Decisions, decisions

In countries like the United Arab Emirates and Qatar, hosting a global shindig often triggers a flow of projects exceeding the scale of the event itself. Dubai, which will stage the World Expo in 2020, is marshalling developments that include a $544 million water canal and an $866 million tramway; Qatar, the host of the 2022 football World Cup, has earmarked as much as $205 billion for fresh infrastructure spending over the five years to 2018. 

Such prospects have yet to have a similar effect on the French infrastructure landscape. True enough, the country is only at the very early stages of competitive processes to host the 2024 Olympics and the World Expo 2025. Still, the only potential project floated in connection with them is the CDG Express, a high-speed train service that would link Paris's main airport to the city centre.

That in itself would be an achievement. Initially planned to enter the construction phase in 2008, the 32-kilometre rail project has been in stand-by mode for years as the government pondered how to foot its €1.7 billion bill. It now looks like the solution favoured is a partnership that would team up government-owned companies SNCF and Aéroports de Paris. This may come as a disappointment to private investors, but it provides some encouragement that big projects contemplated in the past have been paused rather than abandoned.

There is indeed hope in the market that some of these “sea snakes”, as Bruno Candès, a partner at Paris-based fund manager InfraVia calls them, could at some point resurface. These include the Grand Paris metro, a €30 billion scheme to revitalise the capital's suburbs through new subway lines and stations, as well as the €4.2 billion Seine-Nord Canal, a 105-kilometre-long waterway initially mooted in 1985 and for which tenders were first invited in 2010.

Investors are not holding their breath though. It remains to be seen which financing structure would be adopted should these projects go ahead, cautions Romaric Lazerges, a partner at UK-based law firm Allen & Overy. It is anyway unlikely they will start moving in 2015. Meanwhile French deal flow is going through a pronounced slowdown: according to Infrastructure Investor's Research & Analytics division, infrastructure deals closed in the country last year amounted to €4.7 billion, well below the €10.1 billion and €6.4 billion posted in 2012 and 2013 respectively.

Denis Stas de Richelle, global head of infrastructure and asset-based finance at Société Générale, observes that this is partly owing to the number of large initiatives – including three multi-billion high-speed rail lines – launched in the aftermath of the Crisis to revive the French economy. “We're getting to the bottom of a long list of projects.”

Another “optical illusion” stems from last year's municipal elections, notes Renaud de Matharel, chief executive and managing partner of Luxembourg-based fund manager Cube Infrastructure. While the polls dampened politicians' immediate appetite for project procurement, he does not believe the market has hit a long-lasting sticky patch. 

WOBBLES AND TROUBLES

The climate hasn't prevented a number of sizeable transactions from materialising. One of them was Vinci Park, a €1.96 billion transaction completed last June that saw French fund manager Ardian and insurer Crédit Agricole Assurances acquire 37.5 percent each of the parking space operator. 

Another major deal was the purchase by Canadian fund manager Brookfield Infrastructure, Canadian pension fund PSP Investments, London-based firm Arcus Infrastructure Partners and Dutch investor APG Asset Management of the French operations of telecom masts group TDF in a deal worth about €3.5 billion. 

There have been some notable public-private partnerships (PPPs) too: in January, Paris-based fund manager Meridiam Infrastructure and state-backed institution Caisse des Dépôts et Consignations (CDC) led a consortium to fund the €900 million transformation of terminals located in Boulogne-sur-Mer and Calais, in Northern France, into a single port. 

But investors underline the government's ambivalence towards private investment in infrastructure in general and PPPs in particular. This hesitation was on display last year when protests by truck drivers pushed the state to scrap plans for an “ecotax” toll road project – but only after a consortium led by Italian highway operator Atlantia had installed 173 electronic toll gates, worth €1 million each, across the country. “The government teared up the contracts, but did not analyse the reasons for the failure. It still has to learn its lessons,” says Mathias Burghardt, head of infrastructure at Ardian.

This debacle was followed by another hiccup last January, when a highway operator owned by Australia's Macquarie took the state to court after the government delayed toll increases that were set to come into effect four days later.

Other sectors have also suffered from government inconsistency: citing concerns over “risks for water management, the ecological balance of valleys and power distribution,” Energy Minister Ségolène Royal last April announced that France would create state-controlled companies to operate hydroelectric dams, ditching plans to hold competitive bids for the much-awaited contracts. 

Regulatory wobbles have added to the mix. Last year, the European Union decided that the French feed-in tariffs for onshore wind did not qualify as “state aid,” putting an end to two years of uncertainty over whether investors would have to pay back the support previously received. Yet the industry's concerns have now shifted to the drafting of France's “energy transition” law, which will determine the target share of each electricity generation source for the coming decades.

Meanwhile a revamp of laws meant to unify France's various PPP frameworks has yet to produce a clear outcome. Lawyers expect it to be more a play on semantics than a drastic change to the system – with the existing “Contrats de Partenariat” set to become “Marchés de Partenariat” – but note that the state seeks to have greater oversight on how the tool is used. 

THE END OF THE TUNNEL

Yet for all the uncertainty, there are also signs that public counterparties are adopting a more constructive attitude.

