v. 1. 2. ESTIMATES OF COSTS OF ACQUIRIG REPLACEMET VESSELS A. Estimate of costs MethodologX for estimating shii2 I2rice Indications of ship prices of newbuildings and secondhand ships per deadweight ton are reported monthly in the Lloyd's Shipping Economist for selected types of ships, but thes are not applicable to the Pacific island fleet since they cover iarger sizes of vessels only. For example, the smallest type of conventional general cargo carriers is 7,5 dwt, while most vessels of the South Pacific countries are less than 1, dwt. Moreover, the specifications of vessels and the cost structures of shipbuilding may vary considerably between larger and small size ships, which may make it inappropriate for small size of vessels to estimate ship prices on the basis of per dwt price. Therefore, every effort has been made to collect information on prices of ships which have been actually purchased by ship operators in the region in recent years, butthe number of such cases 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 are very 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. There is thus no other means for estimating ship prices than to depend on a few samples of actual transactions and to project them to the other ship sizes by using regressioq analysis. Consequently the following estimated figures should be construed to indicate very approximate ranges of the magnitude of the finance required for the proposed fleet construction/purchase programme as mentioned above. Result of estimate Table 4 contains estimated prices of newbuildings by length overall and by ship type. The total investment required for the fleet of newbuildings ranges from 2 million US dollars to 4 million US dollars. By ship type, conventional passenger/cargo vessels shares about half in the total 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 replacement programme in view of a lack of operational data and information which may prove the feasibility of each shipbuilding project, though acquiring secondhand vessels has been suggested previously with regard to roll on roll off passenger ferries and coastal tankers. In this connection the following three cases are assumed and the result of the respective calculation is indicated in Table 5. Case I Case II Case III All ships would be newly built. Seventy per cent of the ships of each type would be newly built and the rest would 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
1 34 2 Length overall 45m 35m 25m 15m Total Price per ship Mini. Max. 514,8 1,29,6 43, 86, 291, 582,4 umber of ships Total price Mini. Max. 1,544,4 3,88,8 1,612, 3,224, 873,6,747,2 4,3, 8,6,
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B. Level Constraints on the shin acquisition nroramme The required investment of the ship acquisition programme as discussed in Item 4 has been estimated on the assumption that all the tonnage physically needed for replacement could be built or purchased. However, the implementation of the respective ship acquisition project will be largely affected firstly by the economic feasibility of each project and secondly by the availability of favourable financing facilities, provided that every effort has been made to ensure economic and efficient operation in respect of both increasing revenues and reducing expenses or 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 to demonstrate, by detailed comparison and direct evidnce, the effect of ship price and varyingtenns of ship financing on the feasibility of ship acquisition. Such exer.cses would be essential for 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 the following criteria among others: (a) (b) Whether the net cash flow after loan repayment is positive or not; Whether the net cash flow after depreciation is positive or not. The first criterion is most important for both financing institutes and borrowers for ensuring loan performance, while the second criterion may not be so important in particular for financiers. However, the second one is also important for appraising the soundness of the investment 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) (b) (c) of freight rate and quantity of cargo lifted; Ship acquisition price; Terms and conditions of ship finance: (i) (ii) (iii) (iv) Interest rate Loan repayment period Maximum loan coverage Grace period of loan 23
Since these factors are closely interrelated and it is difficult to manually calculate net cash flows, a simulation model has been developed to facilitate calculation of net cash flow. The model has been designed to take account of possible variances of the value of these factors which may produce plenty of cases in combination and to calculate the value of each factor that may breakeven 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 second example covers a conventional cargo/passenger ship to be assigned in a main interisland service. Two different sets of assumptions were applied to each example. The variables of the first one are only ship acquisition price and interest rate with thre'e levels respectively, which resulted in composing.nine cases in total. The variables of the second set refer to ship price, maximum loan coverage, interest rate, loan repayment period and grace period. The first source of these figures is an actual case in a country in the South Pacific. The second and third sources are ship financeterms as recommended by OECD and UCT AD designed to set up standard conditions for granting 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 with a view to making the result of simulation analysis meaningful and pragmatic. Detailed comparison and data are contained in annexes I and II. Discussion on measures for ensuring the breakeven 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 8$61,5, 8$123, and 8$184,5, whilethe interest rates are 1, 14 and 18 per cent. The other assumptions of the input data are contained in Table 12 of Annex I. The result of simulation is shown in figure I. case of a copra boat (based on table II in annex I) o. ;:J '" ' e. '" ' 2 3 561,5 1/. $61 14% $61,5 18% SI23,OOO S(23,OOO SI23,OOO (()O/. 