AfricaRail 2008AfricaRail 2008Johannesburg, 5th June 2008Johannesburg, 5th June 2008

Update on the “Luxembourg Rail Protocol”Update on the “Luxembourg Rail Protocol”the race to modernise rolling stock in Africathe race to modernise rolling stock in Africa

Howard RosenHoward RosenPrincipal, Howard Rosen Solicitors, Zug, SwitzerlandPrincipal, Howard Rosen Solicitors, Zug, Switzerland

Chairman, Rail Working GroupChairman, Rail Working Group

www.railworkinggroup.org

IntroductionIntroduction

• Current problems and investment in rolling stockCurrent problems and investment in rolling stock

• The Luxembourg Protocol and how it creates the The Luxembourg Protocol and how it creates the conditions for private sector investmentconditions for private sector investment

• New solutions for African Railways, lessons learnt from New solutions for African Railways, lessons learnt from the aviation industry – and where we go from herethe aviation industry – and where we go from here

www.railworkinggroup.org

www.railworkinggroup.org

AAE Ahaus Alstatter Eisenbahn The Alta Group Arendt & Medernach Armfelt & Associés Ashurst Aviation Advocacy Bombardier Transportation CIT Comité international des transports ferroviaires Community of European Railways Costaferroviaria debis Financial Engineering GmbH Denton Wilde Sapte Deutsche Bahn Deutsche Verkehrs Bank DLA Piper Dresdner Kleinwort English Welsh and Scottish Railway Europe Rail Consultancy Ltd European Intermodal Association European Investment Bank Field Fisher Waterhouse LLP Freehill Hollingdale & Page Freshfields Bruckhaus Deringer LLP GE Capital Global Capital Finance GmbH & Co. Europe KG Gorrissen Federspiel Kierkegaard Howard Rosen Solicitors HSBC Rail HSH Nordbank Intergovernmental Organisation for International Carriage by Rail (OTIF) KfW Kreditanstalt for Wiederaufbau Lenz & Staehelin Mayer, Brown, Rowe & Maw LLP McCarthy Tétrault Nauta Dutilh NIB Capital Bank N.V. Norton Rose Ober Kaler Private Wagon Federation Rajinder Narain & Co. Simmons & Simmons Stephenson Harwood Transnet Trinity Industries UIC International Union of Railways Union of European Railway Industries White & Case Wiersholm Mellbye & Bech

Introducing the Introducing the Rail Working GroupRail Working Group

• The Railways are our past – and our futureThe Railways are our past – and our future

– Most efficient means of mass transport of Most efficient means of mass transport of goods and peoplegoods and people

– Road and Air capacity limited Road and Air capacity limited

– Environmentally friendly and fuel efficientEnvironmentally friendly and fuel efficient

– SaferSafer

– Key element in economic developmentKey element in economic development

A Global View A Global View www.railworkinggroup.orgwww.railworkinggroup.org

• Annual capital investment in rolling stock Annual capital investment in rolling stock estimated to be in excess of US$ 25 billion estimated to be in excess of US$ 25 billion but it needs to be much higherbut it needs to be much higher

• Minimal capital investment in rolling stock Minimal capital investment in rolling stock in Latin America (some exceptions in in Latin America (some exceptions in urban transportation) Eastern Europe and urban transportation) Eastern Europe and Africa – arguably where it is most neededAfrica – arguably where it is most needed

• Financing very difficult if no creditworthy Financing very difficult if no creditworthy state backing but….state backing but….

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A Global ViewA Global View

• …….. Even creditworthy states skimp on .. Even creditworthy states skimp on investment – and what there is should go to investment – and what there is should go to infrastructureinfrastructure

• Guarantees may not always be bankableGuarantees may not always be bankable

• And there is growing threat to state funding And there is growing threat to state funding because of state aid/WTO considerations because of state aid/WTO considerations

• Geographical usage restrictions applied by Geographical usage restrictions applied by banks in many current financings (e.g. Romania, banks in many current financings (e.g. Romania, Mexico)Mexico)

• Legal opinions and documentation can be Legal opinions and documentation can be costlycostly

A Global View A Global View www.railworkinggroup.orgwww.railworkinggroup.org

• Very restricted operating lease environment Very restricted operating lease environment outside of North America and the UKoutside of North America and the UK

• No public asset based security system at all No public asset based security system at all world-wide but note thatworld-wide but note that

• a limited security system in North America a limited security system in North America has facilitated private sector fundinghas facilitated private sector funding

