The Avenue des Champs-Elysées is known in France as La plus belle avenue du monde (“the most beautiful avenue in the world”). It’s a description that’s hard to dispute even when, as is the case when InfrastructureInvestor arrives for its France infrastructure roundtable discussion in late November, the skies are slate grey and the rain is of the “soak through to the skin” variety. (One of the invitees is quick to point out that the weather had been at least as bad when he was last in London. Fair point well made).
The location is the Paris Marriott hotel, a short stroll from the Arc de Triomphe. Within ten minutes of the appointed time, all participants are present and correct: Thierry Déau, president of Meridiam Infrastructure; Renaud de Matharel, chief executive officer of Cube Infrastructure Fund; Vincent Levita, chief executive and chief investment officer of OFI InfraVia; Dominique Maurel, senior banker and head of infrastructure and energy in France at RBS; and Fadi Selwan, chief operating officer at VINCI Concessions. The lure of a steaming pot of coffee proves irresistible before the quintet engage in a “pre-roundtable” discussion of the pertinent issues of the day: a “warm-up” in at least two senses.
After a few minutes of lively conversation sprinkled with good-natured banter, the group is invited to take seats for the main business of the day – an analysis of the current state of the French infrastructure market. What are the drivers? Where is it headed? What are the opportunities and threats? These questions and more will be the subject of rumination and considered opinion over the following hour or so.
So how do French infrastructure professionals feel about the current state of play in their market? And is optimism or pessimism therefore the prevailing mood in the room? Déau is first to offer an opinion: “There is a pipeline of projects, there is debt available and there is government support. Unquestionably, there is sufficient long-term finance. On the other side, you have performance and asset values. Some funds have not demonstrated resilience because they invested in volatile infrastructure that was correlated to the economy. Others have done well. One thing is for sure: infrastructure in France has not suffered the same fate as the LBO market.”
Easing the bottleneck
When Déau talks of “government support”, he is referring to measures implemented under the Plan de Relance (“revival programme”) stimulus package, which was launched towards the beginning of 2009. The measures (see boxed item, p. 24) – which apply until the end of 2010 – are a distinguishing feature of the French infrastructure market and were expected to ease a bottleneck of around 10 to 15 major infrastructure projects by providing finance and guarantees that would help push projects to completion.
There is an irony in this. Some see a lack of government support as having created the situation where few French infrastructure projects have made the progress they should have done over the last couple of years. “In 2006/07, the French market was suddenly full of talk about PPPs but not a lot has happened. With the stimulus package, this has changed and we have seen a lot of projects starting in 2009,” reflects Levita.
Infrastructure has also been affected, according to those gathered, by local and regional elections. The 2007 presidential election, in particular, resulted in infrastructure-related decisions being placed on the backburner.
Whatever the reasons, the French PPP market – which was enabled by new legislation between 2003 and 2004 – has not yet taken off in the way that many expected. The difficulties lead Selwan to proclaim: “I don’t agree with the view expressed by some that France is some kind of El Dorado for PPPs. Other countries have shown to be more flexible during this crisis in order to succeed. In France – it’s a fact – no big deal has closed in the last 18 months. The government is not yet flexible enough, but the guarantees they are starting to provide might help.”
In a further (but this time, happy) irony, the lack of progress meant less capital being pumped into projects during a period where other countries’ infrastructure markets were witnessing frothy deals amid the cheap credit boom. Maurel argues that the lack of closed deals over the last 18 months means “we have been quite lucky in France”.
The decision by Sarkozy’s government to put infrastructure at the heart of its economic stimulus was not without controversy. The announcement of a “grand plan” to finance everything from Paris’ rail system to new supercomputers raised eyebrows given the existence of the government’s biggest budget shortfall since 1959. The approach appeared to be at odds with that of other European countries, which have pledged to focus on reining in their deficits.
Regardless of the political wisdom or otherwise, there is a feeling the stimulus is being applied at the right time to provide a needed spark to a subdued market that nonetheless has much potential. “In theory it’s a big accelerator of activity, and that has to be a good thing,” says Déau.
It will be interesting to see how things play out. Around the table, there is a mix of enthusiasm and scepticism. “Projects are ready to be moved forward – the highest number in continental Europe,” says Déau. “We have the finance and we have the technical ability.”
However, he goes on to mention the tendency for projects to get bogged down by bureaucracy. This means that, for all the good intentions, there is still concern that government action may be ineffective. “They [the government] have taken in our views on the stimulus package and the first draft was sensible,” says Déau. “But there is a bottleneck in the administration. You need more people on the delivery side. In Australia, you have chief executives heading up small agencies or teams and they are incentivised to deliver. In France, you don’t have this. The advisory side still lack experience in France and the administration lacks resources and is not incentivised enough.”
