29–115

108TH CONGRESS EXEC. RPT.

2nd Session " ! SENATE 108–014

CONVENTION ON INTERNATIONAL INTERESTS IN MOBILE

EQUIPMENT AND PROTOCOL ON MATTERS SPECIFIC TO

AIRCRAFT EQUIPMENT

JULY 16, 2004.—Ordered to be printed

Mr. LUGAR from the Committee on Foreign Relations,

submitted the following

REPORT

[To accompany Treaty Doc. 108–10]

The Committee on Foreign Relations, to which was referred the

Convention on International Interests in Mobile Equipment and

Protocol on Matters Specific to Aircraft Equipment (Treaty Doc.

108–10) (hereafter ‘‘Convention’’ and ‘‘Protocol’’), signed at Cape

Town on November 16, 2001, having considered the same, reports

favorably thereon and recommends that the Senate give its advice

and consent to ratification thereof, as set forth in this report and

the accompanying resolution of ratification.

CONTENTS

Page

I. Purpose ........................................................................................................... 2

II. Background .................................................................................................... 2

III. Summary of Key Provisions of the Convention and Protocol ..................... 2

IV. Implementing Legislation ............................................................................. 3

V. Committee Action .......................................................................................... 4

VI. Committee Recommendation and Comments .............................................. 4

VII. Text of Resolution of Ratification ................................................................. 5

VIII. Appendix—Hearing entitled ‘‘Economic Treaties,’’ Thursday, April 1,

2004, before the Committee on Foreign Relations .................................. 7

2

I. PURPOSE

The Convention and accompanying Protocol establish an international legal framework for the creation, priority, and enforcement of security and leasing interests in mobile equipment—specifically high value aircraft equipment (airframes, aircraft engines,

and helicopters)—and create a worldwide international registry

where such interests can be registered.

II. BACKGROUND

The Convention and Protocol were negotiated over a five-year period under the auspices of the International Institute for the Unification of Private Law (UNIDROIT) and the International Civil

Aviation Organization (ICAO). Work on the Convention was completed in November 2001, and the documents were opened for signature at a Diplomatic Conference held at Cape Town, South Africa, on November 16, 2001. The United States signed the Convention in Rome on May 9, 2003.

The Convention is designed to promote the use modern financing

practices in international transactions for the sale and lease of

high-value mobile equipment. The Convention contains rules for establishing recognized rights associated with international financing

and leasing transactions that are similar to the rules and rights

commonly used in the United States under certain articles of the

Uniform Commercial Code. The Convention also provides for a central, international registry through which various rights and priorities in covered property may be determined. Provisions with respect to remedies and procedures for enforcing rights further add

to the predictability of international transactions and to the autonomy of the parties to them. The Convention does not affect U.S. export and technology controls or regulatory procedures relating to

national security that may apply to items at issue in such transactions.

While the Convention creates a framework for transactions in

three categories of equipment—aircraft equipment, railway rolling

stock, and space assets—the Convention does not come into force

with respect to any specific category absent a separate protocol

dealing with that category. To this end, the Convention is accompanied by the Aircraft Protocol, which contains rules particular to

financing practice for airframes, aircraft engines, and helicopters.

By facilitating international transactions in modern equipment,

the Convention is expected to lead to broad and mutual economic

benefits for all interested parties and to the expanded use of newer,

safer technologies.

III. SUMMARY OF KEY PROVISIONS OF THE CONVENTION AND

PROTOCOL

A detailed article-by-article discussion of the Convention and

Protocol may be found in the Letter of Submittal from the Secretary of State to the President, which is reprinted in full in Treaty

Document 108–10. A summary of the key provisions of the Convention and Protocol is set forth below.

3

Creation and Registration of Interests

The Convention establishes rules that would apply to transactions for the financing of large mobile equipment between creditors and debtors in countries that are party to the Convention. Articles 2 and 7 provide for the creation of an international interest

held by a creditor in an item of large mobile equipment. Such interests are used to provide security to creditors lending money to finance the purchase or lease of equipment. Article 16 establishes an

International Registry where such interests, and transactions related to such interests (such as assignments or subordinations),

may be registered. Chapter V of the Convention addresses other

issues related to the registration system, including requirements

for registration of international interests, validity of registrations,

and provisions for the public to search information relating to registered interests.

Creditors’ Remedies for Default

The Convention establishes remedies available to creditors in the

event of a default on an agreement covered by the Convention.

Under Article 8, subject to any agreement between the parties to

the transaction, these remedies may include taking possession of

the item in which the creditor has an interest, selling or granting

a lease of the item, and collecting or receiving any income or profits

arising from the management or use of the object. Such remedies

must be exercised in a commercially reasonable manner. Article 13

provides for additional remedies to preserve the interests of a creditor who adduces evidence of a default by a debtor, pending a final

determination of the creditor’s claim.

Priority and Assignment

Article 29 of the Convention contains rules to establish priorities

among multiple interests in the same item. Articles 31 and 32 establish requirements for the assignment of interests under the

Convention and the effect of such assignments.

Aircraft Protocol

The Aircraft Protocol provides for the Convention’s application to

transactions related to airframes, aircraft engines, and helicopters.

It provides additional remedies to creditors in the event of default

beyond those contained in the Convention, including the right to

procure de-registration of an aircraft by relevant aviation regulation authorities, and the right to procure the physical transfer of

an aircraft from the territory in which it is situated. It also contains additional provisions for remedies in the event of a debtor’s

insolvency.

VI. IMPLEMENTING LEGISLATION

No implementing legislation is required for the Convention or

Protocol, except for technical amendments to certain authorities of

the Federal Aviation Administration relating to the filing of interests in registries through the FAA. The Administration submitted

proposed legislation on November 18, 2003, and this legislation is

4

currently under consideration in both the Senate and the House of

Representatives.

As noted in the Administration’s response to a question for the

record from Senator Biden, the Convention and Protocol provide for

private rights of action based on their provisions in the courts of

States parties to them.

V. COMMITTEE ACTION

The Committee on Foreign Relations held a public hearing on the

Convention and Protocol on April 1, 2004 at which it heard testimony from the Departments of State and Transportation (a transcript of this hearing and questions and answers for the record

may be found in the appendix to this report). On June 22, 2004,

the Committee considered the Convention and Protocol and ordered

them favorably reported by a voice vote, with the recommendation

that the Senate give its advice and consent to their ratification,

subject to declarations contained in the resolution of advice and

consent.

VI. COMMITTEE RECOMMENDATION AND COMMENTS

On balance, the Committee on Foreign Relations believes that

the proposed Convention and Protocol are in the interest of the

United States and urges that the Senate act promptly to give advice and consent to their ratification, subject to the declarations

contained in the resolution of advice and consent to ratification.

The Committee notes the support for the Convention and Protocol

expressed by the U.S. aircraft manufacturing industry, financial

services entities involved in aircraft financing, the American Bar

Association, and the Air Transport Association.

The proposed declarations to the Convention are designed to preserve current U.S. practices with respect to priority of non-consensual rights arising by law, to preserve the ability of the U.S. Government and other specified entities to detain aircraft in order to

secure amounts owing in connection with the provision of certain

public services, and to permit the exercise of certain remedies without the leave of the court, consistent with U.S. law. The first three

proposed declarations to the Protocol provide that the United

States will apply provisions of the Protocol addressing contractual

choice of law, insolvency case assistance, and requests for the

deregistration and export of aircraft. The fourth declaration provides for the designation of the Federal Aviation Administration as

the exclusive entry point in the United States entitled to authorize

electronic registrations under the Protocol relating to airframes

pertaining to U.S. registered aircraft and helicopters, and as the

non-exclusive point authorizing electronic registrations relating to

engines.

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VII. TEXT OF RESOLUTION OF RATIFICATION

Resolved (two-thirds of the Senators present concurring therein),

SECTION 1. SENATE ADVICE AND CONSENT SUBJECT TO DECLARATIONS.

The Senate advises and consents to the ratification of the Convention on International Interests in Mobile Equipment (hereafter

in this resolution referred to as the ‘‘Convention’’) and the Protocol

to the Convention on International Interests in Mobile Equipment

on Matters Specific to Aircraft Equipment (hereafter in this resolution referred to as the ‘‘Protocol’’), concluded at Cape Town, South

Africa, November 16, 2001 (T. Doc. 108– 10), subject to the declarations of section 2 and section 3.

SEC. 2. DECLARATIONS RELATIVE TO THE CONVENTION.

The advice and consent of the Senate under section 1 is subject

to the following declarations relative to the Convention:

(1) Pursuant to Article 39 of the Convention—

(A) all categories of non-consensual rights or interests

which under United States law have and will in the future

have priority over an interest in an object equivalent to

that of the holder of a registered international interest

shall to that extent have priority over a registered international interest, whether in or outside insolvency proceedings; and

(B) nothing in the Convention shall affect the right of

the United States or that of any entity thereof, any intergovernmental organization in which the United States is a

member State, or other private provider of public services

in the United States to arrest or detain an aircraft object

under United States law for payment of amounts owed to

any such entity, organization, or provider directly relating

to the services provided by it in respect of that object or

another object.

(2) Pursuant to Article 54 of the Convention, all remedies

available to the creditor under the Convention or Protocol

which are not expressed under the relevant provision thereof

to require application to the court may be exercised, in accordance with United States law, without leave of the court.

SEC. 3. DECLARATIONS RELATIVE TO THE PROTOCOL.

The advice and consent of the Senate under section 1 is subject

to the following declarations relative to the Protocol:

(1) Pursuant to Article XXX of the Protocol—

(A) the United States will apply Article VIII of the Protocol;

(B) the United States will apply Article XII of the Protocol; and

(C) the United States will apply Article XIII of the Protocol.

(2)(A) Pursuant to Article XIX of the Protocol—

(i) the Federal Aviation Administration, acting through

its Aircraft Registry, FAA Aeronautical Center, 6400 South

6

MacArthur Boulevard, Oklahoma City, Oklahoma 73125,

shall be the entry point at which information required for

registration in respect of airframes or helicopters pertaining to civil aircraft of the United States or aircraft to

become a civil aircraft of the United States shall be transmitted, and in respect of aircraft engines may be transmitted, to the International Registry; and

(ii) the requirements of chapter 441 of title 49, United

States Code, and part 49 of title 14, Code of Federal Regulations, shall be fully complied with before such information is transmitted at the Federal Aviation Administration

to the International Registry.

(B) For purposes of the designation in subparagraph (A)(i)

and the requirements in subparagraph (A)(ii), information is

transmitted at the Federal Aviation Administration in accordance with procedures established under United States law.

(C) In this paragraph, the term ‘‘civil aircraft of the United

States’’ has the meaning given that term in section 40102(17)

of title 49, United States Code.

7

VIII. APPENDIX

ECONOMIC TREATIES

CONTENTS

Page

Aviation Working Group, letter with appendices, to Chairman Richard G.

