In a market that has traditionally relied on concession-type agreements and public procurement contracts (marchés publics), few would have thought that public-private-partnerships (PPP) would take hold in France. However, Ordonnance No. 2004-559 has changed all that. Since the law governing Contrats de Partenariats Public Privé was passed in June 2004, a flurry of deals has hit the market.

The Ordonnance has, in effect, allowed the state sector to participate in project structures similar to those found in the UK PFI market. Performance-related payments can be spread over the term of the contract, while responsibilities connected with the construction and maintenance of the project will remain with the concession winner.

According to Guy Lafite, head of public finance at Caisse d'Epargne Group, "PPP is just a different form of the public contract; similar in some ways to the system of 'concessions'– including a substantial part of the 'competitive dialogue' – but different in the way the investment is paid back."

Health may yet prove healthy

Assets being sized up for PPP include: urban transportation (roads, bridges and tunnels), public service infrastructure (schools and colleges) as well as environmental projects (waste-water plants). Although it is difficult to put a figure on the size of the market, Eu20 billion ($26 billion) is close to the consensus among experts.

In the healthcare sector, 14 projects, totalling Eu700 million are being slated for close by year-end (see box). Moreover, the French Ministry of Health (Ministère des Solidarités de la Santé et la Famile) estimates that some Eu1.5 billion ($1.9 billion) in PPP healthcare projects will need to be launched. This figure is part of the overall Eu10 billion Hôpital 2007 healthcare investment programme.

However, while many deals have come to market – only one has closed. The first is the Centre Hospitalier de Douai, which is rumoured to have come in at Eu80 to Eu100 million, though initial estimates were said to be Eu25 million. ABN Amro provided the equity, while Depfa took on the debt portion. The debt/equity split was 90:10. The project comprises the construction and management of new premises for non-clinical services at the hospital complex in northern France.

Other deals currently awaiting closure include the Centre Hospitalier Universitaire de Caen. In May 2004, a call for tender was launched for the extension work. The contract is expected to cover financing, construction and maintenance over a 25-year period. The three teams lined up are: Soderec (affliate of Crédit Mutuel), Quille (Bouygues Construction) with ABN Amro, and Icade (Caisse des Dépôts et Consignations) with Eiffage.

The total investment for the project is expected to be between Eu100 and Eu120 million. The preferred bidder is expected to be announced in April or May.

One of the largest deals close to market is the 1,000-bed hospital, Centre Hospitalier sud-Francilien de Corbeil-Essonne. The project is expected to be structured as a 25-year design, build, finance, operate (DBFO) concession with a Eu230 million price tag.

Given France's sophisticated funding markets and strong domestic contractors, outsiders may find it difficult to muscle in on the action. Financial institutions with the expertise and appetite for these projects include Caisse d'Epargne, Ixis, CDC (Caisse des Depots) and SG; while the main group of foreign players that have taken advantage comprises ABN Amro, Dexia, Depfa and RBS. On the contracting side, Bouygues, Vinci and Eiffage tend to be the key players on most transactions.

Whether the PPP market has capacity for more players remains to be seen. Perversely, several US banks are said to be interested in doing business in France, while Macquarie is rumoured to be looking closely at several deals.

Teething troubles

The number of hospital projects coming to market has played a major part in elevating the profile of PPP structures in France, though it may obscure a greater problem.

In the 1980s, France faced a large-scale decentralisation, whereby public procurement was, in effect, passed down to lower levels of government. Thus, policy and budgetary issues held up the PPP market. Certainly, this situation still obtains today.

According to Matthieu de Varax, partner at Simmons & Simmons in Paris, "The French market is not as aggressive or as far-reaching as the UK. At local municipal level, however, there is a need for equipment. The French Government may have transferred autonomy to local authorities, but it is sometimes felt that it has not transferred all the corresponding budget, which may increase the need for some structured financing."

Questions over public spending and policy control may mean that PPP in France will encounter severe difficulties in attempting to grow itself beyond niche sectors, such as healthcare and security. Moreover, certain players have their doubts as to the viability of the number of healthcare projects. "Of course, the healthcare sector is booming and there is now a real critical mass of projects; but, as per usual, they all may not go through," muses a Paris-based project financier.

Not everyone, however, has these reservations. "One of the reasons that PPP may become successful is that it will give local authorities more flexibility, without giving away control over the project. For the public sector, to get value for money on a PPP transaction they need to achieve a fair amount of risk transfer," says Philippe Mallea, partner at Norton Rose in Paris.

