France came to the PPP game late. It wasn’t until Jacques Chirac’s election as president in 2002 that PPP was considered as a viable alternative to state funding. While other jurisdictions tended to settle on a modified version of the UK’s PFI model, France drafted its own PPP framework and brought the 1981 Dailly law in line with the new procurement strategy. As one French PPP banker puts it: “The Anglo-Saxon model travelled all around the world but failed to make it across the channel.” London infrastructure bankers, when not trying to parse the latest utterances from the UK’s coalition government, tend to cast envious glances at the French market.

Although it took nearly a decade longer than Britain for the market to get going, France’s rejection of the British model became a source of strength following the global financial crisis. Britain’s urge to assemble ever more finely-tuned risk transfer was well-suited to the boom years, but the fallout from the crisis brought Gallic simplicity into vogue. The Dailly law’s elimination of performance risk particularly gave the stability lenders desired. Furthermore, France’s love of l’esprit des loix is writ large in its PPP, with contracts relying more on general case law rather than specific terms. This has the enviable effect of cutting down documentation, with Yves-Eric François, director of project finance at Eiffage in Paris, pointing out ‘What takes two lines to outline in France, could run to fifteen pages in the UK.’

A confluence of different factors has given French PPP a strong deal pipeline. Nicholas Sarkozy pushed infrastructure spending as a remedy for the financial crisis, and the need to cut state spending has made off-balance sheet financing the preferred method for delivering this. Most crucially, the timing of the arrival of a slate of high-speed rail (HSR) projects has led to PPP opportunities worth billions rather than millions.

High speed rail arrives

The HSR projects are the result of a plan launched two years ago, and last year’s GSM-R deal laid the foundations for the current wave of projects. Although GSM-R involved the installation of a railway communications network, rather than laying new track, the French state railway operator Reseau Ferre de France awarded the project and its financial structure will provide a template for future projects.

GSM-R, with its Eu1.2 billion ($1.7 billion) size and 15-year concession length, pales in comparison to the three HSR projects currently in finance and tender, however. The largest, the Eu7 billion Tours-Bordeaux line, which was awarded to Vinci last year, is not typical of French PPP, with no availability payments to soften traffic risk. The other two projects, the Eu3.4 billion Bretagne-Pays Loire line and the Eu1.6 billion Nimes-Montpellier line, are both backed with the usual availability support and the Dailly mechanism. Where­as Nimes-Montpellier is currently in tender, with best and final offers from all of France’s big three due soon, RFF awarded Bretagne-Pays Loire to Eiffage in January and the deal is set to close by the middle of the year.

Eiffage and its financial adviser La Compagnie Benjamin de Rothschild have already received a number of final offers from banks for project debt, and are expected to mandate a final bank club in April. There has been strong appetite for the project from the main domestic and foreign lenders active in the market, which Jean-Francis Dusch, co-head of project finance at La Compagnie Benjamin de Rothschild, believes “will prove instrumental to bringing a successful and timely closing for this large landmark PPP.”

Reseau Ferre de France caught many in the French market by surprise when it selected Eiffage as preferred bidder for the 25-year design-build-finance-maintain contract in January, as Vinci and Bouygues had both held more exclusivity deals with banks. Eiffage still gained a solid level of bank support at the BAFO stage, but only from banks that had full credit committee support.

When Eiffage won the bid, RFF stipulated that a funding competition had to take place. Around 60% of the total project costs will be financed through a grant by RFF, leav­ing around Eu1.3 billion to Eu1.4 billion of debt financing. This will be funded through a mix of debt from commercial banks, the European Investment Bank and Caisse des Depots et Consignations, a lending arm of the French state.

The deal’s financial structure will largely follow that of GSM-R. Eiffage’s François explains “GSM-R was a much smaller deal with a shorter concession length. It was also delayed by project-specific problems, particularly the bank­ruptcy of Nortel. The lending structure, however, provides a clear template for Bretagne-Pays Loire.” RFF has once again stipulated a 65% cap on Dailly tranche debt and, as was the case on GSM-R, the EIB and CDC will take part in this Dailly tranche. In contrast to GSM-R, however, the EIB is considering taking on debt carrying construction risk.

Negotiations for GSM-R were protracted, largely due to disagreement over the seniority of the various debt tranches. As the commercial tranche carries more risk than the Dailly tranche, the commercial banks felt that it was unfair to rank pari passu with the EIB and CDC. Banks pushed for a senior ranking, but in the end were appeased by a compromise in which they ranked above the EIB and CDC in all but a few specific instances, such as RFF default. The same issue will arise on Bretagne-Pays Loire, but François is confident that negotiations will be much speedier as “everyone was happy with the solution found for GSM-R, and there’s no reason why it can’t simply be repeated.”

