A. ESTIMATES OF COSTS OF ACQUIRING REPLACEMENT VESSELS

v.
1.
2.
ESTIMATES OF COSTS OF ACQUIRING REPLACEMENT VESSELS
A.
Estimate of costs
MethodologX for estimating shiI2I2rice
Indications of ship prices of newbuildings and secondhandships per deadweight ton are
reported monthly in the Lloyd's Shipping Economist for selectedtypes of ships, but thes~are not
applicable to the Pacific island fleet since they cover i-argersizes of vesselsonly. For example,
the smallesttype of conventional general cargo carriers is 7,500 dwt, while most vessels of the
South Pacific countries are less than 1,000 dwt. Moreover, the specifications of vesselsand the
cost structuresof shipbuilding may vary considerably between larger and small size ships, which
may make it inappropriate for small size of vesselsto estimate ship prices on the basis of per dwt
price. Therefore, every effort has beenmade 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
casesare too few to indicate a general trend of the price of small vessels.
Efforts to obtain quotations from shipbuilders have not beensuccessfulbecausethey are
very reluctant or unable to indicate any quotations in the absenceof 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.
Consequentlythe following estimatedfigures 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.
Resultof estimate
Table 4 contains estimatedprices of newbuildings by length overall and by shiptype. The
total investmentrequired for the fleet of newbuildings ranges from 20 million US dollars to 40
million US dollars. By ship type, conventional passenger/cargovessels 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 dataand information which may prove the feasibility
of eachshipbuilding project, though acquiring secondhandvesselshas beensuggestedpreviously
with regard to roll on -roll off passengerferries and coastal tankers. In this connection the
following three casesare assumed and the result of the respective calculation is indicated in
Table 5.
Case I
Case II
CaseIII
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/cargovessels and landing craft would be newly built,
and roll on -roll off ferries and tankers would be acquired by secondhand
purchase.
lQ
10
4
3
20
45m
Length
overall
Price
per ship
Mini.
Max.
514,800
1,029,600
35m
403,000
806,000
25m
291,000
582,400
0
Numberof
ships
Total
price
Total
15m
Mini.
Max.
1,544,400
3,088,800
1,612,000
3,224,000
873,600,747,2~~
0
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8,060,000
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B.
Level
Constraints on the shin acQuisition nro~ramme
The required investment of the ship acquisition programme as discussed in Item 4 has
beenestimated 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 beenmade to ensure
economic and efficient operation in respect of both increasing revenues and reducing expenses
or for minimizing operating cost in caseof the public sector.
While policy matters on such aspectsare dealt with in Item 6, this section attempts to
demonstrate, 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 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)
Whetherthe net cashflow afterloan repaymentis positive or not;
(b)
Whetherthe net cashflow after depreciationis 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.
Factors 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:
of freight rateand quantityof cargolifted;
(a)
(b)
Ship acquisitionprice;
(c)
Termsand conditionsof shipfinance:
(i)
(ii)
(iii)
(iv)
Interest rate
Loan repayment period
Maximum loan coverage
Grace period of loan
23
0
Since thesefactors 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 beendesignedto take accountof possible variancesof the value of thesefactors which
may produce plenty of casesin combination and to calculate the value of each factor that may
break-even revenue and expensesunder given conditions or assumptions.
To illustratethe useof the model,two exampleshave beenpresented.
The first example relates to a copra boat engaged in a feeder service, and the second
example covers a conventional cargo/passengership to be assignedin a main inter-island service.
Two different sets of assumptions were applied to eachexample. The variables of the first one
are only ship acquisition price and interest rate with thre'elevels respectively, which resulted in
composing.nine casesin total. The variables of the second set refer to ship price, maximum loan
coverage, interestrate, loan repaymentperiod and grace period. The first source of these figures
is an actual case in a country in the South Pacific. The secondand third sourcesare ship financeterms
as recommended by OECD and UNCT 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
comparisonand data are contained in annexesI and II. Discussion on measuresfor ensuring the
break-even operation of the projected ships are also contained in the respective Annexes..
3.