Lugar, stating support for the Cape Town Convention and the Aircraft

Protocol, dated March 29, 2004 ......................................................................... 31

Donnelly, Hon. Shaun E., Acting Assistant Secretary of State, Bureau of

Economic and Business Affairs, U.S. Department of State, Washington,

DC ........................................................................................................................ 9

Prepared statement ........................................................................................ 11

Response to an additional question for the record from Senator Lugar 27

Responses to additional questions for the record from Senator Biden ...... 28

General Electric Company, GE Aircraft Engines, statement submitted for the

record by David L. Calhoun, president and chief executive officer, dated

March 29, 2004 ................................................................................................... 32

Lugar, Hon. Richard G., U.S. Senator from Indiana, opening statement ......... 7

Pratt & Whitney, a United Technologies Company, letter to Chairman Richard G. Lugar, stating support for the Cape Town Convention and the Aircraft Protocol, dated March 30, 2004. ............................................................... 33

Rosen, Hon. Jeffrey, General Counsel, U.S. Department of Transportation,

Washington, DC ................................................................................................. 17

Prepared statement ........................................................................................ 18

THURSDAY, APRIL 1, 2004

U.S. SENATE

COMMITTEE ON FOREIGN RELATIONS,

Washington, DC.

The committee met, pursuant to notice, at 9:30 a.m. in Room SD419, Dirksen Senate Office Building, Hon. Richard G. Lugar (chairman of the committee), presiding.

Present: Senator Lugar.

OPENING STATEMENT OF SENATOR RICHARD G. LUGAR, CHAIRMAN

The CHAIRMAN. This hearing of the Senate Foreign Relations

Committee is called to order. Today, the Foreign Relations Committee will review various economic treaties, including the Convention on International Interests in Mobile Equipment and the Protocol on Matters Specific to Aircraft Equipment. These agreements

are better known as the Cape Town Convention, because they were

negotiated in Cape Town, South Africa in 2001.

In addition, we will address protocols amending United States

Bilateral Investment Treaties with eight Eastern European nations. All of the agreements pending before us today are significant

in that they promote trade and economic cooperation.

Economic treaties and investment agreements are important

tools in generating new commercial opportunities for United States

businesses and in advancing United States foreign policy. Cooperation on the commercial front enhances our ability to work with

other nations on security and political matters. Our committee is

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committed to reviewing expeditiously the economic agreements negotiated by the administration.

The Cape Town Convention will facilitate purchasing and leasing

of large commercial aircraft and aircraft engines by foreign entities

that otherwise might be unable to arrange sufficient financing. Aircraft customers in foreign countries that implement the Convention

will be eligible for lower cost loans from the United States ExportImport Bank when they seek to buy or to lease United States commercial aircraft. These incentives to foreign customers will help

open new markets to United States aircraft manufacturers.

Simultaneously, the Convention creates internationally recognized finance rights and enforceable remedies that will improve the

security of aircraft financing. This is essential in many developing

markets where conducting large commercial transactions is risky,

and where obtaining adequate security for United States financiers

is otherwise difficult.

The Cape Town Convention was negotiated to be consistent with

United States commercial and insolvency laws, and it reaffirms existing obligations under these bodies of United States law. Ratification of the Convention by the United States likely will stimulate

other nations to ratify it, as well. Expanding the list of nations that

participate in the Convention would provide a needed boost to our

aircraft industry and to the broader goal of promoting commerce

with developing nations.

In addition to the Cape Town Convention, today we will review

protocols that amend existing Bilateral Investment Treaties, or

BITs, with eight Eastern European countries. Six of the eight nations, the Czech Republic, Estonia, Latvia, Lithuania, Poland, and

the Slovak Republic, are expected to join the European Union on

May 1, 2004, a month from now. Bulgaria and Romania are expected to join the EU in 2007.

Each of the Protocols is based on a similar understanding

reached between the United States, the European Commission, and

the subject countries. The goal of these understandings is to preserve the effect and intent of existing Bilateral Investment Treaties

between the United States and each of the subject countries after

their accession to the European Union. The protocols create a legal

framework and enhanced consultation for avoiding inconsistencies

between the BIT obligations of the eight nations and their European Union membership.

The United States supports the enlargement of the European

Union. At the same time, we believe that the continued existence

of Bilateral Investment Treaties with countries poised to join that

body will be mutually beneficial to investors on both sides of the

Atlantic. We want to encourage economic growth in these nations,

which is a key to solidifying their young democratic institutions.

We also want to encourage the growth of new capital markets

that can provide United States firms with productive business partners. It is a pleasure to welcome our panel of witnesses. Shaun

Donnelly is Acting Assistant Secretary of the State Department’s

Bureau of Economic and Business Affairs, and Jeff Rosen is General Counsel of the U.S. Department of Transportation. We look

forward to your insights on these important economic treaties.

9

And gentlemen, I would just say parenthetically that the committee has been pleased to have success on the floor following similar hearings. Your labors today hopefully will be productive in the

same way. We are very pleased that our colleagues have in fact

passed on the Senate floor the United States-Japanese tax treaty,

and likewise the tax treaty with Sri Lanka in recent days. The

former of these treaties was especially important because of action

that needed to be taken by the Japanese Diet in a timely way so

that tax years coinciding in Japan and the United States made possible very substantial savings for a large number of American

firms.

That is often the case with tax treaties, but this particular one

was large in its impact because of the size of the Japanese economy, as well as the number of ties that we have. Furthermore, although this is not a tax or commercial treaty, I am pleased to announce for the benefit of members and staff that last night, fairly

late last night, on the floor of the Senate, the IAEA protocol was

passed. This is the International Atomic Energy Protocol, which

the President specifically asked for in his speech on non-proliferation at the National Defense University, just a short time ago.

I was present for the speech, in the front row, and the President

looked at me and indicated that the Senate ought to take action

promptly. We had been taking action, but it prompted me to reply

respectfully that within the President’s administration people needed to get their act together and to find a common theme, which

they did. And so all’s well that end’s well.

The process moved along swiftly, and it’s very important that the

IAEA deals, and is dealing, now with Iran, with Libya, and with

other situations that are not hypotheticals, but that in the real

world are extremely important. I mention these as successes, not

just for the committee but also for the Senate, for the country. We

are working with the administration, just as we seek to do with

you gentlemen today.

We are very, very pleased that you are here, and I would like to

call upon you, Mr. Donnelly to testify first, and then Mr. Rosen.

Let me say at the onset that your full statement to the committee

will be made a part of the record, in full. You may proceed in any

way you wish.

STATEMENT OF HON. SHAUN E. DONNELLY, ACTING ASSISTANT SECRETARY OF STATE, BUREAU OF ECONOMIC AND

BUSINESS AFFAIRS, U.S. DEPARTMENT OF STATE

Mr. DONNELLY. Thank you very much, Mr. Chairman, before I

say anything about the business, I want to thank you on behalf of

Secretary Powell and the administration for the leadership you’ve

been showing on the efforts you just mentioned, the Japan and Sri

Lanka tax treaties. I was the former U.S. Ambassador in Sri

Lanka, so I have a particular interest in that one, but the timely

action on the Japan treaty is very important and also on the IAEA

Protocol.

Mr. Chairman, I very much appreciate the opportunity to appear

here today to recommend on behalf of the administration favorable

action on the Cape Town Convention on International Interests in

Mobile Equipment, and the protocols amending eight Bilaterial InVerDate 11-MAY-2000 13:23 Jul 16, 2004 Jkt 000000 PO 00000 Frm 00009 Fmt 6602 Sfmt 6602 CAPE SFRELA2 PsN: SFRELA2
10

vestment Treaties pending before the committee. I’d add parenthetically that as a fellow Hoosier, I particularly appreciate the

opportunity to appear before you, Mr. Chairman.

The CHAIRMAN. Very nice to have you here.

Mr. DONNELLY. Well, thank you, sir. I’m accompanied by my college from the Department of Transportation, General Counsel Jeff

Rosen, representatives from the Export-Import Bank, the Federal

Aviation Administration, and industry representatives. We appreciate very much the committee’s interest in these treaties as demonstrated by the prompt scheduling of this hearing.

As you know, Mr. Chairman, the administration is dedicated to

facilitating trade and the expansion of commerce across all borders.

And the treaties we’re considering today will promote expanded

trade and investment, support American companies, create American jobs, and advance our economic interests.

Mr. Chairman, the Cape Town Convention on International Interest in Mobile Equipment and the related protocol on Aircraft

Equipment will extend modern commercial finance laws already in

place in the U.S., to international transactions involving high value

mobile equipment. This treaty will make available the benefits of

these finance laws to our trading partners all over the world resulting in lower risks, and an expanded array of credit services, thereby increasing business transactions, manufacturing activity, and

employment growth.

The Convention and Protocol are fully supported by the U.S. industry, and the key government agencies involved, and the negotiating process has really been a model of public, private partnership. All Federal agencies with interest in this treaty, the Departments of State, Transportation, Commerce, the FAA, and the U.S.

Export-Import Bank worked very closely with the affected private

sector to ensure that U.S. positions were in line with the needed

results.

Mr. Chairman, we respectively request Senate ratification of this

Convention and Protocol. These instruments represent a positive

step forward in international commercial law and in our economic

and commercial interests. Early Senate approval will reaffirm U.S.

leadership in this key area.

Mr. Chairman, I’d now like to turn to the second item of business

before the committee today, as you summarized, our Bilateral Investment Treaties with acceding and candidate countries to the European Union. Bilateral Investment Treaties or BITs are a key part

of the framework for U.S. investment in eight of the countries that

are now seeking membership in the EU, the Czech Republic, Estonia, Latvia, Lithuania, Poland, and the Slovak Republic, all of

which will join the EU on May 1, as well as Bulgaria, and Romania

which are candidates, as you said, for accession in 2007.

During the last 2 years BITs have afforded important protections

to U.S. investors in these countries. U.S. investors in turn have

played an important role in those countries’ economic transformation. U.S. investment in the region will benefit even more

once these countries accede to the EU, as enlargement fosters

stronger regional economic integration and expanded economic opportunities.

11

However, certain aspects of the Bilateral Investment Treaties

may conflict with obligations these countries will take on upon

entry into the European Union. Under EU law member states are

required to bring their commitments under preexisting international agreements into conformity with EU law. In addition, the

acts of accession of these countries acceding on May 1 require that

prior to that time they either eliminate any such incompatibilities

or withdraw from such agreements.

Therefore, to the extent necessary to maintain compatibility with

EU legal obligations, we were willing to make adjustments in certain provisions of these BITs in a form compatible with EU obligations in order to preserve the vital protections that these treaties

otherwise provide for U.S. investors.

In addition, we also obtained important assurances from the European Commission about the protection of existing U.S. investors

in these countries, and the right under the E.C. treaty of U.S. investors, once they are established in one EU member state, to invest onward without hindrance in other members of the EU. When

viewed together with the benefits of enlargement, these steps actually represent a significant gain for U.S. investors.

Mr. Chairman, in closing, I would say again that the Protocols

amending the Bilateral Investment Treaties and the Cape Town

Convention under consideration today will help grow the American

economy, produce new jobs, and strengthen economic relations with

new and existing trading partners. We believe that expanding markets overseas is good for American entrepreneurs and American

workers. The amendments to the BITs will support continued U.S.

investment and growth in a large European Union. And the Cape

Town Convention will facilitate financing the sale of major American products to the four corners of the globe, particularly in the

developing world.

