With headline grabbing rail and road programmes coming to market, French PPP looks set to deliver on the promise that has attracted so many foreign banks to set up shop in Paris.

But there are still a number of issues that France has yet to confront with its new and unique PPP system – most significantly the number of different legal frameworks used and whether the 'cession creances' guaranteed government payment scheme is on or off the government books.

French PPP uses the Dailly Law which sets out the 'cession creance' payment scheme under the contrat de partenariat. The contrat is structured with the senior loan divided into at least two tranches. One of these is the cession creance tranche where government (or other awarding authority) payments are guaranteed once the project is built. So effectively one tranche – typically two-thirds to three-quarters of the total amount is public sector risk.

The logic behind the guaranteed cession creances payments is to drive the cost of the projects down to the ultimate benefit of the French granting authority. If there is no guarantee of government payments then the project has some risk and margins rise (they are generally around 90bp for UK PPP debt and 60-70bp in Spain for example). With a large section of the debt risk-free post-construction, debt margins are expected to plummet and so the sponsor can charge less and consequently the government pays out less.

The technique is working – margins on cession creance debt have been coming in at 5-10bps and demand from banks is reasonably strong, even at these wafer thin margins, because the money is effectively risk free. As Axel Richer, Deputy Head of Project Finance at Natexis says; "From a regulatory point of view it's a good deal for a bank with a high rating. If it funds itself below Euribor, it's even more attractive".

On or off-balance sheet?

However it is still unclear how the scheme will function long-term. First and most obviously there is a possibility that without a specific clause ensuring performance that standards may slip. This is highly unlikely says Hugo Parker, director of transportation finance at RBC Capital Markets: "One tranche of the deal still bears performance-risk so you still have enough hurt money in there to incentivise performance". However that performance risk was barely 20% of the debt on the CHSF deal for example. And given the experience of underperformance in the UK rail and tube sector – the Metronet project debt with its 95% underpinning from the UK government, was recently downgraded because of underperformance – 20% performance risk may not be enough.

The other issue with creance is balance sheet treatment – if a government guarantees payments regardless of performance or availability then arguably the debt should remain on its balance sheet. This poses problems given one of the reasons PPP is being adopted so enthusiastically across Europe is off-balance sheet debt and meeting Maastricht public sector debt levels – although as Miguel Holguin Head of Project Finance for HSBC France says, for the moment "if you take the French debt and then consider how much is outstanding under the Dailly Law, it's a very small part".

French PPP creance-type deals do transfer the risk during the construction period which is typically the most risky. However, as soon as the project is built then under the Dailly Law payments are guaranteed without any performance or availability clause.

It is these longstanding irrevocable commitments that are the issue and on which market opinion is divided. Some agree that because there is recourse to the awarding body then the risk has not been transferred and so the debt would be on the government balance sheet. Others suggest that the French government are simply keeping one step ahead of the accountants – a tack that can come unstuck as happened with the Calle 30 project in Spain (for more details search 'calle 30' on www.projectfinancemagazine.com).
In February 2003 Eurostat stated its general position by saying that if availability or traffic risk is transferred then a PPP project is off the balance sheet. Given that this isn't the case for the French government and the assignment of receivables continue regardless of availability or performance then it might be inferred the risk is still the government's.

More hospitals on the way

Neither issue is going to keep lenders out of the French market given they are getting a fully guaranteed tranche with no regulatory equity required. And the most mature sectors – health and prisons – will continue to deliver in the coming months.

Four hospital projects have reached financial close so far, including the recent Caen and Douai deals. The most significant and most recent was the Eu343 million 30-year CHSF concession sponsored by Heveil – a project company incorporated by Eiffage.

Eiffage also won the contract on the first batch of prisons at the beginning of this year – the first significant (Eu270 million) non-concession PPP to close in France – and used that deal as the basis for CHSF thus enabling it to complete financing in a speedy six weeks (compared to the four months it took for Prison batch 1).

The debt was underwritten by CIC, Dexia and HSBC; in a deal that was not untypical for a non-concession (contrat de partenariat) the largest tranche and vast majority of the debt benefits from the cession creance payments, in this instance guaranteed by the hospital trust. In this case the debt broke down as a Eu268 million amortising senior loan priced at just 20bps, a Eu45 million loan bearing performance risk priced around 80bps, a Eu7 million VAT revolver and a Eu24 million equity bridge loan.

