France has ‘completely failed to regulate’ toll roads, says EDHEC

French authorities have allowed 'profits that have no relationship' with market risks, according to the research institute.

French authorities have “completely failed to regulate” outsized returns in the country’s toll road concessions, according to Frédéric Blanc-Brude, director of the EDHEC Infrastructure Institute and co-author of a new report on the issue.

The Singaporean institute found overall return for toll road concessionaires in France is between 6.4 percent and 7.8 percent. However, the average return on equity rises to  between 27 percent and 35 percent when taking into account the debt on the balance sheets of the concessionaires. This “has no equivalent in Europe”, according to EDHECinfra, whose findings were referenced last week in a report by France’s Senate Investigative Committee on motorway concessions.

While the committee has taken EDHEC’s findings into consideration, Blanc-Brude does not believe this issue is exclusive to French toll roads.

“The leverage has been increasing,” he told Infrastructure Investor, noting that in the cases for this report, leverage was close to 80 percent. “There’s a clear trend of more leverage, cheaper debt, lower cost of equity and in some cases, lower corporate debt.”

The situation is not helped by a failure to bring tariff levels down and to make contracts fairer when their extension was being negotiated in 2015.

“We could imagine a slightly less wait-and-see attitude from the legislator. It should be possible to find a fairer framework sooner for the tolls paid by motorists in France,” concluded Blanc-Brude alongside co-author Noël Amenc.

The pair recommended what they see as a fairer model of tolls being at least 15 percent lower while still allowing concessionaires to retain profits on the contracts.

“With a lower WACC by one percentage point, we could lower tolls by 15 percent on average without undermining the economics of the contract,” Blanc-Brude said in a statement. “In fact, the rate used by the Ministry of Transport is several percentage points above the cost of risk actually borne by shareholders.”

The Senate has now called for the government to no longer renew or extend these contracts and instead find a new model which will include regular review clauses to take into account the evolution of the cost of capital.