We urge your committee to take prompt and favorable action on

these treaties. I thank the committee and you, Mr. Chairman, for

its continuing interest in these matters. And the members and staff

for devoting the time and attention to review these treaties so

promptly. I’d be very happy to try and answer any questions that

you may have. Thank you.

[The prepared statement of Mr. Donnelly follows:]

PREPARED STATEMENT OF HON. SHAUN E. DONNELLY

Mr. Chairman and distinguished Members of the Committee, I appreciate the opportunity to appear today at this hearing to recommend, on behalf of the Administration, favorable action on the Cape Town Convention on International Interests

in Mobile Equipment and on the Protocols amending eight Bilateral Investment

Treaties that are pending before this Committee. We appreciate the Committee’s interest in these treaties as demonstrated by the scheduling of this hearing.

The Administration is dedicated to facilitating trade and the expansion of commerce across all borders. We seek to accomplish this through a number of means.

We recently concluded negotiating free trade agreements with our neighbors in Central America and the Dominican Republic, as well as with Morocco and Australia

and certainly hope these agreements will receive favorable consideration from the

Congress. The treaties we are considering today will also promote expanded trade

and investment, support American companies and advance our economic interests.

Mr. Chairman, the Cape Town Convention on International Interests in Mobile

Equipment, and the related Protocol on Aircraft Equipment, will extend modern

commercial finance laws, already in place in the U.S., to international transactions

involving high value mobile equipment. This treaty will make available the benefits

of these finance laws to our trading partners all over the world, resulting in lower

12

risks and making available an expanded array of credit services. This, in turn, will

increase business transactions, manufacturing activity and growth in employment.

The eight Bilateral Investment Treaties, or BITS as they are frequently called,

are a key part of the machinery that established a framework for U.S. investment

in countries that are now seeking membership in the European Union. U.S. investors have played an important role in the economic transformation of the Czech Republic, Estonia, Latvia, Lithuania, Poland, and the Slovak Republic, which will join

the European Union (EU) on May 1—as well as with Bulgaria and Romania, which

are candidates for EU accession in 2007. During the last few years, these BITs have

provided a stable framework for investment and afforded important protections to

U.S. investors in these countries. U.S. investment in the region, in turn, will benefit

even more once these countries accede to the EU, as enlargement fosters stronger

regional economic integration and expanded economic opportunities. However, certain aspects of these treaties may conflict with obligations these counties will take

on upon entry into the European Union. Following lengthy and productive negotiations with the European Commission and with the acceding and candidate countries, we are submitting for your consideration, Protocols to amend our BITs with

these nations, which will preserve many of the benefits of the original treaties in

a form compatible with their accession to the EU.

CAPE TOWN CONVENTION—WHAT IS IT?

Mr. Chairman, the President transmitted the Cape Town Convention and the related Protocol on Aircraft Equipment to the Senate on November 5, 2003. There is

a detailed explanation of the Convention and Protocol as well as a chapter-by-chapter analysis in the Report by the Secretary of State, attached to the President’s

transmittal of the Convention. While it is not summarized here we will be happy

to respond to any questions the Committee may have.

The Convention and Protocol will extend modern commercial finance laws, already in place in the United States, to international transactions in other countries.

These laws are a proven quantity and have worked well in our capital markets and

in international transactions involving high value mobile equipment—including aircraft and related equipment—the specific concern of this Protocol. This Convention

will increase for many other countries the availability of credit and lower the risks

of commercial credit, thereby expanding business activity in sectors affected by this

treaty. This treaty will directly support increased manufacturing and employment

in aircraft frame production, avionics, aircraft engines, aircraft parts, supplies and

services. This treaty will have a marked impact on the markets for these products

and services in developing and emerging countries, where the greatest expansion in

sales is expected to occur over the next 10 to 20 years. This treaty will make assetbased financing available in these emerging countries where today such commercial

law and the associated credit may not be adequate and where credit and country

risk are obstacles.

The Cape Town Convention does this by adopting modern asset-based financing

and assignment of payment rights financing concepts. These principles are reflected

in the U.S. Uniform Commercial Code (UCC), which grants enhanced legal rights

in the aircraft (or other mobile items) rather than relying on company or country

risk. This permits the lender to compensate for other factors that would drive risk

and credit cost up or sharply limit credit altogether and has fueled commercial finance in the United States, in particular aircraft finance. As a result the U.S. is

the preferred finance market for aviation in the world.

The Convention and Protocol are fully supported by industry and the key government agencies involved. The negotiation process can be seen as a model for publicprivate sector partnership. All federal agencies concerned with this treaty: the Departments of State, Transportation, Commerce, and the Federal Aviation Administration (FAA) and U.S. Export-Import Bank, worked closely with the affected private sector. These included manufacturers, suppliers, secured lenders, financial lessors, aircraft leasing organizations, credit rating organizations, aircraft registry interests and others. This was done in order to be sure that U.S. positions were in

line with needed results. Key associations such as the Air Transportation Association (ATA), the Aircraft Working Group (AWG), the Aircraft Title Lawyers Association (ATLA) and others have also supported this Convention.

The Convention will come into force April 1, 2004, (coincidentally the date of this

Hearing) with three ratifying States. However, the Convention will not apply to aircraft until the Protocol also comes into force, which requires ratification by eight

States. Currently, four countries have ratified the Convention and Protocol. We expect that four additional ratifications are likely to occur by the fall, and the Protocol

is expected to come into force by the end of calendar year 2004.

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WHY DO WE NEED IT?—THE IMPORTANCE OF U.S. COMMERCIAL LEADERSHIP

Mr. Chairman, the U.S. is widely recognized as the leader of this effort and the

timing of Senate action and early U.S. ratification will be a powerful signal of our

strong support for the Convention and Protocol. Early ratification will position the

U.S. to fully protect the considerable interests our industries have in assuring that

the early stages of implementation are handled correctly. U.S. manufacturing and

financing interests have placed strong importance on early ratification in order to

provide a boost in sales in aircraft frames and engines. With a sharp and severe

downturn in aircraft and aircraft engine sales in the last several years, reviving this

market has taken on much greater importance. The treaty will facilitate the acquisition of newer, safer aircraft and help developing countries without private capital.

The prospect that this new treaty will be in place in the near future has already

been reflected in the U.S. Export-Import Bank’s preferential exposure fee terms for

borrowers from countries that ratify and implement the Convention and Protocol.

Several major sales of U.S. equipment have been made or will be made based on

the expectation of other countries that the U.S. will ratify the treaty.

Mr. Chairman, there are other aspects to the Convention that should be noted.

First the negotiation of this Convention was a part of a multi-year effort by the Department of State, with other agencies and the private sector, to conclude new

agreements reflecting modern commercial law already in place in the U.S. The purpose is not to export our laws, but rather to export market-tested financing concepts, which can serve to increase economic capacity in States at all levels of development. We have been joined in that effort by a number of international financial

institutions. This has led to the completion also in 2001 of the new United Nations

Commission on International Trade Law (UNCITRAL) Convention on accounts receivable financing, negotiated in parallel with the Cape Town Convention and which

the United States signed on December 30, 2003; the 2002 Organization of American

States (OAS) new Model Inter-American Law on secured Finance, and the 2002

Hague Conference Convention on Securities Intermediaries. We believe that adoption of these instruments can significantly increase economic capacity, especially in

developing countries.

Finally, Mr. Chairman there is the significance of holding the diplomatic conference itself in South Africa. As stated by South African officials at the outset of

the Cape Town Conference in October 2001, ‘‘this marks the first time that a multilateral negotiation has taken place on complex commercial law in the sub-Saharan

region.’’ The decision to do that was taken by the cohosts of the Conference,

UNIDROIT and the International Civil Aviation Organization (ICAO), with the support of the U.S. government. The State Department hopes this will be a precedent

that will lead to more active participation by major developing countries in commercial law reform.

PROCEDURAL AND IMPLEMENTATION ISSUES

To obtain the full benefits of the Convention and Protocol, the U.S. needs to ratify

both. To fully implement the Protocol, the U.S. must also enact technical amendments to FAA authority concerning registry functions under the Protocol. These

amendments were transmitted last November to Congress by Secretary of Transportation Norm Mineta. They have been vetted through the Departments of Transportation, State, and Commerce and are supported by aircraft and engine manufactures, air finance interests, and other key associates. We are hopeful for timely action on these amendments, but if they are not enacted by the time the Senate acts

on the Treaty, the U.S. could deposit the instrument of ratification to the Convention itself, but postpone depositing the instrument for the Protocol until the amendments are enacted.

The fmancing provisions on secured interests do not require any implementing

legislation, state or federal, since the basic concepts of the Convention and Protocol

were drawn from the uniform state law in the U.S. (Uniform Commercial Code Article 9 on secure finance). To assure coordination, experts from the National Conference of Commissioners on Uniform State Laws and the American Bar Association’s (ABA) Business Law Committee have been closely involved at all stages during the development of this legislation. The ABA’s House of Delegates has endorsed

early ratification of the new treaty system.

There are no budget implications or appropriations required. There is no cost to

the government for implementation of the private transactional financing provisions

and we anticipate only minor cost to set up the FAA interface to the new registry

system, which will be absorbed in the FAA’s regular operating budget for the

Monroney Center at Oklahoma City.

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The Convention and Protocol permit optional declarations; several are recommended for the United States upon ratification and are listed in the Report

transmitted to Congress. These optional declarations preserve our existing fmancing

system and designate the FAA as the entry point for the U.S. filings in a new international registry.

The Convention and Protocol have specific provisions that intersect with certain

other conventions. But neither will have any effect on U.S. export and technology

controls or regulatory procedures relating to national security that would otherwise

apply to such a transaction.

Mr. Chairman, we respectfully request Senate ratification of the Convention and

Protocol. These instruments represent a positive step forward in international commercial law and are in our economic and commercial interest. Early Senate approval

will reaffirm U.S. leadership in this area.

U.S. BITS WITH EU ACCEDING AND CANDIDATE COUNTRIES

Mr. Chairman, I would like to now turn to the second item of business before the

Committee today, our bilateral investment treaties with EU acceding and candidate

countries. U.S. investors have played an important role in the economic transformation of Eastern Europe. U.S. bilateral investment treaties (or BITs) with six

acceding countries, the Czech Republic, Estonia, Latvia, Lithuania, Poland, and the

Slovak Republic, and two candidate countries, Bulgaria and Romania, have provided

a stable framework for investment and afforded important protections to U.S. investors. It is for this reason we intend to preserve these treaties as these countries become new members of the European Union. U.S. investors in the region, in turn,

will benefit from these countries’ accession to the EU, as enlargement will foster regional economic integration and expand the markets for U.S.-owned firms.

Member States of the European Union, however, are required under EU law, including the Treaty Establishing the European Community (the EC Treaty), to take

steps to bring their commitments under pre-existing international agreements into

conformity with their obligations as members of the EU. In particular, the Acts of

Accession of the countries that will become members of the EU on May 1 of this

year require that, prior to that time, they either eliminate any incompatibilities between pre-existing international agreements and obligations of EU membership, or

withdraw from such agreements.

