Yes, governments have a role in building roads and railways, but they do not own the cars, buses and trucks that run on the roads so why should they insist in owning 88% of the rolling stock which runs on Europe's railways?
Moreover, another important conclusion of the Berger report is that there is a direct correlation between liberalisation of the rail market and the need for private capital. Europe is clearly committed to opening up the rail market both for freight and passenger traffic, but for this to succeed more private capital needs to be invested in railway equipment. The money is there through banks, lessors, private equity funds and pension funds. But for financiers to take risks secured only by the rolling stock itself, there must be a legal system to underwrite that security as well as a set of common legal rules and security enforcement standards which will operate across national boundaries. That legal infrastructure does not exist - but it is coming.
The Luxembourg Protocol to the Cape Town Convention on International Interests in Mobile Equipment is an international treaty which creates a new global system for the recognition and prioritisation of security interests in rail equipment, particularly those held by secured lenders and lessors. It will be possible to register and search those interests online through an international registry established by the Protocol in Luxembourg and operating 24/7.
The Protocol applies to all rolling stock broadly defined to include metro trains, trams, monorails, cable cars and even gantries and cranes running on tracks at ports, applicable when the debtor is located in ratifying country. In addition, for the first time, the Protocol will introduce a global unique numbering system for all rolling stock. The costs will be modest and the Rail Working Group is working closely with its members to ensure that the system works easily and with the minimum of bureaucracy.
It is a proven system. The comparable protocol to the Cape Town Convention for aircraft is already in operation in over 60 countries, with the international registry for aircraft being run by the same group which has been retained to run the international rail registry.
The Luxembourg Protocol is not yet in force, but it has already been ratified by the European Union and Luxembourg, while Britain, Germany, Italy and Switzerland have signed the Protocol and are working towards ratification. Other countries, such as Denmark, Sweden and South Africa, are working towards ratification.
Once the Luxembourg Protocol comes into force in 2017, it will be a win for governments as it releases them from spending obligations and a win for institutions, banks and lessors, reducing the capital and other costs as the risks decrease. It is also a win for manufacturers by not only allowing them to sell rolling stock to operators when needed, without their customers being bound by governmental budgetary constraints, but also because we expect export credit agencies to provide cheaper funding support for exports, as occurs now where the comparable protocol to the Cape Town Convention for aircraft applies.
By underwriting operating leases for rolling stock, the Protocol will also create a new transparent model which will inevitably move the industry towards more standardised rolling stock, in turn encouraging higher residual value assumptions by lessors and therefore correspondingly lowering rentals. But it will also benefit the public as the Protocol will bring cheaper finance and make it easier for operators to fill capacity gaps.
Not so long ago, the railway sector was seen as a sunset industry; today it is viewed as a sunrise business, being an essential part of the economy of the future, delivering important social, economic and environmental benefits to the community. But this will require considerable investment in new rolling stock from the private sector.
The Luxembourg Protocol is an ambitious vision providing essential support for a liberalised market and creating new business opportunities in Europe and beyond. When implemented, it will facilitate efficient low-risk and low-cost private finance for rolling stock.
The private sector is ready to go but governments have to play their part now by moving forward by implementing legislation to adopt the Protocol, but it's worth it. By removing the need for operators to have vast capital resources or balance sheets, the Protocol will lower the barriers to entry for new entrepreneurs and stimulate a more competitive and dynamic rail industry fit for the 21st century.
