Shipping was instructed to organize work involving the largest companies in the water transport leasing market (STLC, Goznak-Leasing, etc.) and stakeholders in the shipping and shipbuilding market to develop a mechanism for implementation of activities aimed at the development of leasing taking into account the accumulated experience and the need to maintain a competitive environment in the shipbuilding industry.

Representatives of the shipping and independent shipbuilding business have supported the proposal of the Civic Chamber allowing to prevent development of monopolies in the field of ship leasing. 

Enough work for everyone

The program of support to fleet renovation has two interrelated end goals. Firstly, this is the maximum possible replacement of the obsolete fleet with new vessels and, secondly, the loading of domestic shipbuilding enterprises with appropriate orders, which will provide an excellent multiplier effect. Therefore, it is obvious that the preference should be given to proposals ensuring the attraction of the largest amount of funds and, consequently,  construction of more ships. The second criterion for choosing the program, as it seems to us, should be the maintenance of competitive environment in domestic shipbuilding in order to prevent its monopolization and, as a result, degradation. In view of the huge need for fleet modernization, there will be enough work for all enterprises.

Sophia Vinarova