After years of discussion, the concept of Public Private Partnerships (PPP) is finally taking hold in France. Invitations for tenders are imminent on large deals for prisons and hospitals, and a legal and financial advisor will soon be chosen for the first phase of the high speed rail link between Tours and Bordeaux.

A variety of legal structures are being used. In the health, defence and prisons sectors, deals are being put together using sector-specific laws, which were passed in 2002 and 2003. However, in June of this year the government finally passed a general law governing Contrats de Partenariats Public-Prive.

For many years in France there have been concessions awarded for the design, build and operation of various motorways, water, power and railway networks, as well as one off projects such as the Stade de France. But these concession holders had to be paid from the revenues actually deriving from the project. Thus under previous French law the government could not pay against availability, so for example shadow toll roads were not possible.

France has also used public procurement laws involving the design, construction or operation of projects. But the procurement laws include rules that deferred payments (ie payments spread over the life of the project) are prohibited, which makes private financing very difficult. In addition the public sector generally retains most of the risks, and the tender process does not generally permit negotiation.

All that is now changing. When the current French government came to power in June 2002, it was facing high indebtedness and acute infrastructure investment needs, and so decided that fast tracking legislation to get the private sector involved was a priority.

France's new PPP law

Ordonnance Number 2004-559 states that PPP contracts may be entered into where an appraisal process is carried out by the public entity before the contract award process commences. This must show that, 'given the complexity of the project, the public entity is objectively not in a position to define alone and in advance the technical specifications necessary to meet its requirements, or to put together the legal or financial structure of the project, or that the project is of an urgent nature.'

A report is required setting out all the economic, financial, legal and administrative grounds upon which it has been decided to use a PPP structure. The new law states that 'where the project is of an urgent nature, this report may be brief.'

Bankers and lawyers are still studying the text, and it remains to be seen in what sectors it will be used, and to what extent it will supersede structures already in use.

Patrice Vabre, executive vice-president Structured Finance at Dexia Cedit Local in Paris, notes that there will have to be assurances that PPP is providing a cost effective solution for projects, and that other structures may still be deemed appropriate for many projects. "Even under the new Contrats de Partenariats Ordonnance, to do a deal requires some studies by the government or the local authority to justify going the PPP route," says Vabre.

"The jury is out on how the new ordonnance will be applied in practice," comments Tim Scales, partner at Allen & Overy in Paris. "For a project to be tendered under the ordonnance, a number of conditions need to be satisfied, such as the immediacy of the requirement for the relevant public service and the financial and technical necessity of applying the new public private partnership model. There is as yet little guidance, however, as to how such conditions can be shown to be satisfied, and given some of the case law (where the award of public service contracts has been successfully challenged due to failings in the procurement process), this may make investors nervous. Furthermore in sectors in which traditional concession based models have been successfully employed (such as the road and water sectors) questions may be raised as to the need for change."

"Certain ministries have also been developing their own public private structures, and it is hard to predict whether, two or three years from now, the Ministry of Health, for example, will be using its own specific legislation or using the PPP framework," says Scales. But regardless of which structures are used, he expects a sizeable volume of PPP-style projects to be closed over the next few years.

"State budgetary constraints mean that the involvement of the private sector in the financing of infrastructure and public services has become a necessity, and the French government has been very open to suggestions, and wants to leverage off the experience of other countries," says Scales. For example, Allen & Overy and Societe Generale have an established track record on UK prisons deals, and have together been advising the French Ministry of Justice on its upcoming prisons programme.

"The idea of the new ordonnance was to bridge the gaps in procurement techniques available, and to work out where the gaps are you have to look at each sector individually," explains Simon Ratledge, managing associate, Linklaters' PPP/ Project Finance team in Paris.

"For prisons in particular, our view is that so much time was spent upstream on the LOPSI and LOPJ laws (which allow for AOT/LOA lease type structures), we suspect that the first batch at least will employ that technique. It is possible thereafter that the Ministry of Justice may be tempted by a more flexible model under the PPP ordonnance, but then again timing imperatives could lead them to stick to the precedent documents developed in the first wave of projects."

The LOPSI law was passed in August 2002, and related to domestic security, while the LOPJ law relating to the judiciary was passed in September 2002. The AOT/LOA is a lease/leaseback structure which allows public real estate to be temporarily help by the private sector, subject the right of return or purchase in favour of the state.

"A number of key areas are emerging where partnership contracts might offer procurement possibilities not otherwise available, ranging from real estate based schemes where the end user would not be expected to fund, such as universities and certain museums, to shadow toll roads in transport infrastructure," says Ratledge.