• The North American system supporting rail The North American system supporting rail funders and operators is debtor and not funders and operators is debtor and not asset basedasset based

A Global View A Global View www.railworkinggroup.org

• A colonial legacy A colonial legacy – Alexandria railway 1852; Alexandria railway 1852; – Ghana: Sekondi – Kumasi 1903Ghana: Sekondi – Kumasi 1903

• A vital element of development in AfricaA vital element of development in Africa

• Some innovation now in the rail sector (concessions, Some innovation now in the rail sector (concessions, privatisation, commercialisation etc)privatisation, commercialisation etc)

• Key projects for new linksKey projects for new links– Brazzaville Conference April 2006Brazzaville Conference April 2006– Lagos-Kano route?Lagos-Kano route?– Rwanda-Burundi-Tanzania linksRwanda-Burundi-Tanzania links– Mbalam Cameroon projectMbalam Cameroon project– Benin-Togo-Burkina Faso-NigerBenin-Togo-Burkina Faso-Niger– GautrainGautrain

Rail Infrastructure in Africa Rail Infrastructure in Africa www.railworkinggroup.org

Rail Infrastructure in Africa Rail Infrastructure in Africa www.railworkinggroup.org

• Starting point: Serious underinvestmentStarting point: Serious underinvestment

• Remember 1855! Infrastructure needs Remember 1855! Infrastructure needs rolling stock – and it needs to be fundedrolling stock – and it needs to be funded

• Refurbishment and procurement of rolling Refurbishment and procurement of rolling stockstock

• Important that new and used equipment Important that new and used equipment can be financedcan be financed

• But how do you finance the rolling stock? But how do you finance the rolling stock?

Rolling Stock in AfricaRolling Stock in Africa

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• Private Banks will not lendPrivate Banks will not lend

– Unless they understand the systemUnless they understand the system

– Their returns are secureTheir returns are secure

– The assets are secure and correctly The assets are secure and correctly maintainedmaintained

– They can repossess assets on defaultThey can repossess assets on default

• The Luxembourg Protocol provides The Luxembourg Protocol provides solutionssolutions

Rolling Stock in AfricaRolling Stock in Africa

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Cape Town October/November 2001Cape Town October/November 2001

participants from participants from 558 States and 18 States and 111 international international organizations at the Diplomatic Conference organizations at the Diplomatic Conference

Luxembourg 2007Luxembourg 2007

participants from participants from 4242 States and 1 States and 122 international international organizations at the Diplomatic Conference organizations at the Diplomatic Conference

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The Goals of the Luxembourg The Goals of the Luxembourg ProtocolProtocol

• More extensive private sector finance for rolling More extensive private sector finance for rolling stock at a lower coststock at a lower cost

• Reduce barriers to entry to the rail sectorReduce barriers to entry to the rail sector

• Create more diverse financing systems Create more diverse financing systems

in order to facilitate a more competitive and in order to facilitate a more competitive and dynamic industrydynamic industry

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How the Luxembourg Protocol How the Luxembourg Protocol achieves its objectivesachieves its objectives

• Creates as an “International Interest” security interest Creates as an “International Interest” security interest held by certain types of creditorsheld by certain types of creditors

• Applies to all rolling stockApplies to all rolling stock

• Provides for an international registry accessible through Provides for an international registry accessible through the internet 24/7 at which interests can be registered and the internet 24/7 at which interests can be registered and searched againstsearched against

• Allocates priorities to registered interestsAllocates priorities to registered interests

• Adopts detailed enforcement rules for creditors on Adopts detailed enforcement rules for creditors on debtor default or insolvencydebtor default or insolvency

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““Luxembourg” BenefitsLuxembourg” Benefits

• More lenders and lessors ready to finance rolling stockMore lenders and lessors ready to finance rolling stock

• Cost of capital decreases with risk and availability Cost of capital decreases with risk and availability (including “Basel II” advantage)(including “Basel II” advantage)

• Legal costs decreaseLegal costs decrease

• Safer to move assets across borders Safer to move assets across borders

• Opens out options for more innovative financing Opens out options for more innovative financing structuresstructures

• Assuming annual capital investment at $25 Assuming annual capital investment at $25 billionbillion

• Simplistically, assuming just an average Simplistically, assuming just an average interest rate benefit of 1% on estimated interest rate benefit of 1% on estimated procurement, this represents a saving of procurement, this represents a saving of $250 $250 mio.mio. per annum per annum

