African countries lead the way on international treaty on Mining, Agricultural and Construction Equipment

South Africa’s Department of International Relations and Cooperation hosted a diplomatic conference in Pretoria to finalise and adopt the fourth protocol to the Cape Town Convention on International Interests in Mobile Equipment (“Convention”). The Convention facilitates the financing and leasing in cross border transactions of mining, agricultural and construction equipment (“MAC equipment”). On 22 November 2019, The Republic of Congo, The Republic of Gambia, The Federal Republic of Nigeria together with The Republic of Paraguay were the first states to sign and adopt the new international treaty.

A number of the original legal and academic experts involved in the Convention, which was signed in 2001, were amongst the 150 delegates from “forty three states, a regional economic integration organisation, three intergovernmental organisations, four international non- governmental organisations, and a technical adviser” to finalise and adopt the protocol for MAC equipment prepared by UNIDROIT¹. South Africa, and at least another 26 states attending, signed the Final Act of the diplomatic conference setting out the approved final version of the treaty². We also understand from UNIDROIT that more than 20 states have expressed support for the treaty and “declared that their internal processes for signature are already under consideration.” Although the UK is one state which made a strong statement in support of the treaty, it cannot, whilst still a member state of the EU, sign the Pretoria Protocol on its own. When, and indeed if, the UK leaves the EU, it would be in a position to do so in its own right. As yet, the EU has not signed. The UK has, however, signed the Final Act.

The MAC protocol has been renamed the Pretoria Protocol (“Pretoria Protocol”).

What assets are covered and protected?

The Pretoria Protocol will provide legal certainty and protection for the interests of lessors, security interests of secured creditors, and seller’s rights under conditional sale agreements of MAC equipment in cross border transactions, with the intention of removing concern about whether a lease or security interest is recognised and enforceable or not from one state to another when parties are in different states and the MAC equipment has to cross borders during its life. These interests will be effective where the debtor is located in a contracting state and the interest has been registered on an electronic register as an international interest.

The Pretoria Protocol covers specific assets used in three industry sectors: mining, agriculture and construction. MAC equipment eligible for registration of an international interest is listed in each of three annexes by reference to a category of asset using the Harmonised  Commodity Description and Coding System used by the World Customs Organisation. Accessories installed, incorporated and attached to, and all data, manuals and records relating to that item of MAC equipment will also be covered. An international interest over an item of MAC equipment will have priority over a domestic security interest over the same asset.

Under the terms of the Pretoria Protocol, on the occurrence of an insolvency-related event³ of the debtor⁴, an insolvency administrator or the debtor (as applicable) shall give possession of the MAC equipment to the creditor.

Here are some examples of MAC equipment for each sector eligible to fall within the Pretoria Protocol.

Who could benefit from the Pretoria Protocol?

UNIDROIT has been spreading the word about the benefits, both legal and economic, of states signing up to the Pretoria Protocol. Last estimates published by UNIDROIT, following an independent economic assessment in 2018 by Warwick Economics and Associates, suggested that it could have a “positive impact of US$23 billion on GDP in developing countries and of US$7 billion in developed countries, for a total impact on GDP equivalent to US$30 billion a year.” It may also help to increase the stock of MAC equipment in developing countries by US$90 billion.

Indeed, a wide range of people and entities could benefit if there is widespread rapid ratification of the Pretoria Protocol. The aim is for farmers, farming entities, mining entities, builders and construction entities to have better access to more modern equipment at lower costs. Manufacturers, some of which have been involved in the MAC Study Group, could see an increase in demand for some types of equipment, and dealers and traders could see exports into other developing markets. Financiers taking credit risk by providing direct finance and taking security or financing the leasing of MAC equipment, would benefit from legal protection for their interests in cross border transactions, once the new MAC registry is up and running, in a similar way to aircraft under the International Registry of Mobile Assets. In a departure from the aircraft protocol to the Convention, however, sales of MAC equipment are not within the remit of the Pretoria Protocol.

What happens now?

A new electronic register will be need to be designed and developed to allow debtors and creditors the ability to create an international interest. To register an item of MAC equipment, using a manufacturer’s serial number has been proposed as one method of identification. However, next on the agenda should be the design of the register and the scope of what else may be needed to create the unique identifier for a particular asset, whether it be a vehicle registration number, or, say, an electronic photograph. The experience of the current registrar⁶ of the International Registry⁷ for interests in aircraft, would be invaluable in this exercise to create a 24/7 electronic register with minimal human intervention.

Ratification and implementation will be needed by the states which have signed the Pretoria Protocol. For those states which have declared their support, we anticipate they will have to work out where the priority for supporting the new framework to assist financing and leasing of MAC equipment to the developing and developed markets sits in the priority of domestic and international issues at national government level.

To see the fruits of fourteen years of negotiation and thought become a reality in the form of  a new international treaty is quite a feat. To see the treaty in action, however, being used as  a new tool to increase access to finance in certain areas of the world to bolster the key industries of mining, agriculture and construction, will be a huge step for international cooperation.

By Jacqueline Cook, senior professional support lawyer, finance, Stephenson Harwood. Jacqueline took part in a technical workshop ‘The scope of the MAC Protocol and the Harmonised System’ at Harris Manchester College, and attended the eighth annual conference of the Cape Town Convention Academic Project at the Blavatnik School of Government, both at the University of Oxford, in September 2019.

¹ Information from UNIDROIT- The International Institute for the Unification of Private Law, see www.unidroit.org