Indeed the old concept of the concession implied that the person holding the concession cannot be paid by the conceding public entity, but must obtain its revenues from the end users of the public service. Accordingly, only financially free standing projects such as car parks or toll roads could be set up through concessions, not projects based on services sold to the public sector, such as is the case in the many prisons or government building projects done under PFI in the UK.

Some of the existing concessions in France have raised private finance on a limited recourse basis. This was the case with the A28 motorway in Normandy, where revenue streams were generated by real tolls. These A28 revenue streams were used to underpin an offering of concession bonds, which were wrapped by monoline insurer FSA. Upcoming PPP deals are expected to feature a mixture of bonds and bank debt.

PPP deals nearing market

The first French prisons deal will be put out to tender before or after the summer break, so the pre-qualification process should be underway by September at the latest.

The government will be looking for sponsor groups to build 18 prisons, with a total value of around Eu1.4 billion ($1.7 billion). This will be the largest newbuild prison programme in Europe. The Ministry of Justice has already selected Societe Generale to advise it on this initiative. The first deal may comprise three or four prisons with a value of Eu250 million.

However, unlike in the UK, the actual custodial services cannot be outsourced to the private sector, so the staff will continue to be public sector employees.

The Ministry of Defence is also looking for innovative financing options for 17 frigates being delivered to the Navy. The Law on Military Programming for 2003-2008 attaches and approves a report confirming that 'the outsourcing policy of the Ministry of Defence will be continued and accelerated.'

This ties in with the Defence Decree passed in January, which allows the Armed Forces to derogate from the Public Procurement Code. The first Eu5 billion deal for the 8 anti-submarine and 9 sea-to-land warships just involves financing, and not the actual building and delivery of the vessels. The use of private sector finance will mean that there will be minimal impact on public debt from the perspective of Maastricht Treaty requirements, and an optimal tax regime, notably where VAT is concerned.

The planned TGV line between Bordeaux and Tours may also be done as a PPP, and Reseau Ferre de France (RFF) is currently looking to select a financial and legal advisor. The Ligne a Grande Vitesse (LGV) Sud Europe Atlantique will allow trains to travel at 300km/h (as they already do between Paris and Tours), and will be built in two phases. The first 128km stretch between Bordeaux and Angouleme is estimated to cost Eu1.5 billion. The second 181km phase between Angouleme and Tours will cost Eu2.2 billion.

As is the case with all PPPs, a preliminary study will be carried out to ascertain whether a PPP structure is appropriate. However it is widely expected to be one of the pilot PPP projects.

France also has a major new hospital building programme underway. The Hospital 2007 Plan comprises 932 projects costing around Eu10 billion, and involves both new hospitals and the renovation of existing ones. Some of the first projects will be done under the specific sectoral legislation, and the pre-qualification process should happen during 2004.

"There are eight pilot projects which should be the first PPPs developed under the new ordonnance," explains Laurent Vandomme, partner at law firm Herbert Smith in Paris, with the list including police stations and museum renovations as well as hospitals and the high speed rail link.

But Vandomme also sees both the PPP and other structures being used in parallel over the next few years, rather than a wholesale switch to the new PPP rules. "The public authorities will still have the choice between the PPP ordonnance and the more traditional approaches such as concessions, which have been used in highways for decades now," he says.

One subject currently under discussion within various EU governments is the extent to which PPP may be combined with European structural and cohesion funds, which might be applicable in areas such as road and rail links.

To date such combinations have been very rare, but going forward bankers do expect to see projects partially funded by the EU also featuring some sort of private sector financing via PPP.

Call for transparency

The new French PPP ordonannce concentrates heavily on transparency, especially with regard to the allocation of risk between the public and private partners. The law does not set out how this objective should be achieved, but does set out specific requirements for performance objectives with regard to service, building and equipment quality to be set out in the contract, as well as the conditions under which they are to be made available to the public authority.

As Linklaters notes in a report, 'the clear aim is to provide a contractual framework that will avoid documentary uncertainty, and which will, in turn, help to enhance bankability.'

Parties wanting to participate in old-style public procurement programmes may not be very pleased to see them being done via the PPP route. This may be particularly true since the size and complexity (including putting together financing structures) of PPP projects will tend to favour big companies over some of the medium sized companies that have previously won procurement contracts.

The result could be litigation from the losers, who may challenge PPP contracts and try to get the tenders re-opened using a different structure. "Legal challenges from losing parties have become something of a national sport here in France," comments one lawyer, so some of the pilot PPP projects could yet get tied up and delayed in the courts.