As a result of discussions that began in early 2002, a political understanding was

reached on September 22, 2003, among the United States, the European Commission and the six acceding and two EU candidate countries. It provides a roadmap

for avoiding incompatibilities between these countries’ obligations as EU Member

States and their obligations under their BITs with the United States. The understanding not only sets forth how the BITs should be amended, but, as described

later in this testimony, it also secures in the context of future EU measures acknowledgments from the European Commission regarding continued consultations

and the protection of existing investments, which could be of significant importance

to the United States and to U.S. investors.

The specific aspects of the U.S. BITs that raised issues of compatibility are:

• first, the non-discrimination provisions (national treatment, most-favored-nation

treatment, and the exception to nondiscrimination obligations for benefits accorded investors of other countries under obligations arising from a BIT party’s membership in a customs unions or free trade area);

• second, the disciplines on the use of performance requirements; and

• third, the obligation not to restrict capital movements.

By our willingness to make certain adjustments and political commitments in

these areas, we can preserve the vital protections that these treaties otherwise provide for U.S. investors (for example, protections regarding expropriation, fair and

equitable treatment and full protection and security, temporary entry of key personnel, and binding international arbitration). Moreover, we also obtained important

assurances from the European Commission about the protection of U.S. investors in

these countries in two key contexts: first, where U.S. investors seek to invest onward throughout the rest of Europe, and second, with regard to the Commission’s readiness to consult with us when the Commission is considering proposals that

might affect the rights of U.S. investors not only in these countries but throughout

Europe.

THE BITS’ NON-DISCRIMINATION PROVISIONS

U.S. BITs include a broad commitment to afford covered investments the better

of national treatment and most-favored-nation (MFN) treatment. However, they perVerDate 11-MAY-2000 13:23 Jul 16, 2004 Jkt 000000 PO 00000 Frm 00014 Fmt 6602 Sfmt 6621 CAPE SFRELA2 PsN: SFRELA2
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mit the Parties to take exceptions to these obligations in specific sectors, and with

respect to specific matters, provided the Parties identify them in an annex to the

treaty. In these particular BITs, the United States took annex exceptions to national

treatment, and in some cases to MFN, for such sectors as air transport; ocean and

coastal shipping; energy and power production; radio, television and communications; satellite ownership; ownership of real property; provision of telephone and

telegraph services; mining on the public domain; maritime and maritime-related

services; and primary dealership in U.S. Government securities.

In contrast, however, these acceding and candidates countries for EU membership

typically listed few, if any, sectors or matters as excepted from national treatment

or MFN treatment in their respective annexes. For example, the Czech and Slovak

BITs only list ownership of real property and insurance as sectors where measures

that do not conform with the national treatment obligation may be taken by these

countries. They list no sectors as excepted from the MFN obligation.

Our discussions with the European Commission, and the acceding and candidate

countries, revealed a number of areas where EU requirements could conflict with

the BITs’ national treatment and/or MFN obligations. Thus, the amendments to

these BITs identify additional sectors or matters with respect to which exceptions

will be allowed for the new EU Member States. However, they are explicit in stating

that exceptions are allowed only to the extent necessary to meet EU legal obligations. The sectors in which these new exceptions are allowed are, with regard to national treatment: agriculture, audio-visual, securities, insurance and other financial

services, fisheries, hydrocarbons, subsidies, air transport, inland waterways transport, and maritime transport. New exceptions are also allowed with regard to MFN

for agriculture, audio-visual and hydrocarbons.

Another important aspect of the amendments is that they carve out from these

new exceptions existing investments of U.S. firms for a period of either ten years

from the date of the relevant measure, or twenty years after the entry into force

of the BIT, whichever is later. In addition, the amendments provide that no exception applies to the extent that it would require, in whole or in part, divestment of

an existing investment.

In addition to concerns in these areas, the European Commission was concerned

about measures that might create advantages for firms established in EU and nonEU countries as a result of liberalization within the EU or between the EU and

other countries that might not be available to U.S.-owned investments. In particular, the Commission was concerned that the acceding and candidates countries—

once they become Member States—may be obligated under EU law to accord preferential treatment to investors from other EU members or from non-EU countries

that have a special relationship with the EU, but not to U.S.-owned enterprises.

Moreover, the Commission thought additional uncertainty arose because Article 48

of the EC Treaty operates to entitle any firm, once established in accordance with

the law of a Member State, to be treated in other EU members as a national of a

Member State for purposes of the EU Treaty’s guarantees on the right of establishment in any EU Member State.

Thus, because of the Commission’s concerns and its desire to avoid uncertainty

in this area, we also agreed to address the BIT provision called the ‘‘free trade area/

customs union exception.’’ This provision provides that the BITs’ non-discrimination

obligations do not apply to advantages accorded by a BIT party to third countries

by virtue of that party’s obligations deriving from membership in a free trade area

or customs union. We thus included in the Protocols an acknowledgement that the

exception applies to obligations that derive from an economic integration agreement

that includes a free trade area or customs union, such as the European Union, and

also that it applies to advantages accorded to nationals or companies of any third

country by virtue of such obligations.

By acknowledging this, we also created the opportunity to obtain from the European Commission, as part or our political understanding, a clarification of its understanding of the meaning of Article 48 of the EC Treaty: a clarification of the application of Article 48 to foreign-owned companies that will be beneficial to any U.S. firm

that meets its conditions and wishes to use an investment in one EU Member State

as a platform for investment onward in other EU Member States. The Commission’s

clarification of this provision affirms that such firms will be free of restrictions on

establishment elsewhere in the EU.

THE BITS’ PERFORMANCE REQUIREMENTS PROVISIONS

The U.S. BITs with these countries contain a provision that prohibits the imposition of performance requirements upon an investor as a condition to establish, expand, or maintain an investment. Performance requirements typically take the form

16

of requirements that goods be exported, or that goods or services be purchased locally, but similar requirements would also be prohibited. Because EU law includes

certain requirements in the agriculture or audio-visual sectors that might be construed to be prohibited performance requirements, the amendments provide that the

relevant provision of each BIT will not limit the ability of our BIT partners to impose performance requirements in these sectors, to the extent they are necessary to

comply with EU law.

TREATMENT OF CAPITAL MOVEMENTS

Each of the BITs with the acceding and candidate countries obligates the BIT parties to allow capital and other investment-related transfers to be made freely, and

without delay, into and out of their respective territories. The EC Treaty, however,

provides authority for the EU Council of Ministers to restrict capital movements either by adopting temporary safeguards in exceptional circumstances involving serious difficulties in the operation of the economic or monetary union, or by imposing

financial sanctions as a result of a common position or joint action in relation to

a common foreign or security policy. The European Commission was thus concerned

that the obligations in the BITs would impinge on EU authorities in this regard and

create complications should it ever become necessary to exercise this authority. Because the EU has never exercised this authority, we were unwilling to make any

amendments to our BITs to address this concern. However, we acknowledged in the

political understanding that the general exception addressing essential security interests in our BITs preserves the right of a party to apply measures that it considers necessary to protect its own essential security interests, and that good faith

reliance on it would afford the BIT parties protection. We also acknowledged that

essential security interests may include those deriving from membership in the EU.

Finally, given the sensitivity of this issue for the European Commission, we expressed our willingness in the political understanding to continue consultations on

this issue in the context of ongoing discussions between the Commission and Member States that have international agreements with other third countries that include provisions similar to those contained in these U.S. BITs.

FUTURE DEVELOPMENTS IN EU LAW

Finally, the European Commission was concerned that, as the process of harmonization within the EU continues and extends to other sectors, EU measures might

be enacted in the future that raise questions of compatibility with respect to obligations of our BITs. In response to this concern, we agreed on an amendment to the

BITs that provides that the BIT parties agree to consult promptly whenever either

party believes that steps are necessary to ensure compatibility between the BIT and

the EC Treaty. In addition, in the context of the political understanding, the United

States and the Commission expressed their willingness to consult through established means when new EU measures affecting foreign investment are under consideration and raise questions of compatibility with pre-existing international agreements between the United States and EU Member States.

The understanding also acknowledges the importance of protecting existing investment in this context and expresses the intent that, whenever the accession of

new Member States raises questions regarding the implementation or application of

EU measures that would affect U.S. investments, or the imposition of new measures

restricting foreign investment within the EU generally raises questions with respect

to the impact on existing investments, consultations would be undertaken with the

objective of protecting existing investment.

To sum up, as a result of our willingness to address European Commission concerns by making these few but important amendments to our BITs, we have preserved the broader benefits these treaties afford U.S. investors. The amendments do

not go beyond what, upon accession, will be legally required of our BIT partners

under EU law. In addition, we have exempted existing U.S. investments from the

application of new exceptions to national treatment and MFN under these BITs for

at least ten years, and proscribed the application of any measure that would require

divestiture in whole or part of a U.S. investment. We have secured Commission acknowledgment of the principle of protecting existing U.S. investments generally

when new EU measures are under consideration, and established a basis for consultations when new EU measures are under consideration that may affect U.S. investors. And finally, we have obtained an important clarification from the European

Commission on the EC Treaty’s protection of the right of U.S. investors, once they

are established in one EU Member State, to invest onward without hindrance in

other members of the EU. When viewed in combination with the benefits U.S. investors will realize when these countries become members of the EU, and being mindVerDate 11-MAY-2000 13:23 Jul 16, 2004 Jkt 000000 PO 00000 Frm 00016 Fmt 6602 Sfmt 6621 CAPE SFRELA2 PsN: SFRELA2
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ful that the Commission initially sought termination of our BITs, the steps we have

taken actually represent a significant gain for U.S. investors.

CONCLUSION

Mr. Chairman, in closing, I end my testimony much as I opened it. The Protocols

for the eight Bilateral Investment Treaties under consideration today and the Cape

Town Convention support the Administration’s policy to expand trade and investment globally. We believe that expanding markets overseas is good for America and

American workers. The amendments to our BITs will support continued U.S. investment and growth in an expanding Europe. The Cape Town Convention will facilitate

financing the sales of major American products to the four corners of the globe, particularly in developing countries, which are looking to the U.S. for leadership.

We urge the Committee to take prompt and favorable action on the treaties before

you today. Such action will help grow the American economy and produce new jobs,

and strengthen economic relations with new and existing trading partners. I thank

the Committee for its continuing interest in these matters and the Members and

staff for devoting the time and attention to the review of these treaties. I would be

happy to try and answer any questions the Members may have.

The CHAIRMAN. Mr. Rosen.

STATEMENT OF HON. JEFFREY ROSEN, GENERAL COUNSEL,

U.S. DEPARTMENT OF TRANSPORTATION

Mr. ROSEN. I have provided a written statement and I thank you

for accepting that in the record of today’s hearing. In my oral remarks, I would like to highlight two aspects of the Cape Town Convention and the process that brought it to fruition. The first of

these is the broad array of benefits that this Convention will

produce, both here at home, and abroad.

For countries such as the United States, which manufacture airframes, aircraft engines, and helicopters, there will be increased exports as the number of orders for this equipment increases. Increased exports will boost the economy and translate into more

jobs. This job stimulus will be felt not just by the major manufactures, such as Boeing, GE, and United Technologies, but also by

smaller companies that make the parts and provide services for

these companies.

