I OVERVIEW

In France, public-private partnerships (PPPs) are implemented in many economic sectors (e.g., transport, health, justice, education, urban equipment, environment, energy efficiency, telecommunications and culture) for more than €100 billion of activity each year.

The French PPP legal framework has been reshaped through the transposition of the European directives pertaining to public procurement and concession agreements under Ordinance No. 2015-899 dated 23 July 20152 relating to public procurement and partnership agreements (the Partnership Contract Ordinance) and its implementing Decree No. 2016-360 dated 25 March 2016 (the Partnership Contract Decree), and Ordinance No. 2016-65 dated 29 January 20163 relating to concession agreements (the Concession Agreement Ordinance) and its implementing Decree No. 2016-86 dated 1 February 2016 (the Concession Agreement Decree).

This legal reform, which entered into force on 1 April 2016, aims at simplifying, clarifying and unifying the existing legal framework governing the awarding and implementation of concession agreements and public procurement agreements (including partnership contracts).

Furthermore, new regulations have been adopted in 2017 to reform the legal regime applicable to projects implemented under a concession agreement or a partnership contract: Decree No. 2017-516 dated 10 April 2017 modifying the Partnership Contract Decree and Decree No. 2017-1816 dated 28 December 2017 pertaining to the procurement contracts awarded by motorway concessionaires.4

In addition, a new ordinance relating to the use of the public domain has been enacted (Ordinance No. 2017-562 dated 19 April 2017). It slightly impacts the public procurement contracts legal regime.

Such changes, along with the renewed support of certain local entities following positive feedback on prior implementation could foster a new dynamic in PPP projects and public investments in France.

In this chapter, we will focus on the two main forms of PPP implemented in France: (1) concession agreements, as regulated by the Concession Agreement Ordinance and the Concession Agreement Decree; and (2) partnership contracts, as regulated by the Partnership Contract Ordinance and the Partnership Contract Decree.

II THE YEAR IN REVIEW

The end of 2016 to the end of 2017 was a fruitful period for the definition of public investment programmes in the European Union and in France. In December 2016, the European Parliament approved the extension of the Juncker Plan, an initially three-year long European investment programme (2015–2018), for a total amount of €315 billion, which financed an important number of projects to be implemented throughout the European Union and, in particular, in France. It is now planned to finance investments for a minimum amount of €500 billion until 2020, in particular, in the research and development, and energy sectors, with a prime focus on small and medium-sized companies.

Similarly, the new President, Emmanuel Macron, unveiled during 2017 a ‘Great Investment Plan’ (2018–2022) of €57 billion that would support the ecological transition, vocational training, research and development, and adaptation of public administration to new technologies. Some specific measures, among others, aim to develop and renovate road and railway networks, decrease public buildings’ energy footprint and foster the deployment of very high-speed telecommunication networks.

Besides, several important PPP projects have been resumed or further successfully implemented throughout the year. For example, the French state showed a renewed interest for the €26 billion Lyon–Turin high-speed line project during the French–Italian summit in September 2017. Moreover, even though the A45 Saint-Etienne–Lyon highway project seems to still be on hold, in June 2017 the Supreme Administrative French Court issued a favourable opinion for its implementation, which is the last step prior to the signature of the concession contract by the French Minister of Transportation. In addition, in July 2017, France caught up with the field of green energy with the inauguration of its first offshore wind turbine installed off the coast of Le Croisic and started the operation phase of the new Paris–Bordeaux high-speed train line (the Sud Europe Atlantique project).

Nevertheless, as is usually the case during a presidential election year, 2017 was also characterised by a lesser involvement of the French state in PPP projects, although public local authorities remained quite active in this regard.

Indeed, public local authorities signed several PPP projects, such as the following:

  1. the financing, design, construction and part of the operation and maintenance of three secondary schools in the department of Seine-Saint-Denis (around €83 million);
  2. the financing, design and construction of a municipal road in the municipality of Saint-Flour (around €35 million);
  3. the financing, design, construction and maintenance of an administrative building in the municipality of Corbeil-Essonnes (around €25 million);
  4. the financing, design, construction and maintenance of a cultural and sport complex in the municipality of Marquette-lez-Lille (around €10.5 million); and
  5. the refurbishment and the maintenance of public lighting in the municipality of Poitiers (around €7 million), knowing that it is the first energy performance partnership contract launched since the enactment of the Partnership Contract Ordinance.

In addition, it should be underlined that the telecommunication sector has shown a significant activity this year. For instance, the department of Seine-Maritime granted a €400 million concession agreement for an 18-year duration for the operation and commercialisation of a very high-speed telecommunication network and the public grouping of the departments of Loir-et-Cher and Indre-et-Loire issued a concession agreement notice for the design, construction and operation of the same type of telecommunication network for an amount of €500 million and a duration of 25 years.

In another field, a noticeable €20 million concession agreement tendering procedure has been launched by the municipality of Lille for the financing and construction of a four-hectare area including social housing and commercial spaces.

III GENERAL FRAMEWORK

i Types of public-private partnership

As stated above, there are two types of PPP that are mainly used in France: (1) concession agreements, which serve to implement major infrastructure projects such as canals, motorways, water distribution systems and toll bridges; and (2) partnership contracts, which can be compared to private finance initiative contracts.

