In June, the Cabinet of South Africa formally approved the submission of the Luxembourg Rail Protocol to the Cape Town Convention (LRP) to Parliament for ratification. Formal ratification is expected later in the year. Vivien Chaplin of law firm Cliffe Dekker Hofmeyr (CDH) says, “South Africa’s economic growth, particularly over the last decade, has been mired by multiple infrastructural issues, not the least of which are its failing rail, road and port systems. The ratification of the LRP may be significant in providing the spark needed to reignite the engines of the struggling sector.
Providing insight on this is Vivien Chaplin, Director of the Corporate and Commercial practice and Head of the Mining and Minerals sector at law firm, Cliffe Dekker Hofmeyr (CDH).
Over the course of the most recent reporting period, Transnet Freight Rail (TFR) lost more than 15 million tons of freight volumes due to irregular locomotive acquisition, maintenance problems and cable theft along its coal line. “The consequences of this monumental loss have affected the country’s biggest coal exporters, many of whom have already sustained substantial revenue losses due to the institution’s failing rail infrastructure,” says Vivien.
The state of many of South Africa’s important ports is unfortunately in no better condition than its national roads. In a wage strike that has persisted since late 2022, Transnet has incurred monumental losses, with exporting harbours operating at as little as 12% capacity. From bulk minerals to fresh produce, South Africa’s ability to sustain its key exports is under serious threat.
Private sector partnership and collaboration has been hailed by several stakeholders and industry experts as a crucial factor in solving the ongoing crisis. To this point, the most recent confirmation of a private sector partnership set to develop and upgrade Pier 2 of the Durban Container Terminal has been a welcome development. And, as Vivien explains, “In terms of the regulatory structures needed to support these interventions, the Luxembourg Rail Protocol is part of a much-needed progression.”
The LRP is a global treaty, adopted at a diplomatic conference in 2007. The main objective is to make it easier and cheaper for the private sector to finance railway rolling stock (from high-speed trains to trams) without state guarantees, thus enabling governments to focus their resources on infrastructure.
Once it has entered into force, the LRP will result in the creation of an international legal framework for the recognition and enforcement of the security interests of private sector investors (lenders, lessors and conditional vendors), where each are secured by railway rolling stock.
The LRP will also establish a unique rail vehicle identification system (URVIS) which will make it easier to track the location of rolling stock in real-time. It will also introduce an international public registry situated in Luxembourg accessible online 24/7, where private sector investors will register their security interests in the financed equipment and check for potential rival claims.
This will make it possible, for the first time, for all interested parties to easily learn of a creditor’s security interest in an item of rolling stock, and for that creditor to be able to enforce its security in cases of debtor default or insolvency.
Elimination of risk
Vivien says that the majority of the advantages to be gained from the ratification of the LRP relate to the elimination of risk for private sector investors on rail equipment. Primarily, the LRP will lower barriers to entry into the industry for private sector operators and reduce the dependence of state and private operators on state funding.
Furthermore, the LRP will ensure that the security interests of private sector investors will be safeguarded through the establishment of the URVIS. It will also facilitate the short-term operating leases of rolling stock, not just into railway operators from private sector investors, but also between operators, ensuring more efficient use of rolling stock. Ultimately, these developments have the ability to attract capital investment, which will, in turn, promote the expansion of rolling stock manufacturing facilities.
To date, four states have ratified the LRP (as well as of the European Union in regard to its competences), with South Africa being the fifth state to ratify. With the onboarding of Spain as an official member state in early 2023, the treaty entered its next phase, which will involve the opening of the International Rail Registry in Luxembourg City.
While this marks a significant stride forward in terms of addressing the country’s logistical setbacks, significant policy shifts will be required from Transnet and the South African government to ensure a smooth adoption. Resistance from Unions may be on the horizon, as well as significant complexities in terms of the legalities, operational policies and risk allocation.
Funding remains one of these chief concerns, particularly in light of Basel IV – the latest set of banking regulations governing the calculation of risk-weighted assets. “These companies will therefore require legal counsel with a solid understanding of the industry and South Africa’s procurement and legal environment, to navigate the interface between public and private sector parties,” Vivien concludes.