In addition, the Convention and Aircraft Protocol will benefit the

companies that provide the capital that finance the sale of such

equipment around the world. U.S. financial institutions are of

course major players in aircraft financing. The creditor protections

provided for by the Convention and Protocol will benefit them by

significantly reducing the risk they now incur when financing aircraft into countries whose laws do not meaningfully protect creditors in the event of default or insolvency.

It is this risk reduction in turn which will bring significant benefits to many countries and airlines in the world. These benefits

take the form of lower financing charges, and are fresh sources of

capital for aircraft financing. And this is particularly of benefit to

developing countries whose carriers have had to pay high interest

rates, or who have not been able to access the commercial credit

markets at all because of their risk.

In addition, in terms of the benefits, the world’s skies will become safer and cleaner as newer equipment is acquired and

brought into service. Many countries’ airlines are operating older,

less sophisticated aircraft. The full implementation of this Convention and Protocol should hasten the replacement of this equipment

with state-of-the-art aircraft.

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Now, the second item that I want to highlight is the extraordinary collaborative nature of this project since its inception. It is

an example of what a government industry partnership can

produce when done well. At each step of the negotiations, the State

Department, the Transportation Department, the U.S. Export-Import Bank, along with U.S. commercial law financing experts,

worked closely with representatives from industry, financiers, and

aircraft registry interests.

In addition, at all major stages of the process, the U.S. position

on issues was coordinated through the interagency group on international aviation, whose membership in addition to those agencies

I mentioned includes the Departments of Commerce and Defense,

as well as airport, general aviation, and commercial aviation trade

associations.

Furthermore, the U.S. negotiators maintained an ongoing dialog

with the state law commissioners, the Aircraft Title Lawyers Association, the Air Transport Association, and representatives of the

American Bar Association section of business law. So it is easy to

understand why the product of all this effort and coordination has

produced a Convention and aircraft Protocol with so many benefits

and with no apparent opposition to its ratification.

In sum we believe the merits of the Convention and Protocol are

compelling and the process that brought it about was a model collaboration between U.S. Government agencies, international organizations, private sector stake holders, and sovereign governments

worldwide. Prompt ratification by the United States will enable us

to begin to achieve its benefits.

So I thank the committee for its interest and you personally, Mr.

Chairman, for the attention that has been given to these matters

and I would be pleased to answer any questions you may have.

[The prepared statement of Mr. Rosen follows:]

PREPARED STATEMENT OF HON. JEFFREY ROSEN

THE 2001 CAPE TOWN CONVENTION ON INTERNATIONAL INTERESTS IN MOBILE

EQUIPMENT AND PROTOCOL ON MATTERS SPECIFIC TO AIRCRAFT EQUIPMENT

Chairman Lugar and Members of the Committee:

It is with great pleasure that I appear before you today, along with Shaun Donnelly, Acting Assistant Secretary of State for Economic and Business Affairs, to

urge, on behalf of the Administration, that this Committee recommend that the Senate give its advice and consent to ratification of the Cape Town Convention and the

Protocol on Matters Specific to Aircraft Equipment.

CAPE TOWN CONVENTION OF 2001

The Cape Town Convention and Aircraft Protocol, when fully implemented, will

bring great economic benefits to a variety of U.S. constituencies while helping to facilitate the modernization of airline fleets around the world. The benefits will be

truly global. Developing countries and their airlines will be able to upgrade their

fleets at reduced financing costs. The world’s skies will be safer and cleaner as

newer, state-of-the-art aircraft are acquired and brought into service. And for countries that manufacture aircraft there will be increased exports as the number of aircraft orders increases. Increased exports will also mean more jobs for exporter countries such as the United States.

The Cape Town Convention and Aircraft Protocol were negotiated under the auspices of the International Institute for the Unification of Private Law (UNIDROIT),

an intergovernmental organization focused on harmonizing the commercial law of

nations, and the International Civil Aviation Organization (ICAO), the United Nations body responsible for international aviation. It was concluded in November

2001 at a Diplomatic Conference at Cape Town, South Africa, and has been signed

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by 28 states, including the United States. The Convention, coincidentally, enters

into force today, April 1. We expect that the Aircraft Protocol will come into force

late this year.

The Convention is designed flexibly so to be able to operate in conjunction with

protocols covering different types of high value mobile equipment. The Convention

itself sets out the basic terms and provisions that underlie the regime. However, it

is not equipment specific and in fact needs a protocol particular to a given type of

equipment in order to operate. The Protocol before you today applies to airframes,

aircraft engines and helicopters above a minimum size or power threshold. In addition to this Aircraft protocol, the Convention specifically contemplates that there

will also be protocols governing railway rolling stock and space assets. Negotiations

are at an advanced stage with respect to a protocol on railroad equipment and it

is anticipated that a diplomatic conference will be held in 2005 to adopt such a protocol. Negotiations are at an earlier stage with respect to space assets. Left open

is the possibility that additional protocols covering other types of high value mobile

equipment, may be negotiated in the future.

FEATURES OF THE CAPE TOWN CONVENTION

As a general matter, the Convention adopts the asset-based financing practices

already widely used in the United States and weaves them into an international

agreement. Specifically, the Convention establishes an ‘‘international interest’’,

which is a secured credit or leasing interest with defined rights in a piece of equipment. These rights consist primarily of 1) the ability to repossess or sell or lease

the equipment in case of default; and 2) the holding of a transparent finance priority

in the equipment.

Priority will be established when a creditor files, on a first-in-time basis, a notice

of its security interest, in a new high-technology international registry. Once an

international interest has been filed by a creditor and becomes searchable at the

international registry, that creditor’s interest will have priority over all subsequent

registered interests and all unregistered interests, with a few exceptions. The Federal Aviation Administration (FAA), which currently operates an aircraft registry,

will serve as the authorized entry point into the International Registry. This will

allow the aircraft financing practices in the United States, among the most efficient

in the world, to continue undisturbed. The International Registry will be searchable

on a 24 hour, 7 day a week basis. Fees will be charged for filing a security interest

in the International Registry and for other services connected to use of the International Registry. Such fees are expected to be very small because of the electronic

nature of the registry. Last fall, Secretary Mineta sent Congress a set of proposed

technical amendments to the FAA’s registration authority that are necessary for the

FAA to implement its functions under the Convention and Protocol. That legislation

is now pending before the House and Senate transportation authorizing committees.

The rights and enforceable remedies created by the Convention and Aircraft Protocol are designed to reduce the risk assumed by creditors in financing transactions

in many parts of the world. In many countries, the risk factor is significant because

local laws either do not protect lenders in the event of default or bankruptcy, or are

highly unpredictable. With respect to aircraft, this uncertainty is compounded by

the fact that aircraft can and do move readily between countries. It is this uncertainty that drives up the cost of aircraft financing in many countries, which is reflected in the interest rate the financier charges the debtor.

The Convention seeks to reduce this risk in a number of ways. For example, it

provides financiers with a number of key rights with respect to an aircraft financed

to an airline of a country that has ratified this Convention and Protocol. These include the right, upon default of a debtor, to deregister the aircraft and procure its

export; to take possession or control of the aircraft, or sell or grant a lease in the

aircraft; and to collect or receive income or profits arising from the management or

use of the aircraft. The extent of these rights and the speed with which they can

be exercised will be a function of the declarations a country files at the time it deposits its instrument of ratification. These declarations set out which remedies that

state will allow and the means by which the remedies can be implemented. It can

be expected that the greater the remedies a state chooses to recognize in its declarations, the greater will be its benefits.

These benefits will take the form of lower financing charges and fresh sources of

capital for aircraft financing. This will particularly benefit developing countries

whose carriers have had to pay high interest rates or who have not been able to

access the commercial credit markets at all because of their credit risk. For those

countries that have historically financed aircraft acquisitions through the use of sovVerDate 11-MAY-2000 13:23 Jul 16, 2004 Jkt 000000 PO 00000 Frm 00019 Fmt 6602 Sfmt 6621 CAPE SFRELA2 PsN: SFRELA2
20

ereign guarantees, the ability to make use of asset-based financing will allow such

guarantees to instead be used for other national purposes.

ICAO will supervise the International Registry. A Preparatory Commission, established by the diplomatic conference and comprising 20 countries including the

United States, has been doing the groundwork needed to get a registry system in

place. In particular, working with ICAO, the Preparatory Commission prepared a

request for proposals so to select an entity to administer the registry. The Request

went out earlier this year and a selection by the Preparatory Commission will likely

be made next month. It is expected that the International Registry will be operational in the latter part of 2004.

CONCLUSION

In conclusion, I would like to underscore the importance of prompt ratification.

Ratification by the United States will spur other countries to ratify, thus accelerating the entry into force of the agreements and hasten the realization of benefits

to our economy, our exporters, the economic recovery of international aviation, the

developing world, and the safety of aviation. I thank the Committee for its interest

and attention to these matters and would be pleased to answer any questions you

may have.

The CHAIRMAN. I thank both of you for that testimony. I would

just note, Mr. Donnelly, that in your testimony you point out that

the Conventions are coming into force April 1, 2004, which you

note coincidently is the date of this hearing. With only three ratifying states aboard, however, you point out that the Convention will

not apply to aircraft until the Protocol also comes into force, so

both are necessary.

That requires ratification by eight states. Currently, four countries have ratified the Convention and the Protocol. We expect that

the four additional ratifications are likely to occur by the fall, and

that the Protocol is expected to come into force by the end of calendar year 2004.

I compliment both of you and your staffs, as well as our staff of

the Foreign Relations Committee on both sides of the aisle for

alertness to the possibilities of leadership. One reason for taking

this action, or having this hearing now in the midst of everything

else that is going on in the world, is that, as you have mentioned,

by acting in a timely way, we encourage other countries to do so.

From the United States standpoint, we think that you and the

administration have negotiated an excellent treaty that is a benefit

to the aircraft industry and perhaps to others that you have noted.

Yet all of that good work would come for naught if we fail to act.

Our dragging our feet might make other countries drag their feet,

or at least make them more reticent to step up to the plate. I thank

you for the special efforts that have come about to prepare for this

hearing, and for the body of work that you perform.

If we were in any forum other than this body, that is the U.S.

Senate, or the House of Representatives, we would be talking about

jobs. We would be talking about how to employ more Americans in

good paying jobs, and in sophisticated industries in which we are

very competitive.

Sometimes people ask, why in the Senate Foreign Relations

Committee are you involved in such mundane matters as jobs, and

American industry? Well, this is a major foreign policy issue. It’s

a major domestic issue. It’s an issue for all Americans.

What we’re talking about today is expediting the possibilities

that, as you pointed out, Mr. Rosen, the skies will be safer if there

are new aircraft with state-of-the-art safety mechanisms and abiliVerDate 11-MAY-2000 13:23 Jul 16, 2004 Jkt 000000 PO 00000 Frm 00020 Fmt 6602 Sfmt 6602 CAPE SFRELA2 PsN: SFRELA2
21

ties to handle take-offs and landings at will. So that will be a safety factor for us and for the world.

To get to that point someone must produce these aircraft and

this equipment. We’re very hopeful that it will be American workers in American plants. We believe, because we are state-of-the-art

and competitive, that there is a very good possibility that that will

be the case.