Concession agreements5 and partnership contracts6 are both administrative contracts under French law. This distinction is important as the contractual relationship in an administrative contract is different from that in a private contract. Indeed, the parties are, de facto, unequal insofar as the public person benefits from public authority powers.

As stated in the Concession Agreement Ordinance, a concession agreement is defined as an agreement under which a grantor assigns, for a limited period of time, to one or several economic entities, the performance of works or the management of a service, it being specified that: (1) a risk linked to the operation of such works or service must be transferred to the economic entity in exchange for the right to operate the said works or service; (2) a fee in favour of the entity can be added to such operation right; and (3) the risk transfer to the economic entity necessarily implies a real exposure to the market’s fluctuation.

A partnership contract is an administrative contract under which a grantor entrusts to a private party, for a period set according to the amortisation of investment or agreed financing terms, a comprehensive project relating to the design, construction or conversion, maintenance, operation or management of works, equipment or intangible assets necessary to the public service, as well as to the total or partial financing of the latter.

The Partnership Contract Ordinance also clarifies that dismantling and destruction works, as well as the management of a public service, can be transferred to the private party under a partnership contract.

The two main PPPs can be differentiated according to their payment terms: under a partnership contract, the grantor will pay rent to the private partner in exchange for the performance of the mission, while under a concession agreement the compensation of the concessionaire will mainly arise from payments made by users of the service.

ii The authorities

The Concession Agreement Ordinance provides that, in addition to public authorities (the French state, local authorities and their public institutions), private entities (entities specially created to satisfy a non-commercial public interest or formed by several public entities in order to jointly perform certain activities and public undertakings acting as network operators) will be allowed to grant concession agreements.

The Partnership Contract Ordinance is also flexible regarding the grantor that may enter into a partnership contract. The state and its public institutions, local authorities and local public institutions, as well as public health facilities, social security bodies and some public or private entities pursuing a public-interest mission and mainly financed by public funds7 (i.e., public-private joint ventures and state-owned public industrial and commercial institutions) may all enter into partnership contracts.

For partnership contracts executed by the state, the ministries that are involved will depend on the scope of the particular contract. For partnership contracts, approval by the Minister of the Economy and the Budget is additionally required before signature.8

The Partnership Contract Ordinance provides for an extended list of potential procuring authorities. Indeed, the granting authorities will be the same as those described in the Concession Agreement Ordinance.9 As such, private entities could also enter into a partnership contract.

Nevertheless, central administrations, public health facilities and medical cooperation public structures that used to be grantors before the European Directive will no longer be able to enter into partnership contracts.10

Another important actor in the PPP sector in France is the PPP Support Service (FIN INFRA). The FIN INFRA is a dedicated unit within the Ministry of the Economy that assists grantors in the implementation of partnership contracts.11 The FIN INFRA is primarily responsible for the validation of the preliminary evaluations prepared by grantors before launching a tender. The FIN INFRA also assists and advises public authorities in the preparation and negotiation of partnership contracts as well as any other complex public contracts or public contracts implying an innovative financing scheme.

According to the Partnership Contract Ordinance, the FIN INFRA will still be a major actor given that it will also have to issue an opinion about the financial sustainability of each partnership contract.12 This new requirement should be an efficient way to avoid the financial difficulties deriving from the implementation of some partnership contracts in France.

iii General requirements for PPP contracts

Requirements are different for the use of partnership contracts and concession agreements.

The Concession Agreement Ordinance provides that concession agreements must include provisions pertaining to the duration of the contract and the tariffs applicable to service users. The Concession Agreement Ordinance also provides that concession agreements can include provisions pertaining to sustainable development and social objectives.

Moreover, to optimise cost monitoring, the Concession Agreement Ordinance aims to increase transparency relating to the performance of concession agreements.

As a consequence, concession agreements must specify that the concessionaire will be required to provide an annual report to the grantor and that the grantor will have to annually publish essential data pertaining to the concession (i.e., type of investments and applicable tariffs).

Unlike concession agreements, the use of partnership contracts is strictly regulated. The contemplated project has to be related to the construction or conversion, upkeep, maintenance, operation or management of work, equipment or intangible assets necessary for public service and to all or part of their funding. First, a preliminary evaluation has to be carried out in order to evaluate the project’s implementation method. Then, a second evaluation must assess the financial sustainability of the project. In light of these evaluations the grantor must demonstrate that the use of a partnership contract shows better cost-effectiveness than any other type of agreement. Finally the grantor is compelled to submit these evaluations to the FIN INFRA, which is in charge of issuing an opinion on the project’s implementation structure.

This preliminary procedure was introduced by the Partnership Contract Ordinance, aiming to simplify the former implementation procedure and answer criticisms raised during the past decade regarding the implementation of partnership contracts.

A partnership contract must include several mandatory provisions, such as the duration of the contract, the conditions for sharing risks between the grantor and its co-contracting party, the performance objectives assigned to the co-contracting party, the payment terms and the consequences of termination of the contract.

Both partnership contracts and concession agreements are thus entered into for a period determined by the depreciation period of the selected investments or financing terms.

