Cabotage Vessel Financing Fund (CVFF) Guidelines of 2006: Analysis and Gaps

President Aigbokhan
president@foicounsel.com

The Cabotage Vessel Financing Fund (CVFF) Guidelines 2006 lay out the procedure for the administration and implementation of the Cabotage Vessel Financing Fund. The federal government claims that over 350 million USD are currently in the fund, and the indigenous shipowners disagree and say that over $2 billion has been contributed to the fund by way of a surcharge of two percent of the contract sum performed by any vessel engaged in cabotage trade, budgetary appropriation, tariffs, fines, fees for licenses and waivers, interest paid on loans from the fund, and repayment of the principal sum of loans granted from the fund.

The agency in charge of the disbursement of the fund is NIMASA. Contributions to CVFF commenced with the coming into force of the Cabotage Act in May 2004. Several failed attempts have been made to disburse the fund. In December 2022, the former President approved the disbursement and in April 2023, the National Assembly also approved the disbursement of the fund to qualified shipowners as part of a commitment to grow the local Maritime Industry. The statutory purpose of the fund is to facilitate the charter, acquisition, repair and ownership of vessels to be used for coastal trade by indigenous companies, thereby increasing indigenous ship acquisition capacity. Six companies have been recommended for funding but no record exists of actual beneficiaries of the fund to date

The eligible applicants for the fund are Nigerian citizens and shipping companies.

The vessels for the cabotage trade must be built in Nigeria, owned and crewed by Nigerians. Companies partly owned by foreigners are not eligible to benefit from the fund. The fund is accessed on the recommendation of the Nigeria Maritime Administration and Safety Agency (NIMASA) and approved by the Minister of Transport and the maximum approval is Twenty-Five Million USD or its equivalent. The procedure for a ship owner to apply for a loan under the fund is that application is made through NIMASA and upon receiving the application; NIMASA determines the applicant’s suitability or eligibility to access the fund. Every applicant submits financial condition, which includes the cost of the project, liability and ability to repay the loan or obligation. In the case of a shipyard or similar material infrastructure project, the applicant must show a detailed statement of the actual cost of such technology such as insurance, legal and accounting services. Where the application may involve a reconstructed or reconditioned vessel, the vessel must be made available at a time and place accepted for the conduct of the condition survey which cost the applicant will bear.

After the initial assessment by the agency, a notification is forwarded to the primary lending institutions (PLIs) by NIMASA. The PLIs are selected commercial banks, and they include Union Bank, Polaris Bank, Zenith Bank, United Bank for Africa, and Jaiz Bank. NIMASA has set out criteria for commercial banks to participate as primary lending institutions. The bank must have an existing relationship with NIMASA, have proof of substantial financial support in terms of credits extended to indigenous maritime operators, and have shareholders fund over 25 billion Naira. The functions of the PLIs are to liaise with NIMASA to determine the acceptable criteria for utilization of the fund or issuing of guarantees, loan management, participate in the financing and management of the specific project to further secure the repayment of the loan or obligation, and provide any other financial advisory or ancillary services.

It is the responsibility of the PLIs to carry out detailed credit reviews of the applicant and ensure identified risks are covered. The PLIs do their independent risk assessment, and if the project is healthy, the applicant is adjudged eligible for financing. NIMASA then recommends the application to the Minister for his final endorsement/approval before disbursement. The authority of the minister to delegate disbursement under the guidelines cannot be delegated to anyone other than the Permanent Secretary. In circumstances where NIMASA is required to contribute to the loan or issue a guarantee, the minister must decide whether to approve or deny any application for such a request within 30 days after the date the request is received. If a decision is not made by the minister within the specified period, the agency can approve the loan application.

The applicant or operator must possess the necessary experience, ability, and suitability to properly operate and maintain vessels or projects that serve as security for the loan or guarantee. NIMASA does the selection and partly approves the applicant alongside the PLIs, whose roles are to secure the credit fully. It is NIMASA that determines the suitability of the operator’s qualifications and suitability with a certificate issued, which is reviewed. The PLIs have the discretion to request additional collateral or greater equity contributions to limit potential losses in connection with defaulted loans or loans that are in jeopardy due to the deteriorating financial condition of obligors.

