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AfricaRail 2008 Johannesburg, 5th June 2008 Update on the “Luxembourg Rail Protocol” the race to modernise rolling stock in Africa Howard Rosen

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www.railworkinggroup.org. AfricaRail 2008 Johannesburg, 5th June 2008 Update on the “Luxembourg Rail Protocol” the race to modernise rolling stock in Africa Howard Rosen Principal, Howard Rosen Solicitors, Zug, Switzerland Chairman, Rail Working Group. Introduction

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slide1

www.railworkinggroup.org

  • AfricaRail 2008
  • Johannesburg, 5th June 2008
    • Update on the “Luxembourg Rail Protocol”
    • the race to modernise rolling stock in Africa
  • Howard Rosen
  • Principal, Howard Rosen Solicitors, Zug, Switzerland
  • Chairman, Rail Working Group
slide2

Introduction

  • Current problems and investment in rolling stock
  • The Luxembourg Protocol and how it creates the conditions for private sector investment
  • New solutions for African Railways, lessons learnt from the aviation industry – and where we go from here

www.railworkinggroup.org

slide3

Introducing the Rail Working Group

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
a global view
A Global View

www.railworkinggroup.org

  • The Railways are our past – and our future
    • Most efficient means of mass transport of goods and people
    • Road and Air capacity limited
    • Environmentally friendly and fuel efficient
    • Safer
    • Key element in economic development
a global view5
A Global View

www.railworkinggroup.org

  • Annual capital investment in rolling stock estimated to be in excess of US$ 25 billion but it needs to be much higher
  • Minimal capital investment in rolling stock in Latin America (some exceptions in urban transportation) Eastern Europe and Africa – arguably where it is most needed
  • Financing very difficult if no creditworthy state backing but….
a global view6
A Global View

www.railworkinggroup.org

  • ….. Even creditworthy states skimp on investment – and what there is should go to infrastructure
  • Guarantees may not always be bankable
  • And there is growing threat to state funding because of state aid/WTO considerations
  • Geographical usage restrictions applied by banks in many current financings (e.g. Romania, Mexico)
  • Legal opinions and documentation can be costly
a global view7
A Global View

www.railworkinggroup.org

  • Very restricted operating lease environment outside of North America and the UK
  • No public asset based security system at all world-wide but note that
      • a limited security system in North America has facilitated private sector funding
      • The North American system supporting rail funders and operators is debtor and not asset based
rail infrastructure in africa
Rail Infrastructure in Africa

www.railworkinggroup.org

  • A colonial legacy
    • Alexandria railway 1852;
    • Ghana: Sekondi – Kumasi 1903
  • A vital element of development in Africa
  • Some innovation now in the rail sector (concessions, privatisation, commercialisation etc)
  • Key projects for new links
    • Brazzaville Conference April 2006
    • Lagos-Kano route?
    • Rwanda-Burundi-Tanzania links
    • Mbalam Cameroon project
    • Benin-Togo-Burkina Faso-Niger
    • Gautrain
rail infrastructure in africa9
Rail Infrastructure in Africa

www.railworkinggroup.org

rolling stock in africa
Rolling Stock in Africa

www.railworkinggroup.org

  • Starting point: Serious underinvestment
  • Remember 1855! Infrastructure needs rolling stock – and it needs to be funded
  • Refurbishment and procurement of rolling stock
  • Important that new and used equipment can be financed
  • But how do you finance the rolling stock?
rolling stock in africa11
Rolling Stock in Africa

www.railworkinggroup.org

  • Private Banks will not lend
    • Unless they understand the system
    • Their returns are secure
    • The assets are secure and correctly maintained
    • They can repossess assets on default
  • The Luxembourg Protocol provides solutions
slide12