IV BIDDING AND AWARD PROCEDURE

Bidding and awarding procedures for partnership contracts are closely regulated.

Regarding concession agreements, the Concession Agreement Ordinance and the Concession Agreement Decree regulate the bidding and award procedures for concessions of a value greater than or equal to €5.548 million, excluding tax.13 The new legal framework applicable for concessions will remain flexible, with the aim of ensuring effective and non-discriminatory access for all potential bidders (including small and medium-sized companies). Nevertheless, in practice, most of those minimal requirements already existed in French case law.

As regards partnership contracts, the Partnership Contract Ordinance provides that three granting procedures can be implemented:

  1. a competitive dialogue,14 in the case of particularly complex projects where grantors are not objectively able to define the technical means or specify the legal or financial aspects of a project;
  2. a negotiated procedure15 for small projects below a certain amount defined by decree;16 or
  3. a restricted call for tenders.17

As competitive dialogue is the most common procedure for the awarding of partnership contracts, we will focus on that.

i Expressions of interest

To allow effective competition among applicants (it being specified that applications can be submitted through a consortium), partnership contracts and concession agreements must be the object of adequate publicity.18

Nevertheless, partnership contracts may only be used in the following cases: (1) if the value exceeds €2 million for immaterial assets or if the contract contains specific targets on performance; (2) if the value exceeds €5 million for network infrastructures; or (3) if it exceeds €10 million in the other cases.19

Regarding concession agreements, publication requirements are less strict. The public tender notice has to be published in a newspaper authorised to carry legal advertisements and in a specialised newspaper of the relevant economic sector. The notice must also specify the procedures for the applications’ submission and the essential characteristics of the concession agreement, including its purpose and nature. Granting authorities may also require the production of documents from the bidders in support of their applications (i.e., the presentation of sufficient professional and financial guarantees to ensure the continuity of the public service).

In both cases, the publication notice must specify the deadline for applications.

ii Requests for proposals and unsolicited proposals

For both partnership contracts and concession agreements, tendering documents will be communicated to shortlisted applicants.20

Regarding concession agreements, the grantor shall deliver a programme document to the applicant that defines the quantitative and qualitative characteristics of the required benefits and, if applicable, the service pricing conditions applicable to the end user.

Regarding partnership contracts, in a competitive dialogue, the grantor has to define the detailed needs and objectives that the project will have to meet in a functional programme that will be transmitted to the applicants selected for the dialogue.

The possibility of an unsolicited proposal is contemplated neither for concession agreements nor for partnership contracts.

iii Evaluation and grant

For partnership contracts, a dialogue will be conducted with each candidate to define solutions on the basis of the functional programme. The dialogue typically involves two or three phases, which are normally carried out over a period of nine to 12 months.

At the end of the dialogue period, the procuring authority will invite the candidates to submit a tender based on the considered solutions. After analysis of the tenders, a partnership contract will be awarded to the candidate with the most economically advantageous tender in accordance with the criteria set out in the contract notice or in the tender procedure. The awarding criteria must include the overall cost of the tender21 and performance objectives defined according to the purpose of the contract. As soon as the preferred bidder is selected, the contracting authority shall inform the unsuccessful candidates that their tender was rejected. A standstill period of at least 16 days is required between the date of notification of the decision and the date of execution of the contract22 to allow for any eliminated candidate to initiate a summary proceedings challenge on grounds of a breach of the relevant procurement rules.23

For the sole partnership contracts to be entered by the state or entities linked to the state, the FIN INFRA must assess the impact on public finances and the fiscal sustainability of such agreement before its execution.

For all partnership contracts, once they have been signed, the procuring authority is required to send an executed copy of the partnership contract to the FIN INFRA.

At the end of the awarding procedure, a notification must be sent within 30 days to the European Union Official Journal.

Regarding concession agreements, before the negotiation phase, the grantor selects the potential bidders based on their capacities and abilities in accordance with the criteria set out in the publication notice.24 Once they have been selected, applicants have to submit tenders that will be freely negotiated with the contracting authority. At the end of these negotiations a concessionaire will be chosen and the applicants who have had their offers rejected will be notified. A standstill period, however, shall be respected.25

V THE CONTRACT

i Payment

Concession agreements and partnership contracts can be differentiated according to their payment terms.

Under a concession agreement, the operating risk is transferred to the concessionaire and this transfer necessarily implies a real exposure to the market’s fluctuations. As such, the compensation of the concessionaire is linked to the results of such operation. Therefore, the concessionaire’s compensation mainly arises from service users.

However, this requirement does not prevent the payment of subsidies by the procuring authority. Given the requirements that could be imposed by the concession agreement, maintaining the financial viability and economical balance of the concession agreement is necessary so that the concessionaire does not apply very high rates to service users. For example, significant financial contributions are paid in concession projects related to railway infrastructure (high-speed railway) or motorways. Local authorities usually subsidise public transport or school catering concessions.

Apart from the revenue collected from service users and subsidies granted by public authorities, the concessionaire may also earn additional revenues (e.g., proceeds from side activities such as advertising and fines).

