With 38,500 employees in sixty countries, Bouygues Group subsidiary Bouygues Construction is a major global player in the building, civil engineering and electrical contracting & maintenance sectors.

The company is also well placed to benefit from the worldwide trend towards using public-private-partnerships (PPP), and a variety of Bouygues Construction subsidiaries such as Dragages, Bouygues Travaux Publics, Quille, Sodearif, Cirmad and Bouygues Concessions are to be found working on PPP projects in countries as diverse as South Korea, Hong Kong, Jamaica, Croatia and the UK.

With all the experience that Bouygues Construction has built up overseas, it is now one of the key developers for the sizeable pipeline of projects in France as PPP finally takes off in its domestic market.

The group strategy is to create value by building and operating projects, and unlike some of its European competitors it does not acquire PPP or concession assets on the secondary market. This was underlined last year during the privatization of three major toll road companies by the French government – a process in which Bouygues deliberately did not participate.

Bouygues can sometimes be found on the secondary market as a seller, as it manages its portfolio by partially selling down its equity stakes. "There may be cases where we keep all our initial equity in a project over its whole life, but generally we prefer not to keep it so long," explains Robert Benarrosh, general manager, Development and Financial Engineering. "Of course it depends on the project, and the client or bank lenders may put conditions in the initial contract relating to selling down equity stakes. But generally speaking our strategy is to sell part of the equity where allowed, while keeping some of the equity on our books."

In rare cases, such as the South African N4 toll road from Johannesburg to the port of Maputo in Mozambique, Bouygues has sold its entire stake. But more typical is the A28 toll road in France – Bouygues originally had a 45% holding, but reduced this to its current 33% by selling a stake to toll road network operator Sanef. Institutional investors and infrastructure funds are other possible buyers that the company talks to.

Bouygues believes that a strong financial structuring capability is important in the PPP and concessions market, and over the past few years has brought some groundbreaking financings to the market.

Bond or loans?

The A28 was one example, where it tapped the capital markets for financing. And in Croatia Bouygues used various structural enhancements to get a BB-plus rating on bonds for the Bina Istra toll road concession.

"For the A28 financing in 2002 we did a bond offering with a wrap provided by FSA," says Philippe Charton, director, Development and Financial Engineering department at Bouygues Construction. "In toll road projects you have to deal with the effects of inflation, so the bond was inflation linked, and was the first bond offering done on an indexed basis in the Eurozone for a private project."

There have been few subsequent toll road or PPP bond offerings from either Bouygues or its competitors, and the reason for this lies simply in the ready availability of bank debt in what is a highly liquid and competitive bank market.
"We always look closely at both the bond route and the bank debt route, but in today's market the banks are quite aggressive, so its makes more economic sense to use bank debt," Benarrosh explains.

Bouygues is currently working on another major road project in France. In April last year it was part of a consortium awarded the DBFO contract for the A41 Motorway in the French Alps region. Syndication of Eu940 million of debt was launched in February, with Calyon, HSBC and HBOS as mandated lead arrangers.

In France and elsewhere, it is the Concessions Division that operates the road infrastructure concession-holding companies in which Bouygues Construction has a stake.

The Concessions Division operates in eight countries, and plays an upstream role, with financing, design, build and operation forming an integral part of what it offers to clients.

French PPP development

In non-roads sectors, Bouygues Construction is currently examining the long list of PPP projects in the pipeline in France. Last year the government decided to speed up the development of PPP by asking various ministries to submit projects that might be suitable for PPP. These include everything from military telecoms systems to cultural and sporting centres, plus roads and rail networks.

Bouygues Construction bid on the first group of four prisons to be built under PPP, but lost out to Eiffage when the winner was announced last December. It is currently bidding for the next package of three prisons to be bundled into a single PPP deal.

In the healthcare sector Bouygues is also likely to be a major player, as the French government presses ahead with plans to raise Eu2 billion in new hospital investment via PPP. Last year Bouygues Construction subsidiaries won the PPP contract for the logistics hub of Douai Hospital in northeastern France, in a deal involving Eu17 million of design and construction work and Eu20 million of services over 25 years.

And last October Bouygues Construction subsidiaries followed that up by being awarded the PPP contract to build and operate the Women, Children's and Haematology Hospital in Caen. Bouygues is also currently one of the bidders for the Centre Hospitalier de Sud Francilien at Corbeil-Essonnes in the Paris area.

On the Caen Hospital transaction they were partnered by ABN Amro which provided around Eu100 million of project financing in the form of both equity and bank debt.

