In February, the French government unfolded the Plan de Relance, a risk mitigation package designed to get the big deals away. As well as organising special funds for state lending into projects, the Plan de Relance stimulus package includes a new state guarantee programme for PPP and concession projects.

There is a clear distinction running through the French project market between concessions and PPP contracts – the former being subject to demand risk, the latter being able to take advantage of a Dailly tranche to route availability payments direct to lenders.

The new guarantee can be used to cover the risk in a PPP during the construction period, after which the debt would be covered under the terms of the Dailly law, and to cover both construction and demand risk in large concession projects. Therefore, as well as helping large PPP deals with high construction risk get financed, the state guarantee will also offer comfort to lenders on large concessions for the first time. This is expected to push margins for lending on both types of projects down and help hasten deals towards financial close.

However, banker and sponsor celebrations may be short. Because the guarantee, is part of a package of crisis-response measures, it will only be on offer for projects over the next two years: For a project to benefit from its maximum 80% of cover for senior debt up to a Eu10 billion ($14.1 billion) ceiling, the project must reach contractual close before 31 December 2010.

Tram-Train: the frontrunner

The deal expected to be the first to benefit from the new guarantee is the Reunion Tram-Train, a hybrid rail project on the French-governed island of Reunion in the Indian Ocean. The invitation to bid on the Eu2 billion BOFT PPP went out in January 2007, but the deal has been held up by a combination of troubled credit markets and the difficulty of mitigating the complex construction risk implied in the building of tunnels and viaducts, one of which will be the highest rail viaduct in the world.

This first-phase project consists of a 38km line with 25 stations from the town of Saint Paul to Roland Garros Airport in Ste Marie. The hybrid line will have street-level stations in the towns and train-like speeds of up to 100 km/h out of town. Construction is expected to be complete by the end of 2013.

The Tram-Train, with its high construction risk, is a good example of how the new state guarantee would work in tandem with the existing Dailly mechanism. The guarantee will cover up to 80% of the construction risk and, post-construction, a high proportion of the debt will be covered by the Dailly law, guaranteeing that lenders will benefit from the regular availability payments made by the state. Also, should the financing come in the form of a miniperm, the state guarantee will cover any refinancing risk, also up to 80% of senior debt.

The potential impact of the guarantee on margins is already prompting some banks to look for risk where there may be none. For example some of the banks likely to be forming the club for the Tram-Train debt, are talking of Reunion risk – no-one can say what that risk actually is, but lenders concede it has nothing to do with construction risk, that there is no demand risk on the deal, and that Reunion is politically stable. The risk appears to be a drop in the kind of margins banks have become accustomed to since the darkest days of the liquidity crisis.

The pricing question

As for the pricing of the new guarantee, Mission d'Appui a la Realisation des Contrats de Partenariat (MAPP), the government body supervising the application of the guarantee, says that cover will cost something close to prevailing market rates pre-credit crisis – an annual fee ranging from 60bp to 150bp over Euribor, on top of a flat commission.

Expectations of how pricing will shift under the influence of the guarantee range from somewhere between where it is now (above 250bp over Euribor) and where it was before the crisis (100bp-200bp over Euribor).

Exactly how pricing will be affected remains to be seen, but a fair precedent could be what happened in the course of the financing of the Liefkenshoek tunnel construction project in Belgium, which closed in November 2008. In order to get the Eu841 million rail tunnel PPP away, Infrabel (the state-owned rail infrastructure procuring agency) took on market disruption risk (funding cost risk) during the four-year construction period, thus guaranteeing liquidity. The effect on pricing was profound. The commercial debt was priced at around 120bp over Euribor, although initial pricing was said to be a low as 70bp, which prompted HBOS, one of the original banks in line for the deal, to pull out.

