Even in its most basic form, international shipping can be a complex topic. The world runs on global trade, specifically maritime shipping. Yet many of the processes are still quite inefficient and can be a hindrance to operations, especially for SMEs.
The issue of container deposits is not often mentioned when discussing potential issues within the industry, but they often create significant cash flow problems for exporters.
TFG sat down and spoke to Morgan Lépinoy, Managing Director of Viatrans to get a better insight on this topic.
1. Can you provide an overview of the container deposit problem, and why it is such a big issue for so many in the industry? Which countries see this as a more prevalent problem?
Shipping containers are vital for shipping lines, which are availed to shippers (importers, exporters, customs agents, and freight forwarders) for safe and secure transportation of goods.
Whenever released to shippers for delivery of goods or loading of exports, shippers have a commercial obligation to return the container within the agreed period, and in good condition. In case of delay in return, damage, or total loss of the container, the shipper must pay shipping lines arising charges (Demurrage, Damage, or Total Loss).
In emerging markets, particularly in Africa, the risks of delay, damage, or loss are heightened due to infrastructure inefficiencies, cumbersome customs procedures, and political instability affecting international goods transport.
Shippers face financial risk exposure due to often inadequate legal and professional environments that hinder the prompt collection of charges by the shipping lines. This results in a high risk of bad debt and adds to above-average transit times caused by transport issues.
These factors together significantly affect the efficient repositioning of containers, leading to high opportunity costs for shipping lines.
Taking these risks into consideration, shipping lines require container deposits before releasing the containers to the clients.
Due to a lack of better options, shipping lines rely on container deposits as their only security measure. These deposits range from hundreds to a couple of thousand USD per container, based on type and destination. They are used to cover charges that may arise from delays in return (demurrage), damage, or total loss of the container if the customer fails to pay.
However, the deposits come with their downside. All parties involved have recognized the multiple administrative, operational, and financial challenges of the container deposit as a major trade barrier in Africa.
Container deposit challenges significantly impact SMEs, imposing an estimated annual cashflow burden of $1.5 billion in East Africa alone. Some examples are:
- Impact on cash flow: Container deposits can tie up a significant amount of cash for SMEs, particularly if they need to pay deposits for multiple containers. This can create cash flow problems and limit their ability to invest in other areas of their business.
- Competitiveness: The high cost of container deposits can put SMEs at a competitive disadvantage compared to larger companies that have more resources to pay for these deposits. This can make it harder for SMEs to compete in the market and win new business.
- Lost business opportunities: SMEs may be reluctant to take on new business opportunities that require them to pay for container deposits, particularly if they do not have the necessary cash flow or financial resources to do so. This can result in lost business opportunities and limit the growth potential of SMEs.
- Administrative challenges: The process of paying container deposits can be time-consuming and complex, particularly in emerging markets where there may be a lack of standardization and transparency. Making it more laborious for SMEs that may not have the resources or expertise to navigate the process effectively.
These challenges create significant trade barriers, increasing the cost of doing business for SMEs and limiting their ability to compete and grow. Additionally, they negatively impact and undermine the productivity and competitiveness of transport corridors.
The container deposit issue is not only an East African problem, but he challenges span across West and Central Africa as well.
2. How is Viatrans addressing this problem? Can you break down how Viatrans works with both the importers/exporters, and the shipping lines?
Our strategic positioning and institutional framework have been essential in creating a distinctive offering. This addresses the challenges of container deposits within the logistics community and promotes growth in emerging markets by removing trade barriers.
To create a solution that truly catered to the needs of the market, we closely collaborated with the industry’s primary stakeholders, including both public and private entities within the logistics sector.
This approach allowed us to take a comprehensive view of the challenges faced not only by SMEs but also by shipping lines. We understood that gaining acceptance for an alternative to the traditional deposit system required safeguarding the commercial and economic interests of the shipping lines.
This unbiased and all-encompassing approach served as the foundation to develop and provide our comprehensive one-stop solution, successfully addressing the challenges of Container Deposits in the East African Community (EAC).
Partnering with key institutional stakeholders in the region has further strengthened our position and enabled us to meet the evolving needs of our customers and partners. We have established partnerships with crucial entities in the East African region, including
- shipping lines,
- clearing and forwarding agents,
- key intergovernmental and trade facilitation agencies.
These partnerships empower Viaservice to create the most appropriate ecosystem, reinforce a robust due diligence and compliance framework, and ensure a seamless and efficient service for our customers and partner shipping lines.
For SMEs, our solution offers a cost-effective and reliable way to access containers and grow their businesses without tying up significant amounts of cash flow.
On the other hand, for shipping lines, our solution provides an optimal risk-mitigating alternative that goes beyond traditional deposits by securing payment, eliminating bad debt, and offering ancillary benefits.
These benefits include improved cash flow, reduced administration, and faster container turnaround times. Overall, Viaservice’s container guarantee solution has proven to be an innovative and effective means to enhance trade efficiency in East Africa, providing a cost-effective, reliable, and durable alternative to traditional container deposits.
In summary, our business model involves customers purchasing a container guarantee (#1 in the graph) for a specific Bill of Lading (BL) against a nominal service fee, which enables the release of containers without the need for deposits.
In the event of any liabilities, the shipping lines invoice Viaservice on behalf of the guarantee holders, and we advance the payout (#2) on a reimbursement basis (#3).
