The Case for the Rail Protocol
to the Cape Town Convention
The role of the Rail Working Group and the
view of the rail sector
Mannheim, 9th November 2006
Howard Rosen, Zug, Switzerland
Chairman Unidroit Rail Working Group
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
Rail Working Group
Central Committee
• Chairman: Howard Rosen, Howard Rosen
Solicitor, Zug
• Secretary: Karin M.L. Kilbey: HSBC Rail (UK)
Rail Working Group
Central 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
The Players in the Rail Sector
Manufacturers
Operators
The Players in the Rail Sector
Capital
Markets
ECG
Manufacturers
Rating Agencies
Banks
Lessors
Operators
State
The Players in the Rail Sector
Capital
Markets
ECG
Manufacturers
Rating Agencies
Banks
Lessors
Operators
State
Advisers
Brokers
Cape Town October/November
2001
295 participants from 58 States and 11
international organizations attended the
Diplomatic Conference
Cape Town
16th 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
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
Application of the 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
Application of the 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
Why is the Treaty needed for
Rolling Stock?
The Current Challenges for
the international rail industry
The Position in Europe
The Position in Europe
With all the various delays, the average speed of
international rail haulage is only 18 km/hour, which is
slower than an ice-breaker opening up a shipping route
through the 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
The Position in Europe
% tkm
1970
1980
1990
1994
1995
1996
1997
1998
EU 15
Road
Rail
47.9%
32.6%
56.4%
25.8%
68.0%
18.6%
73.3%
14.1%
73.4%
14.0%
73.2%
14.4%
73.7%
14.1%
CEC
Road
15.4%
22.8%
31.3%
41.1%
42.7%
46.0%
47.4%
Difference to 100% is inland waterways & pipelines
Source EU DGVII
Rail
77.3%
67.8%
59.1%
49.8%
47.7%
45.1%
42.2%
US
Road
22.4%
23.6%
27.2%
26.2%
27.2%
29.7%
31.2%
-
Rail
41.5%
39.1%
38.2%
37.6%
38.2%
41.1%
40.0%
-
The Position in Europe
000 Mio tkm
1970
1980
1990
1994
1995
1996
1997
1998
1990-98
1996-1998
EU 15
Road
Rail
416
283
628
287
932
255
1'097
219
1'146
221
1'152
220
1'205
238
1'207
241
30%
(5%)
5%
10%
Source EU DGVII
CEC
Road
55
122
144
124
132
152
175
172
19%
13%
US
Rail
274
364
270
159
169
168
168
153
(43%)
(9%)
Road
602
810
1'073
1'309
1'345
1'419
1'534
n/a
32%
Rail
1'117
1'342
1'510
1'838
1'906
1'980
1'969
n/a
31%
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
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
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
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
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
Why is the Treaty needed for
Rolling Stock?
The General Benefits
Why is the Treaty needed for
Rolling Stock?
The General Benefits
I. The Basic Proposition
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
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
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
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
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
The Basic Proposition
The Current System
Capital
Markets
Donor States
Recipient
States
The Basic Proposition
A New Model
Capital
Markets
Banks/Lessors
Operators
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
Why is the Treaty needed for
Rolling Stock?
The General Benefits
II. The Economic Effects
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:
Lease for 15 years, assuming 20%
residual value at lease expiration
Implicit Int. rate
Monthly rent
increase
2%
5,472.282
3%
6,009.692
9.819%
4%
6,562.296
19.919%
5%
7,129.974
30.293%
Lease for 10 years, assuming 50%
residual value at lease expiration
Implicit Int. rate
Monthly rent
increase
2%
5,424.964
3%
6,062.880
11.759%
4%
6,706.568
23.624%
5%
7,355.959
35.595%
Lease for 5 years, assuming 80%
residual value at lease expiration
Implicit Int. rate
Monthly rent
increase
2%
3,168.322
3%
3,921.411
23.769%
4%
4,675.983
47.585%
5%
5,432.010
72.448%
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
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
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
The Case for the Rail Protocol
to the Cape Town Convention
The role of the Rail Working Group and the
view of the rail sector
Mannheim, 9th November 2006
Howard Rosen, Zug, Switzerland
Chairman Unidroit Rail Working Group