NGE was formed in 2001 from the consolidation of its five main public works businesses – earthworks, pipes & networks, civil engineering, roads, and geotechnics – into a single entity for financial purposes. The earthworks segment continues to be its most important, contributing to around 41% of overall revenue in 2011. More recently it has established a small but potent concessions business.

For the 2011 financial year, NGE’s revenue was up 26% to Eu1.1 billion ($1.42 billion), while its operating income more than doubled and its net debt-to-equity remained steady, though an increase in shareholder equity explains the stability in leverage. Revenue at NGE has been on an upward trend since 2007, notwithstanding a slight dip at the time of the last financial crisis.

France came to the PPP game late, and it was not until 2004 that general legislation allowed the public and private sector to sign contrats de partenariat. NGE sought to adapt its operating model, which was focused on public works, and established a PPP concession division two years later. NGE has so far been named preferred bidder and reached financial close on four projects, all in France.

A confluence of factors has given French PPP a strong deal pipeline over the last few years. The country’s programme if anything accelerated after 2008, on the back of generous state guarantees and strong domestic sponsors. But dealflow is beginning to slow, since several projects that fell under the stimulus package have already reached close. This is in turn will have an effect on NGE’s potential pipeline of PPP projects.

Pathfinder deals

NGE’s first project, the Eu282 million A88 concession, is now fully operational and is entering the ramp-up stage, while NGE is also close to completing construction on both the Eu1.1 billion A63 and the smaller Tarbes bypass in Hautes-Pyrenees, which has an all-in cost of around Eu40 million.

NGE, alongside consortium members Fayat, TIIC and OFI Infravia, reached financial close in January this year on the A150 project in Normandy. That deal had some difficulty in lining up bank support, primarily because of concerns about traffic risk. BBVA had planned to take a ticket on the debt but pulled out. The deal eventually closed with Eu110 million in debt coming from three lenders – Natixis, Santander and WestLB.

The deal was structured as a soft mini-perm, with full cash sweeps kicking in by year 7 and increases in margins over the life of the debt to encourage a refinancing. But NGE was still able to obtain a long tenor of about 24 years and pricing only slightly in excess of 300bp, a solid level considering the deterioration in the financial markets at the time the deal was closing.

Luc Deguillaume, director of PPP and concessions at NGE, notes that NGE was able to lock in credit-approved commitments from lenders in August 2011, before the escalation in the eurozone crisis pushed banks’ cost of funding up further. “Clearly the negotiations for the A150 were difficult,” he says. “But, for us the important thing is that we had already obtained the agreement of the credit committee of the banks and the tenor and margin was secured.”

Traffic risk woes

The A150 was in fact the last greenfield road project with traffic risk to reach financial close in France. The French Ministry for Ecology, Sustainable Development, Transport & Housing (MEEDAT) picked Vinci as preferred bidder in December last year for the Eu750 million A355 bypass in Strasbourg, but the project was abandoned after Vinci was unable to sign in commitments by the deadline specified.

The French government’s refusal to extend the deadline for commitments may have, at least in part, been a pretext, because environmental and political concerns plagued the project, but bank appetite also proved to be thin. Credit Agricole, Deutsche, HSH Nordbank, La Caixa and Santander agreed to lend, while BBVA and UniCredit are believed to have agreed in principle to fund. But even if the two final banks received approval, closing a deal of that size would still have been a challenge.

NGE, in a consortium with Sanef, was the next bidder in line and is understood to have used more robust traffic forecasts than Vinci. However, despite market rumour that the project would be awarded to NGE’s consortium, Deguillaume has had no contact from MEEDAT. “I don’t know what happened with Strasbourg” says Deguillaume. “I think the project was stopped by the state of France. I don’t know for which reason; perhaps the financing was difficult to raise. But if the preferred bidder had not been capable to raise the financing, probably the second bidder would have been called and we were the second bidder with Sanef, and we have not been called.”

Back to the future

Given the size of the debt required and the general deterioration in the financial markets since NGE closed the A150, financing the project would have been tricky, at least without some form of sponsor guarantee during the ramp-up phase, in addition to a slew of other lender-friendly terms. But, NGE has an impressive ability to bring deals with traffic risk to close.