Having said all that, let me ask these technical questions of you

for the benefit of filling out our record today. First of all, Mr. Donnelly, will revision of the Bilateral Investment Treaty, as you and

I have both called the BITs, affect obligations under any other

agreements to which the United States, or the eight countries we’re

considering today, or the EU, are a party?

In other words, are there side effects, other effects that we

should take into consideration in our action on these treaties?

Mr. DONNELLY. Thank you, Mr. Chairman. First let me just endorse all of the comments that you have just made about the importance of timing and U.S. leadership on this. We really think

that as a major producer of aircraft and helicopters, the United

States is going to be a major player in this, and it’s very important

that we be at the table from the very start. And we think that our

being in a position to ratify early will help spur, as you said, Mr.

Chairman, other countries joining it.

On your specific question about, if I can call it corollary effects

of this, we do not believe that there will be any. There has been

similar issues raised by a few of the Eastern European countries

regarding other agreements totally separate, outside of this area,

more in the trade agreements area, and whether their accession to

the EU requires some adaptation in those agreements. And there’s

a separate process underway within the administration involving

the State Department, the U.S. Trade Representatives Office. But

as far as any directly related effects that would flow from these

amendments, we do not believe there are any, and it’s been very

carefully reviewed by the interagency experts, sir.

The CHAIRMAN. Let me followup with a more specific question

about the EU itself. Will these amendments to the BITs result in

increased consultation requirements by the EU? If so, how would

this benefit American industry doing business in the relevant countries? Has a formal consultation procedure been established at all

at this point?

Mr. DONNELLY. Mr. Chairman, can I take that question and get

an answer—— The CHAIRMAN. Yes.

Mr. DONNELLY [continuing]. For you for the record. I don’t want

to speak in an ad hoc way and mislead the committee.

The CHAIRMAN. It would be preferable to research the issue and

come back to us.

Mr. DONNELLY. Yes, sir. We will get you a thorough answer to

that question.

[The following response was subsequently supplied.]

As reflected in the understanding negotiated at the same time as the amendments, the United States and the European Commission made a political commitment to consult whenever new EU measures affecting foreign investment are under

consideration and raise questions of compatibility between U.S. law and pre-existing

22

international agreements between a Member State and the U.S. We further acknowledged that such consultation would take place through existing channels, for

example, through informal contacts between the Commission and U.S. officials responsible for investment, diplomatic channels, and the U.S.-EU Senior Level Coordinating Group. The political understanding reached by the U.S. and the Commission

also calls for a mutual good-faith effort to take into account the views of countries

with international agreements with the U.S.—they may be new candidates for accession or Member States—that may be affected by the contemplated measures.

We believe these consultations should have a salutary effect on U.S. business interests in the region, because they provide a means by which to head off any problems before they materialize.

Separately, in the Protocols amending the BITs that are before the committee, the

United States and each of its BIT partners agree to consult promptly whenever either party to the BIT believes that steps are necessary to assure compatibility between the BITs and the EC Treaty. In such a case, traditional diplomatic channels

would be utilized. Given that both the understanding and amendments contemplate

only established channels for these new consultation commitments, we do not contemplate creating new ones to address related issues.

The CHAIRMAN. In addition to affecting the ability of United

States firms to do business in the BIT countries, will the amendments to the BIT benefit their ability to do business throughout the

region?

Mr. DONNELLY. Yes, sir. That is one of the important benefits

that we see in this package that we have been able to negotiate.

We have gotten a clear understanding in writing from the European Commission that U.S. businesses established in one of these

six acceding countries will have the full benefits. Whether they are

previously established or to be established companies, that they

will be able to take the full benefit of being able to operate from

that base and be able to carry forward into the broader European

market, which as you know, Mr. Chairman, is a large and rapidly

expanding effort.

That was a very important issue for our business community and

one that we were able, we believe, to find a solution that represents a clear step forward for our companies.

The CHAIRMAN. Has there been a framework developed, Mr. Donnelly, for modifying existing agreements that we have with countries that are poised to join the EU?

Mr. DONNELLY. Mr. Chairman, we believe the process we have

gone through in this effort provides a framework. As you pointed

out, six of the countries are acceding in the very short term, two

others are on a somewhat slower path to accede in 2007. But the

European Union has broader plans to continue expansion as countries qualify and step forward to express their interest.

And we believe that the process that we’ve gone through, the

model that we have developed here will provide a framework for

us to use if this same issue should arise as other countries that we

have Bilateral Investment Treaties with come forward in the accession process.

The CHAIRMAN. Presumably, we’ll be closely following EU accession efforts. These go on for quite awhile, and so would not be a

surprise. On the other hand, during some other Foreign Relations

Committee hearing at some stage, other countries may come on the

horizon. I raise the question simply as a matter of precedent. Having proceeded in this way with these eight countries almost in routine fashion we wish to move ahead with others as they come in

line.

23

Mr. DONNELLY. You know, we obviously will have to deal with— Mr. Chairman, the EU does have an ambitious expansion plan in

mind. The time table will obviously be worked out between those

countries and Europe. The United States has long been on record

as supporting the process of European integration, we believe it is

in our political interest, it’s in our economic interest, and we want

to support it.

At the same time we want to make sure that our interests, particularly our economic interests are protected. So we will carry forward, I believe, a very similar process as the accession process

moves forward, and I would think that you’re quite correct that

over the coming years you may see very similar packages coming

back.

Obviously, we’ll have to study carefully each individual Bilateral

Investment Treaty and each individual country situation to make

sure that we are finding the right package that fits each particular

situation, but we believe that the general model that we have been

able to work out here will work in similar situations.

Obviously, the European Commission will be a major player in

that process, they have been the third party in this negotiation as

we’ve negotiated with each of these eight acceding countries individually. We’ve also had the European Commission fully involved

in that process, and they would be a major player as other accession candidates come forward. So I think we will be building on

this model, sir.

The CHAIRMAN. Without being too confusing, let me skip back to

the Cape Town Convention Protocol for just a moment and highlight a paragraph in your testimony that I thought was helpful for

the understanding of our members.

You’ve pointed out that the treaty will facilitate the acquisition

of newer, safer aircraft and help developing countries without private capital. The proposal that this new treaty will be in place in

the near future has already been reflected in the United States Export-Import Bank preferential exposure fee terms for borrowers

from countries that ratify and implement the Cape Town Convention and Protocol.

Several major sales of U.S. equipment have been made or will be

made based on the expectation of other countries. The United

States will ratify the treaty.

I point at the very practical basic dollars and cents issue frequently, even though the countries that we’re talking about that

might be interested in ratifying this and that may now come in because the United States is involved, may do so for these reasons.

An entity such as our Export-Import Bank suddenly becomes available to them on very favorable terms to loan them money, if there

happened to be capital shortages for these large investments in aircraft in the countries.

I mention that because frequently these treaties sort of float by.

It’s thought well and good that we were all visiting with each

other, but in this case there is a very, very practical side to this,

and it involves American institutions and specifically EX-IM Bank,

and perhaps others as the case may be. As we’ve already pointed

out, it doesn’t come into force, at least in the second instance, until

eight countries are aboard. As the United States comes aboard,

24

that might make number 4 and number 5, so the need for leadership here is once again evident.

Let me ask, Mr. Rosen, these technical questions of you. The

Convention and Protocol specifically indicate consistency with the

United States bankruptcy law. They are not intended to affect a

state’s existing insolvency system. There is no reference to the provisions of U.S. law, which specifically deals with aircraft equipment

and vessels. How, if at all, do the Convention and the Protocol

interact with those provisions? What are the potential effects of

this interaction?

Mr. ROSEN. Well, thank you, Mr. Chairman, for giving me the opportunity to address that, because one of the real positives of this

Convention is that it’s so consistent with the existing Uniform

Commercial Code that we have in the United States, in our various

States. And so as a practical matter there will not really be inconsistencies, they’ll be one new aspect in terms of the registration,

that they’ll be a single port of registration through the FAA into

the international registry, but in terms of the basic terms, this is

part of why the United States has so few declarations that will be

needed.

The basic law is extremely similar to that that already exists

under Article 9 of the Uniform Commercial Code, and so in some

instances there’s new terminology, let’s say of international interest

as opposed to security interest, but the concepts are fundamentally

the same.

And so in terms of U.S. law while this would augment and supplement it, it really will not be a significant change in terms of

what we’re already doing, but it will produce efficiencies through

the consistency that will be available in an international context to

have the kinds of rights and remedies, and the transparent priorities available for people to identify what interests exist. And the

ability to have prompt relief in the event of insolvencies that those

efficiencies, from having a clear law akin to what already exists in

the United States, will enable benefits to take place in an international sale context.

The CHAIRMAN. I appreciate your answer, which encompasses the

Uniform Commercial Code. I also appreciate the fact that it has

been adopted by all 50 of our States, and has fairly well developed

case law background now. The coincidence of the treaties that we’re

discussing today with our own Uniform Commercial Code is especially important. I thank you for underlining that.

Let me ask this question. The Convention and Protocol provide

that the FAA will have heightened responsibilities, with respect to

these additional international obligations. Is the FAA presently

equipped to handle this new responsibility. If not, what is required

to provide it with the ability to take on these new tasks?

Mr. ROSEN. Well, Mr. Chairman, let me say that while there are

some new tasks for the FAA, I don’t think that they are major or

substantial burdens, in terms of what will be required. Primarily,

the most important aspect is the operation of the entry from the

United States standpoint, of the notice filings of the interest in the

registry. And for that the FAA will need to participate and we have

asked for—the administration has asked for some amendments to

25

the—some technical amendments, really, to the FAA legislation or

statutes, I should say, to enable that.

But I think that the FAA is prepared, and the FAA has been a

participant at every phase of the process and the negotiations leading up to this and is quite ready to take on the responsibilities that

would be entailed by ratification of the Convention and Protocol.

The CHAIRMAN. Let me ask now if there are any additional items

that either of you would like to highlight for the benefit of the

record. We have your testimony in full. You have summarized your

comments. Hence, I have gone back, Mr. Donnelly, to some of your

testimony, which I felt was especially pertinent in a practical way,

in illustrating the relevance of the treaty.

For the sake of the record, do either one of you, or both, have

some final comment that you would like to make about these affairs?

Mr. DONNELLY. Mr. Chairman, thank you. I would like to just

pick up on the point that you raised about the practical effect on

the Export-Import Bank. The Export-Import Bank at a very senior

level, one of their vice presidents, Robert Morin who is here with

us today has been a full member of the negotiating team and they

have been intimately involved every step of the way.

So we think this is a case where, although this is a formal legal

treaty, it is very much grounded in the practicalities of the business world and actual deals. And I believe the Export-Import Bank

is on record as having said they are reducing their exposure fee by

33 percent, from 3 percent to 2 percent for airlines that purchase

equipment through the EX-IM Bank in countries that have signed

on to this treaty.

So I think it does have the effects that you were pointing out

about really being able to provide an impetus of increased sales,

newer aircraft, safer aircraft. This is really very much a treaty that

can have very practical benefits for us and for all the countries of

the world, and we appreciate the prompt efforts of the committee

to look at it and try to help us move it forward. Thank you very

much.

The CHAIRMAN. Mr. Morin, would you identify yourself? Thank

you for attending the hearing. Mr. Donnelly, are there others who

are here today who have been especially important in the formation of this work that should be recognized?