In what was a daring move by a left-wing government – and one that triggered emotional reactions from local politicians and media outlets alike – the state went ahead with the privatisation of Toulouse Airport in December, selling a 49.99 percent holding to a Chinese consortium for €308 million. Encouraged by the higher-than-expected windfall, the authorities are soon to auction off stakes in Lyon and Nice Airports.

Admittedly, the Toulouse deal may not represent the starting shot of a large-scale privatisation programme. “We see it more as a way for the state to raise short-term liquidity, as part of its asset management policy, than a change in industrial strategy,” says Marie Bouvet-Guiramand, a counsel at French law firm Gide Loyrette Nouel (Gide).

Still, the transaction came shortly after Regis Turrini, ex-M&A boss at media conglomerate Vivendi, took the helm of the Agence des Participations de l'État. Lazerges says the arrival of a more business-friendly figure at the agency managing France's major state holdings could lead the government to become more open to disposals, provided it can keep controlling an asset through a reduced stake.

But a greater source of hope – and of agitation in ministerial corridors – is the Juncker investment plan announced last year by the European Commission. The scheme hopes to leverage €21 billion in public money to help deliver €315 billion worth of infrastructure projects.

Stas de Richelle cautions that the process used to select the awarded initiatives – among a list of eligible projects worth €1,300 billion – has yet to be finalised, and that it is not clear yet how these will eventually be funded. Olivier Jaunet, a managing director at Crédit Agricole, adds that private investors need to remain realistic as to what the scheme can actually achieve: the Project Bond Credit Enhancement Initiative, launched in 2012 by the EIB, has so far been used to sponsor only six projects. 

Yet this may be missing the point, argues Matthieu Muzumdar, investor relations director at Meridiam. He says the Juncker plan deserves to be applauded for the dynamics it creates, as it pushes states to think carefully about which projects they want to put forward for EU support and how to build the internal capacity to progress them. 

Julien Touati, corporate development director and investment director at the Paris-based firm, concurs: six or seven deals would be enough for the plan to claim success, as its purpose is more to demonstrate the validity of the concept of private participation in infrastructure – just as the PBCE showed capital markets could be used to finance projects.

Some sectors could indeed unlock a great volume of deals in the coming years. Touati is particularly enthusiastic about heating network projects, which he says could be bundled in portfolios and yield €2 billion to €4 billion of investable opportunities a year. De Matharel is also keen on heating: Idex, a Cube portfolio company, has a 10 percent share of the French market. He also highlights the roll-out of fiber optic and the privatisation of public transport as potential investment hubs.

Getting the ball rolling on such projects may take a few years, and fund managers meanwhile must find fresh avenues to deploy dry powder. Some are doing so by venturing beyond the country's borders: Ardian, Antin Infrastructure, Meridiam, Cube and InfraVia have long had pan-European ambitions. Jaunet says fund managers are also making efforts to lessen their reliance on public procurement by targeting sectors – such as healthcare – that have traditionally been the remit of private equity players.

PRIVATE DESIGNS

The attention devoted to PPPs overshadows the widely varying investment strategies adopted by the country's top managers. “Being at the forefront of investment in a certain sector, as in our case in oil and gas midstream with Pisto and CATS or telecom with FPS, gives you access to discussions and opportunities that others would not see. It is like being part of a club,” says Stéphane Ifker, a partner at Antin.

Burghardt has a preference for transactions negotiated on a proprietary basis – often alongside industrial players and with potential for build-up through acquisitions. He says the company has now shifted its sights to GDP-linked assets in the areas of energy and transport. 

Vincent Levita, founder and chief executive of InfraVia, likes what he sees in the mid-market, which offers the potential for carve-outs, secondary sales and smaller privatisations. “In our midcap sweet spot, we continue to observe a dynamic deal flow at valuations that are not through the roof.”

Meridiam and Cube have different approaches altogether: the former seeks to avoid the “brownfield bubble” by offering “innovative solutions” for greenfield projects, Touati says, while the latter, owing to its ties with utility groups, looks for majority stakes in regulated assets that it can operate.

Another sector with potential is renewable energy, argues Sylvain Bergès, a counsel at Gide. Typical transactions are small, but some large portfolios sometimes change hands. Christine Poyer, a partner at Allen & Overy, notes that fund managers are setting up structures to allow institutions to invest tickets of €10 million to €20 million, notably through listed vehicles known as yieldcos.

Refinancings have also figured prominently in league tables over the last 12 months. With liquidity plentiful in the hands of banks and institutional lenders, Jaunet says leverage, tenure and covenant conditions are only going in one direction. Sponsors of assets purchased in the early 2010s are seizing the occasion to negotiate more advantageous packages.

Some overseas institutions remain cautious on France, and Bouvet-Guiramand notes that direct investors can't always find enough there to write checks of a hoped-for size. But Burghardt says most are now sanguine that the eurozone won't implode. And France, despite the bad publicity government flip-flops gives the country, remains a market with a sound legislative framework: the state showed little sentiment on cancelling the ecotax contract, but neither did it renege on its obligation to pay €403 million in compensation to Ecomouv. 

Rather than stay away from the market, investors thus try and understand it by asking a lot of questions. But mostly, says Candès, they would just like more deals to come through. “The French administration has a long history of managing concessions and other sorts of regulated assets. There has been recently some background noise on the political side, but our opinion is very much that contracts are being applied and that investors' rights are appropriately protected.”