Exploring The Pool Funding Model As A Viable Funding Option For The Nigerian Shipping Industry; To Be Or Not To Be?

1. What is Pool Funding?

'Pooled funds' is a term used to collectively refer to a set of money from individual investors combined, i.e., "pooled" together for investment purposes. The funds are combined with the intention of benefiting from economies of scale through cost minimization. Some examples of pooled funds include, but are not limited to, hedge funds, mutual funds, and pension funds.¹ Similarly, according to Investopedia, pooled funds aggregate capital from several individuals, investing as one giant portfolio. It allows an individual to access opportunities of scale available only to large institutional investors.²

The information currently making the rounds in the Nigerian shipping space is that the Nigerian National Petroleum Company Limited (NNPCL) and indigenous shipowners are looking to explore the pool funding model in a bid to spread the financial burden of acquiring ships and this was agreed on at a meeting between officials of the Nigerian Chamber of Shipping (NCS) and the Managing Director of NNPCL Shipping, Panos Gliatis.³ This is in a bid to surmount the funding challenges of vessel acquisition.

2. Background

In the Nigerian Shipping industry, the idea of pool funding cannot be said to be entirely new. There have always been concerns as regards the funding in the shipping industry. In April 2023, Yusuf Babalola in a news article stated that NNPC was offering to pay 9% funding to shipowners for vessel acquisitions.⁴

The NNPCL also submitted that the pool funding system would ensure the availability of Nigerian vessels in the next few years as it guarantees impartiality, transparency and equal sharing of earnings.⁵

Under the current realities of the shipping industry in Nigeria, there have also been challenges as regards the unavailability of ships and lack of contracts for shipowners in Nigeria. Thus, the pool funding system is being explored due to the belief that it can help to foster good relationships among shipowners, increase the paltry number of locally owned shipping vessels and serve as a solution to some of the issues facing the Nigerian shipping industry.

3. How Pool Funding in Maritime Works: The International Perspective

Funding pools in the global shipping space is not an entirely novel phenomenon. It can be traceable to the overall existence of shipping pools which have come to exist in every sector of bulk and even container shipping today⁶. As at 2023, it was estimated that no less than about 5 % of the world's tanker fleet and about 10 % of the world's dry bulk fleet are commercially operated in shipping pools, which also operate pool funding for effective results⁷.

To understand how pool funding on the international space works, a good standpoint is to understudy the commercial outlay of shipping pools. Shipping pools can be properly regarded as "vehicles that enable the marketing of transportation services of different owners through a single chartering entity, with the sharing of pooled income on a pre-agreed basis"⁸.

Thus, the idea of pool funding is to provide a central pooling system for multiple investors to pool funds to jointly acquire vessels and make other shipping investments. The motivating idea remains that it is better for 10 persons (natural or artificial) to jointly acquire and manage a vessel, sharing profits and risks, than for a single person or entity to unilaterally bear the funding, risks and potential challenges. Another additional motivation from a ship-owner's standpoint is the need to organize commercial operations purposefully, to enhance efficiency and to provide meaningful transportation services that can place an owner in a stronger bargaining position vis-ŕ-vis charterers, thereby enhancing profitability.

While one might think pool funding is a potential threat to shipping charterers' market influence, charterers have by and large reacted positively to their advent⁹. To do so with confidence, they require a strong and financially stable shipping industry, the security of adequate availability of tonnage, and a level of transportation efficiency (with attendant stable and often lower cost) as can only be available from larger, professionally-managed fleets. Consequently, the success of the pool funding option in other climes is one which can be emulated by the Nigerian shipping industry as well.

4. Potential Benefits of Shipping Pool Funding to the Nigerian Shipping Industry.

As one would expect, the joint pooling of funding for the acquisition and management of vessels in Nigeria has clear benefits. These are explored as follows:

1. Higher Investment visibility and Market profile. Opening up this option will directly increase the investment options available to the industry as more investors will be encouraged to pool funds. This will also result into a direct increase in "deal flow" in the Nigerian shipping industry.
2. Increase in the number of Nigerian-owned vessels: The direct consequence of a successful pool funding model is that the possibility for more Nigerian-owned vessels plying the commercial waterways to emerge will increase, contrary to the current industry reality where most of the vessels operating in the Nigerian shipping industry are foreign-owned¹⁰.
3. Improvement in Quality of Shipping Management Services: Having a proper framework for pool funding in Nigeria will consequently help to improve the quality of professionalism of service in the shipping industry; lead to better perception of financial reliability usually traceable to the larger, professionally-managed operations of funds centrally pooled.
4. Lowering of Existent Risks Barring Investors: Under the current model, one huge factor militating against the increase in shipping investments, especially acquisition of vessels in Nigeria is the risk associated with sole funding of the acquisition, hence poll funding will drastically reduce this, given multiple investors may jointly pool their resources to acquire vessels or invest accordingly.
5. Increased Efficiency in Vessel Leasing & Shipping Operations: Given the investment framework for pool funding often involves multiple investors under a clear ownership structure, this will help to improve processes and operations in the shipping industry as efficiency in fleet deployment and leasing will arise from servicing a wider-range of industry players. The investments will also expand range of vessels, cargoes, contracts of affreightment and opportunity for positioning voyages¹¹.
6. Clear Contractual Frameworks and Better Financial Transparency: Embracing pool funding in Nigeria will help to institutionalize better contractual frameworks between shipowners and other industry players. At the moment, the non-availability of contracts for ship-owners has been regarded as a recurring challenge that needs to be addressed¹². This will also ensure that impartiality, transparency and equal sharing of earnings becomes a reality.

