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ESTIMATES OF COSTS OF ACQUIRING REPLACEMENT VESSELS
A. Estimate of costs
1.
MethodologX for estimating shiI2 I2rice
Indications of ship prices of newbuildings and secondhand ships per deadweight ton arereported monthly in the Lloyd's Shipping Economist for selected types of ships, but thes~ are notapplicable to the Pacific island fleet since they cover i-arger sizes of vessels only. For example,the smallest type of conventional general cargo carriers is 7,500 dwt, while most vessels of theSouth Pacific countries are less than 1,000 dwt. Moreover, the specifications of vessels and thecost structures of shipbuilding may vary considerably between larger and small size ships, whichmay make it inappropriate for small size of vessels to estimate ship prices on the basis of per dwtprice. Therefore, every effort has been made to collect information on prices of ships which havebeen actually purchased by ship operators in the region in recent years, butthe number of suchcases are too few to indicate a general trend of the price of small vessels.
Efforts to obtain quotations from shipbuilders have not been successful because they arevery reluctant or unable to indicate any quotations in the absence of detailed specifications.Meanwhile, the prices of actual shipbuilding contracts are not made public in most cases. Thereis thus no other means for estimating ship prices than to depend on a few samples of actualtransactions and to project them to the other ship sizes by using regressioQ analysis.Consequently the following estimated figures should be construed to indicate very approximateranges of the magnitude of the finance required for the proposed fleet construction/purchaseprogramme as mentioned above.
2.
Result of estimate
Table 4 contains estimated prices of newbuildings by length overall and by ship type. Thetotal investment required for the fleet of newbuildings ranges from 20 million US dollars to 40million US dollars. By ship type, conventional passenger/cargo vessels shares about half in thetotal amount, while in terms of length overall no great differences are observed among the
groups.
It is difficult to predict the share of used ships in the proposed fleet replacementprogramme in view of a lack of operational data and information which may prove the feasibilityof each shipbuilding project, though acquiring secondhand vessels has been suggested previouslywith regard to roll on -roll off passenger ferries and coastal tankers. In this connection thefollowing three cases are assumed and the result of the respective calculation is indicated inTable 5.
Case ICase II
Case III
All ships would be newly built.Seventy per cent of the ships of each type would be newly built and the restwould be acquired by means of secondhand purchase.Conventional passenger/cargo vessels and landing craft would be newly built,and roll on -roll off ferries and tankers would be acquired by secondhand
purchase.
lQ
Total35m 25m 15m45mLengthoverall
514,8001,029,600
403,000806,000
291,000582,400
Priceper ship
Mini.Max.
103
0Number ofships
34
00
4,030,0008,060,000
1,612,0003,224,000
873,600,747,2~~Totalprice
Mini.Max.
1,544,4003,088,800
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B.
Constraints on the shin acQuisition nro~ramme
The required investment of the ship acquisition programme as discussed in Item 4 hasbeen estimated on the assumption that all the tonnage physically needed for replacement couldbe built or purchased. However, the implementation of the respective ship acquisition project willbe largely affected firstly by the economic feasibility of each project and secondly by theavailability of favourable financing facilities, provided that every effort has been made to ensureeconomic and efficient operation in respect of both increasing revenues and reducing expensesor for minimizing operating cost in case of the public sector.
While policy matters on such aspects are dealt with in Item 6, this section attempts todemonstrate, by detailed comparison and direct evid~nce, the effect of ship price and varyingtenns
of ship financing on the feasibility of ship acquisition. Such exer.c~ses would be essentialfor substantiating the ship acquisition programme and consequently for detennining the actualmagnitude
of the required investment.
Criteria on the feasibilit~ of 12ro_iects
In case of any shipbuilding project, its feasibility must be considered based on thefollowing criteria among others:
(a) Whether the net cash flow after loan repayment is positive or not;
(b) Whether the net cash flow after depreciation is positive or not.
The first criterion is most important for both financing institutes and borrowers forensuring loan performance, while the second criterion may not be so important in particular forfinanciers. However, the second one is also important for appraising the soundness of theinvestment on a long term basis.
2. F actors that determine cash flows
There are many factors that influence the prospect of cash flows in ship operations,among which the following are considered most important:
(a)
Level
of freight rate and quantity of cargo lifted;
(b) Ship acquisition price;
Terms and conditions of ship finance:(c)
(i)(ii)
(iii)
(iv)
Interest rateLoan repayment periodMaximum loan coverageGrace period of loan
23
Since these factors are closely interrelated and it is difficult to manually calculate net cashflows, a simulation model has been developed to facilitate calculation of net cash flow. Themodel has been designed to take account of possible variances of the value of these factors whichmay produce plenty of cases in combination and to calculate the value of each factor that maybreak-even revenue and expenses under given conditions or assumptions.
To illustrate the use of the model, two examples have been presented.
The first example relates to a copra boat engaged in a feeder service, and the secondexample covers a conventional cargo/passenger ship to be assigned in a main inter-island service.Two different sets of assumptions were applied to each example. The variables of the first oneare only ship acquisition price and interest rate with thre'e levels respectively, which resulted incomposing.nine cases in total. The variables of the second set refer to ship price, maximum loancoverage, interest rate, loan repayment period and grace period. The first source of these figuresis an actual case in a country in the South Pacific. The second and third sources are ship financeterms
as recommended by OECD and UNCT AD designed to set up standard conditions forgranting export credit on ship export to developing countries from developed countries.
In selecting input data of operation, actual figures were adopted as far as possible witha view to making the result of simulation analysis meaningful and pragmatic. Detailedcomparison and data are contained in annexes I and II. Discussion on measures for ensuring thebreak-even operation of the projected ships are also contained in the respective Annexes..
