SPC/CRGA 37 (07) Paper 3.3 ORIGINAL: ENGLISH

SECRETARIAT OF THE PACIFIC COMMUNITY

THIRTY-SEVENTH MEETING OF THE COMMITTEE OF REPRESENTATIVES OF GOVERNMENTS AND ADMINISTRATIONS (Apia, Samoa, 7–9 November 2007)

FOCUS ON MEMBER PRIORITIES: POLICY MATTERS AND SECTORAL INITIATIVES

AGENDA ITEM 3.3 – SMALL ISLAND STATES SHIPPING

(Paper presented by the Secretariat)

EXECUTIVE SUMMARY

1. SPC’s special focus on meeting the unique needs of its small island state (SIS) members, as endorsed by CRGA 36, has been facilitated through the development of joint SPC/country strategies (JCS). SPC continues to work closely with the SIS Unit of the Pacific Islands Forum Secretariat (PIFS) and other CROP agencies under the aegis of the Pacific Plan and PIF’s SIS Officials and Ministerial Meetings to meet the priority needs and development aspirations of SIS. This is in addition to SPC’s direct assistance to SIS, which continues under current programme arrangements.

2. At CRGA 36 in November 2006, members noted the new specific priority areas that the Regional Maritime Programme (RMP) had included in its work programme for SIS to assist them in improving existing shipping services. In conjunction with PIFS, SPC conducted a feasibility study on a feeder shipping service from Fiji to Wallis and Futuna, Tuvalu, Kiribati and Nauru. The study produced the following recommended options:

a) Maintain the status quo, that is, SIS maintain existing services;

b) Obtain a new ship through donor assistance, initially under a management arrangement with the Pacific Forum Line (PFL);

c) PFL to reintroduce a feeder service with guaranteed slot agreements;

d) Use existing capacity in Tuvalu and Kiribati, that is, the Moanaraoi could provide a limited service to Tuvalu, Wallis and Futuna and Nauru;

e) Establish a “Regional Shipping Service Agreement” – as the best long-term option.

3. Pacific Island countries and territories (PICTs) also acknowledged the importance of managing shipping services, and SPC went a step further to facilitate commercial ship management training by holding a workshop for SIS shipowners and operators. Further workshops will be held in 2008 to provide ship management experience in a risk-free environment, using simulation techniques to present realistic world trading scenarios and maritime issues.

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4. The provision of high-quality shipping company management and operational advice to SIS would promote more efficient shipping services, particularly on domestic routes. Coastal and inter-island shipping services play a pivotal role in linking scattered settlements in PICTs, but transport entities within island countries have limited capability in running complex shipping services. Effective use of professional expertise is necessary to improve the ability of key personnel within the transport sector to manage services and make commercial decisions. Boards may wish to consider the appointment of professionals (e.g. retired bankers, accountants, lawyers) as permanent advisers. Boards could also be more active in seeking advice from outside professionals, potentially with assistance from donors, through a central coordinating point such as a technical regional organisation.

5. PICTs would benefit from a more coordinated response to transport issues based on the principles of good governance and economic sustainability. Both sub-regional and regional approaches (to specific areas) could improve the efficiency and effectiveness of shipping services. Regional approaches are likely to have benefits in areas such as safety and security and best practice in shipping management and operations. Similar approaches could be adapted for the provision of domestic services where a transparent subsidy may be required.

Recommendations

6. CRGA is requested to:

i. note the direction, progress and nature of SPC support for SIS;

ii. support the recommended options of the SIS feeder shipping service study and acknowledge that PICTs need to work as subregions to improve SIS shipping services;

iii. note the need for training in commercial ship management in SIS and support the delivery of risk-free simulation training by SPC’s Regional Maritime Programme;

iv. encourage additional financial support from donor partners for the establishment of an SIS ship management unit within the Regional Maritime Programme for capacity supplementation, improved technical advice and effective shipping management services; and

v. recommend as appropriate to Conference.

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SMALL ISLAND STATES SHIPPING

Purpose

1. The purpose of this paper is to inform CRGA and Conference of the Secretariat’s progress in:

i. supporting the unique needs of SIS;

ii. addressing the issues of shipping services for SIS;

iii. implementing plans to further training on commercial ship management;

iv. providing operational advice on the management of SIS shipping companies.

Background

2. For SIS, shipping services are critically important in terms of everyday transport requirements and development aspirations such as trade. This priority requires support from all development agencies including the donor community. This paper provides an update on progress made in addressing SIS shipping service issues, implementing plans to provide training on commercial ship management for SIS, and providing operational advice on the management of shipping companies in SIS.

3. Four initiatives relating to improving shipping services to SIS have been undertaken to date:

3.1 Two feeder shipping service studies – PFL undertook an initial feasibility study in December 2005 which recommended that PFL not proceed with the introduction of a feeder service on the grounds that it was unlikely that the service would be financially viable. The objectives of the SPC-PIFS feasibility study were to investigate and recommend a course of action with regard to a feeder shipping service between Fiji, Tuvalu, Kiribati, Nauru and Wallis and Futuna, and any other suitable place in that region to the north of Fiji. Although Wallis and Futuna is not a Forum member, it was considered beneficial for SIS to include it in any proposed feeder service as the extra volume of cargo could improve the viability of the service. The draft study was completed in time for the SIS Ministers Meeting held in April 2007 in Apia, Samoa, to allow time for feedback from SIS Ministers to be taken into account in the final report.

3.2 A commercial ship management workshop – At a workshop held in August for SIS ship operators, delegates used the STRATSHIP programme to gain first-hand experience of the type of decision making and problem solving that ship-owners face daily.

