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
2. Background
In the
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
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
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.- 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.
- 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. - Lowering of
Existent Risks Barring Investors : Under the current model, one huge factor militating against the increase in shipping investments, especially acquisition of vessels inNigeria 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. - 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. - 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;
- 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. - 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
2.
3. Adaku Onyenucheya, 'Shipowners, NNPCL to explore pooling model for vessel acquisition financing', (2024), Shipowners, NNPCL to explore pooling model for — Business —
4.
5. Adaku Onyenucheya, 'Shipowners, NNPCL to explore pooling model for vessel acquisition financing', (2024), Shipowners, NNPCL to explore pooling model for — Business —
6. https://lawexplores.com/pools-in-international-shipping/ "Pools in
7. https://lawexplores.com/tag/hsba-handbook-on-ship-finance/ Handbook on
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 —
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
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