Unlike concession agreements, partnership contracts are characterised by a regular payment from the grantor to the private partner throughout the term of the contract. This remuneration is determined for the services provided by the private partner (works, intangible investments, supplies and services) and is divided into several parts. One part represents the compensation of the partner for the supply of equipment and the cover costs for servicing the loans contracted to carry out the investment, financing costs, taxes and fees that the partner pays on its investments. The compensation also takes into account the services provided by the private partner. Finally, the compensation of the partner must cover the maintenance costs and expenses for major maintenance and the renewal of certain infrastructures.

The partnership contract shall define the terms of the calculation and disbursement of the payment to be made by the grantor. Such payment may be monthly, quarterly or half-yearly.

Under partnership contracts, the compensation is not necessarily fixed as it can take into account:

  1. the completion of performance objectives – the compensation of the private partner may depend on performance targets set in the partnership contract. Premiums or bonuses may be paid (e.g., if the works are completed before the date specified in the contract). Likewise, penalties (e.g., in case of a delay in completion) may reduce the amount of the rent to be paid by the grantor; and
  2. the collection of ancillary revenues26 – the Partnership Contract Ordinance allows the private partner to develop structures and equipment in order to benefit from complementary incomes.

The Partnership Contract Ordinance specifies that should a partnership contract include the transfer of a public service management, the contractor could receive direct payments from service users on behalf of the public authority responsible for this public service. As such, the cash flows of each of the parties will have to be expressly distinguished in order to avoid any confusion with the legal framework applicable to concessions.

ii State guarantees

There are no state guarantees per se issued for PPPs in France.

However, in early 2009, the state established a guarantee system for priority PPP projects in response to the financial crisis, which was affecting a number of very large PPPs. The FIN INFRA27 examined four projects worth a total of over €13 billion, but only one project – under a concession agreement scheme – was selected to benefit from the guarantee: the high-speed railway, Sud Europe Atlantique, which was the biggest rail PPP ever launched in Europe (financing of €7.8 billion). This concession agreement was granted by Réseau Ferré de France to a consortium led by VINCI, and the state guaranteed a €1.06 billion senior secured debt to the lenders.

Unlike the state, local authorities may guarantee loans subscribed by the project company under a concession agreement or a partnership contract.

Moreover, the contracting authority (including the state) may enter into direct agreements with the private party and its lenders to cover specific issues (cancellation or nullity of the concession agreement or the partnership contract) and preserve the lenders’ interests.

iii Distribution of risk

PPPs rely on a clear allocation of the risks between the public and private entities. This allocation of risks is negotiated by the parties and is usually the object of a ‘risk matrix’. Except for the risk of use of the works, the risk matrix is fairly similar for concession agreements and partnership contracts.28

Risks relating to the performance of the contract (e.g., delays in the completion and delivery of the works, archaeological discoveries and design risk) are generally transferred to the private entity.

In France, particular attention is given to public authority powers (i.e., powers to unilaterally amend or terminate the contract on general interest grounds) as the contract provisions may define the financial consequences of the use of public authority powers by the grantor.

iv Adjustment and revision

Being long-term agreements, PPPs often include specific clauses for the review of contractual terms, such as tariff-variation clauses, indexation clauses29 and meeting clauses.

Amendments can also be entered into, but only if the overall structure of the contract is not materially altered. Should the grantor be a public authority, the PPP contract can, as a principle, be unilaterally modified by it. As stated in subsection iii above, French administrative case law establishes the possibility for the public authority to unilaterally amend the contract for reasons of general interest. However, the power of amendment is regulated so that the modification cannot result in a disruption of the overall structure of the contract. Administrative case law protects the co-contracting party of the administration. In fact, the economic balance of the contract must be maintained, and the private co-contractor must be adequately compensated for the damages suffered.

The new legal framework applicable to both partnership contracts and concession agreements strictly regulates their amendments by stating six limitative alternative cases under which modifications are acceptable.30

Regarding concession agreements, any with a duration of more than five years will be determined in light of the period needed to amortise the investments required.

The provisions of the Partnership Contract Decree and the Concession Agreement Decree pertaining to the modification of French PPP contracts will apply even for contracts entered into before 1 April 2016. This improvement clarifies the legal regime and provides for greater flexibility in the implementation of concession agreements.

v Ownership of underlying assets

The legal regime applicable to concession agreements where the grantor is a public authority is organised around a classification distinguishing three types of assets:

  1. assets of compulsory reversion that shall revert to the public authority automatically once the contract ends. Because they are crucial to the provision of the public service, these assets are considered, when the contract does not address this issue,31 as the property of the public authority ab initio, that is to say, from the moment the concessionaire acquires an asset or completes specific works. Assets of compulsory reversion must necessarily return free of charge to the public authority at the end of the contract;
  2. assets of optional reversion, which are useful to the provision of the public service but are not necessary to ensure its continuity. The concessionaire is the owner of such assets for the duration of the concession agreement and they only become the property of the public authority if the public authority exercises its recovery right at the end of the concession agreement. The terms of payment of such assets are specified in the contract; and
  3. assets that belong to the concessionaire. They are not subject to being returned to or eventually recovered by the public authority as they do not aim to ensure the continuity of public service.

