The Case for the Rail Protocol

1. The Case for the Rail Protocol to the Cape Town ConventionThe role of the Rail Working Group and the view of the rail sectorMannheim, 9th November 2006 Howard Rosen, Zug, Switzerland Chairman Unidroit Rail Working Group

2. Members of the Rail Working Group AAE Ahaus Alstatter Eisenbahn  The Alta Group Angel Trains  Ansaldo Trasporti  Ashurst  Association of American Railroads  Aviation Advocacy Bombardier Transportation Bruckhaus Westrick Heller Löber  Community of European Railways  Costaferroviaria  debis Financial Engineering GmbH  English Welsh and Scottish Railway Ermewa International  Eurofima  European Investment Bank  Ferroviaria  Firema  Freehill Hollingdale & Page  Freshfields  GE Capital  Global Capital Finance Howard Rosen Solicitor  HSBC Rail  HSH Nordbank KfW Kreditanstalt for Wiederaufbau  Lenz & Staehelin  McCarthy Tétrault  SNCB SG  Nauta Dutilh  NIB Capital Bank N.V.  Norton Rose  Intergovernmental Organisation for International Carriage by Rail (OTIF) Theodore Goddard  Transnet  Trinity Industries  UIC International Union of Railways  Union of European Railway Industries (UNIFE)  Deutsche VerkehrsBank  White & Case Wiersholm Mellbye & Bech

3. Rail Working GroupCentral Committee • Chairman: Howard Rosen, Howard Rosen Solicitor, Zug • Secretary: Karin M.L. Kilbey: HSBC Rail (UK)

4. Rail Working GroupCentral Committee • Other Members: • Gerfried Mutz, OTIF • Louise Oddy, Angel Trains • Konrad Schott, Bruckhaus Westrick Heller Löber • Michael Jung, KfW Kreditanstalt für Wiederaufbau • Jérôme Gauthier, Bombardier Transportation • Roger Reinhold, Global Capital Finance • Patrick Honnebier, Utrecht University • Berthold Reuter, HSH Nordbank • Martin Metz, Deutsche VerkehrsBank • Hervé Guenassia, Banque européenne d’investissement • Ad Toet, CER Community of European Railways • Andrew Charlton, Aviation Advocacy • Tom Winsor, White & Case

5. The Players in the Rail Sector Manufacturers Operators

6. The Players in the Rail Sector Capital Markets Manufacturers Rating Agencies ECG Banks Lessors Operators State

7. The Players in the Rail Sector Capital Markets Manufacturers Rating Agencies ECG Advisers Banks Brokers Lessors Operators State

8. Cape Town October/November 2001 295 participants from 58 States and 11 international organizations attended the Diplomatic Conference

9. Cape Town16th November 2001 • Unidroit Convention On International Interests In Mobile Equipment, containing 62 Articles signed • together with Aviation Protocol (a further 37 articles • 5 Resolutions including one supporting the next two protocols on Railway Rolling Stock and Space Assets

10. What the Treaty seeks to achieve • An answer to the Basic Problem - How to finance with security an asset potentially continuously moving across borders? • Limited security in asset financed due to • Local (conflict of) Property Law • Local Bankruptcy Law • Potential conflict of priorities

11. Application ofthe Treaty • The Treaty provides a new protected type of security in relation to • Lessor’s (and lessee’s interest) under a lease • Vendor retaining title in equipment • Lender taking security in an asset financed under a loan

12. Application ofthe Treaty in the Rail Sector • Since many assets are able to cross borders (even if in practice they do not), all rolling stock is intended to be covered in the Treaty • Including urban transportation equipment

13. Why is the Treaty needed for Rolling Stock?The Current Challenges for the international rail industry

14. The Position in Europe

15. The Position in Europe With all the various delays, the average speed of international rail haulage is only18 km/hour, which is slower than an ice-breaker opening up a shipping route throughthe Baltic Sea!” “Opening up rail transport to regulated competition …… is the central precondition for revitalising the railways….What is needed is….. A veritable cultural revolution to make rail transport once again competitive enough to remain one of the leading players in the transport system in the enlarged Europe” EU White Paper 2002: European Transport Policy for 2010: Time to Decide

