As in every shipbuilding nation, Canada provides a range of financing initiatives to encourage foreign and domestic buyers of ships to place newbuilding orders at Canadian shipyards. These initiatives have always and must continue to include:
- Interest rate buy-down for financing used in Canadian ship construction or modification projects (SFF from Industry Canada)
- Term export financing for buyers of foreign vessels built in Canada (from EDC)
- Refundment Guarantees – to provide export buyers of vessels with comfort in investing in Canada (from EDC)
- Small Shipyard Grants
The Structured Financing Facility
The SFF provides an interest rate buy-down of financing used in the acquisition or modification of a Canadian built vessel or offshore structure to a maximum of 15% of the shipyard contract. Unfortunately the program was not funded in March of this year for unknown reasons. SFF was designed to be an alternative to the accelerated capital cost allowance (ACCA) in the Canadian tax regulations. ACCA is provided to Canadian ship owners/operators to allow them to write down their investment in only four years. ACCA and the 25% tariff were originally used to encourage Canadian shipowners to build their new vessels in Canada. The removal of the 25% ship tariff in January 2010 seems to have made the ACCA no longer useful for that purpose. It now serves as a very convenient benefit for shipowners at the expense of shipbuilders.
Until March of this year ship owners were afforded the use of the Structured Financing Facility (SFF). One of its expected outcomes was the creation of demand for shipyard work. In this it was highly successful as both domestic and foreign shipowners were eligible for the program and it was used by foreign buyers of vessels. In many cases,it was a deciding factor by clients of Canadian shipyards in choosing Canada as the country to build or modify its ships. The SFF was most recently used by Groupe Ocean who built two vessels under this program and stated that the SFF was critical to the decision to build in Canada. The SFF must continue to remain in force.
Term export financing for buyers of Canadian ships
To encourage Canadian shipowners to build in Canada long-term financing, similar to what is offered in the majority of shipbuilding nations is required. It is commonplace in Europe and Asia for state export credit agencies to provide construction finance for exporting shipowners. This must include term financing for buyers of ships; meaning repayment over a minimum period of 12 years at reduced interest rates. Financing over 18 to 25 years needs to be considered. Although in Asia loan-to- value can be higher, 80% is generally an accepted level of financing. The US Title XI program is a good example. This program allows up to 87.5% of the new vessel to be financed. A comparison of three different types of financing, 25-year title XI financing, 18-year extended term financing and 12-year OECD financing show that 25-year financing can produce a daily financing rate nearly 50% cheaper than the daily debt-servicing cost under OECD terms.
Being a capital intensive industry where shipyard clients are normally expected to fund the construction
of a newbuild vessel by way of deposits, certain guarantee facilities have been developed globally to help alleviate the financial risk of clients who are making stage payments on a newbuilding vessel.
Payment terms in shipbuilding generally ensure that the builder is cash-flow positive throughout the construction project. Generally this means 5 x 20% payment terms i.e. 20% at each of the following milestones: contract signing, steel cutting, keel laying, launching and delivery. This means that 60% of the total sales price (and likely around 75% of the shipyard’s entire project cost) is paid once the first steel blocks are placed on the construction berth i.e. mitigating any cashflow shortages throughout the build.
In exchange for providing such attractive payment terms to the shipyard, clients do however expect the shipbuilder to have in place some form of guarantee or bond. Generally the shipowner will ask for a guarantee of 100% of any monies paid. In the unlikely event that the ship is not eventually delivered then the guarantor will refund those milestone payments.
These forms of bonding or refundment guarantees are commonplace in shipbuilding contracts across the world and are provided by state export credit and development agencies. In Canada, refundment guarantees are also provided by Export Development Canada.
Small Shipyard Grants
While not as capital intensive as large commercial vessels, small shipyards in Canada generally build smaller but complex and innovative vessels. Smaller vessels ordered by commercial and public interests are highly exportable products and the quantities required are often high. In the United States a shipyard program has been adopted that should be looked at by the federal and provincial governments. It is designed to help small shipyards invest in production equipment, provide technical skills training for employees and maintain well-paying jobs for their employees by keeping the yards competitive. A total of $9.9m in grants was allocated to the program in 2011. Financing is an important area for small business. Serious consideration of the above would help Canada’s small shipbuilders.