Up to a dozen more hospitals, including the reasonably big Bougoin, St. Nazaire and Annemasse schemes, may close in the next year. As Damien Legrand, Managing Director of infrastructure finance for Depfa Bank says: "People don't want to be the first, but once one closes others will follow". The same could be said about the French Government – initially cautious but now pursuing PPP aggressively. Buoyed by its success with the Plan Hopital 2007 a Plan Hopital 2012 programme is now in the pipeline.

To streamline the process for preparing bids for the numerous medium size projects coming to market, Depfa Bank and Bouygues Construction teamed up to create an investment and development fund named Challenger Investissement in February. The stated aim is to offer fast-track competitive PPP solutions targeted at local authorities and public awarding bodies. This clearly anticipates that France, like the UK, will mature to the point where a template solution will be able to be applied to a succession of PPP deals.

Road and rail opens up

But while the majority of deals will continue to come from the small and medium size project (hospitals, streetlighting, schools) sectors, the volume will come from transport where a Eu7.5 billion rail programme and some large roads are on the horizon.

The projects are split between the traditional concession PPP structure and the newer contrat de partenariat. In the rail sector three projects are being tendered by the rail network operator Reseau Ferre de France (RFF) – Lovells is legal adviser on all of them.

The largest is the Eu4.5 billion High Speed Line South Europe Atlantic (LGV SEA) which will link Tours and Bordeaux. It is a traditional concession PPP and Ixis has been appointed as financial adviser. Because of the debt size there has been a concerted effort to get as many banks interested in the scheme as possible and a roadshow recently visited London and Madrid in a bid to drum up interest.

The project comprises 302km of new track to be built in two phases. The aim of the project is to improve the speed in travelling to Paris and link up with the Spanish rail network. Even though most of the funding will be user-generated because of the size of the project and the fact the track will only have one user (SNCF) it is expected to attract some kind of subsidy and traffic assurance.

The Eu1.2 billion CNM Nimes to Montpellier bypass will be tendered under the contrat de partenariat scheme and will enter prequalification in December. RBC have been appointed as advisers. The scheme will be 70km of new-build track that will bypass the current Nimes to Montpellier line. Initially it will take freight and this will double the amount that presently travels on the line (from 10 million to 20 million tonnes). The other consequence is that passenger journey times on the original line will be reduced. Construction of the line should begin in 2008 and should complete in 2012.

The other project is the GSM-R scheme to put in new telecommunications on the rail network which will start prequalification at the end of October. Both the GSM and CNM projects are contrat de partenariat and should have cession creances tranches of 65-70% of the debt. Rothschild is financial adviser on the GSM-R project and also on the state-awarded Eu680 million CDG Express – a new build high-speed rail link between Paris Charles De Gaulle airport and the city. This project is a traditional concession and should close prequalification at the end of the month.

In the roads sector the largest real toll on the way is the Eu1.2 billion A65. The preferred bidder is A'lienor a consortium owned by Eiffage (65%) and Sanef (35%) who are being advised by Ixis. Progress is slow because the project is waiting on a public utilities decree before construction can begin. Consequently financing on the 142km Alps road is unlikely to take place until next year.

If the scheme follows the example of the A41 then the concession could be in excess of 50 years. For that financing margins were 110bps over Euribor during construction stepping up to 120bps after completion and 160bps after year 10; although even at the time it was assumed that the project would refinance.
As for the contrat de partenariat schemes there are no templates to work from and it looks unlikely that any will reach financial close this year: The big project coming up is the A4-A86 which is designed to ease traffic congestion around the south of Paris and could require a debt package of around Eu1 billion.

A certain future for PPP

Now only six months away the French Presidential election may affect the momentum but will not change the direction of French PPP as both parties are in favour of the model. And there are a great many projects still to come – tram systems in Boulougne and Mulhouse, and a potential Eu1 billion scheme on Reunion Island. In addition there is the 50,000-seat Lille stadium and the huge Nord Seine canal project.
Authorities at the state level (the right-wingers) and at the municipalities (which are mostly socialist run) have been equally as enthusiastic at putting projects forward. Unlike in the UK where PFI/PPP is something of an issue for the electorate, in France it has yet to become an electoral issue. "None of the candidates has mentioned PPP as a point of discussion. There does not seem to be any political debate on the issue any more," says Richer. The 20 or so projects of the original 35 pushed forward by CIACT are highly unlikely to be interrupted. Indeed, the issue of the elections has not stopped the state putting forward their idea for the plan hopital 2012.