The long and winding (rail) road

The €7.8 billion high-speed rail line connecting the cities of Tours and Bordeaux, in western France, has finally reached financial close after a protracted procurement process that lasted close to four years.

Tours-Bordeaux’s massive size would have almost certainly guaranteed it a drawn-out procurement process regardless of when it had been launched. But having the project in procurement right in the midst of the worst financial crisis of the last 50 years made it inevitable that it would need some extra time to cross the finishing line. That it actually managed to cross it, instead of falling by the wayside, is in itself a minor miracle.

Worrying idiosyncrasies

That’s because Tours-Bordeaux became, as soon as the crisis broke in 2008, a project with an uncomfortable price tag and a number of worrying idiosyncrasies. The latter included being a €7.8 billion concession exposed to traffic risk, contrasting with the more palatable, availability-based projects banks switched their preference to following the crisis. Availability payments are public contributions paid in exchange for maintaining an asset in good condition.

To make sure the project wouldn’t be deemed off-limits for commercial banks, Tours-Bordeaux became the first privately financed infrastructure deal to make use of a guarantee mechanism, implemented by the government following the outbreak of the crisis, which could cover up to 80 percent of the private sector debt used to fund projects. 

As an offset to traffic risk, the guarantee at least kept commercial banks at the table. But negotiating and implementing the intricacies of this mechanism – including obtaining state-aid clearance from Brussels – took time. Due to its size, the project also required a substantial amount of debt financing coming from sources other than commercial banks.

In the end, the European Investment Bank lent €1.2 billion in debt and equity to the project – its biggest ever French loan. And savings funds managed by state-backed bank Caisse des Depots, the Fonds d’ Epargne, also made their way into the project via a 40-year, €757 million loan.

However, these considerable efforts addressed only the private sector side of the financing equation. There was also a €4 billion cheque that had to be written by the public sector, involving the central government, RFF and the local regions through which the line will pass, some of which were not of the same political family as the ruling government.

Needless to say, Tours-Bordeaux spent a fair amount of time bogged down in local power politics. A deadlock emerged when former Socialist presidential candidate Ségolène Royal, who lost against President Nicolas Sarkozy in the 2007 presidential elections, said the region she headed would not contribute its share for the project. The stalemate was eventually broken when the central government stumped up her share of the funds.

Government the glue

If there is a lesson to be learned from Tours-Bordeaux, it is the vital importance of having a central government committed to public-private partnerships. Given the number of obstacles the project had to face over the course of its procurement, the government’s intervention – whether through its guarantee mechanism or the Fonds d’Epargne – was the glue that kept the deal’s different constituencies from coming unstuck.

Without that strong commitment, what the sponsors are now proudly calling “the world’s largest rail concession” would probably have become just one more ambitious casualty of the global financial crisis.