Part 2: East African trade growth – Can container guarantees unlock the idle $1.5bn trade finance gap?

Estimated reading time: 8 minutes

In part 1 of this interview, Morgan Lépinoy, Managing Director of Viatrans broke down how container deposits are creating deep structural issues for the shipping and logistics industry in Africa, and what Viatrans is doing to help mitigate these challenges.

But this is a complex issue, one that needs a follow-up interview to clarify the remaining questions, and Lépinoy was happy to come back to give us further insight.

1. What are the problems with current demurrage charges, and how does it impact the industry? Will improving transparency in this space make banks/lenders more willing to do business with perceived high-risk clients?

Demurrage, first and foremost, represents an opportunity cost. It is essential for shipping lines to optimise their container fleet by efficiently repositioning empty containers from surplus to deficit areas. Therefore, the turnaround of containers upon discharge plays a crucial role for every shipping line. 

However, numerous factors can contribute to longer container turnaround times, including:

• port congestion, 
• inadequate inland infrastructure, 
• border and customs clearance delays, 
• adverse weather conditions, 
• civil unrest, 
• and more. 

Demurrage serves as an indemnity for shipping lines to cover the opportunity cost incurred beyond the agreed free time for container turnaround. Delays in containers hinder export capabilities in other regions, leading to idle use costs for shipping lines. However, Demurrage by consequence, also represents a substantial cost for importers, often increasing the overall cost of doing business in certain parts of the world.

Efficiency gains, improvements in logistics infrastructure, and innovative solutions addressing the aforementioned challenges are instrumental in enhancing overall logistics operations. By reducing transit times, the risk and impact of demurrage for the industry can be minimised.

While demurrage represents a cost, it also instils accountability and drives continuous improvement in logistics practices and innovations. This is crucial in an industry where various internal and external factors can disrupt the supply chain. 

Container deposits are a significant factor in causing delays during container clearance after unloading. Having to gather large cash deposits for the shipping line can be challenging and financially straining, particularly when there’s limited working capital. This adds to the overall delay in clearing and transporting containers.

With the introduction of the container guarantee, we have successfully improved the clearance process. Customers no longer need to worry about arranging deposits, leading to more prompt container clearance. 

This efficiency gain has reduced the turnaround time of containers under guarantee by a couple of days, resulting in significant cost savings, potentially avoiding demurrage charges.

Demurrage remains one of the largest expenditures borne by importers and exporters. Our distinctive position in managing these expenditures allows us to uniquely assess payment behaviour, instances of demurrage, reasons for delays, and operational fitness on behalf of our clients. 

Such critical information is currently absent from existing credit scoring and profiling solutions in the market. Traditional credit scoring solutions mainly focus on individuals seeking credit and provide limited insight into businesses, especially in the logistics sector. 

This lack of a track record often leads to the denial of financing or offers of generic and costly facilities. Consequently, the logistics sector remains cashflow strained, limiting its investment potential in business development and innovation, thereby hindering sustainable growth and resilience.

2. Considering that approximately $1.5 billion is tied up annually with shipping lines in East Africa, how can container guarantees through Viatrans help infuse this amount back into the economy or businesses?

1) Thanks to the container guarantee, we have successfully redirected working capital, which was previously tied up in deposits with shipping lines, back into businesses. This infusion of capital enables companies to allocate resources to other critical business activities and operations.

2) Leveraging synergies with the trade finance and banking ecosystem, we can provide valuable tools to enhance risk assessment and de-risk a customer segment that has been largely underserved. This contribution will strengthen the ecosystem, empowering the supply of competitive and tailored trade finance solutions, thereby fostering substantial growth and creating numerous investment opportunities within the sector.

Through the core of our solution and Viaservice’s strategic positioning to improve the financing ecosystem, we have taken a significant step towards addressing the annual idling of $1.5 billion in East Africa. By reintroducing this capital into circulation, we unlock its potential for a multiplier effect with new trade financing facilities, offering enormous opportunities for the sector and the region as a whole.

3. Do you have any case studies that show how Viatrans services have helped solve some of these industry issues?

Prior to Viatrans’ solutions, our customers were burdened with large payments for every shipment, with limited financing options.