Mr. DONNELLY. Well, I believe—and perhaps my colleague could

do a better job, but we do have two senior FAA representatives who

have been full members of the delegation, Jeff Klang and I believe

Joe Standell, one from headquarters and one from the Oklahoma

City office which is the center of this aviation effort, and they have

been key members.

We also have Jeffrey Wool and representatives of the aircraft

group—aviation group in the private sector and members of some

of the leading companies I see in the crowd as well here today. So

I think we are—it’s a very clear indication of the broad support and

the collaboration that has been behind this effort and part of that

has obviously been the consultation process with members of your

staff, Mr. Chairman.

26

The CHAIRMAN. Well, we appreciate the attendance of each of

these public and private officials today. Putting heavier credentials

to work is what we are about.

Mr. Rosen.

Mr. ROSEN. Thank you, Mr. Chairman. I think the one additional

thing that I would like to underscore is what a win, win proposition

this particular Convention and Protocol are, because it has the benefits of—by virtue of being an efficiency enhancement of providing

benefits simultaneously to the sellers and the workers of the companies who are making and selling the products and to the borrowers who are the purchasers of the equipment at issue.

And so it’s truly one of these win, win situations, and I think it’s

in part for that reason that another important aspect of the Convention, that the aircraft Protocol is set up to be the first of what

would be several available Protocols. So the Convention is an

equipment Convention that can accommodate future Protocols, and

in that regard there are already processes underway for potential

Protocols in the future that might deal with railway rolling stock

and drill equipment, possibility space equipment, and perhaps in

the future high value mobile agricultural or construction equipment.

And so the structure of this particular Convention is one that,

because it is a win, win kind of set up, an efficiency enhancing

setup is one that I think is of great interest in a number of contexts. But this is a terrific place to begin and to demonstrate the

benefits, and as you underscored the practical benefits that are already being realized through the reduction of exposure fees and

credit costs.

And so I welcome you and your committee’s readiness to take

this up so promptly and with so much attention, and hope that

what I’ve been able to provide here today provides some help to

that.

The CHAIRMAN. Let me just say that the comment that you have

made is especially interesting. You had mentioned some very important industries that might use the same framework, with, I suppose, slight modifications of language pertinent to those industries.

Where in the grist of the mill process are these agreements? Are

they well along? How could you describe administration efforts?

Mr. ROSEN. Well, I think it’s fair to say that they’re at different

stages, that some of them are more inchoate than others, that the

ones with regard to the rail stock and rail equipment is perhaps

underway, but that these are, I think the subject of continuing negotiation processes and are something that will continue.

But in part, the success of the aircraft Protocol if countries are

able to move ahead and ratify it and take advantage of it’s benefits

will prove a model of how these things might be done.

The CHAIRMAN. I appreciate that. I’m sure that all Americans

who are listening to this record will appreciate this, because each

of these industries, for the same reasons we’re discussing the aircraft industry, have vital employment opportunities. They offer

new jobs for Americans, and new possibilities, utilizing our basic

institutions.

We wish you and your colleagues well as you all help these procedures move ahead. Let me mention that we’ll keep the record of

27

the hearing open for the rest of the day in the event that members

who were not able to attend the hearing have questions that they

may wish to submit. We hope that you would respond quickly to

such questions, as well as to the one question that you reserved,

Mr. Donnelly, earlier on, so that our record will be complete.

I want to consult closely with Ranking Member Senator Biden to

put this on the agenda of our next mark up. It is problematic simply because of the schedule of the Senate. We want to make certain

that we are all here, and that we have some reasonable chance of

getting a quorum.

It is a high priority for our committee’s activity. We would hope

to get the treaty to the Senate floor so that our colleagues, all of

them, could consider its merits. We thank both of you for coming,

as well as your staffs, and those who have supported you. Likewise,

we thank staff on both sides of the aisle here who have made this

hearing very successful. Having said that, the hearing is adjourned.

Mr. DONNELLY. Thank you, sir.

Mr. ROSEN. Thank you, sir.

[Whereupon, at 10:23 a.m., the committee adjourned, to reconvene subject to the call of the Chair.]

ADDITIONAL QUESTIONS SUBMITTED FOR THE RECORD

RESPONSE OF HON. SHAUN DONNELLY TO AN ADDITIONAL QUESTION FOR THE RECORD

SUBMITTED BY SENATOR RICHARD G. LUGAR

Question. The testimony describes a process for consultations to take place between the U.S. and the European Commission to address certain issues that may

arise in the future. Would such consultations be in addition to the procedures that

already exist or would new channels need to be created for such consultations to

take place?

What, if any, effect would such consultations have on U.S. business interests in

the region?

Answer. As reflected in the understanding negotiated at the same time as the

amendments, the United States and the European Commission made a political

commitment to consult whenever new EU measures affecting foreign investment are

under consideration and raise questions of compatibility between U.S. law and preexisting international agreements between a Member State and the U.S. We further

acknowledged that such consultation would take place through existing channels,

for example, through informal contacts between the Commission and U.S. officials

responsible for investment, diplomatic channels, and the U.S.-EU Senior Level Coordinating Group. The political understanding reached by the U.S. and the Commission also calls for a mutual good-faith effort to take into account the views of countries with international agreements with the U.S.—they may be new candidates for

accession or Member States—that may be affected by the contemplated measures.

We believe these consultations should have a salutary effect on U.S. business interests in the region, because they provide a means by which to head off any problems before they materialize.

Separately, in the Protocols amending the BITs that are before the Committee,

the United States and each of its BIT partners agree to consult promptly whenever

either party to the BIT believes that steps are necessary to assure compatibility between the BITs and the EC Treaty. In such a case, traditional diplomatic channels

would be utilized. Given that both the understanding and amendments contemplate

only established channels for these new consultation commitments, we do not contemplate creating new ones to address related issues.

28

RESPONSES OF HON. SHAUN DONNELLY TO ADDITIONAL QUESTIONS FOR THE RECORD

SUBMITTED BY SENATOR JOSEPH R. BIDEN, JR.

Question 1. Are there any related exchange of notes, official communications, or

statements of the U.S. negotiating delegation not submitted to the Senate with regard to the Convention and the Protocol, which would provide additional clarification of the meaning of the terms of the Convention and the Protocol? If so, please

provide them.

Answer. There were no exchange of notes or official communications with regard

to the meaning of the terms of the Convention and the Protocol. With regard to

statements of the U.S. negotiating delegation, an official record of the deliberations

of the Diplomatic Conference has not been issued, although we have requested an

unofficial copy from the Secretariat and we will provide that to the committee when

received. We believe that the record of the meetings will not contribute to the meaning of terms, beyond what has already been set forth in the Official Commentary.

Question 2. What is the view of the executive branch with regard to the authoritative nature of the Official Commentary issued by UNIDROIT?

Answer. The Official Commentary of the Convention and the Protocol, issued by

UNIDROIT in September 2002, is an interpretive aid. The Commentary was authorized to be issued by a formal Resolution of the Diplomatic Conference. It was produced by the appointed Rapporteur, together with the chairs of each committee of

the Conference and in close collaboration with key participating States. The United

States delegation and U.S. industry representatives reviewed every provision of the

Commentary, and are satisfied with its accuracy.

Question 3. Does the executive branch regard the Convention and the Protocol as

self-executing? Are there any provisions of either which are not self-executing?

Please be specific.

Answer. The financing and other basic provisions of the Convention and Protocol

on secured interests, transactional remedies, etc., do not require any implementing

legislation, state or federal, and to that extent are self-executing. The basic concepts

of the Convention and Protocol were drawn from the uniform state law in the

United States (Uniform Commercial Code, Article 9 on secured finance) and the

transaction results are consistent with that law, so that there is no need for further

legislation to have its provisions implemented by financing parties.

The exception to the above relates only to the Federal Aviation Administration’s

(FAA) role in the new finance-registry system. All key participants, government and

industry, in the United States have agreed that, both for overall effectiveness of aircraft finance and maintaining the effectiveness of the FAA’s current role in registrations for aircraft interests, the FAA should be the single point of entry for authorization for filings under the Convention for U.S. registered aircraft, which would occur

at the FAA’s main registry facility in Oklahoma City. In order for that to operate

properly, technical amendments to the FAA’s current authority have been submitted

to Congress by the Department of Transportation.

The technical amendments essentially do three things: first, they update the

FAA’s statutes by adding references to the new Convention registry and provide

that the FAA will be designated as the ‘‘entry point’’ for registration of U.S. aircraft

and engines for filings under the new system. Secondly, they provide that

deregistration and filing authorization follow the Convention’s requirements as to

consent of affected parties. Thirdly, they provide for filings of prospective interests,

a modem approach followed by the Uniform Commercial Code and standard in such

financings, but not included in FAA standards set in the 1950s. There is no known

opposition to these amendments, they track modem aircraft finance, and they have

been supported by all key participants in the air-finance sector.

The effect of the foregoing is that transacting parties may bring actions based on

the provisions of the Convention and the aircraft finance Protocol in the courts of

a State party to the Convention. As a general matter, the Convention establishes

certain financing interests in covered transactions, and transacting parties can seek

enforcement thereof without requiring prior approval or action of governmental authorities with regard to claims brought under the Convention or Protocol. The Convention and Protocol do not however supercede otherwise applicable law, except to

the extent a matter is resolved by those treaty texts. Thus transacting parties in

the U.S. could also cite grounds for action under the Uniform Commercial Code or

other applicable law, but would not need to do so; in the case of conflict, the provisions of the Convention would prevail.

29

Question 4. Your testimony describes extensive consultation with other federal

agencies and interested parties in the private sector. During the course of the negotiations, were there any consultations with this committee? If not, why not?

Answer. During the course of negotiations, the State Department did not brief the

Senate Foreign Relations Committee (the SFRC), but rather relied upon aviation industry representatives who had contact with members of the SFRC from time to

time. In briefings done by industry representatives, materials that were provided to

staff, had been discussed with and approved by the federal agencies working on the

Convention and the Protocol.

I understand this question as reflecting a desire by the SFRC to be kept better

informed by the State Department during the course of negotiations. My colleagues

and I take note of that desire and will certainly endeavor to be more proactive in

the future.

Question 5. Article 5(3) of the Convention states that ‘‘[r]eferences to the applicable law are to the domestic rules of the law applicable by virtue of the rules of private international law of the forum State.’’ The term ‘‘applicable law’’ is not defined

in Article 1. Does the meaning of ‘‘applicable law’’ as set forth in Article 5(3) apply

to the same term when used elsewhere in the Convention (e.g., the term ‘‘applicable

law’’ is found in several other articles, such as Articles 12, 30(2) and 50(3))?

Answer. The definition provided in Article 5(3) is the commonly applied definition

of that term in private international law conventions, such as the United Nations

Convention on Contracts for the International Sale of Goods (Article 7) and the

United Nations Convention on the Recognition and Enforcement of Foreign Arbitral

Awards (Article 5). The common definition of ‘‘applicable law’’ set forth in article

5(3) is intended to applywhenever the term is used in the Convention.

Question 6. In the proposed declaration for Convention Article 39(1)(b), does the

term ‘‘any entity thereof’’ include states and municipalities?

