New financial opportunities for new fleet

VTB Bank JSC is sponsoring Neva International Exhibition and Conference on Shipbuilding, Navigation, Port Activity, and Ocean and Shelf Exploration. Common interests uniting VTB Bank and the marine industry are the topics of our dialogue with the Director of the First Corporate Client Services Department, VTB Bank JSC, Mikhail Fedorenko.

— Mr. Fedorenko, could you comment on the agreement recently concluded between VTB Bank and ‘Sovcomflot’ JSC: is this agreement aimed at the forthcoming IPO of ‘Sovcomflot’?

— The prospects offered by this agreement are much wider. What is at issue is the creation of effective mechanisms making it possible to turn St. Petersburg into the capital of domestic shipbuilding and shipping industry. Russia’s largest ship owner and VTB Bank – one of the leading creditors to the Russian economics – have agreed upon cooperation to ensure handling of current and strategic objectives.

The Bank shall be capable of assisting the ‘Sovcomflot’ company’s structural reformation and settling further corporate development issues.

— What is the way to overcome the major problem of funding for the shipbuilding and shipping industry: High interest rates? Longer payback periods? Non-coverage of loans?

—At the moment Russian shipping companies are facing the need to register their ships in foreign countries when using international loan programs. Involvement of Russian financial institutions and employment of their guarantees, as well as creation of the Russian International Register of Ships (RIRS) shall help to change the situation dramatically.

The Russian International Register of Ships shall enable employment of foreign and Russian-made ships as transportation means for foreign trade freights free from value added tax loads and custom dues. The process of returning Russian ships their original nationality has just begun, nevertheless by the early year 2007 the total of 136 crafts with full capacity of 500 000 DWT have been registered by the RIRS.

Leasing may become one of the most attractive forms of cooperation between the State and the shipping companies. The advantage of the leasing funding model for the projects is evident: leasing does not require the lessee to immediately divert significant current assets to the purposes of the project.

Funding of new ship building projects is the most painful problem for Russian shipbuilding companies (this principally concerns inland shipbuilding companies).As a rule, their variable financial condition, unstable state of the cargo-handling complex, lack of security result in high loan value and short period of loan. As to leasing operations, the tax legislation provides for certain preferences allowing significant reduction in expenditures (reduced net worth tax amounts due to accelerated depreciation, saving on advance corporation tax).By the year 2010 the lease financing market in Russia promises to experience threefold growth to reach the value of $22 billion. This also includes the water-borne transportation segment.

Lease loan system in the water-borne transportation sector is now actively developed by the VTB Group subsidiary, VTB-Leasing JSC. This company holds the first place in the year 2006 ratings with leasing agreement package totaling to over RUR 1.2 billion.

In turn the experience of ‘Sovcomflot’ shall benefit VTB Bank possibilities for rendering consulting services covering the issues of financing the shipping industry, assessment of ships and investment projects in the field of navigation.

— Is the process of implementation of new financial schemes capable of introducing general improvement to the situation in this sector as a whole? As a matter of fact, official calculations have shown that the demand for foreign trade freight transportation in Russia should increase up to 540.5 million tonnes by the year 2010 including 306.6 million tonnes of bulk cargo and 234 million tonnes of dry cargo. Domestic shipyards in their present condition cannot assure construction of such fleet…

— Unfortunately the Russian shipbuilding industry does not possess sufficient capacities to construct vessels over 70 000 DWT. This is a fact and one of the reasons why Russian ship owners are bound to order vessels from foreign shipyards. A significant reason for placing the orders with foreign manufacturers is the fact, that such orders are placed under state guarantees of credits offered by foreign governments. Russia as a state cannot provide this option yet.Besides, a number of foreign countries have abolished customs dues and import taxes for the shipbuilding equipment; in Russia the customs dues and taxes are still effective for such types of equipment. This directly increases the production cost of the outputs of Russian shipyards. In the recent decade shipbuilding companies in Japan, South Korea and China have experienced sharp growth in technology, logistics, and production management. As an example, one plant in South Korea produces up to 60 heavy-tonnage vessels a year. The construction period starting with keel-laying for Aframax class vessel to the delivery point covers around 5 months.In Russia this period is several times greater. To go on with this example, the construction of the product tanker at the ‘Admiralty Shipyards’ takes an average of 19 months. Under such conditions domestic shipyards shall not be capable of rivaling shipbuilders from Japan, Korea, China, and Croatia. I would like to draw special attention to the idea, that they cannot do it now. The resources spent on attainment of civil crafts of various types (their total amount by the year 2015 shall reach RUR 140 billion) shall turn into domestic investments enabling modernization of shipyards and making them competitive in the world market concerning the order performance times.