3. Effects of shil2 acQuisition l2rice and interest rate on °l2erating sumlus
(a) Case of a coI2ra boat
The assumed ship prices of this case are 08$61,500, 08$123,000 and 08$184,500, whilethe interest rates are 10, 14 and 18 per cent. The other assumptions of the input data are contained
in Table 1-2 of Annex I. The result of simulation is shown in figure I.
case of a copra boat (based on table I-I in annex I)
00o.~00;:J.5'"='-e.=''"
0
-2
-3
561,500-100/.
$61.500-14%
$61,500-18%
SI23,OOO S(23,OOO SI23,OOO-(()O/. -14% -18%Cases
by ship price -interest rate
$184,500-10"/0
$184,500-14%
$184,500-ISO/.
Figure I. Effects of ship acquisition price and interestrate on operating surplus per month
24
As observed in the above graph, the first 5 cases are considered viable in terms of cashflow, while only the first 3 cases can afford full depreciation.
(b) Case of conventional cargo/l1assenger shil1
The assumed ship prices of this case are US$175,000, US$350,000 and US$500,000,while the interest rates are 10, 14 and 18 per cent. The other assumptions of the input data arecontained in Table 11-2 of Annex I. The result of simulation is indicated below in Figure 5-2 anddetailed analysis is contained in annex I.
case
of conventional cargo/passenger ship based on Table II-I in Annex I
4
000"-~cn:::>
.5'"~e.~'"
01)c
.~..C>0-
0
2
0
-2
-4
-6
-8$175,000-100/.
$175,000-14%
$175,000-ISO/o
$350,000 $350,000 $350,000 $500,000-100/. -14% -ISO/. -100/.
Cases by ship price -interest rate
$500,000-14%
$500,000~ 18%
Figure
II. Effects of ship acquisition price and interestrate on operating surplus per month
The result of simulation shows that the last 5 cases are not viable in terms of cash flow,and they cannot afford depreciation at all, though the fourth case may afford partial depreciation.
4.Effects
of finance terms on o~eratin~ sumlus
(a) Case of a coI;);ra boat
In this case study as shown in annex III, the ship price of newbuilding is assUmedU8$123,OOO and that of used ship U8$61,500, while the following three sets of finance termsare
applied to compare their effect on operating surplus and viability of projects.
25
TABLE 7
Actual case OECD terms* UNCTAD termsFinance terms
Maximum loanInterest rate per yearLoan repayment period
76%14%
11 years
80%8%
8.5 years
90%5%
14 years(10 years for used ship)
3 yearsGrace period
Nil
year
(*Effective as of end January 1997.)
In the above packages of finance tenns, the most favourable in gener,al is the UNCT AI?terms, followed by the OECD tenns. The actual cas~ applies the toughest conditions althoughit is more favourable than OECD in respect of loan repayment period and grace period.
The other assumptions are basically the same as those of the previous section andcontained in Table 111-2 of Annex II. The result of simulation is summarized in Figure 5-3.
case of copra boat (based on Table 1-11 in annex II)
~~~
Figure m. Effects of ship finance terms on operating surplus per month
In the first three cases of the above graph, sufficient surpluses are expected, but underOECD and Actual terms new ships cannot afford depreciation at all.
26
(b) Case of a conventional car~o/Qassen~er shiQ
The same packages of finance tenns as the case of copra boat are applied to this case. Theother asswnptions are basically the same as those of the previous section and contained in TableIV -2 of annex II. The result of simulation is swnmarized in figure III.
The graph in Figure 5-4 indicates that under Actual tenDs used ships can ensure positivecash flow before depreciation, but in other cases the cash flows turn negative. Under the OECDand UNCT AD tenDs, positive cash flows are expected in the first three cases, but in the last case,namely new ship after depreciation, the cash flows turn negative.
.case of conventional cargo/passenger ship (based on table 4-11 in annex II)
5. Su!!gested approach to ensure viable ship acQuisition
In the preceding sections various measures to make ship acquisition project commerciallyor economically viable have been discussed. These measures are summarized as follows:
(a) Measures to increase revenue: Increase of freight ratesIncrease of space utilization rates
(b)
Measures
to reduce expenses: Reduction of ship priceReduction of interest rateExtension of loan repayment periodWider loan coverage
Longer grace period
27
In the analysis of break-even values, only four factors namely freight rate, ship price,interest rate and loan repayment period are independently examined for the sake ofsimplification. But it is easy to make the similar exercise in respect of the other factors such ascrew cost, fuel, etc. when needed.
In the analysis of break-even values in Annexes I and II, each factor is dealt with as asingle dependent variable, since if plural factors were involved as dependent variables, no answercould be reached by computer unless detailed constraints were programmed. However, it shouldbe noted that in practice every effort should be made for improving the values of every factorwith a view to ensuring the break-even as a whole. For example, in addition to measures takenby ship operators in raising freight rates and in improving load factors, cooperation ofshipbuilders and bankers should be sought in order to make ship acquisition projects viable..
As is clearly illustrated by the result of the simulations, under the circumstances andconditions prevailing in the South Pacific, there may be many instances of ship acquisitionprojects in which secondhand ships about 5 years old at half the price of a newbuilding couldensure a break-even after loan repayment under present financing arrangements. This is one of'the reasons that ship operators in the South Pacific lean heavily toward the purchase ofsecondhand tonnage, while with newbuilding of a similar type of vessel it would be difficult tobreak-even. From the above it can be seen that computer models can assist in analyzing possibleship financing, replacement and operating alternatives. It is therefore proposed to make an in-depth study for examining the viability of planned ship acq\,Jisition projects by utilizing thesimulation models which were demonstrated in the preceding sections and annexes I and II.
28