This situation led to several challenges:

1) They were reluctant to pursue more business opportunities due to the additional deposit requirements, limiting their competitiveness and hindering the sourcing of new opportunities.

2) They were unable to allocate resources for crucial aspects of their business operations, slowing down their access to innovation, renewal, expansion of assets, and business development activities.

Since our inception in 2020, our solution has benefitted numerous SMEs, accounting for over 60% of licensed clearing and forwarding agents in Tanzania, and operating across the East African Community (EAC), allowing over $12 million to date of cash previously held in deposit to circulate back into their businesses. The positive impact has resulted in three main outcomes:

1. Levelling the playing field: SMEs can now compete on equal footing with larger logistics companies for the same cargo. Previously, they were constrained by the large deposits they couldn’t afford. Under the deposit era, some of our customers dealt with only 1-2 shipments per month, involving 20-100 containers per year. With our solution, these same clients are now handling that much cargo on a monthly basis, and some even more. This transformation has led to a fairer and more competitive environment in the market.
2. Unleashing idle capital: The cash that was once tied up and dormant is now being put to work. Customers can explore new acquisitions of assets, make more hires, and invest in their businesses, which was previously inconceivable. This improved working capital has significantly upgraded their resilience, making them investment-ready stakeholders, and contributing to the growth of the sector. Additionally, it has made trade and transport corridors more attractive to investors. Some of our customers have utilised the freed capital to acquire trucks and expand their services from simple clearing to clearing and forwarding, creating more opportunities and strengthening their market position.
3. Reducing operational and financial risks for shipping lines: As more volume moves to the container guarantee model, shipping lines experience reduced operational and financial risks. Turnaround of containers and liability collection improves, enabling shipping lines to optimise their resources, focus on value-added tasks, and enhance customer service excellence. The adoption of the container guarantee has also contributed to de-risking the region, making it more attractive for more vessel calls and further building upon an improved market environment to meet the growing demand.

Our solution has positively impacted SMEs, shippers, and shipping lines in the East African region, promoting a more competitive, efficient, and robust logistics sector.

4. Finally, how does Viatrans envision the future of shipping, particularly in terms of digital and financial trade solutions, given the current challenges faced by the industry?

In my view, the trade financing sector is on a path of digital transformation, fueled by numerous upgrades as the shipping industry undergoes further digitisation. However, it is important to recognise that this industry, despite its potential for innovation, remains old-fashioned, conservative, and slow to embrace new technologies. 

Simply introducing innovations won’t suffice; successful digitalisation should focus on addressing trade barriers, which currently underlie the inefficiencies and increased costs of trade. The companies that will thrive in this field are those that innovate with purpose, adopt a long-term view, and adapt to the fast-paced, ever-changing supply chain environment. 

A short-term, profit-driven approach won’t have the lasting impact required in this industry.

Looking ahead, the future of financial trade will be more inclusive and personalised. Partnerships between various stakeholders in the logistics and banking/TFI sectors will lead to significant developments. These collaborations will not only build expertise but also enhance the sharing of information and tailor solutions to specific needs. 

Data will be a critical ally, but managing it, both in terms of privacy and assessment, will be essential. The supply chain has multiple transactions, challenges, opportunities, and financing needs at each link in the chain. Each generates vast amounts of data. 

Innovative companies will be required to develop synergies across the spectrum and bridge the gap between parties to navigate this complexity, simplify processes, and deliver the right product or innovation to meet the right and specific needs.

In this context, leveraging data effectively in emerging markets and the traditional, old-fashioned environment of the industry will require tools that seamlessly integrate with existing systems. Solutions must avoid adding complexity to an ecosystem already dealing with numerous external factors. 

Simplicity and immediate perceivability of customer workflows and benefits are crucial for successful adoption and trust-building. Despite the complexity of the solution’s backbone, it is essential to ensure a user-friendly experience for operators with diverse backgrounds, both professional and academic, especially in emerging markets. Avoiding internal complications in an industry already dealing with a wide range of external challenges will be key to widespread acceptance and successful implementation.