16. The Position in Europe

17. The Position in Europe

18. The Position in Europe • Certain types of rolling stock constantly cross borders • Rail traffic needs to be more competitive • Competitive access requires private sector funding • Relatively few banks prepared to lend or lease rolling stock without clear or implicit state guarantee

19. The Position in Europe • Cost of private sector funding higher since fewer banks and higher risks • Some areas of operations off-limits for banks above a certain level – e.g. parts of central and Eastern Europe • Assets can get lost

20. A Global View • More capital investment required desperately to enable the rail sector to compete • Financing very difficult if no creditworthy state backing but…. • ….. States skimp on investment • Guarantees may not always be bankable • And there is growing threat to state funding because of state aid/WTO considerations

21. A Global View • 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

22. A Global View • 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 • Geographical usage restrictions applied by banks in many current financings (e.g. Romania, Mexico) • Legal opinions and documentation can be costly

23. Why is the Treaty needed for Rolling Stock?The General Benefits

24. Why is the Treaty needed for Rolling Stock?The General BenefitsI. The Basic Proposition

25. The Basic Proposition • More security to Funders should reduce interest costs on non state credits • NB Recent Exim Bank announcement concerning Aircraft • New banks and lessors will come into the market, increasing supply of funds and reducing interest rates further; securitisations become easier • Manufacturers will feel more confident to offer credit to operators

26. The Basic Proposition • The Treaty will facilitate a true operating lease environment by assuring the lessor that its asset can be efficiently repossessed • And will encourage the development of leases of second user equipment • NB Recent Chile acquisition of refurbished RENFE rolling stock • In turn this will open the market for operators to sell and lease back a significant part of their rolling stock, creating liquidity in the market and for the operator

27. The Basic Proposition • The Treaty will facilitate funding without state guarantee and therefore increase capital investment (as happened in the UK post 1996) • Allows states to redeploy limited resources to infrastructure • Reduces substantial legal & insurance costs • Reduces scope for disputes

28. The Basic Proposition • The Treaty improves Rail’s competitive position by bringing a level playing field with aircraft and truck finance • Knock on effect for municipal transportation • Lowers barriers to entry for • private operators: encouraging competition • Banks and lessors: facilitating cross border expertise

29. The Basic Proposition • 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

30. The Basic Proposition The Current System Capital Markets Donor States Recipient States

31. The Basic Proposition A New Model Capital Markets Banks/Lessors Operators

32. The Basic Proposition Advantages of the New Model • Targeted finance • 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 • Less scope for corruption

33. Why is the Treaty needed for Rolling Stock?The General BenefitsII. The Economic Effects

34. The Economic Effects • Extension of the Treaty to the Rail sector • will facilitate investment in rolling stock from the private sector into developed as well as lesser developed countries • will make existing financing cheaper • will create more securitisation options • Review of examples based on a notional asset cost of US$ 1 million:

35. Lease for 15 years, assuming 20% residual value at lease expiration Implicit Int. rate Monthly rent increase

36. Lease for 10 years, assuming 50% residual value at lease expiration Implicit Int. rate Monthly rent increase

37. Lease for 5 years, assuming 80% residual value at lease expiration Implicit Int. rate Monthly rent increase

38. The Economic Effects • Assuming annual capital investment at $25 billion • Simplistically, assuming just an average interest rate benefit of 2% on estimated procurement using the most conservative slide, this represents a saving of $327 mio. per annum • Multiplier effect: lower interest rates and involvement of more funders, will make more investment economically viable, so actual savings will be higher because columes should increase

39. Summary • The Rail Protocol will provide a new level of security for asset backed financing in rolling stock • It will assist by creating an internationally recognised security interest and a registry in which such interest can be recorded with consequent priority rights • By creating more security it will facilitate financings or make them cheaper thereby in turn encouraging more capital investment • It should underwrite the development of a global operating lease market and lower barriers to entry into the rail sector

40. A Lawyer's Viewpoint • The Treaty will reduce risk and costs • It should minimise the risk of disputes in the future • Documentation and Legal opinions should be simpler • But there should be more business

41. The Case for the Rail Protocol to the Cape Town ConventionThe role of the Rail Working Group and the view of the rail sectorMannheim, 9th November 2006 Howard Rosen, Zug, Switzerland Chairman Unidroit Rail Working Group