France has been at the forefront of successfully procuring and financing some of the biggest transport and social infrastructure projects this year.

The €1 billion (US$1.4 billion) French Pentagon PPP or 'Pentagone à la française' - to be located at Balard in Paris - is one of the largest defence infrastructure deals to close globally in 2011 alongside Australia's US$944 million military housing PPP - Single LEAP Phase 2 [Transactions Database].

It is also among the largest social infra projects to reach financial close this year, behind Australia's US$3 billion Royal Adelaide Hospital PPP [Transactions Database] and Canada's US$2.1 billion CHUM hospital PPP [Transactions Database].

The other two French infrastructure projects which are likely to top project financing charts this year are the high speed rail PPPs - LGV Tours-Bordeaux PPP [Transactions Database] and LGV Bretagne-Pays de la Loire [Transactions Database].

While experts believe the country may not repeat such big ticket deals in the near future but France's efficient infra procurement mechanisms reaffirm the government's commitment toward its PPP program.

The French Pentagon has been praised by most of its stake holders for sticking to the procurement timelines set out by the Ministry of Defence when the project was first put out to tender in 2009.

The 300,000m² headquarter development reached financial close with a group of five european banks coming together to raise around €800 million in senior debt for the project. Three of those MLAs are also leading the loan syndication process which is likely to conclude in the coming weeks.

While France is not planning any other defence PPP projects in the near future, the government has been active in the education and prison accomodation space. It is currently in the process of tendering around 10 university redevelopment projects under its €5 billion ‘Operation Campus’ scheme to renovate and expand 10 pôles de recherche et d’enseignement supérieur (PRESs), or super-campuses. 

Background & Project specifications

France has come a long way since 2008 when the Ministry of Defence closed its first defence project PPP - the EAALAT French army flying school [Projects Database]. While the project cost was just a mere €60 million, it undoubtedly paved the way forward for larger defence deals and was one that contributed to essential army aviation infrastructure.

Marc Fornacciari, Partner at Salans who advised the lenders on the Pentagon project says, "The French Ministry of Defence has shown good governance on projects, and in general the counrty has been open to PPPs and outsourcing development of government projects. The French railway authority's GSM-R project is also a case in point."

The 'Pentagone à la française' began its procurement process in 2009 and received a strong level of interest from the private sector. Not surprisingly the three big French construction majors Vinci, Bouygues and Eiffage were part of the final bidder shortlist competing for the project.

A Bouygues-led consortium finally bagged the project in February 2011 and will be building the new Pentagon under the SPV named - Defence Opal SAS [Transactions Database].

The consortium members are:

• Bouygues Bâtiment Ile-de-France (16 per cent)
• Exprimm (2.9 per cent)
• Thales Communications SA (6 per cent)
• Sodexo France (6 per cent)
• Dalkia France (2 per cent)
• FIDEPPP (16.5 per cent)
• SEIEF (16.5 per cent)
• OFI Infravia (0.1 per cent)
• Caisse des Depots et Consignations (34 per cent)

The DBFM scheme will include the construction and renovation of the former Cité de l'Air and the maintenance of 300,000m² of buildings over a 30-year concession period. It will be located in the Balard district and will house all armed forces staff central to the ministry - up to 10,000 people.

The project also includes a recovery operation to property located on the western end of site Balard ("West Horn"), covering about 90,000m² of office. Development Venture Fund III, managed by AXA REIM is the lead investor on this aspect.

The Pentagon development also envisages three day nurseries open to the public, two restaurants each capable of serving 4,000 meals per day, two conference centres, a media centre dedicated to armed forces press conferences, a medical centre, a sports centre with a swimming pool open to the public, 1,300 parking spaces and 900 bedrooms providing accommodation for people working at the ministry.

Construction is set to begin in January 2012 and be completed by June 2014.

As Fornacciari explains, the 90,000m² real-estate development added some complexity to the project since it needed to be ring-fenced from the rest of the project which was being procured as a PPP. However, he says that the real estate development will be used for commercial purposes and revenue would be used to pay back the costs of the Pentagon.

"The Pentagon is a big project for France in-terms of construction, the Ministry of Defence had been studying it for a few years and was keen to take it forward so it could bring many defence functions under one roof. Selling old defence buildings in the heart of Paris and building a Pentagon on the outskirts was also a motivation for the project,"  Fornacciari says. 

Financing 

The French MoD achieved financial close on the project on 30 May, 2011 with a group of five lenders coming together to finance it through a bank debt solution.

Senior debt of about €806 million was arranged by the five lenders:

• BBVA - €152.6 million 
• CIC - €121 million 
• Dexia - €177.5 million
• Natixis - €228.3 million
• Société Générale - €126.6 million 

The debt tenor is 25 years and is being provided in the form of a construction loan in two tranches, VAT facility and an equity bridge loan. Debt to equity is set at around 90:10. Around €80 million in equity is being provided by the sponsor consortium.

The project is now in the loan syndication phase with BBVA, Dexia and Natixis acting as joint bookrunners on the loan syndication process.

The loan syndication was launched to the market in June this year and is expected to conclude in the next few months. A small group of european and international banks are expected to pick up tickets in the syndication process, a source close to the deal had told IJ news earlier on.

All three tranches of the loan will be syndicated and the sponsors may look at refinancing the project after the construction phase.

Syndication is seeing renewed interest among players in the project financing market as they look to spread and share risk among peers.

Apart from the Pentagon, the €7.8 billion Tours-Bordeaux high speed rail PPP is also planning to enter the syndication market.

Advisory Roles

Deloitte gave financial advice to the authority with Hogan Lovells acting on the legal side and AOS Studley giving technical advice.

For the sponsor, Dexia and Natixis jointly provided financial advice with legal counsel coming from Orrick. Mott MacDonald gave technical advice.

Salans have legal counsel to the lenders, with Mott MacDonald providing technical advice.

Conclusion

Social infrastructure projects in the defence sector are highly sensitive in nature and not easy to come by. One of UK's high profile defence projects - the SAR-H PFI - was cancelled last year amid bidder controversy [Projects Database] and no new defence PPP project has been tendered since.

While the French Pentagon is definitely a landmark deal for France and the defence sector as a whole, the MoD is not planning anything similar for the forseeable future. France, however, still remains one of the most active social infra PPP markets in western Europe as Italy, Spain and Netherlands see a slight slow down.

In the past France has had a lot of healthcare projects being procured under the PPP model, however lately the country has been more focussed on the stadia, education and justice space. The government is making progress with its university and prison schemes which will be looking for funding during this year and will once again stand testimony to the government's efficient and timely PPP procurement mechanisms for essential infrastructure in both the social and transport sectors.

Project at a glance