In January last year, NGE, along with consortium members HSBC European Motorway, DIF Infrastructure III, Colas, Egis, and Spie Batignolles, closed the financing for the A63 road widening project in south-west France. The deal closed as Eu756 million in debt from a club of 8 banks and was impressively oversubscribed, given both traffic risk and that the project involved the payment of a concession fee.

NGE does not shy away from traffic risk. NGE is one of four bidders, along with the three majors – Bouygues, Eiffage and Vinci – shortlisted for the Eu500 million A381 real toll project, and Deguillaume confirms that NGE is looking to submit a bid for the Eu1 billion A45 real toll project once the French government has put the project out to tender.

For both projects the French government is likely to provide some sort of guarantee or generous subsidies to make sure that both projects do not fall victim to the same difficulties that sank Vinci’s A355. “I think that the traffic risk is not easy to syndicate and perhaps the French state is analysing the situation with advisers to optimise the contract in order to bring in private players,” says Deguillaume.

Competitive advantage

NGE has not been appointed preferred bidder on any PPP projects in France since the A150, although this is probably more a consequence of market vagaries than anything else, particularly the declining deal flow, especially for road deals. NGE will look to maintain its run of success by winning concessions for other asset types. Voies Navigables de France has shortlisted NGE, along with three other bidders – Vinci, Bouygues and Spie Batignolles – for a project that entails the renovation of 29 dams on the Meuse and Aisne rivers under a 30-year concession.

But NGE’s main focus is in the transport sector and it tries to distinguish itself as a leading sponsor for some of the smaller deals or co-shareholder for the larger ones. “I think we are different from the three majors,” says Deguillaume. “We have no building activity and our activity is mainly national.” This approach is likely to continue, since it is difficult for NGE to compete directly with the three majors on some of the mega-deals.

Captive funding

NGE, along with Compagnie Benjamin de Rothschild and OFI Infravia, is in process of marketing a new 14-year closed-ended fund that will concentrate on investments in several small- and medium-sized projects in France, an area where NGE is likely to have an advantage.

The three are in the process of obtaining approval from the Luxembourg authorities and will look to reach first close once they have raised around Eu80 million. The new fund will invest in projects that require between Eu30 million and Eu300 million in capital expenditure, although they may not be exclusively in transport and would include social infrastructure and accommodation projects.

In September 2011 NGE bought railway construction company TSO, which has worked as far afield as Cambodia, Saudi Arabia, Panama and the Dominican Republic. But for the time being, Deguillaume is not predicting any push to expand its PPP business overseas. “We have no experience at NGE outside France,” he says. “In the medium-term we will compete more abroad, largely thanks to the general experience of TSO. TSO is working on several continents and NGE plans a cautious development, although this will be mainly focused on rail projects, for which subsidiaries of NGE could bring expertise. At present our plans are to support TSO through our subsidiaries.”

In the forthcoming years France is expected to cede leadership to the Benelux region as the leading European PPP market and the remaining dealflow is likely to be more weighted towards the social infrastructure and accommodation sectors. But NGE’s involvement in PPP projects has always been selective and is largely an offshoot of its experience in public works, and this is unlikely to change.

The NGE PPP track record

Date range: 25/04/2008 to 20/12/2011 
Total debt volume ($m equiv): $1,890.08
Tenor range: 3 to 35 years 
Average debt volume ($m equiv.): $472.52
Average tenor: 26

Deal Name	Sector	Country	Amount ($m equiv)	Closed	Sponsors
A88 Toll Road	Transport > Shadow toll	Europe – EU > France	445.14	25/04/2008	AXA Investment Managers, Demathieu & Bard, NGE, Spie Batignolles, Caisse des Depots et Consignations – CDC, Egis Projects, Malet Materiaux, Entreprises Valerian
Tarbes Bypass	Transport > Availability road	Europe – EU > France	49.9	08/07/2010	Spie Batignolles, Caisse des Depots et Consignations – CDC, NGE
A63 Salles-Saint Geours de Maremne	Transport > Availability road	Europe – EU > France	1251.83	18/01/2011	HSBC European Motorway Investment, Colas, Spie Batignolles, DIF Infrastructure II, Egis Projects, NGE
A150 Ecalles-Alix to Barentin Real Toll Concession	Transport > Real toll	Europe – EU > France	143.21	20/12/2011	NGE, Fayat, TIIC, OFI Infravia

Source: BenchBase