Going back to the initial rationale for the transaction, why did Marseilles need this bypass? What difference will it make?
The rationale behind the L2 project, which was first sketched in 1930, has existed for a long time. Marseilles’ two highways – the one coming from the north and the one going east – connect via the city centre. This is clearly not ideal as it creates a lot of nuisance for the city’s inhabitants. L2 thus seeks to divert traffic from the city centre towards a route that is adequate in terms of both capacity and protection from nuisance. A significant proportion of the bypass, for example, is covered – which will alleviate the city centre from significant noise and pollution.
Another objective of L2 is to help equip the northern area of Marseilles, traditionally one of its less privileged areas, with adequate access the rest of the city. There is a real effort to integrate this piece of infrastructure into these areas, create junctions and genuinely improve people’s quality of life in the neighbourhood. Other tangible benefits of L2 will trickle down to the local community: construction, for example, will employ more than 500 people at its peak. So L2 is not only an ambitious upgrade of Marseilles’ transport infrastructure – it is also a multi-dimensional urban project.
Why did you decide to bid?
We chose to bid for L2 because it was one of last year’s flagship projects: not just another French road, but a project of urban integration with a tangible impact on France’s second-biggest city. Given our footprint in the country, and our experience with greenfield assets, we had a strong desire to be involved in the tendering process.
What considerations went into the partnerships with your fellow consortium members?
When you are competing for a project as big as that, you give yourself a much better chance to win if you bring in some innovation. So we worked a lot during the bid – not only the construction consortium but also people from Meridiam – on various technical options, possible routes and design solutions. We really looked into the details of the map. To make the exercise worthwhile you need a contractor with first-class engineering capability: one that is not only capable of looking into the text books and saying “we can do this” but can also think about problems creatively.
During tenders what makes you win ultimately, at least partly, is the price. However it really helps if you receive support from with a contractor that doesn’t just squeeze costs out of the project but can also do a great job technically as well as spend time on optimisation. We have a long-standing relationship with our partners on L2 – led by Bouygues, Colas and Spie Batignolles – so we knew they were the right match for us.
I believe the roots of the deal go back some time; what sorts of issues needed to be resolved to ensure it was optimal for all parties?
There were a lot of administrative entities with a common interest in closing the project: the city, the wider urban area, the department, the region and the state. This in itself of course was a good thing, but it also meant that coordinating their various requests and needs was not always easy. That was partly solved by using the public-private partnership framework, which helped us to get them united.
Another hurdle was that L2, in the past, had mostly been funded step by step. People had secured funding for two kilometres, but wouldn’t have the money for the next two. Bringing a solution where you could secure overall funding was a key positive change.
But perhaps the most time-consuming challenge was managing stakeholder expectations.
This awareness with regard to stakeholders’ expectations was key to our selection as the winning consortium. We also benefitted and built on the work done over the years by administrative bodies.
What was the thinking behind the long-term bond issuance?
This year we’ve closed five deals, essentially with bond solutions in place. This is no coincidence: since 2010-2011 we’ve been working incrementally on developing such solutions. L2 was a good candidate for that because of its favourable risk profile. We also got Allianz very early in the process, which was important to make sure we had the right contracts and structure in place.
The objective was to secure long-term funding, in an environment where only a limited number of banks would follow us. Lower costs were also a factor: at that time, bank pricing had probably peaked in terms of margins. But for us, the priority was to make sure we had a funding structure that could remain in place from day one to year 25 without relying on refinancing assumptions somewhere in the middle.
How much of a challenge was it to do a “first of its kind” financing?
The first difficulty was to make this kind of solution acceptable to the French state, which at the time had little experience of such schemes. For that specific purpose we believe the Project Bond Credit Enhancement (PBCE) initiative by the European Investment Bank (EIB) helped a great deal. Even if we didn't use the PBCE instrument for this transaction, the fact that the EIB and the European Commission put a strong emphasis on such instruments created momentum on the public sector side. PBCE is not only an instrument, it’s also a signal that has been sent to the market – and the public authorities – that project bonds are part of the solution, not the problem.
There were also some technical issues that had to be managed, and we’ve been rather innovative in addressing those. One challenge revolved around the Dailly mechanism (a scheme through which a tranche of the funding benefits after completion of the construction phase from a guarantee from the French State). To benefit from this guarantee, the French law says you need to be a bank. So we needed to find an innovative structure, through a mono-tranche securitisation vehicle, to enable the bondholders to benefit from this security.
The success of the issue certainly owes something to an environment more favourable for project bonds: the Mission d'Appui aux Partenariats Public-Privé (MAPPP), France’s PPP unit, was working on such instruments at the time. But it also helped that Allianz showed its commitment very early, as part of a strategy that was resolutely long term. Once you have a large institutional investor willing to commit a dedicated team of experts and sustain it over the long term, it really changes the game.