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HANSA 11-2018

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Finanzierung | Financing

Finanzierung | Financing Financing innovations needs pragmatism Innovation comes with a premium along with any benefits. Unless the advantages from using innovative ships are translated into savings or revenue, the comparison of conventional versus innovative technology is unfair, as one compares apples with oranges T$ 3.000 2.500 2.000 1.500 1.000 500 -500 0 -1.000 -1.500 -2.000 Development of Net Savings 1 2 3 4 5 6 7 8 9 10 11 12 In a more scientific way, the tradeoff between the premium and the expected advantages is simplistically expressed in a formula, where the marginal benefit or the marginal cost reduction should compensate the higher acquisition or installation cost; hence, all decisions are translated into money. However, when it comes to environmental benefits, the comparison becomes rather tricky. By installing technology that reduces emissions, the owner offers a ship that might be friendlier to the environment, however, unless the savings of fuel are adequately reflected in the »consumption-speed« warranty, his ship does not really enjoy any preferential status in the market. The benefit is transferred to the charterer-operator, who is consequently faced with improved unit cost of energy. Even in this rosy scenario, the risk of selecting, installing and operating new technology rests with the owner. This risk is high and any premium in the charter or freight market does not usually justify the investment. The risk and the related cost are therefore absorbed »internally«; the market is not willing to reward greener operations. Regardless of the nature of innovation, ships of innovative technology are commonly confronted with higher acquisition costs, therefore their capital expenses (CAPEX) are higher; at the same time evidence and experience suggest that the operating expenses (OPEX) do not differ substantially. In fewer words, their running expenses are higher than the comparable tonnage of conventional technology. This is evident in LNG-fueled ships or even ships with power-boosting technologies installed, such Flettner rotors. »The market needs a mechanism where benefits and risks are split among the parties involved« The voyage related savings might justify the original investment, yet at a cost of operational limitations and unknown risks, as in the case of LNG-fueled ships, where bunker availability or price differential remain largely undetermined. So, the discussion boils down to identifying the party or the stakeholder willing (or not) to absorb the cost of innovation. Business practice and research suggest, that city-ports might absorb part of the cost, by determining lower port dues for green ships. The rationale is rather simplistic: city-ports suffer more from the poor quality of air due to shipborne activity, therefore, they will promote »greener« or even ban »dirtier« tonnage. So far, major ports, such as Hamburg, Barcelona, Net Savings for Ship Owner Net Savings for Supplier Years Source: Schinas Antwerp, Los Angeles, Long Beach, Vancouver and Rotterdam are joining forces to fight global warming. The port authorities will be working together under the World Ports Climate Action Program on a number of projects that address the issue of global warming. These ports, among many others, offer awards and incentives for attracting greener tonnage. Apparently, not all ports are willing or capable to follow this practice; especially ports and terminals that compete in rather elastic markets, and trades can find alternative routes, cannot afford this policy. The other option is that the states and therefore the tax-payers might absorb part of the cost; this is the issue of the Export Credit Agencies (ECA) and their facilities. Although the debate on the cost or the distortion of the free and fair market is on, ECAs, such as SACE of Italy, Euler Hermes of Germany, Finnvera of Finland as well as Bpifrance of France, promote relevant projects and technologies by financing new ships, especially of high value in terms of outfitting, like cruise ships. This option might serve owners and investors with a long horizon; nevertheless, few projects qualify or can sustain the lengthy procedures. Reconsidering the risk of technology selection, it becomes obvious that the market needs a mechanism, a business model, where benefits and risks are split among the parties involved, in most cases between the technology supplier and the owner. Assume the following case: an owner has a ship and aims at improving its energy performance by installing a wind-assisted 4.000 power-boosting technology. 3.000 By successfully installing this technology, the overall performance is improved as 2.000 less fuel is consumed. Less fuel infers less 1.000 emissions. The fuel savings (or the improved charter rate) compensate the outlay 0for this technology. Operational pragmatism necessitates that the amount, -1.000 duration and terms of financing are realistic -2.000 and achievable, which is not always the case. Once the equipment is selected, installed 1 and 2 fully 3 paid, 4 all 5 risks 6 rest 7 -3.000 with the owner. This is a heavy burden for 8 9 T$ NPV with and without Pay-as 22 HANSA International Maritime Journal – 155. Jahrgang – 2018 – Nr. 11