In comparison to Bretagne-Pays Loire, progress on Tours-Bordeaux has been anything but high-speed. RFF awarded the contract to a Vinci-led con­sortium in March 2010 but its com­plex mix of state guarantees and com­mercial debt has delayed the financing process. Around Eu3 bil­lion will come from commercial banks, with Credit Agricole, BNP Paribas, Dexia, Santan­der, Societe Generale, BBVA, SMBC, UniCredit and Medibanca as mandated lead arrangers.

Ready for traffic risk?

Tours-Bordeaux’s inclusion of demand risk may make it unique among the HSR projects currently in tender, but some bankers believe that a possible model lies in France’s well established tradition of toll road financing. The Eu1.1 billion A63 toll road that closed in January is perhaps an apt comparison. Tours-Bordeaux entails the up­grad­ing of existing line, just as the A63 concerned the widening of an existing stretch of road. Julien Thureau, managing direc­tor and head of infrastructure project finance at Societe Generale agrees that there are “some similarities”, but he is keen not to push the comparison too far, however, pointing out “The main difference is that rail traffic risk is more difficult to analyse since there is one dominant user of the asset (the SNCF), as opposed to a toll road, where users are numerous (car and truck drivers), which enables lenders to conduct a more straight forward statistical analysis.”

Despite France’s track record of successful toll road fin­anc­ing, there is a paucity of new traffic risk deals. A pre­ferred bidder is due to be selected for the relatively small A150 concession, after which the pipeline dries up. Has the downturn made banks unwilling to accept traffic risk? Julien Thureau Societe Generale, thinks not: “Traffic risk is not a new feature in France and there have been numerous precedents, both pre- and post-crisis. Each and every deal has its own traffic dynamics and financing structures tend to be tailor-made, but what is clear is that the market is already used to French road concession contracts and to the traffic risk concept.”

Lionel Epely, co-head of transport at Dexia, adds a note of caution, however: “Following the crisis, bank appetite for large greenfield toll roads remains untested. The A63 may have been a large deal, but it wasn’t greenfield. It covers a pre-existing road with proven traffic levels. The real test of the bankability of large greenfield traffic risk concessions will be the A355 in Strasbourg, if it ever happens.” The 24km A355 Strasbourg bypass is planned, in part in response to German motorists driving through Strasbourg to avoid their own tolling systems. The project has an esti­mated cost of Eu800 million but environmental assessments have delayed it repeatedly, and many in the French market wonder in private if it will ever see the light of day.

Life after HSR

With France’s bread and butter busi­ness of toll roads un­certain, it is unclear where the next slew of big deals will come from. “After the current pipe­line of HSR projects have reached financial close, we could see a drop off in the large-scale jumbo PPPs in France,” com­ments Amir Jahanguiri, a partner at Willkie Farr & Gallagher, “Although a few large accommodation projects, such as the Balard ministry of defence project and the new prison tenders, are currently also in procurement or past preferred-bidder selection stage.”

The Balard project is a 30-year design-build-finance-operate concession entail­ing the development of a new head­quarters for the French Ministry of Defence in Balard on the outskirts of Paris. The project will consolidate the various French armed services oper­ations at a single site, and the ministry intends to recoup some of the project costs from selling off the 12 sites that it renders surplus to requirements.

The ministry awarded the project to the Bouygues-led Opale consortium in February. The consortium has banks in place and is on course to close the deal by the ministry’s end of April target. Five banks have been mandated for the project: Dexia, Natixis, BBVA, CIC and Societe Generale. Dexia and Natixis are the consortium’s financial advisers as well as mandated lead arrangers.

Total project costs will be in the region of Eu800 million ($1.11 billion), and the government will make annual pay­ments to Opale of Eu125 million, covering rent and ser­vices. The consortium has also won a portion of land attach­ed to the site for real estate development. This real estate portion is a familiar feature of French stadium PPPs, with the sponsor usually selling the land to a developer and then using the proceeds to finance the main project. If this model is followed on the Balard project, lenders will almost certainly seek corporate guarantees for the amount financed through the real estate sale.

