France's Contrat de Partenariat under the new PPP Ordonnance looks set to finally kick in this year.

The final bids for the second group of French prisons to be built under PPP were sent in on 31 May. These prisons will be awarded under the special sectorial law (LOPSI/ LOPJ). But more signifcantly, the third round of prison financings will follow soon after and will be financed according to a Contrat de Partenariat.

The French government has been keen to get deals moving under the new Ordonnance. The sectorial law for the Home Office and Justice Department and the Ordonnance Sante (healthcare) sector came into practice in 2003. But the PPP Ordonnance, although passed in 2004, has yet to take hold.

The sectorial laws are more restrictive in terms of the kind of services that can be transferred to the private sector. For hospitals the difference is less pronounced than for prisons, which explains why prisons have been chosen for the first Contrat de Partenariat deals.

The Contrat de Partenariat deals will typically have two tranches of debt, the first akin to government or local authority debt (depending on the public sector authority involved) and the second riskier project debt.

But in many respects the basic structure of PPP Ordonnance transactions will be much the same as for LOPSI/LOPJ or Ordonnance Sante transactions. "When the PPP Ordonnance was being discussed, the people drafting the sectorial laws made sure that they anticipated the PPP structure, and applied this to the sectorial rules for the prisons and hospitals," explains Stephane July, Director, Infrastructure, at Dexia Credit Local in Paris.

"For example, we will still have a Cession Creances, which is an assignment of receivables, for a portion of the deal, and project debt on the remainder," July explains.

"But what will change is the nature and importance of services within this contract, because under the PPP Ordonnance there is no restriction on services," July adds. "For example, for the third group of prisons there could be new types of services within the contract, such as catering and laundry."

The bidding on the first group of four prisons, in Rhone, Loire, Herault and Meurthes-et-Moselle, was won by Eiffage. Societe Generale has been acting as advisor to the government on the prisons programme which comprises a total of Eu1.3 billion of prisons with over 13,000 inmates in 18 facilities.

Healthcare buoyant

Hospitals will eventually follow prisons in being financed under the PPP Ordonnance, though some sort of lease structure is still likely to be used.

Centre Hospitalier du Sud Francilien at Corbeil-Essones was recently awarded to Eiffage, which is currently working towards financial close with the help of financial adviser HSBC. Last December Eiffage also won the bidding for the first group of prisons, with Natexis and Calyon as financial advisers.

Three important hospital deals will soon proceed to the invitation to tender stage. The biggest is at St Nazaire, not far from Nantes. It has a Eu250 million construction cost, and is likely to be awarded late this year.

Two other hospitals are in the Rhone-Alps region. Bourgion Jallieu will have a construction cost of around Eu100 million, and Annemasse Eu150 million. All these are being done under the sectorial laws.

Last October, the contract for the Women's, Children's and Haematology teaching hospital unit in Caen was also awarded to Bouygues Construction and subsidiaries Quille and Exprimm.

Under the long term hospital lease used, the design, construction, operation, long term maintenance and financing of hospital facilities are entrusted to the private partners in exchange for performance based rent payments.

At Caen this includes the provision of hard FM services, renewal of facilities, and operation of certain services, such as cleaning, security, and waste management, all to be provided by Exprimm over a period of 25 years.

The debt-to-equity ratio for Caen is 90:10 which is fairly typical for the hospitals sector. Of the equity stake, Bouygues Construction took 10% while ABN Amro took 90%: ABN Amro is also providing the debt, along with Royal Bank of Scotland and Societe Generale.

Banks to take equity

Banks and other institutional investors are expected to play a significant role on the equity side as more French PPP projects come to market.

Last September Linklaters advised ABN Amro and DEPFA on the Douai Logipole project, involving the design, build, finance and maintenance of a logstical support platform (logipole) at the Douai Hospital in the North of France. Project costs are approximately Eu30 million, and the project will be built by Norpac, and maintained by Exprimm, members of the Bouygues Group.

"The Douai Logipole project was structured around a long term administrative lease (or BEH) granted under the recently revamped public healthcare laws to improve public services," explains Simon Ratledge, partner at Linklaters in Paris.

"Various structures may be used under the PPP Ordonnance, but it does mention that lease structures may be used, which is what the sectorial deals are based on, and I would expect that to remain a feature," Ratledge says.

"Douai had high level of assignment of receivables, and that financing technique will continue to be popular because it offers low cost financing approaching the rate that the government borrows at," he adds. "Lease payments, as far as they have been assigned to creditors, have been ring fenced from performance risk. In addition to this tranche there will be a riskier tranche carrying a higher rate of interest."

The PPP Ordonnance does not specify whether payments made by the public authority must be linked to factors such as availability or performance. There will also be differences in terms of explicit or implicit guarantees provided by the public sector to the lenders on the project.

But sponsors such as Bouygues are confident that there will be strong interest from lenders for the riskier tranches, with foreign banks giving French banks plenty of competition.

New sectors and lenders

UK banks are determined to get a slice of the new PPP business in France, especially since they have plenty of experience in assessing project risk on deals back home. For the A41 real toll road the debt financing was led by Calyon, HSBC and HBOS. And Royal Bank of Scotland was a member of one of the consortia which bid on the first group of prisons.

A variety of sectors will also be opening up to PPP for the first time over the next twelve months, as the concept spreads beyond hospitals and prisons.

The main area of attention for arrangers is rail transport following a new law enacted in January that allows RFF to develop infrastructure projects under the Contrat de Partenariat.

Some long awaited projects are expected to have calls for tender in late summer. The Tours to Bordeaux TGV rail link is expected to be launched under a concession framework as opposed to PPP, but the high speed link between Nimes and Montpelier is expected to be done under the PPP Ordonnance as is a deal for the GSM communications system used by the national rail network.

Presidential elections due in 2007, which may slow some deals down, but in general bankers see good momentum for PPP in France. With budget deficits an issue at both state and local level, all the main parties have signed up to the basic concept of PPP.

Further down the line transactions could include airports, the military helicopter training school, and the military telecommunications system. Another deal will involve the national sports institute INSEP, where elite athletes are trained. There are also a number of road projects being done in France involving the private sector, but thus far the concession model has been used, and it remains to be seen whether any roads will feature in the early group of Contrat de Partenariat deals.