Since the passing of PPP legislation in 2004 – Ordonnance no 2004-559 – and its enactment from late 2005, the French transport PPP market looks set to flourish. The French government is keen to see many of its infrastructure projects built and operated under PPP. This has also led to a rush of foreign banks into the French market, a rush that is adding to already abundant liquidity and driving down margins in the process.

But for foreign transport sponsors the market is proving difficult. "We have so much legislation that foreign construction companies find it difficult to understand it," says Paul Lignières a partner with Linklaters. This has particularly upset foreign contractors who feel it is a form of indirect protectionism. Indeed, the likes of Vinci, Bouygues, Eiffage and Alstom dominate bidding consortia and in France's recent sale of majority stakes in state-owned toll roads there was an outcry in the French press when it initially looked like Spanish sponsors would win.

Nevertheless, foreign financial institutions are making headway in the French market, attracted by new, and relatively risk-free, French PPP legislation. Initially, the winning consortium builds a project at its own risk and once it becomes operational the public entity pays for its use along with the associated services. At that point, a material part of the debt becomes guaranteed to the lenders by a 'Cession Dailly acceptée'. In effect the state procurement body is irrevocably bound to pay the fees relating to the part of the debt covered by the guarantee directly to the lenders, regardless of the outcome of the project. The guarantee covers both the repayment of interest and capital.

"This is one of the big innovations of French PPP. Once implemented the State cannot change its mind," says Adrien Le Doré, Associate Attorney with DLA Piper. The Cession Dailly acceptée is designed to give comfort to the banks and provide lower funding costs for the contractors. In turn this should contribute to lowering the costs of PPP contracts for the French state.

One of the many sectors set to benefit from the new legal framework is transport infrastructure where a raft of projects is expected covering roads, rail and even canals.

Road to PPP

Up to now most road schemes in France have been done via a real toll concession. However, not all roads are commercially viable on this basis. Some are built to help stimulate economic activity in a particular region. Others simply can't be tolled for political or other reasons. To get these tyskeatingpe of roads built the government will use its own unique PPP format.

According to Nicolas Painvin, senior director of finance at Fitch Ratings, French PPP is designed for projects where the user will not provide the bulk of revenues. "Most of these roads will be linking other highways. Traffic will not be sufficient to repay the investment so the authorities will go for PPP rather than real toll," explains Guy de Mouzon, Head of Infrastructure & PPP in the Project Finance Department of Natexis Banques Populaires.

The State remunerates the project company, which is also responsible for operation, maintenance and renewal of investments, on the basis of performance and the road's availability to users. Contracts to operate the roads are expected to last around 30 years: The French government spurned shadow tolls due to the less than satisfactory Portuguese experience with them.

"The first projects under the new PPP legal framework are only being presented now so there is no real track record," says de Mouzon. But projects coming up include the Eu100 million A88 linking the towns of Caen and Sées, which is at prequal stage. In addition there is the A4/A86 – designed to suppress the main traffic jam in France around the south of Paris – and a smaller road leaving Marseilles towards the east of the country known as the L2.

These projects are expected to launch next year. Given there are no PPP precedents for roads, it is difficult to speculate on future market appetite for these deals given predicted low pricings. During construction there's the possibility of similar pricings to that of the toll roads at around 100-120bp over Euribor. Some bankers think it could even go below 100 basis points. Once operating, the debt corresponding to the irrevocable payment commitment will narrow the spread to a razor thin 10bp over Euribor. The remaining debt, carrying the project risk, would likely be priced at a level similar to classical non-recourse financings although taking into account the public counterpart – possibly around 100bp.

The debt/equity mix could be around 90/10 once the "Cession Dailly acceptée" is in place. "In the new legal framework where the scope of services provided is widened, margins could slightly increase if the contractor takes on other risks to make his bid more attractive," adds de Mouzon.

Rail PPPs near tender

The rail sector is throwing up some larger projects. Since January 2006 the rail network operator, Réseau Ferré de France (RFF), has been authorised to carry out projects under PPP and has recently mandated financial advisors on three, projects, two of which will be done under the new PPP structure.