Another hurdle that will need to be overcome is political resistance at municipal level. Over the past few years, some left-wing municipal governments have queried PPP as privatization by other means. Moreover, given France's high percentage of civil servants, there will be issues for many employees in transferring to the private sector.

"With PPP, employees would normally transfer to the private sector; though, given the sensitivity of these issues in France, it will take a long time and a significant cultural shift to move people from the public to the private sector," adds de Varax. "In the early stages of the development of PPP in France, state employees are unlikely to transfer, as is witnessed by the current prison or hospitals programmes".

However, the French Government seems to be committed to a PPP programme through its initiation of a national PPP authority. The authority – which includes Clifford Chance, Freshfields, Dexia, and SG – is expected to elaborate guidelines and lay down some benchmarks for those looking to use these structures.

Rail and jail

For some, the use of PPP by the Ministère de la Justice (Ministry of Justice) for prisons has come as a surprise. In August 2002, the LOPSI law, relating to domestic security, was passed; while the LOBJ legislation, relating to justice, was brought in a month later.

Both laws allow for AOT/LOA sale-and-leaseback structures which permit the private sector to finance public buildings and real estate, subject to right of return or purchase in favour of the state. Since so much time was spent on these laws, there was an expectation that the structures would be used in lieu of PPP.

However, the Ministère de la Justice has decided to launch a PPP programme for a tranche of four of its prisons, which represents a total investment of some Eu250-Eu300 million. This deal is part of a Eu900 million construction programme for 18 prisons with a total of 8,900 prisoners.
For the first tranche, all four prisons will come under the same 20-year concession. Though the winner of the mandate will be responsible for the construction of the buildings, the state will retain in control of all custodial services.

In November 2004, the Ministère de la Justice drew up a shortlist of bidders, made up of Bouygues, Eiffage, Spie, Batignolles, Sogea and GTM for the first tranche. The winner of the full financial bid should be announced in late spring or early summer. The four prisons are located at Rhone, Loire, Herault and Meurthes-et-Moselle.

The prison programme could be one of the largest in Europe and future deals will likely replicate the tranche structure.

While infrastructure projects have been on the increase, transportation deals have been thin on the ground. One of the most high profile PPP deals to hit the market has been in the rail sector.
On 10 February, the Eu1 billion ($1.3 billion) Perpignan-Figueras high-speed rail project closed. The deal marks the first cross border train line financed by the private sector since the deregulation of the European rail-freight market and the construction of Eurotunnel. TP Ferro, a company formed by Eiffage and ACS-Dragados, was awarded the 50-year concession of this new train line. The 44km high-speed rail line includes an 8-km tunnel under the Pyrenees.

IXIS Corporate & Investment Bank acted as financial advisor and coordinated the financing on behalf of TP Ferro. The Eu550 million ($714 million) 35-year maturity commercial debt for the project is priced at 135bp over Euribor during construction and 150bp during operation. (For more details, search "Perpignan").

It is also rumoured that a planned TGV line between Bordeaux and Tours will be structured as a PPP. This sounds like wishful thinking to some. "I really don't think we will find that many projects in the rail sector. There has been talk of PPP for the TGV, but there would have to be enabling legislation. So I can't really see it in the near future," says a Paris-based project financier. The Ligne a Grande Vitesse (LGV) Sud Europe Atlantique is expected to be built in two phases: the first 128km-phase between Bordeaux and Angoulême is estimated to cost Eu1.5 billion; while the second 181km-phase between Angoulême and Tours will cost Eu2.2 billion.

Great expectations?

While the outlook looks positive, it is as yet unclear what form the French PPP market will take: "A lot of municipalities are very enthusiastic and want PPP for all projects. They may indeed be over enthusiastic. They don't realise these are aggressive tools and not a free gift. If they are not careful, there may be a few nasty surprises," says a local lawyer.

This over-enthusiasm may wane once municipal authorities realise that the costs involved in launching a project may have no correlation with the overall size of the deal. Moreover, a handful of project financiers are mentioning the unmentionable: that contractors do not have the capacity to launch all projects.

Nor might they. Construction and civil works companies, however, are not expected to hang around in these transactions. "Once the project closes they [construction and civil works companies] will want to get out. However, we are looking at them on a long-term basis. Even if we are acting to create funds we intend to stay long term partners of local authorities," adds Lafite.