High-speed ambition, delayed departure

Try this for a timeline. Project launched in February 2008; preferred bidder announced in March 2010; commercial close sealed and financial close negotiations started in autumn 2010; financial close earmarked for spring 2011 – maybe.

These more than three years (and counting) comprise the procurement process for the €7.8 billion Tours-Bordeaux high-speed rail line (HSR), connecting two cities in western France. The project forms the centrepiece of the country’s €10 billion-plus HSR programme.

In some ways, Tours-Bordeaux is special: it’s one of Europe’s largest-ever concession projects. It was also structured as a traffic risk project that then had to be propped up with several layers of state-backed support thanks to the financial crisis. As a result, it involves a huge number of public and private players at the same table, ensuring lengthy procurement times.

But in spite of its singular characteristics, Tours-Bordeaux is also representative of France’s public-private partnership (PPP) pipeline in general: very promising but not as straightforward as many would wish.

A bit of everything

That France has one of Europe’s most attractive privately financed infrastructure programmes is undeniable. As you will read over the course of these pages, it takes in everything from high-speed rail, roads, prisons, university accommodation, defence projects, regional airports and a mouth-watering auction of more than 5,000 megawatts of hydropower concessions. This is happening at a time when many of its European counterparts are cutting down on their infrastructure spending.

Still, those wishing to get involved should be aware that leisurely procurement is the norm rather than the exception. To be fair, it’s not all France’s fault. In fact, the country has arguably presented the best response to the global financial crisis in the form of a blanket guarantee able to cover up to 80 percent of the debt used to finance its PPP programme, up to a maximum of €10 billion.

The guarantee was indispensible to prevent an exodus of lenders and keep the government’s PPP programme from grinding to a halt. That it had to be extended from its original two-year expiry date because of protracted procurement times speaks to the complexity of implementing these mechanisms. In addition, France’s big HSR projects all involve both regional and central government funding, opening the door to further hand-wringing.

Tours-Bordeaux again provides a good example of this complexity. As a €7 billion-plus concession with traffic risk in procurement during the worst financial crisis of the last 50 years, lenders and sponsors had to be given significant assurances of government support to keep the project from collapsing.

This meant that, in addition to the almost €4 billion in subsidies coming from the state and regional authorities, the government had to offer to guarantee the majority of the roughly €1.6 billion in commercial debt required for the deal. In addition, it was forced to dig into French savings, the Fonds d’Epargne, via state-backed bank Caisse des Depots et Consignations, to provide a €750 million loan for the project post-construction. To round the package off, the European Investment Bank (EIB) stepped in to lend €600 million.

Crowded table

In practice, the sheer number of people that have had to sit at the table for financial close negotiations has been the major reason for the recent delays, acknowledge several participants in Tours-Bordeaux. At any meeting, there are likely to be representatives from: the three sponsors (VINCI, AXA and CDC Infrastructure); the eight commercial banks involved in the deal; procuring authority RFF; the Fonds d’Epargne;  the EIB; MAPPP (the country’s PPP unit); and all their respective advisors.

But there are other reasons. “We are still working out how the deal structure will fit with the debt guarantee provided by the French state,” explains Francois Bergere, the head of MAPPP. “While everything was accepted in theory we are now stuck in the nitty-gritty of actually implementing it,” he adds.

The guarantee also had to be verified by Brussels, to make sure that its use would not run contrary to state aid regulations, a process which has now been concluded, says Bergere. And then there are other, more worrying factors weighing on the deal, such as the fact that not all of the regional authorities involved in the project have pledged their funds yet. This residue is said to amount to €1.7 billion of the near-€4 billion in public subsidies.

As one banker explained, RFF is negotiating on a case-by-case basis with all of the required local players. But outside of RFF, none of the other participants have a clear picture about which local authorities are on board, the banker said. To further complicate matters, France will hold mid-level elections in March, which opens the door to new regional heads who may not be predisposed towards the project.

All of which makes the spring 2011 deadline to reach financial close look less like a line in the sand and more like an expression of hope. In reality, none of the parties involved in the deal will vouch for it, although the project does look set close this year – and probably in the first half.

More to come

There are two other tranches of high-speed line also earmarked to reach financial close this year. The most advanced is the €3.4 billion Bretagne Pays de la Loire (BPL) HSR line – connecting Connerre, in eastern France, to Rennes, in the centre of the country – which has just been awarded to developer Eiffage.

Similar to Tours-Bordeaux, the project will involve important contributions from the central and local authorities – to the tune of roughly €1 billion each – and, as such, is open to the same uncertainties currently plaguing the bigger project.

On the commercial side, the fact that it is backed by availability payments from the French government should, in theory, make it easier to close than Tours-Bordeaux. It has also been confirmed as eligible for the government’s debt guarantee, which can cover the majority of the €1 billion in debt required for the deal. Moreover, it should benefit from some of the acquired expertise in closing Tours-Bordeaux.

The final and least advanced line that forms part of the HSR programme is the €1.6 billion Nimes-Montpellier stretch, in the south of France, which is only expected to receive final offers from France’s “big three” (Bouygues, Eiffage and VINCI) sometime in mid-2011. Like BPL, it is an availability-based project and like its two bigger brothers, it is also scheduled to reach financial close before the year is out. However, market sources admit the deadline is likely to slip to 2012.

In spite of the ongoing delays, 2012 looks set to be the year when France’s massive high-speed rail programme finally grinds to a halt. However, there is talk of another HSR line, connecting Marseille to Nice, in the south of France, which could be procured as a PPP. At between €5 billion and €7 billion, it would rival Tours-Bordeaux in size and, given that there is already some political controversy surrounding its proposed route, in complexity too.

Nobody expects that project to come to market anytime soon – which means at least one HSR project could even stretch beyond 2012. Given the mammoth task currently underway, that’s probably not a bad thing.