"We can either have an institutional investor as an equity investor, together with a bank arranging the debt, or there may be a bank providing both equity and debt," says Benarrosh. For Caen Hospital, ABN Amro took 90% of the equity, and Bouygues Construction took 10%. Featured on the debt side were ABN Amro, Royal Bank of Scotland, and Societe Generale.

Adapting to PPP Ordonnance

Up to now in France PPP deals were done under special sectoral laws, such as LOPSI/LOPJ for prisons, or the sector specific healthcare legislation, but soon there will be deals done under the specific PPP Ordonnance. The positive news for equity investors, developers and banks lenders is that the basic structures and risk allocation will be similar, so the market can move forward quickly without having to find new financing structures. Bankers say that the first deals under the PPP Ordonnance should be signed this year.

Investors and lenders face the same basic risks under sector specific or Ordonnance deals, and debt to equity ratios are likely to remain the same at around 90:10. Bank lenders do not take construction risk, since developers will offer performance guarantees under fixed price contract.

"Basically there will be two debt tranches in the project," explains Benarrosh. "One tranche is a Cession Dailly, which is guaranteed by the public sector, and gives French public sector borrowers very low funding costs."

"The second tranche is quite similar to what we see in UK PFI deals, so there is likely to be strong appetite from banker lenders, just as there is in the UK market," Benarrosh adds. "Typically our project lending banks take pieces of both tranches, so they have a low-margin-low-risk Cession Dailly tranche, plus a riskier tranche with a higher margin."

The French hospital PPPs are coming at just the time when there is an anticipated slowdown in hospital PFIs in the UK, with UK government concerns about how much it can afford to spend on the National Health Service. But Bouygues still sees plenty of opportunities in the UK. "Both markets are important to Bouygues Construction," says Benarrosh.

"It is true that there is a slowdown in the UK healthcare PFI market at the moment, and no one is exactly sure what is going to happen next, but we are staying focussed and we have a number of projects that we are looking at the present time," explains Sebastien Pejoan, Deputy Director for UK, Development and Financial Engineering department at Bouygues Construction. "Our plan is still to be involved in the UK healthcare market, but we are also looking at other sectors such as education and the social housing sector."

"So though the French PPP market is now growing fast, and we are going to get involved in many French projects, I don't think it will be to the detriment of our involvement in the UK market," adds Benarrosh.

Global footprint

UK deals that Bouygues has been involved in include Barking Schools, Barnet General Hospital, the Home Office Headquarters, West Middlesex Hospital, and King's College London. In fact up to now the highest volume of Bouygues PPPs have been in the UK, while PPP in France is just getting moving.

Outside of these two countries, the group does not have any particular geographical priorities, but will instead look for opportunities anywhere in the world where they like the structure of the PPP laws.

A Bouygues Construction subsidiary in Asia, Bouygues Travaux Publics, won the contract in a 50:50 joint venture with Hyundai to build maintain and operate the Eu250 million Masan Bay Bridge in South Korea, which is currently under construction.

And in January the new AsiaWorld-Expo centre was inaugurated in Hong Kong. The project, which had construction costs of Eu250 million, was built on a design-build basis on behalf of the Hong Kong Special Administrative Region government, the Airport Authority, and a local private financial partner – Yu Ming Investments. Following completion, Bouygues subsidiary Dragages Hong Kong has started operating the centre, together with a local partner, for 25 years.

Most of these are very large projects, but in its domestic market Bouygues is also targeting small PPP projects of only Eu15 million.

Joining the infrastructure funds

In late February Bouygues Construction announced that it was teaming up with a financial partner, DEPFA Bank, to create an investment and development fund known as Challenger Investissement, Challenger being the name of the Bouygues Construction headquarters south west of Paris.

The idea is that PPP deals are making increasing demands upon central and local authorities, and that the fund will be able to streamline the implementation of projects, offering clients fast track solutions for medium-sized projects.

Challenger Investissement is 100% owned by Bouygues Construction, with DEPFA able to provide bank debt and financial structuring expertise. Challenger Investissment will rely upon support from Sodearif and Cirmid, two property development subsidiaries of Bouygues Construction. KPMG advised on the structure while the fund was being put together.

Bringing in new investors into the Challenger Fund remains a possibility, though not in the near future. The plan is invest in some projects first, and not to pre-sell without any deals in place.

But the fund gives Bouygues a strategic advantage in winning smaller PPP concessions in its home market, while remaining a global player bidding for very large PPP projects.