Tours to Bordeaux: a big-ticket trip

Reseau Ferre de France's (RFF) Eu8 billion, 60-year Tours to Bordeaux high-speed rail concession has also been going through MAPP's appraisal process to evaluate its need of and eligibility for the state guarantee. The French government will provide up to 50% of project capex, the EIB has made a commitment in principle to lend Eu1 billion, and CDC has committed to lending around Eu700 million, but only once the state guarantee is firmly in place. RFF has confirmed that a guarantee is being put in place by MAPP, and that it will have a potential life of 30 years, if necessary, therefore covering half of the concession's demand risk.

At the time of writing, bidding consortia led by Bouygues, Vinci and Eiffage have prequalified, and the request for proposals has been issued, with a deadline of 15 December. Financial close is not expected before the summer of 2010, with the seven-year construction period set to start in 2011. Natixis is acting as financial adviser to RFF.

CDG Express: running slow

The Charles de Gaulle Express (CDGE) is the third project, along with Tram-Train and Tours to Bordeaux, which is going through MAPP's evaluation process for the application of the state guarantee.

The Eu700 million CDGE rail project involves the building of a 32km high-speed service between Paris Est and Charles de Gaulle airport, running though a new 700m tunnel to reach a pair of tracks parallel to RER Line B and currently being used by regional trains. Beyond Aulnay-sous-Bois, the CDG Express services will diverge at Villeparisis onto an 8km double-track branch running parallel to the TGV Interconnexion to a new terminus at the airport.

Vinci won the concession in July 2008 after Bouygues pulled out, allegedly because of the risk profile. Calyon, Vinci's financial adviser, has lined up a potential club of around six banks to provide funding, but the deal will not be an easy one to close. Added to the liquidity problems and the fact that from the beginning the French government announced that it would not be subsidising the construction, CDGE's risk profile is very complex. Construction risk is high because of the tunnelling, added to the fact that construction will take place in urban areas. Traffic risk is equally high, with competition from existing road links and RER line B, which covers the same route and which is to be refurbished soon. As a result, it has been difficult to negotiate pricing and risk allocation.

Financial close is expected by the end of 2010, and to reach that goal the government will probably have to come in to guarantee a high proportion of the debt in order to provide sufficient comfort to the lending group.

The pipeline is full

There is a significant deal volume hanging on the success of the new guarantee. There are now 10 to 15 large infrastructure projects in the French pipeline across the road, rail, transport, defence and education sectors – representing between Eu30-40 billion in project spending for the rail/transport sector alone. But not many are moving towards financial close. And the pipeline continues to fill – for example, most recently, the Eu400 million A35 Strasbourg toll road concession launched.

The smaller projects such as the Plan Campus university building and refurbishment PPP contracts, which have been going out as individual tenders, are closing without any real trouble, given their relatively small size (the largest, Paris 7, stands at around Eu120 million), the application of Dailly tranches post-construction and co-lending from the state. But the large projects, both straight PPP and concession, have been facing difficulties.

One troubled deal that, when closed, will provide guidance to others with similar needs is RFF's Eu1 billion ($1.4 billion) GSM-R rail telecoms PPP, featuring a Vinci/TDF/Axa/SFR consortium. The deal is now being held up by the bidding process for the takeover of Nortel, which is providing the hardware for the scheme – otherwise the financing, which features Royal Bank of Canada as adviser to the consortium, is in place.

Financing will involve around Eu600 million in senior debt, the rest being covered by state subsidy and equity. A club of banks taking tickets averaging Eu75 million will provide the senior debt, a large proportion of which will be refinanced post-construction with a Dailly tranche. The EIB will also be coming in with some of the funding, though the amount is unconfirmed. Pricing will start at around 250bp over Euribor and will have a tenor of 15 years with a short tail, basically mirroring the length of the PPP, which is likely to be the first of RFF's large rail projects to close this year.

The project involves installing GSM equipment on around 14,000km of trunk lines, following on from the 2,000km of line in north-eastern France that RFF equipped with its own resources as a pilot for the roll-out of the tender for the national scheme. Those close to the deal have been critical of RFF for what they see as the imposition of Nortel as hardware supplier on the winning bidder, and confirm that RFF is bearing full liability for the situation's outcome.