In the longer term, the launch of new waves of prison and university PPPs, courthouses in both Paris and Caen, and stadiums such as Bordeaux should keep the market ticking over, even if nothing yet matches the sheer scale of the HSR projects. Besides, for sponsors size isn’t everything. “Of course we like the larger deals, but we do great business on the deals in the Eu10 million to Eu30 million range as well,” explains Eiffage’s Francois, “School PPPs, for example, are rarely bigger than Eu50 million, but they have a quick and efficient framework that sponsors love.”

The big three – hard to break

The current slew of high-speed rail tenders illustrate a key feature of the French market: the continued dominance of France’s big three construction firms. More often than not Vinci, Bouygues and Eiffage end up as the only three short­listed bidders. More alarming are the occasions when one of the three choose not to bid, leaving just the other two in the running. For example, despite its large deal size, Eiffage has chosen not to bid on the Paris courthouse PPP. This could leave just Vinci and Bouygues in com­petition for a close to Eu1 billion deal.

Does such a small pool of active bidders damage com­petitiveness? SG’s Thureau doesn’t think so, comment­ing “Although I hear from time to time that this situation may be detrimental to competition I do not subscribe to this point of view.” As evidence Thureau cites “the fierce competition that we noticed when advising on the public side, for instance the Ministry of Justice on its prisons PPPs and the Ministry of Transportation on two toll road con­cessions.” Eiffage’s surprise victory on Bretagne-Pays Loire certainly sug­gests that there is real competition between the big three on the larger projects.

Capacity is not really a problem for the big three either. As Michaël Armandou, an associate at Willkie Farr, points out “The sponsors within the ‘magic circle’ of Vinci, Bouy­gues and Eiffage are not only key players in the French market, but also leading construction companies worldwide and as such have the capabilities to allow them to deliver a number of major scale projects simultaneously.” Winning a large HSR deal apiece has not stopped Eiffage and Vinci from bidding on Nimes-Montpellier, for example.

Displacing the hegemony of the big three may seem impossible but, as many note, the state is already trying to do so. “The French government now seems keen to broaden the market to smaller construction companies and foreign sponsors” suggests Amir Jahanguiri, “as the perception is that new blood in the market would be positive and bring in more value to the public sector.”

The next wave of prison PPPs, for example, will be split between tenders for single prisons and for batches of three prisons bundled together. The thinking behind this is that, whilst the big three will bid on the bundles, the smaller prisons will be left open for smaller sponsors. “Don’t expect to see Eiffage pursuing the single prisons,” Eiffage’s François hints, “It is only fair that the smaller companies are given opportunities, and everyone wants to avoid PPP appearing to be a gift earmarked for the big three.”

The state has also tried to drive greater involvement from foreign sponsors, with limited success so far. Although RFF held roadshows in Spain and the UK before the launch of the HSR tenders, the big three still dominated the bidding. There are certainly cultural barriers in the way of foreign sponsors. ‘France has a history of concession based financ­ing dating back to the late nineteenth century and this sets the tone here,’ explains François, ‘Disregard this history and you have little chance of success.’

The French Ministry of Ecology, Sustainable Development, Transport and Housing’s selection of the Italian-led Ecomouv consortium as preferred bidder for the Eco Tax project looked as if it might open the market further. At the beginning of March, however, the administrative court in Cergy-Pontoise annulled the Atlantia (formerly Autostrade)-led consortium’s victory after a successful challenge from the rival Sanef/Siemens consortium. The ministry (MEEDDAT) has now launched a counter appeal, but if this is unsuccessful the project will have to be retendered.

The selection of the Atlantia-led con­sortium in January was a shock to most in the French PPP market. As one international banker looking for a great­er foothold in France lamented “We thought backing one of the big three was a pretty safe bet!” Following its vic­tory, the consortium (comprised of Atlantia, 70%; Thales, 11%; SNCF, 10%; SFR, 6%; and Steria, 3%) had been pressing ahead with financial struc­turing, appointing Deutsche as its financial adviser and obtaining commit­ments from around ten commercial banks. If the decision of the French court is upheld then this financing group will fall apart.

The challenge was based on two points. Firstly, Atlantia entered the bidding alone but then accrued partners as the tendering process proceeded. Secondly, the impartiality of the company’s relationship with MEEDDAT was called into question, as one of the State’s technical advisers had former­ly worked for Atlantia on previous bids in other countries.

If the project is retendered, then it removes one of the few big deals outside of HSR from the pipeline. The 13-year contract is worth over Eu2 billion ($2.8 billion), with a project cost of around Eu1 billion. A decision on the counter-appeal is expected to be reached rapidly, as Eco Tax is a priority green policy of the French government.