RFF has appointed RBC Capital markets as financial advisory on the Eu1.2 billion Nimes-to-Montpellier rail bypass (CNM); Ixis on the Eu4.5 billion High Speed Line South Europe Atlantic (LGV SEA) between Tours and Bourdeaux; and Rothschild on the Eu1 billion GSM-R sol-train radio modernisation. Lovells is acting as leal advisory on all three projects

The largest of the three deals, the LGV SEA, comprises 302km of new track to be built in two phases. Unlike the other two projects which will both be awarded as contrat de partenariat, LGV SEA will be under a traditional concession contract and, because of its size, will require significantly more financial engineering to make it bankable – notably some form of traffic risk assurance and subsidy.

Tenders for all three projects are expected to be out by the end of September with the first, GSM-R, due at the end of August.

The tender for the Eu630 million Charles De Gaulle Airport-Paris (CDG Express) link, currently under advisory from Rothschild and Clifford Chance, is also expected to be out by October and should also be a PPP. The project is expected to be particularly costly given that there will be the need for compulsory purchases of private property as the work will be carried out in urban areas of Paris. "It can however be a solid and useful project for Paris, providing the interface risk with SNCF trains running on the same track as long as it is well managed," says Damien Legrand, Managing Director in charge of PPPs at DEPFA in Paris.

In the light rail sector, the City of Reims has commissioned a Eu350 million tram and bus project from Groupement Mobilite Agglomeration Rémoise – a consortium led by Bouygues, and Alstom. Apart from running the bus and tram services the project also involves building and maintaining 12km of track.

Another project on the books is the Eu100 million Leslys Lyon Part-Dieu/St Exupery airport tramway link which is expected to close shortly.

The regional assembly of the Island of Reunion, a French Department, has also decided to launch its tramway project, the Eu1 billion "Tram-Train", as a PPP. The first section will be operational in 2012 and the project will involve building around 40km of track from the town of Sainte-Marie to Saint Paul. The next stage is to seek a financial adviser.

Although, the French government and the EU will provide funds to get many of these regional PPP projects started, there is no explicit obligation for the government to bail them out should they go wrong. In terms of municipalities, Painvin says: "the agency would generally consider a significant share of the infrastructure charge paid by the municipality as debt service, and assess its creditworthiness accordingly".

Canals go PPP

State canal operator, Voies Navigables de France (VNF), is also tapping the PPP sector and has issued a tender calling for a financial adviser for the 130KM Seine Nord project, which could be worth up to Eu4 billion.

The proposed canal system would link, by 2020, the river Seine, to the Dunkerque-Scheldt canal via the Oise river. This would create a direct link between the French and Benelux networks for cargo ships. The project would also involve the construction of three loading terminals.

Revenues would comprise of a fee paid by VNF linked to availability and performance. There's also the possibility of revenues being included from the loading terminals.However, the proposed project has been mired in controversy with detractors questioning its economic value. Some bankers think it could be subject to further delays and may not even happen.

Equity returns

Potentially generous returns on equity are attracting many of the usual suspects to the France. Axa, Barclays Capital, Royal Bank of Scotland, Babcock & Brown and Macquarie bank are all reported to be taking an active interest. Bankers say that returns on equity of up 10-14% are possible on some PPP projects. However, that is expected to narrow substantially with so much interest.

On the debt side the monoline insurers, which are currently struggling to find attractive yields, are also reported to be scouring France for potential transactions. They have had some success in the Spanish PPP market and the UK, but bankers have mixed views on their chances of success in France. Margins are already very tight and more so than on the Iberian peninsula.

Also, most of the PPP senior debt is expected to be backed by Cession Dailly and therefore there is little value to be added by wrapping it. There may be an opportunity to wrap the unsecured tranches. But bankers say there are likely to be legal issues in separating it out. However, for very large deals it may be possible for the monolines to come up with viable structures.