Cape Town October/November 2001

participants from 58 States and 11 international organizations at the Diplomatic Conference

slide13

Luxembourg 2007

participants from 42 States and 12 international organizations at the Diplomatic Conference

slide14

www.railworkinggroup.org

The Goals of the Luxembourg Protocol

  • More extensive private sector finance for rolling stock at a lower cost
  • Reduce barriers to entry to the rail sector
  • Create more diverse financing systems
  • in order to facilitate a more competitive and dynamic industry
slide15

www.railworkinggroup.org

How the Luxembourg Protocol achieves its objectives

  • Creates as an “International Interest” security interest held by certain types of creditors
  • Applies to all rolling stock
  • Provides for an international registry accessible through the internet 24/7 at which interests can be registered and searched against
  • Allocates priorities to registered interests
  • Adopts detailed enforcement rules for creditors on debtor default or insolvency
slide16

www.railworkinggroup.org

“Luxembourg” Benefits

  • More lenders and lessors ready to finance rolling stock
  • Cost of capital decreases with risk and availability (including “Basel II” advantage)
  • Legal costs decrease
  • Safer to move assets across borders
  • Opens out options for more innovative financing structures
the economic effects
The Economic Effects

www.railworkinggroup.org

  • Assuming annual capital investment at $25 billion
  • Simplistically, assuming just an average interest rate benefit of 1% on estimated procurement, this represents a saving of $250 mio. per annum
  • Lease rates should fall by 5% – 7.5%
  • Multiplier effect: lower interest rates and involvement of more funders, will make more investment economically viable, so actual savings will be higher because volumes should increase
slide18

www.railworkinggroup.org

Why the Protocol’s important

- the Different Stakeholder Perspectives

  • Banks and Lessors
  • Operators
  • Manufacturers
  • Customers
  • Governments
  • Aid Agencies
a new model for development aid
A New Model for Development Aid

www.railworkinggroup.org

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

  • Allows redirection of aid/ECGD facilities: Give us the law, not the money!
  • Arguably State givers are entrepôts between the capital markets and developing states; we can cut out the “middle man” with benefits for everyone
slide20

Donor States

Recipient States

www.railworkinggroup.org

A New Model for Development Aid

The Current System

Capital Markets

Capital Markets

a new model for development aid21

Capital Markets

Banks/Lessors

Operators

A New Model for Development Aid

www.railworkinggroup.org

A Different Approach

advantages of the new model
Advantages of the New Model

www.railworkinggroup.org

  • Targeted finance, releases aid and government resources for infrastructure development
  • Private Sector “controls” of use of funds
  • Limits of funding from economic viability, not aid budgets
  • No cash required from governments
  • Avoids tied aid – to suppliers or politics
  • Removes discrimination against local financiers
  • Less scope for corruption
slide23

www.railworkinggroup.org

The Lessons from the Aviation Sector

  • Diverse financing – especially operating leasing – creates a new dynamic in the industry
  • Private sector finance is the key to success
  • Successful financing depends on registration of title interests and clear right to repossession
  • The Aviation Protocol to the Cape Town Convention is already in force: African ratifying states to date: Angola, Cape Verde, Ethiopia, Kenya, Nigeria, Senegal and South Africa
slide24

www.railworkinggroup.org

Implemetation Milestones

  • Diplomatic Conference: February 2007
  • Preparatory Commission: February 2007 –
  • Tender Process for registry: 2008
  • Signatures and ratifications 2007 –
  • Into force 2009? Are 4 ratifications enough?
slide25

www.railworkinggroup.org

What the rail industry needs to do

  • Actively support the work of UNIDROIT and the RWG
  • Educate itself – seminars and articles
  • Create universal identification systems
  • Press governments to sign and ratify the Cape Town Convention and Luxembourg Protocol (with the right options)
  • Be creative
slide26

www.railworkinggroup.org

  • AfricaRail 2008
  • Johannesburg, 5th June 2008
    • Update on the “Luxembourg Rail Protocol”
    • the race to modernise rolling stock in Africa
  • www.railworkinggroup.org
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