A source involved in the French PPP market blamed the set­back on the carelessness of both Atlantia and the French state. The source added that if Atlantia had sought partnerships with other companies after the tendering process had closed, there would have been far less basis for a legal challenge.

Dailly grind

Whereas the French PPP market is still relatively closed on the sponsor side, for international banks it is a far easier prop­osition. “The Dailly used to provide a challenge for some foreign banks, as it’s a very specific instrument which could be difficult from a documentation and funding standpoint,” explains Benjamin de Rothschild’s Dusch “The Dailly is no longer a problem for many foreign lenders now, which is positive as international banks are a clever source of funds to tap to cover the significant liquidity needs of larger PPP projects. It doesn’t matter where a bank is from as long as it is competitive and fully understands the key matters related to being an infrastructure project finance lender.”

The Dailly mechanism is, indeed, one of the key reasons France has become such a sought-after market. Put simply, the cession Dailly acceptée is a post-completion assignment of receivables to the financing institutions, guaranteed by the public sector and isolated from performance risk. The rationale behind the Dailly is that, although direct government lending would be cheaper, it still drives down debt pricing whilst keeping project costs off the state’s balance sheet. Indeed, a result of the assumption of performance risk by the state, commercial banks usual­ly lend at just 100bp over Euribor on Dailly debt.

The Dailly has a cap of 80% of in­vest­ment costs, in order to retain an ele­ment of project risk for the private sector. Crucially, however, there is no stipulation on how much of a project’s bank debt can be covered by the mecha­nism. This means that raising the level of sponsor equity can squeeze out debt susceptible to performance risk. The logical extension of this is that a deal geared at 80% could obviate performance risk for the lenders entirely.

“This is already something we’re seeing on smaller deals, such as Eu10 million to Eu20 million housing pro­jects,” informs one PPP banker “It is less common on larger deals, but that doesn’t mean it can’t happen.” Vinci’s Eu200 million Nice stadium PPP, for example, closed in January through a debt package arranged by BBVA, SMBC, Credit Agricole and Societe Generale that was effectively fully covered by a Dailly guarantee.

For those who believe that risk transfer lies at the heart of PPP, this trend is undeniably worrying. SG’s Thureau is some­what uneasy about this approach, remarking “One could arguably wonder whether lenders are incentivised enough or vigilant enough in terms of risk structuring and following up of their assets over the life of the loans.” The danger of complacency on the part of lenders is certainly something parts of the state are mindful of, as seen in the RFF’s stipulation that no more than 65% of project costs can be covered by the Dailly for the large HSR tenders.

Despite these concerns, the continued existence of the Dailly seems unquestionable. As Benjamin de Rothschild’s Dusch puts it “In France the Dailly is a fact of life and it certainly supports the completion of landmark PPPs.” The banks may not have Dailly debt to themselves for long, as pressure for a bond market solution is coming from both the public and private sector. Dexia’s Epely explains “There is a consensus on the idea that developing bond financings for the infrastructure market does make sense, as banks are going to be increasingly constrained on long term funding with Basel III.”

To this effect, discussions regarding a possible Dailly securitization vehicle, known as Fonds Commun de Titrisation (FCT), are taking place between the government and high-profile banks such as HSBC, Dexia and Natixis. The aim is for the vehicle to issue bonds that carry the same AAA rating as French treasuries to institutional in­vest­ors, and government and banks have already approached ratings agencies over the idea. Driving down the cost of debt is a key concern for government, with Eiffage’s François noting “the government was extremely unhappy with paying upwards of 100bp on Dailly debt following the crisis.” On the other side, it also offers large banks the opportunity both to offload debt and make good money through struc­turing and underwriting the bonds.

The vehicle would have to be com­pliant with the European Commission’s competition laws, and it will only work if institutional investors can account for the bonds as risk-free, but what else stands in FCT’s way? “It will first and foremost require a concrete working case to take off,” remarks Dexia’s Epely, “This means that at some point, one tendering authority will need to take the lead and organise the competition in such a way that a bond solution for the financing of the Dailly tranche can emerge on its project.”

Many in the market think that the vehicle, initially at least, would make most sense as a refinancing option. “Refinanc­ing makes sense as institutional investors cannot take part in the construction risk at the start of a project,” explains Eiffage’s François. Wilkie Farr’s Jahanguiri points out that “many recent deals have been financed through mini-perms and therefore the deal pipeline for the coming years should be full of complex refinancings for which sponsors will probably tap the bond market.” With the added liquidity of the bond market at its disposal and a number of large refinancings in the pipeline, the French PPP market could continue its boom for some time yet.