Applicant contributes at least 15% of the total project cost, while the fund and PLI finance not more than 85 percent of the total project’s cost. A further breakdown shows that NIMASA is to pay 50 percent of the fund while the PLIs pay 35 percent and 15 percent by Shipowners. As part of measures to make the fund easy to pay back by the shipowners, NIMASA has approached Nigerian National Company Limited (NNPCL) to take up 9 percent of the 15 percent of the loan to be repaid by prospective beneficiaries. Interest rates and fees are usually below the existing commercial or market rate. There has been one challenge to another in the disbursement of the fund. The latest is the interest rate fixed by the PLIs. And there is a disagreement between the agency and PLIs over the proposed 8.5 percent interest. See Yusuf Babalola, “Efforts Towards Disbursement of Cabotage Funds:” Leadership Newspaper, June 2023 https://leadership.ng/efforts-towards-disbursement-of-cabotage-funds/.

NIMASA determines the fees applicable to the beneficiaries and ensures all PLIs adhere strictly. Administrative fees do not exceed 0.5% of the loan requested. The investigative fee does not exceed 1% of the loan requested. The cumulative expense to access the fund is 1.5% of the loan requested. The fee is to be paid before the loan is accessed, and if, for any reason, the application is rejected or disapproved, 50% of the 1% of the loan investigation fees paid will be forfeited to NIMASA. On the whole, if an application is rejected, 1% of the loan sought is lost in the buffet of requests. It ought not to be so; the administrative fees ought to be fixed from where the expenses for investigation and other services will be deducted.

Large cargo vessels and oil bunkers are all operated by foreign shipping lines, with coastal trading operators following behind. This is because shipping businesses are capital-intensive, and it would take the involvement of the government for operators to build and operate a successful shipyard. Between 10 and 12 Million USD are needed to build a 15, 000-ton ship that can sail on a shallow sea with a draft of 6.5 meters. See Anna Okon, “Coastal trade: Nigerian operators fall behind amid challenges.”. July 19, 2019. https://punchng.com/coastal-trade-nigerian-operators-fall-behind-amid-challenges/. Nigerian operators do not have access to finance, even for the acquisition and maintenance of service boats. Even the monthly maintenance exercise for dry docking is on the high side. Funding is made worse for our businessmen owing to a dearth of forex.

According to Section 20(5) of the Central Bank Act, it is still a criminal offence for any person to disburse dollars for payment for services or goods. Central Bank of Nigeria (CBN) has on several occasions directed banks in Nigeria not to collect foreign currency for payment of domestic transactions and use their customer’s domiciliary accounts for making payments for visible and invisible transactions like fees, fines, and licenses originating or consummated in Nigeria. This supersedes the freedom to do business in Nigeria with a choice of currency. See Central Bank of Nigeria, “Currency Substitution and Dollarization of Nigerian Economy,” April 17, 2015, Ref No. BSD/DIR/Gen/LAB/08/013; Memorandum 16 of the Central Bank of Nigeria Foreign Exchange Manual (CBN Forex Manual). The dollarization of the funds, perhaps targeted at improving foreign reserves, is illegal. Also, denominating the pool of funds in any foreign currency instead of Naira is a crime. Since our legal tender is Nigerian, CVFF must be consummated in Naira

Also, there is a need to audit the fund to determine the exact amount in the account.

Surprisingly, outside administrative fees and investigation fees, there are processing or filing fees. Huge processing fees for inaccessible funds are responsible for the slow pace of the maritime sector. The fund must portray itself as intervening and not revenue-generating through application fees. NIMASA has approved 18 institutions to offer maritime training. Surprisingly, no Nigerian institution as of today offers a Certificate of Competence to seafarers, and this necessitates additional training in foreign schools to enable them to obtain the certificate. If foreigners are made to stop operating in Nigeria, there might be no staff to take up the jobs onboard. NIMASA and TET Fund must approve funds to get the materials and manpower needed to train all cadres of people in Nigeria’s waters.

Source: @BarristerNg