Effects of shil2 acQuisitionl2rice and interest rate on °l2erating sumlus
(a)
Case of a coI2raboat
The assumedship prices of this caseare 08$61,500, 08$123,000 and 08$184,500, whilethe
interestrates are 10, 14and 18 per cent. The other assumptionsof the input dataare contained
in Table 1-2 of Annex I. The result of simulation is shown in figure I.
caseof a copraboat(basedon table I-I in annexI)
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561,500
$61.500
-100/.
$61,500
SI23,OOO
S(23,OOO
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$184,500
$184,500
-14%
-18%
-(()O/.
-14%
-18%
-10"/0
-14%
Cases
by ship price -interest rate
Figure I. Effects of ship acquisition price and interest
rate on operating surplus per month
24
$184,500
-ISO/.
case
Figure
Effects
4.
As observedin the abovegraph,the first 5 casesareconsideredviable in termsof cashflow,
while only the first 3 casescanafford full depreciation.
(b)
Case of conventional cargo/l1assengershil1
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 are
contained in Table 11-2of Annex I. The result of simulation is indicated below in Figure 5-2 and
detailed analysis is contained in annex I.
of conventional cargo/passengership based on Table II-I in Annex I
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$350,000
$350,000
$350,000
$500,000
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-14%
-ISO/.
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$500,000
$500,000
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~ 18%
Casesby ship price -interest rate
II. Effects of ship acquisition price and interest
rate on operating surplus per month
The result of simulation shows that the last 5 casesare not viable in terms of cash flow,
and they cannotafford depreciation at all, though the fourth casemay afford partial depreciation.
of finance terms on o~eratin~ sumlus
(a)
Caseof a coI;);raboat
In this case study as shown in annexIII, the ship price of newbuilding is assUmedU8$123,OO
and that of usedshipU8$61,500,while the following threesetsof financetermsare
appliedto comparetheir effect on operatingsurplusand viability of projects.
25
Nil
~
26
TABLE 7
Financeterms
Actual case
Maximum loan
Interest rate per year
Loan repayment period
76%
OECDterms* UNCTAD terms
14%
80%
8%
90%
5%
11 years
8.5 years
14years
(10 yearsfor used ship)
3 years
Grace period
year
(*Effective asof endJanuary1997.)
In the above packagesof finance tenns, the most favourable in gener,alis the UNCT 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 111-2of Annex II. The result of simulation is summarized in Figure 5-3.
caseof copra boat (based on Table 1-11in annex II)
Figure m. Effects of ship finance terms on operating surplus per month
In the first threecasesof the abovegraph, sufficient surplusesareexpected,but under
OECD andActual terms new shipscannotafford depreciationat all.
Measures
(b)
Case of a conventional car~o/Qassen~er
shiQ
The samepackagesof finance tenns as the caseof copra boat are applied to this case.The
other asswnptions are basically the sameas 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 5-4 indicates that under Actual tenDsused ships can ensure positive
cash flow before depreciation, but in other casesthe cash flows turn negative. Under the OECD
and UNCT AD tenDs,positive cashflows are expected in the first three cases,but in the last case,
namely new ship after depreciation, the cashflows turn negative.
.
caseof conventional cargo/passengership (based on table 4-11 in annex II)
5.
Su!!gestedapproachto ensureviable ship acQuisition
In the preceding sectionsvarious measuresto make ship acquisition project commercially
or economically viable have been discussed.These measuresare summarized as follows:
(a)
Measuresto increaserevenue:
(b)
to reduceexpenses:
Increaseof freight rates
Increaseof spaceutilization 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 break-even 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 easyto make the similar exercise in respectof the other factors such as
crew cost, fuel, etc. when needed.
In the analysis of break-even values in Annexes I and II, each factor is dealt with as a
single dependentvariable, since if plural factors were involved as dependentvariables, no answer
could be reachedby computer unless detailed constraintswere 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 break-even as a whole. For example, in addition to measurestaken
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 secondhandships about 5 years old at half the price of a newbuilding could
ensurea break-even after loan repayment under presentfinancing arrangements.This is one of'
the reasons that ship operators in the South Pacific lean heavily toward the purchase of
secondhandtonnage, while with newbuilding of a similar type of vessel it would be difficult to
break-even. From the above it can be seenthat computer models can assistin 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\,Jisitionprojects by utilizing the
simulation models which were demonstrated in the preceding sections and annexesI and II.