3.3 Provision of shipping company management advice – Once adequate programme funding is obtained, this service could be expanded to include an SIS ship management unit that would supplement the capability of shipping management personnel in PIC domestic and/or international fleets.

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SIS feeder shipping service from Fiji to Wallis and Futuna, Tuvalu, Kiribati and Nauru

4. SIS face well-known challenges relating to remoteness and small economies, with cargo costs an impediment to growth. The issues surrounding a feeder service to Nauru, Kiribati, Tuvalu and Wallis and Futuna have been discussed at various regional meetings culminating in an SPC/PIFS feasibility study. Consultations were held with SIS Ministers from Kiribati, Nauru and Tuvalu who attended the First Regional Meeting of Ministers for Maritime Transport (19 April 2007, Apia, Samoa) and valuable feedback resulted in the recommendation of five options, namely:

4.1 Maintain the status quo – that is, SIS maintain existing services that can be relied on, although there were concerns about high freight rates, flexibility in sourcing goods from other Pacific Islands, and regularity of shipping services.

4.2 Obtain a new ship – if a new ship (recommended size set at 150–200 TEU) was to be obtained through donor assistance, an initial management arrangement with PFL at a beneficial charter rate was suggested as the best medium to long-term option. This option would provide a freight rate reduction of 39% (long term) if all goods were sourced from Suva.

4.3 Pacific Forum Line (PFL) to reintroduce a feeder service – provided financial viability was guaranteed by slot agreements (used/unused basis). This was considered to be a good medium to long-term option with demonstrated freight reductions of up to 33% from Suva, but SIS were not prepared to provide subsidies for guaranteed slot agreements.

4.4 Use existing capacity in Tuvalu and Kiribati – the Moanaraoi, a 60 TEU vessel, could provide a limited service to Tuvalu, Wallis and Futuna and Nauru as the best short to medium-term option because services could start almost immediately without disrupting existing arrangements.

4.5 “Regional Shipping Service Agreement” – A fifth option raised during the SIS Ministers Meeting on Feeder Shipping Services in April 2007 was that of a “Regional Shipping Service Agreement” similar to the Micronesian Shipping Commission (MSC), but it was felt that this would be more appropriately covered by a separate study as it would have impacts on countries outside the scope of the study.

Commercial ship management training for SIS

5. At the request of some members, the Secretariat, through its Regional Maritime Programme (RMP), facilitated a commercial ship management workshop for participants from Kiribati, Federated States of Micronesia, Samoa, Tokelau and Tuvalu. The workshop included simulation training using the Asia Pacific Maritime Institute STRATSHIP software programme.

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6. The workshop focused on shipping and maritime economics within shipping operations. Participants were given information on factors in commercial decision making (e.g. type of cargo, supply and demand, bunker prices, freight revenues), which improved their understanding of how freight rates are determined. To illustrate how the freight market works, shipping cycles were also investigated, in particular the time lag in shipping supply and demand. Understanding the types of decisions that ship-owners make and the impact of these decisions on freight rates improves ability to analyse trends in shipping costs and revenues and understand how different strategies influence freight rates.

7. The simulation programme presented realistic trading and scheduling scenarios, enabling participants to gain experience in making strategic decisions to maximize company value. RMP intends to run another such workshop in 2008 for shipowners from around the region.

Shipping company management advice for SIS

8. To improve shipping management services, RMP provides technical advice, capacity supplementation and training to the region’s shipping personnel. However, additional financial support is needed to enable SPC to deliver specific programmes to improve the effectiveness and efficiency of shipping services for Pacific SIS. Impediments to effective shipping services are summarised below:

8.1 Government involvement – In shipping, there is often extensive direct government involvement in commercial activities, with resulting adverse effects on financial management, commercial decision making and operational efficiency (e.g. excess staff and inefficient use of resources). This involvement may also create instability in the general management of the government’s financial resources, potentially diverting funds from other sectors.

8.2 Infrastructure – Government decisions on infrastructure may suffer from inadequate evaluation. Often, there are also problems with infrastructure management. Acquisitions may be obtained through donor agencies, but maintenance, which requires outlays of recurrent expenditure, is more difficult.

8.3 Pricing – This is a particular problem in shipping. Vessels are sometimes provided by donor agencies and then operated with a pricing structure that does not cover the cost of service delivery. The inevitable result is that vessels become unserviceable and donors are approached to fund replacements. These arrangements are clearly unsustainable.

8.4 Monopolies – In many cases in the Pacific region, monopolies – including legislated monopolies – exist in markets that should be regarded as contestable. This allows operators to exploit their position with monopoly rents.

8.5 Inadequate capitalisation – In many cases, transport agencies required to perform commercial activities are not adequately capitalised. Inadequate capitalisation biases agencies towards investment choices that require relatively low up-front capital but high operating costs. This bias can be seen in many of the leasing choices made for ships. Inadequate capitalisation also encourages poor maintenance practices.

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8.6 Financial expertise – In general, with some exceptions, the region has a shortage of appropriately qualified and experienced local financial professionals. As a result, current financial information is either not readily available, or not necessarily reliable. The lack of accurate financial information affects feasibility studies on important investment decisions and the preparation of business plans and projections. Many of these studies have been an underlying factor in poor infrastructure decisions. A lack of accounting expertise also impacts on budget settings and costs.

Conclusion

9. The Secretariat is happy to inform CRGA and Conference of progress made in meeting the unique needs of SIS. In collaboration with the Pacific Islands Forum Secretariat and other stakeholders, SPC has (i) facilitated a feasibility study on a feeder shipping service from Fiji to Wallis and Futuna, Tuvalu, Kiribati and Nauru; (ii) provided a workshop on commercial shipping management for SIS shipowners and operators; and (iii) continued to provide advice on ship management issues to SIS shipping companies.

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10 October 2007