• Lease rates should fall by Lease rates should fall by 5% – 7.5%5% – 7.5%

• Multiplier effect: lower interest rates and Multiplier effect: lower interest rates and involvement of more funders, will make more involvement of more funders, will make more investment economically viable, so actual investment economically viable, so actual savings will be higher because volumes should savings will be higher because volumes should increaseincrease

The Economic Effects The Economic Effects www.railworkinggroup.org

www.railworkinggroup.org

Why the Protocol’s important Why the Protocol’s important

- the Different Stakeholder Perspectives- the Different Stakeholder Perspectives

• Banks and LessorsBanks and Lessors

• OperatorsOperators

• ManufacturersManufacturers

• CustomersCustomers

• GovernmentsGovernments

• Aid AgenciesAid Agencies

““The countries of the bottom billion need rules The countries of the bottom billion need rules appropriate for their societies at their level of appropriate for their societies at their level of development which address the problems they development which address the problems they face” – Paul Collier, face” – Paul Collier, The Bottom BillionThe Bottom Billion

• Allows redirection of aid/ECGD facilities: Give us Allows redirection of aid/ECGD facilities: Give us the law, not the money!the law, not the money!

• Arguably State givers are entrepArguably State givers are entrepôôts between the ts between the capital markets and developing states; we can capital markets and developing states; we can cut out the “middle man” with benefits for cut out the “middle man” with benefits for everyoneeveryone

A New Model for Development Aid A New Model for Development Aid

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The Current System

Capital Markets

A New Model for Development Aid A New Model for Development Aid www.railworkinggroup.orgwww.railworkinggroup.org

Donor States

Recipient States

Capital Markets

A Different Approach

Capital Markets Banks/Lessors

Operators

A New Model for Development Aid A New Model for Development Aid

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• Targeted finance, releases aid and government Targeted finance, releases aid and government resources for infrastructure developmentresources for infrastructure development

• Private Sector “controls” of use of fundsPrivate Sector “controls” of use of funds

• Limits of funding from economic viability, not Limits of funding from economic viability, not aid budgetsaid budgets

• No cash required from governmentsNo cash required from governments

• Avoids tied aid – to suppliers or politicsAvoids tied aid – to suppliers or politics

• Removes discrimination against local Removes discrimination against local financiersfinanciers

• Less scope for corruptionLess scope for corruption

Advantages of the New ModelAdvantages of the New Model

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www.railworkinggroup.org

The Lessons from the Aviation SectorThe Lessons from the Aviation Sector

• Diverse financing – especially operating leasing – Diverse financing – especially operating leasing – creates a new dynamic in the industrycreates a new dynamic in the industry

• Private sector finance is the key to successPrivate sector finance is the key to success

• Successful financing depends on registration of title Successful financing depends on registration of title interests and clear right to repossession interests and clear right to repossession

• The Aviation Protocol to the Cape Town Convention is The Aviation Protocol to the Cape Town Convention is already in force: African ratifying states to date: already in force: African ratifying states to date: Angola, Cape Verde, Ethiopia, Angola, Cape Verde, Ethiopia, Kenya, Nigeria, Senegal Kenya, Nigeria, Senegal and South Africaand South Africa

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Implemetation MilestonesImplemetation Milestones

• Diplomatic Conference: February 2007Diplomatic Conference: February 2007

• Preparatory Commission: February 2007 –Preparatory Commission: February 2007 –

• Tender Process for registry: 2008Tender Process for registry: 2008

• Signatures and ratifications 2007 –Signatures and ratifications 2007 –

• Into force 2009? Are 4 ratifications Into force 2009? Are 4 ratifications enough?enough?

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What the rail industry needs to doWhat the rail industry needs to do

• Actively support the work of UNIDROIT Actively support the work of UNIDROIT and the RWGand the RWG

• Educate itself – seminars and articlesEducate itself – seminars and articles

• Create universal identification systemsCreate universal identification systems

• Press governments to sign and ratify the Press governments to sign and ratify the Cape Town Convention and Luxembourg Cape Town Convention and Luxembourg Protocol (with the right options)Protocol (with the right options)

• Be creativeBe creative

AfricaRail 2008AfricaRail 2008Johannesburg, 5th June 2008Johannesburg, 5th June 2008

Update on the “Luxembourg Rail Protocol”Update on the “Luxembourg Rail Protocol”the race to modernise rolling stock in Africathe race to modernise rolling stock in Africa

www.railworkinggroup.org

www.railworkinggroup.org