INTERNATIONAL MARITIME JOURNAL Finanzierung | Financing Net Savings INTERNATIONAL MARITIME JOURNAL FORUM SCHIFFFAHRT FINANZIERUNG Net Savings for Ship Owner Net Savings for Supplier 4.000 3.000 2.000 1.000 NPV with and without Pay-as-you-save with λ=0.8 Net Savings with P-a-Y-S (Ship Owner) Net Savings without P-a-Y-S (Ship Owner) the owner. Therefore, a pay-as-you-save model (PAYS) was developed, splitting the benefits between the supplier and the owner. The concept is simple: only a part of the total cost is paid by the owner while 9 10 the 11 rest is 12covered Years by the achieved savings. One could consider an average annual price of bunkers or relevant formula for translating tons of fuel saved into benefit. However, the holy grail of this relationship is no other than benefits related to a carbon price. Should carbon price come into the equation, the incentive for greener performance will become stronger. A numerical example illustrates the benefits for the owner and the supplier. Recently, the rise in carbon price as exchange traded commodity (ETC), from 7 $ to 20 $/t of carbon, or 21 $ to 62 $/t of fuel over the last twelve months, is a concerns in conventional shipping and justifies expectations in green projects, while some projections have that rising to 100 $ a ton of carbon in 2020, or 310 $ per ton of fuel. »It’s unfair for owners to face all the risks, when the regulatory environment is ambiguous« The effect of the difference (delta) between the contract duration and the remaining usage of wind-assist technology is depicted in the graph »Development of Net Savings«. In the first six years the supplier receives 80 % of all savings. At the end of year six, the contract expires, and all future savings are posted on the account of the ship owner. Moreover, it can be observed that the initial investment is amortized at the end of year six for the ship owner and in year five for Net Savings with the technology provider. The interests of P-a-Y-S (Ship Owner) the ship owner and of the supplier differ Net Savings without in their weighted P-a-Y-S (Ship average Owner) cost of capital (WACC) as well as in the risks and costs of the technology, therefore any comparison in this case is only illustrative. The development of the net present value (NPV) of the technology with and without a PAYS contract, is shown in the next graph. Under the assumption that the supplier receives 80% of the savings 11 12 Years -save with λ=0.8 T$ 0 -1.000 -2.000 -3.000 1 2 3 4 5 6 7 8 9 10 11 12 T$ 4.000 3.000 2.000 1.000 0 -1.000 -2.000 -3.000 Years in the first six years (λ = 0.8), the owner might opt for a traditional way of financing the technology – though this is only an option if the owner has access to adequate funds. The third graph shows the same constellation with λ = 0.6, which means that the supplier receives only 60% of the savings. The PAYS contract would have a slightly higher NPV than the traditional investment. Other parameters that have a rather big impact on the comparison between the PAYS contract and the traditional investment are the price of the technology (C) as well as its fraction (c), that must be paid as a first installment. The larger the gap between the price of the technology and the first installment is, the more attractive the PAYS option becomes. The industry needs a fair business model to split the risks and benefits of greening. It is unfair for owners to face all the risks, especially when the regulatory environment is ambiguous, and the impact depends largely on other industries (refineries, global carbon markets etc.). There is a healthy level of low carbon and alternative fuel technology development, as with the aforementioned wind-assisted segment having 40+ technology providers and projects currently underway, so the supply side is growing, however shared-savings models are still in their infancy. Much of the research, creativity and novelty is still required, as the interests of various stakeholders are conflicting, and a modus operandi should be achieved. Business trends and experiences from other industries suggest that sharing-schemes can be expected in shipping as well. Author: Orestis Schinas Hamburg School of Business Administration NPV with and without Pay-as-you-save with λ=0.6 1 2 3 4 5 6 7 8 9 10 11 12 Net Savings with P-a-Y-S (Ship Owner) Net Savings without P-a-Y-S (Ship Owner) Years HANSA International Maritime Journal – 155. Jahrgang – 2018 – Nr. 11 23

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