Regarding partnership contracts, the private partner is the owner of the assets. The private partner sets up a financing that covers: (1) the acquisition of assets; (2) the cost of the works; and (3) the cost of maintenance and renewal. Consequently, by paying rents to the private partner, the contracting authority pays for the acquisition of proprietary interests in certain assets. At the end of the partnership contract the partner transfers the assets to the contracting authority.

Assets that are not integrated in the financing base (i.e., not acquired by the grantor through the rent) can remain the property of the private partner. However, they may be subject to a contractual provision providing for their transfer against payment to the public authority at the end of the contract.

vi Early termination

The provisions for early terminations are the same for partnership contracts and concession agreements.

Specific legal frameworks exist for two types of termination: termination on the grounds of general interest and termination for contractual breach by the contracting authority.

Termination on the grounds of general interest

Should the grantor be a public entity, it cannot waive its unilateral right to terminate a public law contract on the grounds of general interest. The quantum of the indemnity owed to the private entity is the highest of all termination cases.

Termination for contractual breach by the public authority

Should the grantor be a public entity, the termination for contractual breach by the grantor cannot be a contractual ground under which the concessionaire may require the termination of a concession agreement.

To terminate a concession agreement on the basis of a contractual breach by the grantor, the concessionaire must request such termination before the relevant administrative jurisdiction. The concessionaire would then be entitled to be indemnified in accordance with the principles established by administrative case law, namely, to be indemnified in respect of losses suffered, as well as in respect of the loss of profits. Recent case law confirmed the possibility of including in a contract, not related to the performance of the public service, a provision allowing the partner to terminate the contract for a contractual breach by the public authority.32 Consequently, certain partnership contracts not related to the performance of the public service could potentially include such contractual provision.

Termination for failure to fulfil the obligations as determined by the Court of Justice of the European Union

Both the Concession Agreement Ordinance and the Partnership Contract Ordinance provide that the agreement has to be terminated, in case of major breach, if the Court of Justice of the European Union states that the grantor has awarded the contract without complying with the obligations imposed by the European Directive (as provided under Article 258 of the Treaty on the Functioning of the European Union).

Except for these three types of termination that are regulated, the terms and conditions of other forms of termination can be freely negotiated by the parties.

If a force majeure event or an unforeseen event occurs, the contract may be terminated and the contract will usually provide that the private entity will be indemnified on the basis of the ‘useful expenses’ theory developed by the Supreme Administrative Court.33 As it is a jurisprudential theory, it is still difficult to determine which costs are deemed to be useful expenses and consequently are to be indemnified. However, financial expenses should be indemnified.34

One of the major points of both the Partnership Contract Ordinance35 and the Concession Agreement Ordinance,36 is the enshrinement of the principle of indemnification of financial expenses incurred under the partnership or the concession agreement in case of judicial cancellation following a third-party challenge.

Indeed, in case of cancellation of the contract, the private entities can seek indemnification for all expenses incurred in accordance with the concession agreement or the partnership contract, which may include the financial expenses incurred to ensure the performance of the contract, to the extent that the said expenses have been useful to the grantor.

In respect of the concession agreement, such financial expenses are defined broadly and include the costs for the concessionaire relating to the financing instruments and those arising from the early termination.

It shall be noted, however, that the indemnification of the useful expenses can only apply when a schedule of the concession agreement and the partnership contract specifies in respect of the concession agreement, the main characteristics of financing to be set up for the purposes of the contract performance, and in respect of the partnership contract, the provision that binds the contracting partner to the financial institutions.

Finally, both the Partnership Contract Ordinance and the Concession Agreement Ordinance provide that, if an indemnification clause is provided under the partnership contract or the concession agreement, then it is deemed separable from the rest of the said agreements.

The Concession Agreement Ordinance clarifies the quantum of the financial indemnification applicable in case of cancellation or termination of a concession agreement by a judge following a third-party challenge.

As a consequence, the concessionaire may request to be indemnified for the expenses incurred under the concession agreement that have been useful to the grantor, including financing expenses and costs.

From a project finance perspective, such express reference to the theory of ‘useful expenses’ should be reassuring for both sponsors and lenders.

Indeed, the indemnification of useful financial expenses constitutes a major achievement for the lenders and all finance parties involved in a partnership or concession project because it covers the risk of third-party challenge, in particular, should a concession agreement or a partnership contract be held to be void as result of a challenge.

The contract may also be terminated for breach by the private entity. The possibility to terminate the contract on this ground and its consequences must be provided for in the contract. In this case, the private entity cannot receive compensation for the damage resulting from the early termination of the contract.

In any case of termination, it is preferable to contractually provide the financial consequences and terms of payment of owed indemnities in the contract.

The contract may also be terminated for breach by the private entity. The possibility to terminate the contract on this ground and its consequences must be provided for in the contract. In this case, the private entity cannot receive compensation for the damages resulting from the early termination of the contract.

In any case of termination, it is preferable to contractually provide the financial consequences and terms of payment of owed indemnities in the contract.

VI FINANCE

In France, PPPs are usually financed under a project finance scheme. The key feature of project financing is that it is an ‘off balance sheet’ financing for the sponsors.

Project finance generally involves high debt-to-equity ratios depending on the particular project and market. It refers to a limited recourse (or non-recourse) financing structure that does not impose any obligation on the project sponsors to guarantee the repayment of the project debt, should the project revenues not be sufficient to cover the total debt service. Shareholders of the project company are generally only liable up to the extent of their shareholdings.

