Update on the Luxembourg Rail Protocol: Modernizing Rolling Stock in Asia

1. An association under Swiss law www.railworkinggroup.org • VietTraffic • Hanoi, Vietnam, 15 – 17 October 2008 • Update on the “Luxembourg Rail Protocol” • the race to modernise rolling stock in Asia • Howard Rosen • Principal, Howard Rosen Solicitors, Zug, Switzerland • Chairman, Rail Working Group

2. An association under Swiss law www.railworkinggroup.org • Introduction • Reducing procurement costs and expanding the market for private funding of trains • The Luxembourg Protocol and how it creates a new international framework to facilitate private finance of rolling stock • New solutions for Asian Railways, lessons learnt from the aviation industry – and where we go from here

3. Introducing the Rail Working Group An association under Swiss law www.railworkinggroup.org Members of the Rail Working Group: AAE Ahaus Alstatter Eisenbahn  The Alta Group  Arendt & Medernach  Armfelt & Associés  Ashurst  Aviation Advocacy  Bombardier Transportation  Bowman Gilfillan Attorneys  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 Fromer, Schultheiss & Staehelin 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 An association under Swiss law 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 An association under Swiss law www.railworkinggroup.org • Annual capital investment in rolling stock estimated to be in excess of EUR 37 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 – and significant procurement needed in Asia following heavy economic growth • Financing very difficult if no creditworthy state backing but….

6. A Global View An association under Swiss law 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 a 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, DPRK) • Legal opinions and documentation can be costly

7. A Global View An association under Swiss law 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. An association under Swiss law www.railworkinggroup.org • Rail is the only answer for mass transport of people and freight in high growth economies • A vital element of development in Asia • Inter City and Urban Transportation systems being developed across Asia • New dedicated freight lines for natural resources/mining in India and China and High Speed Rail Links across Asia • 4 “Silk Routes” – Trans Asia Rail Rail Infrastructure in Asia

9. Rail Infrastructure in Asia An association under Swiss law www.railworkinggroup.org

10. Railways in Vietnam An association under Swiss law www.railworkinggroup.org • 127 Years old • Gauge differentials • Hi-speed link Ho Chi Minh City – Hanoi needed • 2007 – 2010 Development Plan • VNR restructuring (and VNR also own manufacturers) • Links to Cambodia, Thailand and beyond • Scope and need for Capital investment but are there sufficient resources?

11. Rolling Stock in Asia An association under Swiss law www.railworkinggroup.org • Starting point: Serious demand but hi-tech supply limited within the region (e.g. Japan) and possible capacity constraints from Europe • Cross border issues on gauges and standards but ERTMS (European Rail Traffic Management System) and new technology on the way… • Remember March 1855! Infrastructure needs rolling stock – and it needs to be funded – but how do you do it?

12. Rolling Stock in Asia An association under Swiss law 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

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

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

15. An association under Swiss law 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

16. An association under Swiss law 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 and allocates priorities to registered interests • Adopts detailed enforcement rules for creditors on debtor default or insolvency

17. An association under Swiss law 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 but also domestic benefits • Opens out options for more innovative financing structures – especially in current more cautious climate • Spin-offs: asset identification, impulse to asset standardisation

18. The Economic Effects An association under Swiss law www.railworkinggroup.org • Assuming annual capital investment at EUR 37 billion • Simplistically, assuming just an average interest rate benefit of 1% on estimated procurement, this represents a saving of EUR 370 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

19. An association under Swiss law www.railworkinggroup.org Why the Protocol’s important - the Different Stakeholder Perspectives • Banks and Lessors • Operators • Manufacturers • Customers • Governments • Aid Agencies

20. A New Model for Development Aid An association under Swiss law 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

21. Donor States Recipient States An association under Swiss law www.railworkinggroup.org The Current System A New Model for Development Aid Capital Markets Capital Markets

22. Capital Markets Banks/Lessors Operators A New Model for Development Aid An association under Swiss law www.railworkinggroup.org A Different Approach

23. Advantages of the New Model An association under Swiss law 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

24. An association under Swiss law 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: Asian ratifying states to date: • Afghanistan, China, India, Indonesia, Malaysia, Mongolia, Oman, Pakistan, Turkey

25. An association under Swiss law www.railworkinggroup.org Implemetation Milestones • Diplomatic Conference: February 2007 • Preparatory Commission: February 2007 – • Tender and appointment process for registry: 2008 • Signatures and ratifications 2007 – • Into force 2009? Are 4 ratifications enough?

26. An association under Swiss law 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

27. An association under Swiss law www.railworkinggroup.org • VietTraffic • Hanoi, Vietnam, 15 – 17 October 2008 • Update on the “Luxembourg Rail Protocol” • the race to modernise rolling stock in Asia • www.railworkinggroup.org