Despite the jittery lending market, dealflow in the French infrastructure and PPP markets is solid and a number of deals have closed recently with no flex on pricing. This is not only a testament to the success of the cession creance payment scheme (effectively state-guaranteed payments post-construction) but also the willingness of relationship banks to fund deals with full market risk for strong sponsors.

For example, the Eu400 million ($600 million) commercial tranche for the Arcour-sponsored A19 real toll – lead arranged by RBS, Fortis, BBVA, Calyon and the EIB – reached financial close in March with no pricing flex, full market risk and an unconfirmed margin range of 80bp to 110bp over Euribor. Significantly, Arcour parent company Vinci had originally planned to fund the deal with internal loans raised on a corporate basis.

The same lack of flex is also evident on the recently-closed, Bouygues-sponsored, 30-year concession for new prisons in Nantes, Reau and Annouellin. Lead arranged by RBS, the facility features Eu86 million of pure project debt priced at 60bp during construction and 75bp to term, along with a guaranteed tranche at 10bp.

New sectors and legal changes

In addition to solid market fundamentals, the French infrastructure market is diversifying into new sectors. Over the past two years the roads, prisons and hospital sectors have spawned a succession of financings, and now prequalification for a number of new university PPPs has launched. Even the Zoo de Vincennes in Paris is getting a Eu100 million-plus revamp via a PPP deal, for which Bouygues has prequalified, while Eiffage is preferred bidder on the Eu440 million Lille Stadium.

The trend looks set to continue to grow, since the Sarkozy administration is a strong supporter of private sector involvement in infrastructure development. Furthermore, last year a survey of 120 local authorities in France found that one-third were considering bringing in private sector partners over the next five years for infrastructure projects, and the current economic slowdown across Europe, with an associated drop in government tax income, will add impetus to this trend.

The first offers are expected this month for the new university PPPs. The biggest is University of Paris VII, at a build cost of Eu200 million, followed by University paris-Dauphine, University Paris IV and Univesity Versailles Saint Quentin, all of which are around Eu50 million.

Social infrastructure deals completed to date – hospitals and prisons – have been done under sector-specific Ordonnances rather than the general PPP law or Contrat de Partenariat PPP. But a number of amendments expected to be passed by the National Assembly later this year are going to make the PPP law not only easier to implement, but also more efficient for sponsors and bank lenders.

"Under the PPP law, which was passed in June 2004, there were two conditions that had to be met to enter into a PPP – either the project involved urgency or complexity," says Noel Chahid-Nourai, partner at Allen & Overy in Paris. "These conditions were put in place because PPP contracts were viewed as contrary to the principles of public procurement law, so exceptions needed to be granted."

"When using the Ordonnance-specific frameworks for hospitals or prisons it was not necessary to prove that there was urgency or complexity, so over the past few years projects have been done under these sectoral laws," he explains.
The PPP law of June 2004 is now being amended, and the draft changes state that in many sectors it will be accepted that there is urgency or complexity without examining the individual project. So in the future more deals will be done under the general PPP law rather than the sectoral frameworks – "primarily because the general PPP law gives a wider scope for services to be included as well as the capital cost of the project, and is more convenient to use," adds Chahid-Nourai.

Keeping the equity low

One of the advantages of French PPP legislation, either sectoral or general, is that projects can be structured using availability payments from a local authority – not dissimilar to UK PFI. But "the difference with the UK is that in France a part of those payments become unconditionally and irrevocably payable from the project completion onwards [under the Dailly Law governing public sector authorities], leaving a portion of the debt as pure public sector risk," says Julien Touzot, director of infrastructure at DEPFA Bank in Paris.

This allows bankers to lend into deals with very high debt-to-equity ratios. For example, last year the new PierreOudot Hospital 35-year concession in Bourgoin-Jallieu – the third hospital PPP after Caen and CHSF Corbel Essonnes – was financed on a 95:5 debt-to-equity split. The same is true for the financing of the Eiffage-sponsored Intermunicipal Hospital Centre of Annemasse-Bonneville, which is currently in syndication.

Lead arranged by Dexia Credit Local, HSBC France and RBS, the Eu170 million debt package for the 23-year build and operate concession features a Dailly tranche priced at 15bp to 30bp, a Eu26 million non-recourse tranche priced at Euribor plus 80bp and a Eu9 million four-year equity bridge.

"The structure was similar to previous hospital PPP deals such as CHSF Corbeil Essonnes, with the public authority signing an irrevocable contract to make long-term payments that will cover most of the capital expenditure for the new hospital," says Eric Cartier-Millon, legal counsel on the deal and partner at Gide Loyrette Nouel in Paris. "This assignment of receivables to the project company typically covers around 90% of the total debt, which is effectively guaranteed by the public authority."

The low equity demand of Dailly-based deals also allows sponsors to take on many projects simultaneously without running up against equity capacity constraints.

Rail PPP comes of age

In addition to the large volume of social infrastructure deals France plans further diversification into rail and rail communications. The planned digital communications network for Reseau Ferre de France (RFF) is being done via PPP. RFF has already started on the 2,000km initial section of a planned 14,000km, which will create a digital telecoms network to replace the current Train-to-Surface analogue system.

In late March RFF short-listed four bidders for the partnership contract, which will involve the design, construction, rollout, operation, maintenance and funding of the Global System for Mobile Communication–Railway (GSM-R) project.

The TDF consortium comprises Vinci Energies, Vinci Concessions, SFR and Axa Investment Managers. The second bidding group comprises Eiffage and France Telecom. An Alcatel-Lucent France group is backed by public infrastructure fund Caisse des Depots et Consignations and Macquarie Capital Group. And the fourth group, known as ETDE, comprises Bouygues Telecom, Sogretel, SNEF, Barclays European Infrastructure, and Dutch Infrastructure Fund.

RFF also has a series of high-speed rail lines to build over the next few years, which could either be structured as concessions or use the PPP law. "Availability payment mechanisms might be a feature of some of the rail projects which could be put out to tender by RFF in the near future," says DEPFA's Touzot. "But the upcoming Tour-Bordeaux HSL concession [the Eu7 billion-plus South Europe Atlantic High Speed Line] sees the bank lenders taking pure commercial risk."

Three consortiums – led separately by Bouygues, Vinci and Eiffage – have been shortlisted for the project and "bankers are currently working on innovative debt structures for the three bidding groups, which are expected to submit their bids in September," adds Touzot.

Solid dealflow

The signs are that France is going to be one of the busiest and least risky countries in Europe for PPP arrangers over the next five years. The amendments to the 2004 Contrat de Partenariat legislation can only help.

"Banks are generally happy with the existing PPP framework, but the new amendment to the law concerning the assignment of receivables will be an improvement," says one observer.

"Frankly I don't attach too much importance to whether projects are done under a special ordonnance for hospitals or under the PPP law," says another. "From a bankability point of view I don't see much difference between the two."

The key factor is the public sector guarantee for most of the debt, which makes deals highly creditworthy. Banks can also put these PPP loans into public sector covered bonds, which remain a very cheap source of funding and have been much less affected by the credit crunch and capital markets volatility than many other asset classes.