In respect of the partnership contract, the Partnership Contract Ordinance provides that the procuring authority must be informed of any change in the project company shareholding. The partnership contract must contain provisions regarding the procuring of authority information, and as applicable, the proceeds sharing terms in case of the sale of the project company shares.

The borrowing entity is a project company, namely, a special purpose vehicle (with no previous business or record) that will finance, design, build, operate and maintain the project. In France, project companies are often incorporated as liability companies or partnerships.

The repayment of the project loans by the project company relies on the future cash-flow projected to be generated from the operation of the project (primarily allocated to operating costs and then to debt service).

One of the main concerns of the lenders is to analyse the bankability of the project, which depends on several factors. For instance, the project’s cash-flow capacity, the mitigation of the risks between all stakeholders, the project company’s contractual documentation and the security package must all be examined to ensure the successful financing of a PPP in France.

Many sources of financing are available, including commercial lenders (banks, insurance companies, credit corporations, etc.), sponsors’ equity, public bodies, international (multilateral) agencies, bilateral agencies and bondholders. These financiers might be based in France or abroad.

Prohibited under the 2004 Ordinance, the Partnership Contract Ordinance now contemplates the possibility for a procuring authority to contribute to the financing of the project.

State or local authorities or other public bodies, whether acting as procuring authority or not, are now entitled to take a minority stake in the project company. In this case, the project company by-laws must specify the allocation of risk between the shareholders and the measures implemented to prevent any conflict of interest.37

The Partnership Contract Ordinance also provides that partnership contracts are eligible for subsidies or other financial contributions. The terms and the payment schedule of the subsidies and other financial contributions can be adapted to the duration of the contract. Such provision was already provided by the 2004 Ordinance.

In respect of financing adjustment, the Partnership Contract Ordinance also specifies that the procuring authority may provide that financing terms referred to in the final tender can be adjusted, provided that this adjustment may not affect the conditions of the bidding procedure by exempting the procuring authority of the obligation to respect the principle of choice of the most economically advantageous tender or allowing the prospective candidate to affect the economic balance of its tender.38

In a typical project finance transaction, the lenders provide different types of debt to the project. Senior lenders provide a debt with a right of payment senior to that of the subordinated lenders. Moreover, some lenders might provide a tranche of debt for a specific period of time and with a specific interest rate and an amortisation differing from the tranche provided by others lenders. A wide range of French law debt instruments are also available to issue subordinated, high-yield or convertible bonds.

The standard types of project finance credit agreements may notably include:

  1. the term sheet – an initial agreement between the project company (in its capacity as future borrower) and the lenders outlining the key terms and conditions of the financing;
  2. senior facility agreements – agreements between the lenders and the project company setting out the rights and obligations of each party regarding the senior debt;
  3. a common terms agreement – an agreement entered into by the financing parties and the project company that defines the terms and conditions that are common to all the financing instruments and the relationship between the parties (for instance, definitions, events of default, order of drawdowns, project accounts, permitted investments, voting process for waivers and amendments, undertakings, covenants, representations and warranties, etc.). Such agreement ensures that all the finance parties have a common understanding of the key definitions and critical events;
  4. subordinated loan agreements – loan agreements whereby subordinated creditors agree not to be paid until the senior creditors have been repaid. These loans are usually provided by the project sponsors or by third-party investors such as investment funds;
  5. a shareholders’ agreement – an agreement that sets forth the rights and liabilities of each project company shareholder especially with respect to capital contributions, transfers, conflicts of interest and restrictions on competition;
  6. an intercreditor agreement – an agreement between the project company and the lenders (senior lender, mezzanine lender, hedging counterparty, loan noteholders and intra-group lenders, etc.), which regulates the creditors’ rights to receive payments (such as principal, interest and fees), notably in the event of default;
  7. hedging agreements – agreements that enable the project company to fix the interest rate on all or part of its debt or to limit its exposure to exchange rate risks;
  8. a direct agreement between the lenders and the project company under which the lenders will be entitled to take over the project (step in) regarding the key project agreements should the project company default under certain circumstances;
  9. sponsor support and third-party guarantee – senior lenders will often require sponsors or third parties to put in place certain credit-enhancement measures (parent guarantee, letter of credit, comfort letter);
  10. public sector support – public sector support instruments may also be set up (e.g., direct funding support by way of public sector capital contributions);
  11. contingent support or guarantees by the public sector or other private sector participants involving specific risks that cannot otherwise be effectively controlled by the project company or other private sector participants (e.g., minimum traffic and revenue guarantees for a toll road); and
  12. EU loan guarantee – an example is the Loan Guarantee for Trans-European Transport Network Projects, which is a credit-enhancement instrument set up and developed jointly by the European Commission and the European Investment Bank, facilitating a larger participation of the private sector involvement in the financing of Trans-European Transport Network infrastructure.

As project finance is carried out on a limited (or non-recourse) basis, it is critical to secure the finance parties through a collateral security package, which also helps to enhance the bankability of the project and the creditworthiness of the project company in its capacity as borrower.

Under French law, a security interest is generally created in favour of the creditors of the secured obligation.