14% 18%Cases by ship price interest rate $184,5 1"/ $184,5 14% $184,5 ISO/. Figure I. Effects of ship acquisition price and interest rate on operating surplus per month 24
case Figure 4. Effects 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,, US$35, and US$5,, while the interest rates are 1, 14 and 18 per cent. The other assumptions of the input data are contained in Table 112 of Annex I. The result of simulation is indicated below in Figure 52 and detailed analysis is contained in annex I. of conventional cargo/passenger ship based on Table III in Annex I 4 " cn :::> '" e. '" 1) c. C> 2 2 4 6 8 $175, 1/. $175, 14% $175, ISO/o $35, $35, $35, $5, 1/. 14% ISO/. 1/. Cases by ship price interest rate $5, 14% $5, 18% II. Effects of ship acquisition price and interest rate 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. of finance terms on oeratin 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,oo and that of used ship U8$61,5, while the following three sets of finance termsare applied to compare their effect on operating surplus and viability of projects. 25
il 26 TABLE 7 Finance terms Actual case OECD terms* UCTAD terms Maximum loan Interest rate per year Loan repayment period Grace period 76% 14% 11 years year 8% 9% 8% 5% 8 years 14 years (1 years for used ship) 3 years (*Effective as of end January 1997.) In the above packages of finance tenns, the most favourable in gener,al is the UCT AI? terms, followed by the OECD tenns. The actual cas applies the toughest conditions although it 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 and contained in Table 1112 of Annex II. The result of simulation is summarized in Figure 53. case of copra boat (based on Table 111 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 under OECD and Actual terms new ships cannot afford depreciation at all.
Measures (b) Case of a conventional caro/qassener shiq The same packages of finance tenns as the case of copra boat are applied to this case. The other asswnptions are basically the same as those of the previous section and contained in Table IV 2 of annex II. The result of simulation is swnmarized in figure III. The graph in Figure 54 indicates that under Actual tends used ships can ensure positive cash flow before depreciation, but in other cases the cash flows turn negative. Under the OECD and UCT 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 411 in annex II) 5. Su!!gested approach to ensure viable ship acquisition In the preceding sections various measures to make ship acquisition project commercially or economically viable have been discussed. These measures are summarized as follows: (a) (b) Measures to increase revenue: to reduce expenses: Increase of freight rates Increase of space utilization rates Reduction of ship price Reduction of interest rate Extension of loan repayment period Wider loan coverage Longer grace period 27
28 In the analysis of breakeven values, only four factors namely freight rate, ship price, interest rate and loan repayment period are independently examined for the sake of simplification. But it is easy to make the similar exercise in respect of the other factors such as crew cost, fuel, etc. when needed. In the analysis of breakeven values in Annexes I and II, each factor is dealt with as a single dependent variable, since if plural factors were involved as dependent variables, no answer could be reached by computer unless detailed constraints were programmed. However, it should be noted that in practice every effort should be made for improving the values of every factor with a view to ensuring the breakeven as a whole. For example, in addition to measures taken by ship operators in raising freight rates and in improving load factors, cooperation of shipbuilders 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 and conditions prevailing in the South Pacific, there may be many instances of ship acquisition projects in which secondhand ships about 5 years old at half the price of a newbuilding could ensure a breakeven 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 of secondhand tonnage, while with newbuilding of a similar type of vessel it would be difficult to breakeven. From the above it can be seen that computer models can assist in analyzing possible ship financing, replacement and operating alternatives. It is therefore proposed to make an indepth study for examining the viability of planned ship acq\,jisition projects by utilizing the simulation models which were demonstrated in the preceding sections and annexes I and II.