— The situation in the seagoing shipbuilding industry is far from perfect, but that in the inland sector is even worse.It is a mere critical situation with most enterprises either shut down or repurposed.

— It is a true fact that in the USSR over one hundred ship repair facilities of MinRechFlot (River Fleet Ministry) created the major part of the inland barge and tug-boat fleet. In the winter period these enterprises were engaged in repairing the vessels for the fleet, and within the navigation period the plant capacities were utilized for building new vessels.

Today average operating age of the vessels effecting inland transportation has exceeded the critical value and equals 28 years; for the river-and-sea type vessels – 24 years. In the past fifteen years no significant refurbishment of the inland fleet has been performed. Thus in case mass-volume decommissioning for vessels with expired operation terms takes place, this shall cause grave decrease in the sphere of inland cargo transportation.

To our opinion, the way out of this situation is the adoption of the Federal purpose-oriented program for development of commercial shipbuilding in Russia for the period prior to year 2015. This program shall reflect the concept of government assistance “by way of direct subsidization of shipbuilding projects, granting tax remissions, placement of government orders for construction of commercial vessels to Russian shipyards, writing off debts, granting financial resources aimed at modernization and reconstruction of shipyards and research and advanced development.” Government subsidizing of interest on bank loans requires special attention. This issue is of considerable concern. In particular, if foreign shipbuilders or ship owners are granted a credit for a period of 10...12 years or longer, with 5-8% per annum on the basis of loan up to 80% of the price of the ship, and their Russian colleagues are granted credits for a period of 2 to 7 years with 9 - 12% per annum. In foreign countries the shipbuilders are exempted from customs dues and import taxes for associated hardware, where in this country these dues and taxes are imposed in substantial amounts. Thus subsidization of interest on bank loans partially remits the burden for servicing the debt.

It should be taken into consideration, that development of the mechanism for financial assistance to the shipbuilding industry rendered by the state shall be based on business issues: availability of company’s own cargo-handling complex, positive growth dynamics of the key figures (incl. financial growth).Most likely, the implementation of the Program shall be performed on the basis of the government-and-private partnership principles.

Considering the problems and issues listed above, VTB Bank takes an integrated approach to their solution. Detailed evaluation of possibilities for rendering financial backing to various operations can be fully supported by VTB.

— The agreement between VTB Bank and ‘Sovcomflot’ is one of the sides to the concept of a ‘golden triangle’ (with financing structures, freight transport operators and shipbuilders) that has been outlined as a necessary measure by the Minister of Industry and Energy of the Russian Federation, Mr. Victor Khristenko. Are there any agreements of the kind planned to be concluded with other shipping companies?

— Surely, and this concerns both shipping companies and shipbuilders. With the advent of infrastructural projects in the sphere of transportation, as well as shelf exploration projects, more effective application of industrial capacity at hand is required, including closely located transportation companies, shipbuilders, and specialized machine manufacturers. An effective interactions mechanism (the ‘golden triangle’) shall support the idea of shaping integrated structures in the shipbuilding industry.

We have the first example right here before us: the United Shipbuilding Corporation with the building and post-delivery servicing of the ships as its main area of activity. The new corporation shall be involved in implementation of government’s defense order and civil shipbuilding projects. This shall cover the interests of sea-bound shipping and deal with tasks of ensuring inland waterway transportation.

Go to Index of # 3(21) 2007


# 3(21), 2007
Topical Interview

Director of the First Corporate Client Services Department, VTB Bank JSC, Mikhail Fedorenko

Director of the First Corporate Client Services Department, VTB Bank JSC, Mikhail Fedorenko