Less explicit but equally cautious in his assessment of prospects is Selwan, when he says: “There are a lot of projects on the market. I don’t know which ones will get to the end first.”
Maurel and de Matharel use the example of Australia to draw an unfavourable comparison with their home market. Says Maurel: “What’s missing is flexibility and deliverability. We were involved in a big deal in Australia and I was impressed by how pragmatic they [the Australians] were. They adapted to the market and the situation to get the transaction completed and delivered.”
Adds de Matharel: “The continental European market is perhaps not organised with the same efficiency towards institutional investors as in other more mature markets such as Australia or the UK. Governments of those countries have understood that attracting massive interest from institutional investors to invest in infrastructure could fuel significant economic growth. As a result, they have supported such investments with dedicated programmes which have at times included tax incentives.”
Green projects good, roads bad
Another view expressed is that projects are most likely to be given the go-ahead when they accord with certain political agendas – arguably at the expense of unfashionable projects which may nonetheless be much needed. Says Levita: “When the government decided to push the button to re-boot the economy, they identified two types of project. The most effective, useful and ready to go are ‘old economy’ projects such as motorways, but they are not politically compatible with the new ‘green trend’. Green projects are good politically, but they were less ready.”
Levita feels that improvements could be made if more key decisions were made at a local rather than a national level: “The big projects are driven by government. You could imagine in addition to that, more projects run locally with competencies at the local level. France is, after all, supposed to be decentralised.”
There is also a view, however, that those in government have, in the words of Thierry Déau, “kind of got it”. He adds: “The administrative and technical side are more aware of the issues. In terms of MAPP [Mission d’Appui, the French government’s PPP task force], and what it imposes in terms of conditions to access the state guarantees, it’s clear they now know that too much leverage is not a good idea. They understand the issues.”
Déau explains that “issues” in the past have stemmed from inappropriate deal structuring: “It’s very obvious about PPPs pre-crisis that a lot of structures were poorly done. There was a poor transfer of risk. With some of these fragile structures, if it blows up you don’t know what happens except for the fact that the government may have to pick up the pieces. The crisis was a good thing because the crazy people who provided too much liquidity have now gone away.”
He adds: “When they have too much liquidity, the banks throw money at everything. When there’s no liquidity, they become very risk-averse. However, most of the institutions that are good at analysing PPP risk continue to lend today and French banks are generally good at it.”
Common sense prevails
The consensus around the table is that France is not only in possession of a strong pipeline of infrastructure projects, it also has an investment community determined to support them with sensible financing.
“Over the last one and a half years we have seen positive effects in the French infrastructure market,” says de Matharel. “Firstly, all stakeholders have gone back to basics. All have understood that infrastructure assets yield predictable cash flows which generally resist better than those of other asset classes to downside economic scenarios. Everyone has also understood that this is true provided the assets have not been overloaded with debt and that they are ‘true’ infrastructure and not ‘borderline’ infrastructure. Market risk was too strong in some cases and too linked to the economy. The French market has perhaps been more reasonable on the use of leverage than other more mature markets. As a result, asset performance remains generally good despite the crisis. Secondly, investors have understood that investing in infrastructure requires a good understanding of local players, whether they are operators or government counterparts. This has helped local infrastructure funds raise large amounts of capital in recent months.”
He continues: “Also, many investors have found themselves overexposed to sterling and there is concern about the US dollar, so they are looking to the Euro zone. And that’s a favourable development as far as liquidity is concerned.”
De Matharel also believes that the legal framework for PPPs in France is a selling point: “The French infrastructure market financed by private equity capital has been developing strongly since the mid 19th century. As a result, public authorities have a good understanding of risk allocation models. The numerous concession contracts signed in the motorway sector, for example, is a good demonstration of that. The equilibrium between the public and private sectors in concessions is reliable. It could be argued that there is a risk dividend from the quality of the legal framework. Together with currency diversification and the fact that you have big operators in partnership with you, the French market provides investors with a lot of comfort.”
Maurel adds: “The French model is very well perceived by the market, both from an industrial and a financing viewpoint. The model is solid, and so too are the sponsors.”
Thus may the scene be set for France to become one of Europe’s most interesting markets for infrastructure in the period ahead – perhaps even the most interesting. Says Selwan: “It was the UK a few years ago, now it’s France. It’s a cycle. There are lots of highways, railways, public buildings, all sorts of things that can be financed. It will last for two or three years and then the projects will be numerous somewhere else.”
For the roundtable participants, it was now time for them to move on – back to their offices or to meetings in the main – or did one of them mention the hotel’s bar area looked particularly inviting? Perhaps a glass was subsequently raised to prospects for French infrastructure investing as it seeks to deliver on its undoubted potential.