5. The Other Side of the Story: Potential Negative Implications of the Pooling Model for the Nigerian Shipping Industry

To every story, there is always a second side to it, hence the need to consider the pros and cons of every potential action or reaction. As evidently beneficial and promising as the pool funding model appears to be in the context of the Nigerian shipping industry, it is not without its potential negatives. These are explored as follows;

1. Problematic Management of the Relationship between Shipowners & Ship Managers: Critics of the model have warned that the pooling funding model for ship acquisition being explored by the Indigenous ship owners and the Nigerian National Petroleum Company Limited (NNPCL) is a recipe for disaster and chaos as it may create a significantly problematic relationship between the shipowners pool funding and the ship managers, thereby making the relationship too complex to effectively manage¹³.
2. Chaos & Lack of Coordination of Funding Process: Critics also argue that taking funds from diverse sources for vessel acquisition will render the shipping industry a web of chaos¹⁴, as multiple owners will assert individual rights, notwithstanding the understanding that special purpose vehicles and legal agreements may govern these relationships.

6. Conclusion & Recommendations

Notwithstanding the potential negative implications of pool funding, it is without a doubt, an internationally-embraced best practice in the global maritime industry. As such, the Nigerian shipping industry can ill afford to continue ignoring this viable alternative to inject the necessary cashflow, propel the shipping industry to the next level and project it to competitively thrive on the global space.

For the adoption of the pool funding alternative to become a reality, it is our recommendation that industry stakeholders, vis-ŕ-vis regulators in the shipping industry must collaborate effectively to produce a proper policy framework as well as commercial orientation to shippers and other stakeholders, so that more Nigerians will be interested in whole-scale investments in the space.

In the same vein, the framework should be properly set up in order for more funding partners including High Net-worth Individuals (HNIs), investment banks, corporate outfits and other investors to be encouraged to take the investment dive which will elevate the shipping industry.

Footnotes

1. CFI Team, 'Pooled Funds', Pooled Funds - Definition, How They Work, Pros and Cons (corporatefinanceinstitute.com) accessed 29 January 2024

2. James Chen, 'Pooled Funds: Definition, Examples, Pros & Cons', (2020), Pooled Funds: Definition, Examples, Pros & Cons (investopedia.com) accessed 29 January 2024

3. Adaku Onyenucheya, 'Shipowners, NNPCL to explore pooling model for vessel acquisition financing', (2024), Shipowners, NNPCL to explore pooling model for — Business — The Guardian Nigeria News - Nigeria and World News accessed 29 January 2024

4. Yusuf Babalola, 'Nigeria: NNPC Offers 9 Percent Funding to Shipowners for Vessel Acquisition' (2023), Nigeria: NNPC Offers 9 Percent Funding to Shipowners for Vessel Acquisition - allAfrica.com accessed 29 January 2024

5. Adaku Onyenucheya, 'Shipowners, NNPCL to explore pooling model for vessel acquisition financing', (2024), Shipowners, NNPCL to explore pooling model for — Business — The Guardian Nigeria News - Nigeria and World News accessed 29 January 2024

6. https://lawexplores.com/pools-in-international-shipping/ "Pools in International Shipping, the global perspective"

7. https://lawexplores.com/tag/hsba-handbook-on-ship-finance/ Handbook on Ship Finance.

8. Ibid.

9. Ibid

10. Adaku Onyenucheya, 'Shipowners, NNPCL to explore pooling model for vessel acquisition financing', (2024), Shipowners, NNPCL to explore pooling model for — Business — The Guardian Nigeria News - Nigeria and World News accessed 29 January 2024

11. Ibid

12. Ibid

13. https://dailytrend.com.ng/2024/02/05/shipowners-nnpcl-pooling-model-for-vessel-acquisition-is-a-recipe-for-chaos-capt-iheanacho/

14. Ibid