3. What is the difference between a container deposit, container guarantee, and traditional insurance?
The container deposit obliges customers to tie a cash amount with the shipping lines on a spot or revolving basis (amount computed per container) until the containers are returned. Any delays, damages, or losses incurred will be deducted from the total deposited amount.
The remaining balance will be refunded to the customers, but this process often takes several weeks due to the administrative and cumbersome reconciliation procedures carried out by the shipping lines. If the liability exceeds the deposited amount, the shipping line will absorb the full deposit, and any remaining balance will be invoiced to the customer.
A traditional insurance approach would involve customers paying a premium to obtain specific coverage (e.g., a $100 premium for coverage of $10,000 eventual liability for demurrage, damage, and total loss).
Despite past attempts, no solutions have gained traction. As of today, no insurance-based approach effectively meets the industry’s needs, maintains the liability chain, or secures stakeholder endorsement.
The main problem with insurance products designed for this issue is that they break the liability chain. If you pay “XXX USD” for “YYY USD” coverage, the risk related to “YYY USD” is transferred to a third-party insurance company, leaving you without any liability.
The insurance company then faces the “YYY USD” exposure with no incentives or controls to affect the client’s operations or the supply chain management. This is particularly concerning in areas where external factors can hinder the timely return of containers, leading to unpredictable and potentially unlimited financial exposure for the insurance company.
Consequently, the shipping line would quickly come to understand when considering such insurance as an alternative, that the insurance provider lacks any meaningful incentives and measures to limit its exposure due to the multitude of factors involved.
This situation directly affects the insurance provider’s ability to sustainably offer the solution in the long term without risking bankruptcy. Additionally, the process for the shipping line to recover from the insurance company is time-consuming and dependent on a chain of successful events over an extended period, leaving the shipping line with growing outstanding amounts to collect from the insurance company, while the insurer’s capacity to fulfill its obligations diminishes.
Offering such insurance solutions can lead customers to neglect efficient management and mitigation of potential liabilities, knowing an external party will bear the burden. This may result in shipping lines facing not just financial concerns, but also operational challenges like equipment mishandling and delays, over which they lose control.
Overall, this business model would prove to be neither scalable nor sustainable for any of the parties involved.
Our container guarantee effectively addresses all the aforementioned concerns. By establishing strong institutional partnerships with Revenue Authorities, Clearing and forwarding associations, and logistics regulators, we enhance and maintain the liability chain.
These partnerships grant us the authority to enforce measures against defaulting customers, ensuring compliance. While we do bear the risk of non-collection by advancing demurrage, damage, and total loss litigation on a reimbursement basis, our robust institutional framework and value proposition have consistently outperformed shipping lines in recovering such costs.
This success is evident with six shipping lines already availing our solution, and over 60% of licenses for clearing and forwarding agents in Tanzania registered for our service, serving both domestic and transit containers across the landlocked countries serviced by the ports of Tanzania.
In fact, our Container Guarantee model has become an industry-wide standard, recently integrated into the new Tanzanian Shipping and Logistics regulation. Recognized as the most business-friendly and sustainable alternative to deposits, we are currently expanding its reach to Kenya in Q3.
The Container Guarantee holds significant influence, as measures taken to enforce compliance, such as suspension for certain customers or further escalation, could severely impact their ability to clear cargo across all partner shipping lines and the entire region.
This serves as a major incentive for customers to ensure well-managed and insulated operations and commit to repaying Viaservice for any advances made on their behalf to shipping lines to maintain their eligibility.
In addition to benefiting shipping lines by fast-tracking the payment lifecycle to just a couple of days after invoicing, thereby improving their cash flow and eliminating bad debt exposure, our solution liberates customers from the burden of deposits. Consequently, they can now efficiently utilize their working capital to create more value for their businesses.
4. What strategies are Viatrans implementing to bridge the gap between traditional procedures and the lack of competitive trade finance solutions?
The logistics community in Africa, as well as worldwide, has long been considered a high-risk customer segment. The lack of logistics expertise and tools to mitigate risk for this group of potential customers has led trade finance institutions and traditional lenders to limit their exposure to these markets, and underserve this community.
Our business model, however, provides a solution that unlocks a substantial amount of working capital for these perceived “high-risk” customers. This infusion of cash can now be invested in their businesses and other areas of operations, promoting further growth and efficiency.
The new cash inflow faces a barrier due to a limited supply of tailored trade finance or credit solutions, hindering its growth effect. The underlying problem stems from a lack of transparency, limited understanding of logistics operations, and insufficient reliable financial information. These factors prevent lenders from effectively assessing the needs and creditworthiness of this customer segment.
Leveraging our unique positioning as a key financial and trade facilitation partner within the logistics sector, our solution aligns with banks and credit reference agencies to enhance the state of trade finance.
It provides the most accurate and comprehensive profile view of the creditworthiness and business fitness of freight forwarding and clearing agents. By aggregating liability instances, payment behavior, volume, and other operational and financial information for a large and growing pool of customers, we are uniquely capable of feeding into CRBs and banks’ compliance processes.
This not only improves Know Your Customer (KYC) and compliance requirements but also establishes us as a reliable third party, enhancing the visibility and credibility of the logistics community with TFIs and traditional lenders.
The resulting synergy will not only bolster the potential of these new customers with TFIs but also drive significant development in the supply of more competitive and customized trade financing solutions.
Stay tuned for Part 2 of the interview soon!