End of an era

It’s easy to forget that France only really started to dabble in public-private partnerships (PPPs) – not concessions, mind you; those have been in the French DNA for ages – in 2004, when it passed its first law regulating this type of contract.

It’s easy to forget because of how wholeheartedly former President Nicolas Sarkozy’s administration embraced PPPs during his single turn in office and the predominant role France acquired in the European PPP market. Put simply, France has been the European PPP market for the last couple of years.

Let’s consider a few figures, to better contextualise France’s meteoric ascent up the PPP league tables.

According to a 2010 study from Andreas Kappeler and Mathieu Nemoz, respectively an economist at the European Investment Bank (EIB) and a consultant at think-tank the European PPP Expertise Centre (EPEC), France accounted for 5.4 percent of the 1,340 PPPs that reached financial close across Europe from 1990 to 2009. In value terms, the country claimed 5.3 percent of the €254 billion of European PPPs closed during the same time-span.

Interestingly, those figures already reveal the impact of the Sarkozy administration’s embrace of the PPP model. An earlier 2007 study from different authors looking at the number of PPP deals signed between 1990 and 2006 found that France accounted for just 2.8 percent of the number of projects closed during this time period and 3.9 percent of the total market value.

But it’s only when 2010 dawns that France begins to hint at the type of PPP delivery that would soon secure its place at the top of the league tables. According to data from EPEC, France was the second-most-active European market by deals, closing 19 transactions during that year. It was, however, only the fourth-largest market by size, with close to €2 billion of deals closed.

The following year, 2011, would prove to be France’s breakthrough year. While it retained its position as the second-most-active market by number of deals closed (again with 19 deals), France became the European PPP market’s 800-pound gorilla, with roughly €11 billion of PPPs reaching financial close that year. That astounding figure amounted to 62 percent of the €17.9 billion of PPPs closed in Europe in 2011.

Even though EPEC’s figures for 2012 only cover the first half of the year, we again find France as Europe’s second-largest PPP market by number of deals (11) and the continent’s biggest market by value of transactions (€2.9 billion) closed.

CHANGE OF GOVERNMENT

Of course, market connoisseurs know that France’s recent prolific performance was due in large part to the closing of three multi-billion-Euro high-speed rail lines that formed part of rail agency RFF’s high-speed rail programme. With that programme now ended, deal flow was always going to take a tumble.

But there’s another reason why deals are dipping these days: in May 2012, Socialist President Francois Hollande took power and, not unlike what happened with the Coalition government in the UK, decided to investigate the value for money of his predecessor’s favoured procurement tool.

“Compared to the last three years, we are seeing much fewer big deals, but there are still small to medium deals out there,” offers Rene Kassis, head of Banque Postale’s new European Infrastructure and Real Estate Debt Fund.

“The public sector has been doing a bit of soul searching on the PPP model. We are now reaching the end of this soul-searching period and can expect some changes to be done to the PPP model. What is needed now is a pipeline, although it’s not realistic to expect a large pipeline in the near future,” Kassis, who has been working in the industry for 20 years, adds.

Vincent Levita, president of fund manager OFI InfraVia, agrees with Kassis: “PPPs have been challenged, but the model has been accepted [by the new government].”

But a source from one of France’s big-three construction companies, who wished to remain anonymous, was less optimistic:

“The general message is that this government is ideologically opposed to PPPs and is not convinced about the model. A report has been finalised a few weeks ago which is expected to be very negative about PPPs, concluding they are not good value for money because the current cost of debt is too high.”

Even now, though, there is still a PPP pipeline of sorts in France. Shortly before going to press, some €400 million of prison PPPs, comprising four facilities, reached financial close for example, and there is talk of more to come. The ‘on-again, off-again’ L2 Marseille bypass PPP, worth some €750 million, is back on the market, with offers due in January from Vinci, Bouygues and Eiffage and an award expected by the summer.

VNF, the public manager of France’s inland waterways, is launching a series of small dam projects across the country whose sole purpose is to regulate the flow of water. These small deals, estimated at less than €200 million, are being procured as PPPs.

Universities is another sector that will still see deal flow, although government dislike of the PPP model probably means that not as many projects as previously thought will end up going down the private sector route.

Another expected change is the source of deal flow going forward. RFF’s high-speed rail programme put the spotlight on the central government for a good few years, but as Kassis points out, “70 percent of public infrastructure investment in France comes from local authorities”.

“I always believed this market [PPP market] in France is not necessarily for large national infrastructure,” he adds.

France’s future as a PPP market, then, seems to be very much in the eye of the beholder. If you’ve got used to the billions of Euros worth of projects closed over the last years, then the French market going forward will almost certainly disappoint. If, however, you were of the view that the recent boom was never sustainable – and are optimistic that the new government will not discard the model entirely – then France is likely to continue being one of Europe’s premier PPP markets.

