The financial structures of the shipping industry are rapidly evolving even as ship owners face intensifying pressure to combat greenhouse gases. Can changes in ownership structures hinder innovation or could they perhaps be a way to encourage it?
In October 2019, the Scottish government confirmed that it will be taking the Ferguson Marine shipyard into public ownership. On the other side of the Atlantic, Teekay Offshore Partners is being acquired by Brookfield Business Partners and DryShips recently accepted an offer to be privatised. The Indian government, too, has revealed plans to privatise its flagship carrier, Shipping Corporation of India. Does this herald a renewed surge in limited ownerships or the rise of public-private partnerships (PPP) in the shipping industry?
Experts say these changes in ownership are inevitable in the current environment of low stock valuations and sharp drop-off in coverage.
“There is not a huge appetite for shipping stocks in this picky public market,” says Kevin Humphreys, General Manager of Sales, Merchant & Gas Carrier Segment at Wärtsilä Marine Business. “If the management is a major shareholder and has enough cash assets, it makes sense to go private, especially if the stock is undervalued.”
“Either way, an already rapidly evolving shipping industry can expect a ripple of changes with changing ownership structures,” says Spyros Hirdaris, a professor at Aalto University.
“If you compare the Chinese PLC model against the European approach to business, you can see how the difference in outlook links up with the overall economic policy and macroeconomic targets of these regions,” Hirdaris explains. “In China, a state-centric model ensures the industry remains competitive while the government can protect itself against unexpected risks. In Europe, the market leans towards private investment with a focus on niche segments. The risks have to be well-calculated.”
Humphreys is of the opinion that while public ownership could offer a number of benefits to companies, including access to public equity markets, a lower cost of capital and higher valued assets, the companies could then be subject to a stringent public reporting regime and higher administrative costs.
“The focus of such companies could be more of a quarter-to-quarter one, instead of long term,” he says. According to Humphreys, private ownership can give firms the advantage of becoming early adopters of innovation. “Quicker decisions equal newer technologies being pushed out faster,” he says. By the same token, with fewer stakeholders involved, could limited ownership make companies less accountable?
Hirdaris predicts limited ownership could over-strengthen unions or limit innovative corporate and business evolution.
“A solution could be to establish good trade union agreements and set up an independent review body that will fairly judge the status of PLC annually and propose policy and business changes,” he says.
The concerns over accountability can also be assuaged with banks acting as regulatory bodies that push for efficiency and compliance, regardless of ownership structure.
On the positive side, the bidding processes will act as a boost for innovation in the industry. Setting up innovation acceleration schemes as incentives can attract individual or family owners, says Hirdaris, who feels that limited ownership can help bring in investment to innovation and R&D.
“Companies can encourage the buyout of shares or the set-up of a hybrid business model where the core of the business is run in PLC fashion, but at the commercialisation stage, private investors can be active,” he says.
Humphreys adds that if companies look towards investing in more efficient ships, it will automatically attract better rates on average.
Currently, the International Maritime Organization (IMO) aims to cut the shipping industry’s total annual greenhouse gas emissions by at least 50% by 2050 compared to 2008.
To that end, this year, a global framework called the Poseidon Principles brought together 11 major banks in a bid to improve the role of maritime finance in addressing global environmental issues. The consortium pledges to ensure that the organisations they are lending to are in line with the industry’s climate goals.
“With major financial players involved in making debts available only under favourable terms, it will force shipping companies to operate more efficiently. It’s an exciting development that will make a huge impact on creating a cleaner, greener shipping industry,” Humphreys says.
In fact, cleaner technology is now a big focus in the shipping industry. “There is a visible shift towards hybrid engines and LNG-powered vessels, which can reduce greenhouse gases by 25%. There is also a call for more efficient ship designs and big data and AI as a major driver of efficiency,” Humphreys says.
Hirdaris believes that in the naval sector, it is possible to observe both “protectionism” and inward-looking innovation.
“Currently, the UK and other EU countries are open to business and collaboration with navy partners worldwide. I believe that if we shift from globalisation to regionalisation, the USA model (as per The Jones Act) is more likely to be followed in the future or the competition against developing economies may not be forgiving,” Hirdaris says.