December 5, 2022

Maritime Today Online

latest news and events in maritime and shipping

Need for a framework for disbursement of Cabotage fund for development of Nigerian tonnage and Coastal shipping

Need for a framework for disbursement of Cabotage fund for development of Nigerian tonnage and Coastal shipping

By Emmanuel Maiguwa

Introduction

The Cabotage Act 2003, which reserves the right of trade within Nigeria’s coast to Nigerian Owned, Managed, and Built vessels, is the nation’s response towards building local and indigenous capacity in shipping services. The measure of shipping services determines a nation’s strength within the International Maritime Organisation and its success in the Blue Economy.

The cabotage act made provision in section 44 part VIII for establishing the Cabotage Vessel Financing Fund (CVFF), where a 2% deduction on cabotage-protected trade earnings goes into the development of indigenous tonnage (ships) in Nigeria.

About 19 years after, the CVFF fund generated about 350 million United States dollars which the Federal Government of Nigeria has not been able to disburse as intended by the provisions of the Act. However, there have been several attempts by past administrations to disburse the funds, but they were all unsuccessful.

There has been growing debate on who owns the funds, how they should be disbursed, and who should be the beneficiaries. Unfortunately, neither the private sector nor the government has been able to come to clear answers to these questions. As a result, the funds kept accruing in coffers without disbursement while Nigeria’s performance in the blue economy continued to dwindle.

This article explains the ownership of the funds to determine the ultimate decision maker, how it should be disbursed, how to maximise the potential of the funds, and who should benefit from it in the interest of the industry, country and global shipping.

 WHO OWN THE CVFF

To understand the owners of these funds, this article will review the working modalities along three (3) segments of the markets in the Nigerian coastal trade. One of the central goals of the Cabotage Act in these three markets is to prevent non-Nigerian vessels from participating so that local capacity in ship ownership can be developed, thereby preserving the market to the Nigerian shipowner by law rather than competition. The Nigerian Ship owners cannot compete favourably with foreign interests if competition is allowed to drive the market as competition would result in depleting the Nigerian tonnage or may make it vanish. Therefore, it is pertinent to discuss the three segments of the Nigerian coastal trade market before understanding their implications for the Cabotage act.

1. The Maritime Oil and Gas Offshore Market (MOGM): This is the oil exploration industry domiciled in our maritime domain. The exploration and production activities are carried out under Joint partnerships between the Federal Government of Nigeria (FGN)and the International Oil Companies (IOCs). The National Petroleum Investment Management Service (NAPIMS) manages the partnerships in which budgets are adopted based on hire rates and applicable taxes for different types of vessels (on the vessel hire aspect). By implication, rates approved for vessel hire for IOCs in this market take into account the taxes (including 2% cabotage deduction) while ensuring that the Nigerian Owner earns a fair hire rate.

2. The Conventional Market -Cargo (CM-C): This market significantly belongs to Tanker Vessel owners who trade within the Nigerian coast. By fully implementing the cabotage act, it is expected that the FGN would preserve the opportunities to move petroleum products within Nigerian Ports/waters only on Cabotage-approved vessels. Based on this, 2 % of the hire rate is deducted and paid to the FGN through the appropriate agency (Nigerian Maritime Administration and Safety Agency – NIMASA).

What is missing in this market is freight protection compared to the Oil and Gas Offshore Market, where rates are decided and paid while ensuring that the payment currency is strategically applied to protect the ship owner mostly in a 60/40 ($/N) ratio. This challenge, however, presents an opportunity for stakeholders to review the freight framework and enforcement strategy to ensure that shipowners within this market are not disadvantaged.

The ships that operate in this market are higher in tonnage and capacity. In practice, they provide the opportunity to advance human capacity development in seafaring and other auxiliary shipping services. Therefore, it will be in the nation’s interest to review the practice and ensure appropriate freight structure and protection for the development of its coastal shipping.

3. The Conventional Market – Service Craft/boat for Hire (CM-S): This market exists outside MOGMand CM-C, even though the vessels/crafts used are similar to the first two markets described above. The vessels here do not often carry petroleum cargo for 3rd parties like they do in the conventional market and are not engaged by the IOCs. Reasons for this may vary from the type and age of vessels to the lack of available contract opportunities in the IOCs, demand and other short-term (spot) market requirements.

 These crafts’ activities include Habour Tug services outside the NPA purview, private salvage services, escorts of merchant ships in and out of Nigeria within EEZ, etc.

The CM-S   has one of the lowest, unstructured, and unprotected rate/hire earning systems in Nigeria’s maritime domain. Therefore, applying the 2% deductions on the trade is extremely difficult even though the market boosts of significant tonnage and activities that could have substantial contributions to the CVFF, especially when proper framework and protection are applied.

However, regardless of the three markets in question, the implication of the CVFF to the cabotage act are many:

By fully implementing the cabotage act, it is envisaged that the FGN has protected the market/trade from foreign participation in the interest of the Nigerian shipowner. Therefore, the Nigerian shipowner is guaranteed in shipping trade within the confines of demand for ships.