THE COURT CASE THAT WAS AVERTED

Reports of the current government’s aversion to the public-private partnership (PPP) model aren’t just talk. They are very real, and the public authorities aren’t shy about calling already-signed PPP contracts into question.

Take the case of the Paris Court of Justice – a roughly €700 million PPP that reached financial close during the first half of 2012. The project was sponsored by a consortium of Bouygues, Exprimm, Lloyds Banking Group, DIF and SEIEF and secured close to €600 million in debt from a bank club including BBVA, BayernLB, HSBC, NordLB, Societe Generale, SMBC and Bank of Tokyo Mitsubishi.

But new Justice Minister Christiane Taubira was not happy with the circa €90 million a year in availability payments the state is on the hook for, as well as the project’s total lifecycle cost of €2.7 billion. So the contract was put on hold while the Minister considered her options, which included tendering the project again through the public route, cancelling it altogether, or sticking with the PPP route.

Taubira eventually decided on the latter, seeing as cancelling the PPP would have cost the state some €400 million in compensation payments and cancelling the project outright would negate the need for it. There is a twist, however: the government wants to renegotiate the contract.

It’s not clear how the renegotiation will proceed, but Taubira has made loud noises in the French press that the main objective of the renegotiation is to significantly reduce the bill the state will have to foot for the courthouse PPP.

Only time will tell if this will be a bellwether for how the government plans to deal with PPP contracts going forward.

THE GREAT GAS SALE

French oil company Total’s sale of its TIGF gas network is the chunkiest deal in the French secondary market at between €2bn and €3bn. But should investors be worried in the wake of Gassled?

It’s gearing up to be one of the year’s standout infrastructure deals: the sale of French oil company Total’s gas network, known as Transport Infrastructures Gaz France (TIGF), in a transaction that could be worth between €2 billion and €3 billion.

Somewhat predictably, the sale – one of the largest deals to have graced the French secondary market in recent years – is also gearing up to be a very French affair.

At press time, two consortia were preparing to submit binding bids for the asset, a gas distribution network spanning 5,000 kilometres across four French regions. Both count marquee French investors as participants.

The frontrunner – at least in terms of ‘Frenchness’– is a consortium of Belgian utility Fluxys, sovereign wealth fund the Abu Dhabi Investment Authority (ADIA), and French firms AXA Private Equity, CDC Infrastructure, CNP Assurances and Predica, the latter two both insurance companies.

The team is known affectionately as the “jumbo consortium” among sale participants and it is said that Fluxys, should the consortium win, will take the largest stake in TIGF, although it will not hold a majority.

The other bidder comprises the Government of Singapore Investment Corporation (GIC), thought to be the largest shareholder, Italian gas firm Snam and French energy group EDF, which is said to hold a minority stake of 20 percent in the consortium.

A third consortium, until recently also in the running, comprised Spanish transportation company Enegas, Borealis, the infrastructure arm of the Ontario Municipal Employees Retirement System, Antin Infrastructure Partners and the Oman Oil Company.

Initially, the sale attracted interest from seven consortia.

BLUE CHIP

On the face of it, TIGF is the type of blue-chip asset large-cap infrastructure investors tend to like: it’s regulated, generates a steady return and has a significant market share.

On the transportation side, TIGF is responsible for shifting 12 percent of France’s natural gas. In addition, it accounts for 22 percent of French storage capacity. According to the company’s website, TIGF recorded €370 million in turnover in 2010 and has invested about €1.7 billion in its storage and transportation assets over the last 11 years.

But TIGF’s blue-chip status also comes with a few potential headaches.

For starters, the sale has already attracted considerable government and union attention, with the French government keen on making sure jobs aren’t cut and unions opposing the sale altogether. TIGF employs some 500 people and has its headquarters in Pau, south-western France. It is understood Total has requested the bidders maintain TIGF’s headquarters in Pau and conserve jobs as much as possible.

That probably goes without saying, considering the French government’s heavy-handed reaction late last year to steel giant ArcelorMittal’s plan to close two furnaces located in a small French town near the German border.

ArcelorMittal deemed the furnaces unviable in the current context of a European market struggling with overcapacity and moved to shut them down, only to see the Socialist government of President Francois Hollande threaten to nationalise the sites.

After a round of high-profile hand-wringing, ArcelorMittal pledged to invest in the sites and stay away from lay-offs and the French government withdrew its threat of nationalisation.

THE GASSLED EFFECT

There is also an open question of whether recent tariff cut proposals for Gassled – Norway’s gas transportation network – will have a knock-on effect on the bidding for TIGF.

Two members of the so-called “jumbo consortium” – ADIA and CDC Infrastructure – are investors in Gassled and are now faced with a “material” loss of revenue and “considerable refinancing risk” in relation to their investment in the Norwegian gas monopoly, according to ratings agency Standard & Poor’s.

You may know by the time you are reading this whether Gassled’s travails have dented investors’ appetite for TIGF.