Although there is no concept of parallel debt clause, French law recognises the role of security agent. Pursuant to Article 2488-6 of the Civil Code, a security agent may be in charge of setting up, registering, managing and enforcing any security interest for the benefit of the secured creditors.39 Indeed, security interests are granted in favour of each lender and not only for the benefit of the security agent, which means that each of the lenders might be entitled to act individually in enforcing its specific security interests rights (subject to any restrictions in the financial documentation). The security agent is thus appointed by the creditors and acts under a power of attorney granted by the lenders.

The most common types of security interests used in PPP project finance transactions in France are:

  1. a pledge over bank accounts (governed by Article 2355 et seq. of the Civil Code);
  2. a pledge over securities accounts (governed by the provisions of Article L211-20 of the Monetary and Financial Code) involving a pledge over shares or other financial securities and a pledge over the bank account on which cash proceeds relating to such shares or financial securities are credited (e.g., dividend);
  3. a pledge over the project company’s ongoing business (governed by Article L142-1 et seq. of the Commercial Code) notably involving lease rights, logo and corporate name, goodwill, commercial furniture, equipment and machinery used for the operation of business, and certain intellectual property rights attached thereto;
  4. a pledge over equipment (governed by Article L525-1 et seq. of the Commercial Code);
  5. a pledge over intellectual property rights (governed by Article 2355 et seq. of the Civil Code);
  6. f a pledge over receivables – including future receivables – (governed by Article 2355 et seq. of the Civil Code);
  7. assignment by way of security over receivables (including contingent or future receivables if such receivables are sufficiently identified). Under French law, receivables are assigned by way of security, which is a simplified form of assignment of receivables for security purposes. It transfers the ownership of a receivable to the relevant secured creditor. Such security interest, which is governed by Article L313-23 et seq. of the Monetary and Financial Code is only available, provided that: (1) the assignee is a credit institution licensed in France or otherwise licensed to carry out its activities in France through the European Passport; (2) the assigned receivables secure a credit granted by a credit institution (the assignee) to the assignor in connection with its business activities; and (3) the assigned receivables relate to business or professional activities;
  8. delegation of receivables (governed by Article 1336 et seq. of the Civil Code). A delegation is commonly used to take security over receivables under insurance policies. The debtor agrees to make payments directly to the secured creditor; and
  9. security interests (mortgage, lender’s lien, antichresis) on real property (land, buildings, rights of way and easements). Such security interests must be entered into by way of notarised deed and registered to the relevant land registry.

At the closing date and before any subsequent disbursement of the loan, lenders will require that the borrower first comply with a set of conditions precedent, including (for the first drawdown): organisation and existence of the project company, execution and delivery of facility agreement and related financing documents, security interests filings, availability of funds, related equity documents, sponsors supports documents, third-party support documents, guarantees, enforceability of project contracts, permits, insurances policy endorsements and insurance report, real estate surveys and title insurance, financial statement of project company and other project participants, construction budget and construction drawdown schedule, revenue and expenses projections, engineering report, consultant reports, environmental review, legal opinions, no material adverse change, no defaults and no litigation.

VII RECENT DECISIONS

In 2017, few major rulings affecting the legal framework for PPPs were issued by administrative judges.

First, in a decision dated 14 February 2017, the French Supreme Administrative Court developed its case law relating to the possibility of entering into a concession agreement without implementing a prior tendering procedure.40

Although it is not clearly stated under the Concession Agreement Ordinance or the Concession Agreement Decree, according to the judge, a public authority can exceptionally enter into a temporary service concession agreement without implementing a prior tendering procedure in the event of: (1) an emergency situation beyond its control; and (2) the entry into the temporary agreement being made necessary in consideration of a reason of general interest grounded on the continuity of service.

In such case, the French Supreme Administrative Court added that the duration of such service concession agreement cannot exceed either: (1) the required duration to initiate and implement a new prior tendering procedure; or (2) the required duration to properly prepare the execution of the service by the public authority itself.

Then, on 30 June 2017, the French Administrative Supreme Court ruled on the conditions under which a third party to an administrative contract (including PPP agreements) is entitled to challenge a public authority’s decisions in relation to contract implementation. Under French case law, such decisions are usually deemed to be distinct from the contract itself.

In this case, it has been ruled that a third-party facing the refusal of a public authority to unilaterally terminate the contract is allowed to bring to court a claim in order to obtain the contract judicial termination if the said third-party’s interests are likely to have been affected in a sufficiently direct and certain way by such refusal.

However, in support of its claim, the third-party may only raise that (1) the public authority was legally bound to terminate the contract, or (2) the contract is affected by justifying the contract termination and which could be raised by the administrative judge on its own initiative (i.e., irregularities contrary to public policy), or (3) the contract implementation – including for instance serious contractual breach – is manifestly contrary to the general interest. In addition, the grounds raised by the third party must be directly related to its allegedly affected interest.

VIII OUTLOOK

The transposition of the 2014 European directives pertaining to concession agreements and public procurements substantially modifies the existing French PPP laws that included several regimes with strong specificities (i.e., administrative long-term leases, temporary occupation permits, partnership contracts and concession agreements).

