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Diplomacy in Action

57. Attorney-Adviser, PIL, letter to UNCITRAL concerning draft protocol for space equipment finance


December 1, 2005

Martin J. Stanford
Deputy Secretary General
Intrernational Institute for the Unification
of Private International Law (UNCITRAL)
Via Panisperna, 23
Rome, Italy

United States Position on the Draft Protocol for Space Equipment Finance

You have requested confirmation of our views previously expressed in order to assess whether sufficient support exists to schedule the next intergovernmentaI meeting on this matter. At the outset let me make clear that we believe that progress on the present draft protocol on space asset financing is important for the ability of commercial activities in outer space to progress beyond the place where they have leveled off, or even to maintain that level in the future. We believe all nations will benefit from expanding the range and depth of commercial activities in outer space.

The timing is now right to resume intergovernmental work. The Cape Town Convention and the Protocol on aircraft financing will come into force in March 2006 (the necessary eighth ratification just having been deposited), and the new international finance registry is now undergoing operational testing in Dublin, Ireland. We are thus already creating valuable experience which will facilitate our work on the space assets protocol. While we attempt to negotiate this protocol, available financing and insurance for space operations has remained far behind growing financial pools for other sectors. The largest sources of commercial finance will not enter the space assets finance arena unless and until there is a legal basis for secured finance rights and priorities. In the absence of this draft protocol, there is no reliable basis for such secured finance rights on the international level. Reference alone to nationally-based rights has no reliability of enforcement in any other jurisdiction (something the Cape Town Convention was designed to overcome), and the UN's Outer Space Treaty system casts doubt on the validity of seeking to extend national laws into outer space for that purpose. On the last point, we support the provision that assures that this protocol will not affect any rights and obligations of any state party to the UN's Outer Space treaties.

Completion of the space assets protocol thus becomes the single initiative at the international level that can fill this gap and provide a basis to bring in less costly and more reliable financing. There are some who favor waiting for the space industry to mature, noting that the aircraft industry had over 60 years experience with the commercial finance field before negotiating the Cape Town Convention's first protocol on aircraft finance. The other view, one that we are in agreement with, is that we have a window now that if missed will put off these developments for many years, and we can build support for the space protocol on the current attention in a number of countries on implementation of the aircraft protocol. Engaging aerospace and financing interests now on the benefits of the space assets protocol will enhance the likelihood of getting support for the final text.

We would like to comment briefly on three aspects of this work.

First, it is important to recognize that our task is to make the protocol for space assets reasonably competitive with commercial aircraft financing, in order to attract support from capital markets that exist for the aerospace sector. We recognize the necessity of deferring to national regulatory regimes on certain matters such as capacity and license to operate, non-transference of certain data and technology, and related national security matters. This is a factor in aircraft acquisition and operations as well, but generally absorbed in existing financing practices and therefore not a problem in that sector. It is however a problem considerably more pronounced for space assets. Broad deference to national regulatory systems, unless constrained through optional declarations as to transparency, time limits for approvals, etc., will for certain countries sharply limit the credit benefits of this protocol. Of perhaps greater concern there have has been proposals to impose mandatory public service obligations on secured lenders if they seek to enforce their rights where default has occurred. This approach may eliminate the potential economic benefits of this exercise. Today, outside of this protocol, if a country chooses to place public services on a commercial, rather than a government controlled or owned platform, they take the risk of losing those services if the primary operator cannot continue. Secured lenders cannot be used to cover that risk, and maintaining an open-ended public service operations requirement, other than for limited and specified emergency operations, would effectively keep secured lenders from financing under such a protocol. One option is that if continuation of such services were mandated, a government would undertake as a treaty matter the obligation to acquire that capacity in full and present time compensation.

Secondly, in order to make space asset and operations financing competitive with the aircraft sector, and to balance the negative credit effect from broad deference to national regulatory regimes (because of the uncertainty and delay that results), it is very important that additional economic assurances be added to the draft protocol. These include assurances of rights to the income stream from satellite and other space equipment operations pending determination whether the secured lender can in fact be a transferee; rights to structure income streams offshore or otherwise repatriate income; assurances that operations facilities and maintenance of satellite capacity will not be allowed to deteriorate during such period; and optional provisions for pre-qualifying and approval of back-up operators in the event a secured lender needs to enforce its rights. These enhancements are a minimal threshold, and more may be considered as necessary to bring the otherwise risky sector of space asset financing into competitiveness with other areas of aerospace, if the protocol is to achieve actual economic value.

Thirdly, development of the notice-filing finance registry system should go forward now. It is important that that be done on the basis of what works functionally and at low cost. As with the aircraft finance registry, decisions should be made on technical capacity to identify, file and search, and whether the search results meet credit industry needs, period. Practical filing issues involving components can be accommodated without resolving priority issues, which in practice is always subject to inter-creditor agreement. Costs of the system and access fees must be kept low, and this may be achievable by building on existing systems and proposals for assistance.

In sum, this as a timely opportunity to move forward. We are encouraged by the level of support for conclusion of this effort, and thank you for the opportunity to restate our previous views.

Harold S. Burman
Office of the Legal Adviser
Department of State

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