Answer. Yes, the term ‘‘any entity thereof’’ is intended to include states, municipalities and other political subdivisions.

Question 7. What is the purpose of Convention Article 40, in contrast to Article

39(1)(a)? That is, Article 39 does not require a non-consensual right to be registered,

and Article 40 does. Why is this distinction made in the Convention?

Answer. Article 39 applies to certain non-consensual rights or liens, which by domestic law in a particular jurisdiction may have priority without registration. Article 40 permits a State to require that those non-consensual rights, as well as other

non-consensual rights that may not have priority by virtue of their domestic law,

will nevertheless acquire such priority pursuant to the Convention upon registration

on a first to file basis. For developing countries that wish to enhance their credit

capacity under this Convention system it will be important to maximize the application of Article 40 with respect to such rights or liens, rather than rely on Article

39, since the requirement to register such liens in order to obtain priority will have

a significant effect on ensuring predictability for creditors. By way of contrast, since

the United States already has a well functioning aircraft-finance market, declarations recommended for the United States in the Secretary of State’s Report transmitted to the Senate by the President, Senate Treaty Doc. 108–10, cover only Article

39, and would therefore preserve intact existing practices in the United States.

Question 8. Article XIII of the Protocol provides a procedure for a debtor to issue

an irrevocable deregistration and export request authorization. The Secretary of

State’s letter, and the Official Commentary, indicate that this process is subject to

related aviation safety laws and regulations. Is the export of aircraft in this manner

also subject to any applicable export control laws and regulations in the United

States? Please elaborate.

Answer. Absent express provisions to the contrary, neither the Capetown Convention nor the Protocol would have any affect on export control laws or regulations.

The only regulatory matter affected by an express provision in the Protocol relates

to aviation safety procedures. Thus, the Convention and the Protocol will have no

effect on export and national security law or regulations and will provide no limitation on the exercise of those constraints by the relevant governmental agencies.

ADDITIONAL PROTOCOLS WITH EU ACCEDING COUNTRIES OR CANDIDATE COUNTRIES

Question 1A. Each protocol contains an exchange of letters regarding the ‘‘essential security interests’’ clause in each of the underlying treaties.

30

Was the discussion with the European Commission and with the Acceding Countries and the Candidate Countries about the possible applicability of the ‘‘essential

security interests’’ clause limited to the issue of possible restrictions on capital

movements?

Answer. The issue of ‘‘essential security interests’’ arose in discussions with the

European Commission and the Acceding and Candidate Countries only in the context of the existing EU authority under the EC treaty to impose restrictions on capital movements in limited circumstances and actions that Acceding and Candidate

Countries might need to take to comply. However, the provision in our BITs is not

limited to this context.

Question 1B. Do you envision that the countries might be compelled by their EU

obligations to invoke the ‘‘essential security interests’’ clause in other contexts?

Answer. Although we are not aware of circumstances where the ‘‘essential security interests’’ clause has been invoked by a Party to a U.S. BIT to defend actions

otherwise inconsistent with BIT obligations, the possibility that it might be invoked

in the future in relation to EU obligations in contexts other than capital movements

can not be excluded entirely. It is difficult to envision under what circumstances

this might occur. Measures permitted by the provision on the protection of a Party’s

essential security interests would include security-related actions taken in time of

war or national emergency. Actions not arising from a state of war or national emergency must have a clear and direct relationship to the essential security interest of

the Party involved. We view measures to protect a Party’s essential security interests as self-judging in nature, although each Party would expect the provisions to

be applied by the other in good faith.

Question 1C. Was it understood that the ‘‘essential security interests’’ clause

should only be invoked in extraordinary circumstances?

Answer. Yes. During our discussions with the European Commission and Acceding and Candidate Countries, we discussed the meaning and purpose of this clause.

Question 1D. Has the ‘‘essential security interests’’ clause been invoked under the

current BITs with any of the Acceding Countries or Candidate Countries?

Answer. Although the United States has never been a party to an investor-State

dispute under any of our Bilateral Investment Treaties, U.S. investors have invoked

the dispute settlement provisions of our BITs against several of our treaty partners,

including some of the Acceding and Candidate Countries. We are not aware, however, of any instance in which the ‘‘essential security interests’’ clause has been invoked in any of those cases.

Question 2. If the United States does not ratify these protocols, is it the view of

the Department that the Acceding Countries and Candidate Countries would likely

decide to terminate the Bilateral Investment Treaties?

Answer. Yes. Although we cannot be certain of the actions that individual countries would take, our assessment is that, if it became evident that the U.S. did not

intend to ratify these protocols, the European Commission would renew its efforts

to encourage these countries to terminate their BITs with the U.S. by, among other

things, threatening infringement proceedings. We believe that given the Acceding

Countries’ commitments in their Acts of Accession to address incompatibilities or

withdraw from their international agreements with third countries, the Accession

Countries would be likely to provide notice of termination of their BITs with the

U.S. Candidate Countries would also be likely to do so, although the more distant

date of their actual accession might affect the timing of their decision.

31

STATEMENTS SUBMITTED FOR THE RECORD

AVIATION WORKING GROUP,

March 29, 2004.

Senator RICHARD G. LUGAR, Chairman,

Senator JOSEPH R. BIDEN, Ranking Member,

Committee on Foreign Relations,

U.S. Senate.

Re: Cape Town Convention and the Aircraft Protocol

DEAR SENATORS LUGAR AND BIDEN,

I write to you as Secretary of the Aviation Working Group (AWG), a non-profit

entity whose members are the major aerospace manufacturers and financial institutions set forth in annex 1 hereto.

I write to underscore the firm support of the AWG and its members for the Cape

Town Convention and the Aircraft Protocol, and to express appreciation for the

Committee’s decision to take action on these instruments this term. We have also

been authorized to pass to the Committee a letter of support from the Air Transport

Association, and attach that letter as annex 2 hereto.

AWG has actively participated in the development and negotiation of the Cape

Town instruments for a number of years, working in close coordination with the

U.S. government negotiating team among others.

We believe that prompt and widespread ratification of the Cape Town instruments will significantly promote a wide range of aerospace interests, starting with

increased aerospace exports and job creation. We also believe the texts will advance

broader governmental interests, including adoption of commercially-oriented rules of

law in cross-border trade.

Please do not hesitate to call on us to provide any assistance as advice and consent to ratification is considered over the coming period.

Sincerely yours,

JEFFREY WOOL,

Secretary.

[Attachments.]

ANNEX 1

AVIATION WORKING GROUP/AWG

AWG STRUCTURE AND MEMBERSHIP

AWG is a not-for-profit legal entity whose members are:

Airbus S.A.S.

The Boeing Company

Bombardier Inc.

Boullioun Aviation Services, Inc.

Citibank, N.A.

debis Airfinance

DVB Bank Aktiengesellschaft.

EMBRAER—Empresa Brasileira de Aeronautica S.A.

GE Capital Aviation Services Inc.

General Electric Company

Indosuez Air Finance S.A.

International Lease Finance Corporation

JPMorgan Securities Inc.

KfW

Morgan Stanley & Co. Incorporated

Rolls-Royce PLC

Singapore Aircraft Leasing Enterprise Pte. Ltd.

SNECMA S.A.

United Technologies Corporation (Pratt & Whitney Division)

32

ANNEX 2

AIR TRANSPORT ASSOCIATION,

1301 PENNSYLVANIA AVE., SUITE 1100,

Washington, DC, June 13, 2004.

Mr. JEFFREY WOOL, Secretary

Aviation Working Group

c/o Perkins Coie

607 14th Street, 8th Fl.

Washmgton. DC, 20005

Re: Cape Town Convention and its Aircraft Protocol

DEAR JEFFREY,

As you know, ATA has followed the development of the Cape Town Convention

and its Aircraft Protocol (the ‘‘Convention’’) inc1uding the recent U.S. signature

thereof and efforts now underway to seek prompt ratification of these instruments.

We are also aware of the active role played by the Aviation Working Group within

the framework of a broad U.S. effort to develop and promote these instruments.

While we have not felt it necessary to play an active role regarding the Convention, ATA does support its ratification. That support stems, in part, from the fact

that the U.S., through its permitted declarations to the treaty, will ensure the continuation of current recordation procedures and priorities via use of the Federal

Aviation Administration as the interface with the new international registry created

under the Cape Town Convention.

Please feel at liberty to pass this letter to others involved in the ratification process. I would be happy to respond to any questions regarding this matter.

Sincerely,

JAMES L. CASEY,

President & Deputy General Counsel.

GENERAL ELECTRIC COMPANY,

ONE NEUMANN WAY,

Cincinnati, OH, March 29, 2004.

Honorable RICHARD G. LUGAR, Chairman,

U.S. Senate Committee on Foreign Relations,

Dirksen Senate Office Building,

Washington, DC.

Honorable JOSEPH R. BIDEN, Ranking Member,

U.S. Senate Committee on Foreign Relations,

Dirksen Senate Office Building,

Washington, DC.

Re: Cape Town Convention and its Aircraft Protocol

DEAR SENATORS LUGAR AND BIDEN,

I write to you to underscore our firm support for the Cape Town Convention and

its Aircraft Protocol, and to express General Electric’s sincere appreciation for the

Committee’s decision to take action on these instruments this term.

GE’s Aircraft Engines component has actively supported the development of Cape

Town for a number of years, working in close coordination with the U.S. government

negotiating team.

The ability to protect the interests of U.S.-based manufacturers in cross-border

transactions is vitally important to us. We believe that prompt ratification of the

Cape Town Convention will help to promote a wide range of U.S. interests and

should provide a much needed boost for aerospace exports and job creation. We also

believe the Convention will advance broader U.S. interests, including adoption of

commercially oriented rules of law in cross-border trade.

33

Please do not hesitate to call on us to provide any assistance as advise and consent to ratification is considered over the coming period.

Sincerely,

DAVID L. CALHOUN,

PRESIDENT AND CHIEF EXECUTIVE OFFICER,

GE Aircraft Engines.

PRATT & WHITNEY,

400 MAIN STREET,

East Hartford, CT, March 30, 2004.

The Honorable RICHARD G. LUGAR,

Chairman, Committee on Foreign Relations,

United States Senate,

Washington, DC.

DEAR MR. CHAIRMAN:

I write to reiterate the strong support of Pratt & Whitney and United Technologies Corporation for the Cape Town Convention and its Aircraft Protocol.

Prompt ratification of Cape Town is crucial and we appreciate the Committee’s decision to take action early this year.

We have actively worked to support the development, negotiation and now ratification of the Cape Town Convention for a number of years. This convention will significantly promote a wide range of U.S. interests, including the health of the aerospace industry and the creation ofjobs. Moreover, Cape Town will promote the adoption of commercially oriented rules of law in cross-border trade, which benefits us

all.

We hope that the Senate Foreign Relations Committee will continue to move expeditiously with its consideration of the Cape Town Convention. Prompt ratification

by the United States will certainly serve as incentive for other countries to ratify,

opening up additional markets for U.S. exports.

Please do not hesitate to call on us to provide any assistance that may be required

as the Senate moves forward with advice and consent of the Cape Town Convention

over the coming months.

Sincerely,

LOUIS R. CHEˆ NEVERT,

President.

Æ