The Federal Government has ensured that the Oil and Gas offshore market set rates so that the Nigerian ship owner will earn a fair rate after deducting the 2% Cabotage levy. This 2% which reflects the cost of oil production, is FGN making provision for funding. Therefore, it is not a mutual contribution by shipowners where the same contributors can lay claims.

The market has presented a potential reserved only for the Nigerian shipowner to trade by taking advantage and establishing trade protection policies.

HOW SHOULD THE CVFF BE DISBURSED

Going by the above, one can see that contributions to the CVFF come from the effort made by FGN to protect trade for the Nigerian shipowner. Something the Nigerian shipowner has little chance of succeeding if left to compete with foreign interest. One can also see in the MOGM market that the FGN made provisions to ensure that the 2 % deduction did not constrain the shipowner from earning a fair rate. Even ships outside this market that operate in the conventional market have enjoyed trade protection offered by the Cabotage act as enforced by NIMASA to some extent.

There may be arguments resulting from the lack of protection of freights in the conventional markets, but these are just grey areas to be looked into for improvements. By design, it does not remove the Cabotage’s goal of protecting and preserving trade for Nigerian shipowners. Whether it is achieving that as desired is an entirely different study to undertake.

Therefore, to disburse the CVFF funds for the benefit of the industry and not for specific individuals or groups, the FGN should consider the following procedures:

1. Study of Nigeria’s tonnage potential– The study will look at the current frameworks and policies contributing to the growth of Nigerian tonnage outside the acquisition cost and identify areas of weaknesses Elements such as OPEX – repairs, components and machinery sourcing, seafarers training and development Fees and levies etc need to be carefully assessed

The study will look into the market segments like the ones described above to determine the best potential for Nigerian tonnage growth. The aim here will be to know the types of vessels currently contributing significantly to the industry and their potential in years to come.

It will also look at current /future regulations affecting these types of ships and markets that are on the way.

Of course, tonnage growth cannot be successful without competent seafarers. A review of the current state of seafarer’s training and development in Nigeria to determine its development strategy, the present fleet types, markets, and offers available. In addition, the study may have to review the country’s current seafarer development strategy, if there is one.

Lastly, the study should identify the critical services needed for any country to grow its tonnage and review where Nigeria stands. It will go further to review achievable and unachievable variables (gaps). Finally, it would identify the gaps that can be closed and those that may have to take a back seat based on comparative advantages or other factors.

2. Development of a strategic roadmap toward achieving the potential– The study must have pointed to Nigeria’scurrent and future opportunities available to grow tonnage realistically, as well as seafarers’ development that will position the maritime industry for real growth on a short and long-term basis.

This tonnage growth roadmap must be robust and flexible to withstand the highly dynamic changes associated with the global maritime industry. Furthermore, it must be free from political interference and be expert-driven.

Lastly, the road map should consider that even though it is a national policy, shipping is international trade. Therefore, international collaboration is critical, and it may be wise for Nigeria to identify one or more shipping nations to partner with in achieving its potential in the Blue Economy.

3. Strict disbursement of the CVFF towards the roadmap– I regard this as the simplest but most sensitive part of this program. The easiest because once there is a quality study and a strategic roadmap, the disbursement of this CVFF becomes only a matter of fiscal discipline. I firmly believe that the inability to disburse the CVFF comes from a lack of a proper definition of the funds and strategy disbursement.

 The arguments on who owns the fund or who should be the beneficiary of the funds are all irrelevant here. These funds belong to the FGN. The mistake the FGN will make is to commence disbursement of these funds carelessly on emotions without a strategic roadmap from a sound study described here.

BENEFICIARIES OF THE FUND

The last element to consider is the guideline for the disbursement that the government and stakeholders are clamouring for. This guideline should achieve only two primary goals:

  1. Ensure that funds are used for the purpose as approved so that we don’t end up with the problems of the past where funds were taken for ships acquisition but directed into other company use
  2. Ensure that organisations accessing these funds have the technical capacity to manage and operate vessels successfully in the three major ship management areas (Technical, Crew and Commercial Mgt)

 CONCLUSION

The CVFF is a form of intervention made possible by the Federal government to drive a program that will benefit Nigeria. As clearly shown, the funds belong to all Nigerians under the government’s leadership to disburse for the purpose it was collected. It does not belong to any specific group or individual and should not operate as a mutual contribution.

The disbursement of the funds cannot meet the intention of the Act without careful study and strategy to ensure the goal of developing local and indigenous capacity in shipping is met. Disbursing the funds on a simple guideline developed by the Minister alone will not serve the intent of the CVFF and will be a waste of resources.

The actual beneficiaries of the funds should only be determined by the outcome of the research and development strategy put in place. Anyone who falls into such a category and is interested in the fund should be able to apply for the funds. His capability to repay within the development strategy should be a determinant for approval.

Caution should be exercised to ensure value is gotten out of the CVFF. But, while caution is necessary, time is of the essence. Therefore, a suitable framework is critical at this point to take advantage of both the funds that have accrued and the potential in our shipping industry. A thriving Blue Economy for Nigeria is the trigger to releasing Africa’s maritime potential to meet the United Nations Sustainable Development goals.