AfricaRail 2008 Johannesburg, 5th June 2008 Update on the “Luxembourg Rail Protocol”

1. 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

2. 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

3. 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

4. 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

5. 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….

6. 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

7. 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

8. 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

9. Rail Infrastructure in Africa www.railworkinggroup.org

10. 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?

11. 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

12. Cape Town October/November 2001 participants from 58 States and 11 international organizations at the Diplomatic Conference

13. Luxembourg 2007 participants from 42 States and 12 international organizations at the Diplomatic Conference

14. 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

15. 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

16. 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

17. 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

18. www.railworkinggroup.org Why the Protocol’s important - the Different Stakeholder Perspectives • Banks and Lessors • Operators • Manufacturers • Customers • Governments • Aid Agencies

19. 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

20. Donor States Recipient States www.railworkinggroup.org A New Model for Development Aid The Current System Capital Markets Capital Markets

21. Capital Markets Banks/Lessors Operators A New Model for Development Aid www.railworkinggroup.org A Different Approach

22. 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

23. 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

24. 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?

25. 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

26. 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