DECARB FUNDING NEEDS WILL REQUIRE FRESH INVESTORS

from The Motorship January/February 2023

BEATING THE JAPANESE INVASION

Tony Foster, CEO and CIO of Marine Capital discusses the challenges of attracting outside investment into the decarbonisation of the UK’s short-sea sector

Speaking at the launch of the UK Domestic Shipping: Mobilising Investment in Net Zero report in January 2023, Tony Foster discussed the challenges of attracting the inward investment of up to £75 billion (USD93bn) into the UK’s domestic maritime sector to fund its transition to net zero.

While the report itself seeks to address some of the techno-economic issues related to the decarbonisation of the UK’s domestic and short sea shipping sectors, Marine Capital itself contributed a focus on the commercial challenges and opportunities the transition presents.

Although the estimate of £75 billion is no more than an estimate, it does demonstrate the necessity of attracting outside investment into the industry. In particular, the report examines how investment hurdles might be overcome and external funding sources mobilised to invest in the sector.

These questions are vitally important to the wider decarbonisation debate. The decarbonisation of the sector will require investments in retroﬁts and conversions, as well as the installation of port infrastructure to provide bunkering of alternative fuels and in some cases shore power. No less importantly, we will have to invest in our human capital, ranging from investment in training through to safety.

These questions need to be answered to cut through the ‘chicken and egg’ paradox of alternative fuel supply and demand. We know that these questions around future fuel supplies, availability at ports and even potential customers are being considered right now when decisions are being taken around specifying the fuels upon which a newbuild will operate.

Green corridors are intended to act as a shortcut to create demand for these fuels. But progress on the ground is lagging somewhat behind the rhetoric.

We also note that the rapid growth of offshore wind capacity, and the future emergence of floating wind capacity, is also likely to create infrastructure bottlenecks near ports. “This is a knotty problem, which we expect will may well require specific government intervention.”

But access to capital represents a particular challenge for domestic operators, partly because the small scale of the niches mean that they are too small to attract institutional investors. Equally, the small size of the domestic and shortsea operators means that they are unable to access capital.

The ﬁnancial institutions located in the UK do not the appetite, or even perhaps the capacity, to provide debt funding for ﬂeet replacement, which we estimate may cost over £40 billion over the coming decades.

But the domestic industry players in nearly all cases will not have the necessary equity to fund this themselves. The market consists of a long tail of smaller shipowners, many of whom might not be able to attract bank finance. This is likely to have a disruptive effect on many aspects of the market, ranging from existing business models and contractual relationships, through to shortening the operational life of assets and forcing some ship owners to commission newbuildings for the first time.

From a ﬁnanciers’ perspective, asset risk valuations are complicated by a lack of familiarity with the shipping sector, while the lack of scale on projects and inability to aggregate transactions can lead to credit risk being applied.

Although a variety of other financing schemes have been applied in other parts of the world, and we have also looked at the possibility of applying Contracts for Difference (CFD) to the maritime sector, I think an asset leasing model has significant potential. In the UK, this has already been successfully applied in the railway sector.

In order to have the breadth and depth to be able to offer fleet replacement opportunities to smaller companies in the sector, it would require private capital, both the equity and the debt. The government’s role could be limited to providing guarantees to ensure a floor price for vessels at the end of the lease, for example.

Such a model appeals as it addresses most of the risks of acquiring future assets, and also requires no upfront capital commitment from government and potentially no cost in the long run. Such creative approaches are likely to be required as the maritime sector is likely to face stiﬀ competition from other sectors for government funding in the current climate.