While France has traditionally lagged behind the UK in the size and scale of its PPP programmes, the prison sector is a marked exception write Simon Ellis and Vander Caceres

With the latter now having reached its prison capacity and scrambling to put together a procurement solution, the French Ministry of Justice's (MoJ) ambitious PPP plan to house an extra 8,900 inmates is already well advanced.

In February a consortium of Eiffage, Calyon and Natexis reached close on the €300 million eastern tranche to house an extra 2,790 inmates at new build prisons in Roanne, Nancy, Lyon-Corbas and Béziers (see IJ case study, 15 March 2006).

This month - THEMIS - another construction-bank consortium of Bouygues, Dexia and RBS has closed the €205 million second wave scheme to build and maintain three prisons in the north-west of the country.

There has even been provision for future dealflow, with the MoJ set to offer the enticements of a third phase of new build, the refurbishment of a Paris prison and a swathe of new build court contracts.

However, as a brief look at the THEMIS deal reveals, that may be of parochial interest. To foreign sponsors the French justice sector remains as closely guarded as the institutions it oversees.

Background

The innate political sensibility of the prison sector and stringent rules of the French Civil Code did not make prisons a promising area for a PPP programme, but political will was galvanised by a crisis.

Between 2001 and 2004 France's prison population rose by nearly 9,000 to 55,028, more than 7,500 above the official capacity.

The surplus exposed a historical failure in procurement and led the Ministry of Justice to push through PPP legislation and empower the Agence de Maîtrise d'Ouvrage de Travaux du Ministère de la Justice (AMOTMJ) to procure a wave of 18 prisons.

Amir Jahanguiri, In-counsel at Freshfields Bruckhaus Deringer Paris, explains,

'It is not a case of replacing existing capacity but adding new space into the system. The Ministry of Justice last procured prisons for with an extra 4-5,000 of capacity in 1986, but that was proved quite inadequate.'

In September 2002 the Perben law granted private sector the right to operate prison and court buildings on a temporary lease and in 2004 the Ordonance de Partneriat, which will come in to effect in the new year, consolidated the legal basis for French prison PPP.

Procurement - the usual suspects

The second wave of France's prison project was tendered in April 2005 and as with the eastern tranche attracted a France's big four construction firms - and precious few others. The final shortlist was:

• Bouygues with Dexia and RBS
• Spie-Batignolles with Caisse des Depots and HSBC
• Vinci-Sogea with IXIS
• Eiffage with Calyon and Natexis

After the nine-month competitive dialogue process required under French law, the contract was awarded to the Bouygues-led THEMIS consortium in July 2006.

Under the contract Bouygues will design, build and maintain three prisons in the west of France:

• Poitiers-Vivonne, a Centre Pénitentiaire (secure prison) housing 600 inmates
• Rogerville near Le Havre, a Centre Pénitentiaire housing 690 inmates
• Le Mans-Coulaines, a Maison d'Arret (detention centre) with capacity for 400 inmates

Ownership of the prison land and all soft services will remain in the hands of the state.

The Financing: Not in our books

Dexia and Royal Bank of Scotland acted as joint mandated lead arrangers with Dexia also taking on the role of financial adviser to THEMIS. Societe Generale acted as adviser to the government.

Financial close was reached on 12 October and according to Dominique Maurel, Head of Project and Export Finance at RBS France there is no urgency to launch syndication soon.

'We are not going to keep this on our books because our goal is to distribute it in the loan market' says Maurel.

This is in stark contrast to lenders in the eastern tranche of prisons as Calyon is planning to keep debt from that transaction on its books. 

The total project value is around €205 million and comprises a two-tranche €194 million debt facility and an equity bridge loan of about €11 million. The bank debt carries a 31-year maturity, a fixed interest rate and is amortising.

Drawdown is likely to occur before year-end as the contractor will begin construction works in early 2007.

About 70 per cent of the bank debt is guaranteed by the MoJ's 'Cession Dailly' law.

Overall, the structure of the financing did not differ much from the financing for the first batch of prisons which closed back in March (//ijglobal.com/gen/products/2006-03-14-04-38-20-7666.aspx).

However, pricing is likely to be slightly higher than the one achieved in the first prisons deal - namely EURIBOR plus 70bp during construction and EURIBOR plus 40bp after construction - because this time there is no construction guarantee in place and because banks have played a more significant role on the equity side.

In the first batch, sole project sponsor Eiffage provided a construction guarantee in order to minimise debt margins.

This time banks made equity investments with Dexia and Royal Bank Scotland taking 40.5 per cent stakes apiece, while the remaining 19 per cent was taken by Bouygues.

Conclusion

The progress of the French prison programme is proof of the country's ability to procure ambitions objectives through PPP, and - with the second wave achieving cloes in just 16 months - to do it with enviable efficiency.

By playing a more signifcant role on the equity side, Dexia and RBS are likely to have achieved a higher margin than the one achieved in the March deal. This trend is likely to continue as typical sponsors like Bouygues are able to free up their balance sheets, while at the same time improving their bids.

A third concession for prisons with capacity of 2,350 at Lille, Nantes and Réau will be awarded next year. The AMOTMJ is also planning to tender Palais de Justice (large regional courts) at Bougoin-Jailleau and Toulon and a PPP refurbishment of Paris-La Santé Maison d'Arret.

However it is questionable whether firms based outside the country will consider returning a PPQ as worth the price of an international stamp.

A source in the market claims 'the French authorities are making efforts to increase competition and drive down construction costs by attracting European construction firms such as Dragados and Hochtief into the market. But I cannot see them penetrating this round of tenders for the justice sector.'

Further afield custodial sector PPP looks to have a strong future with the UK likely to embark on a major round of new projects and cash-strapped EU-8 countries such as the Czech Republic and Hungary looking for ways to meet EU requirements on a limited budget.

The project at a glance