While preserving certain specificities of French law, the new provisions aim to simplify, clarify and unify the existing legal framework governing the award and implementation of concession and partnership agreements in accordance with recent French and European case law.

On 17 January 2018, the French Prime Minister announced that the state put an end to the Notre-Dame-des-Landes airport project.41 This announcement echoes the ‘Ecotaxe project’,42 which was abandoned by the state in 2014, following opposition demonstrations throughout the country. The termination of these PPP projects (whose agreements had been validly signed by the state) might undermine the investors’ confidence and hinder the development of projects backed by institutional lenders. In addition, following these events, the involvement of the state in projects might not be perceived as much of a guarantee as it used to be for lenders.

The year 2018 should, however, be a key year for PPPs in France in the context of investment and financing policy changes that will occur, in particular, as a consequence of the presidential election. Such renewed public policies are likely to trigger noticeable dynamics concerning PPP projects in several key sectors (e.g., transport, health, education, urban equipment, environment, energy efficiency and telecommunications).

1 François-Guilhem Vaissier is a partner and Olivier Le Bars as well as Diane Houriez are associates at White & Case.

2 Ratified under Article 39 of Law No. 2016-1691 dated 9 December 2016.

3 Ratified under Article 40 of Law No. 2016-1691 dated 9 December 2016.

4 This decree: (1) allows motorways concessionaires to exempt themselves from the application of the public procurement rules when some defined conditions are met (in particular in case of urgency); (2) sets out the duration of the contracts awarded by motorways concessionaires and the conditions under which they must be awarded; and (3) provides for a threshold under which the bidding and award procedures of the procurement contracts entered into by motorways concessionaires are not highly regulated.

5 Article 3 of the Concession Agreement Ordinance.

6 Article 3 of the Partnership Contract Ordinance.

7 As mentioned under Articles 10 and 11 of the Partnership Contract Ordinance.

8 See Article 156 of the Partnership Contract Decree stating that a partnership contract may be signed by the state or a state public institution only after approval by the Minister in charge of the Economy and the Budget. In addition, a public body established by the State (un établissement public de l’Etat) must obtain the approval of Minister in charge of its supervision. Such approvals will be presumed if no reply is given within one month from the transmission of the contract. For local authorities, the principle of their free administration exempts them from any requirement for state approval. Thus such authorisation by the Minister of the Economy and the Budget is not needed.

9 Article 10 of the Partnership Contract Ordinance and Article 9 of the Concession Agreement Ordinance.

10 Article 71 of the Partnership Contract Ordinance.

11 Before 2016, the FIN INFRA was the MaPPP, which was created by Decree No. 2004-1119 dated 19 October 2004 and modified by Decree No. 2016-522 of 27 April 2016.

12 Article 76 of the Partnership Contract Ordinance.

13 Notice relating to the procedural thresholds and the list of central public authorities (JORF No. 0305 dated 31 December 2017).

14 Article 42 of the Partnership Contract Ordinance. The grantor conducts a dialogue with the candidates admitted to the procedure with the aim of developing one or more suitable alternatives capable of meeting the specified requirements.

15 The negotiated procedure is defined as the procurement procedure in which ‘the contracting authorities consult the economic operators of their choice and negotiate the terms of contract with one or more of them’. The negotiation process enables grantors to negotiate the terms of the contract.

16 Article 42 of the Partnership Contract Ordinance.

17 Article 42 of the Partnership Contract Ordinance.

18 Article 41 of the Partnership Contract Ordinance and Article 35 of the Concession Agreement Ordinance.

19 Article 75 II of the Partnership Contract Ordinance.

20 In concession agreements, the public authority lists applicants admitted to tender after consideration of their professional and financial guarantees and their ability to ensure the continuity of public service and equality of service users.

21 The 2004 Ordinance specified that overall cost of the tender is intended to mean the sum, in current value, generated by the design, financing, construction or conversion, upkeep, maintenance, operation or management of works, equipment and intangible assets, and the provision of services specified for the term of the contract.

22 The duration is either 11 or 16 days depending on certain criteria (i.e., in case of electronic transmission of the decision to the rejected bidders).

23 Article L551-1 of the Code of Administrative Justice.

24 Article 22 of the Concession Contract Decree.

25 Article 1-1 of the Decree No. 93-471 of 24 March 1993 and in 2016, Article 29 of the Concession Agreement Decree.

26 The collection of ancillary revenues serves as a financial incentive for the partner, but also for the public party. Indeed, the rent paid by the public body may be reduced depending on ancillary revenues collected by the partner.

27 At this time, the name of the FIN INFRA was ‘MaPPP’ (Mission d’appui aux PPP). The MaPPP was replaced by the FIN INFRA in 2016.

28 Under concession agreements, the risk of the works being used by the end user is borne by the concessionaire.

29 These clauses must comply with Articles L 112-1 to L 112-3 of the Monetary and Financial Code that prohibit, with certain exceptions, indices based on overall inflation and requires the use of indices related to the obligations whose price is indexed.

30 Article 139 of the Partnership Contract Decree and Article 36 of the Concession Agreement Decree.

31 The contract may assign: (1) ownership of the works to the concessionaire for the duration of the contract, which, although necessary for the operation of public service, are not established as the property of a grantor; or (2) rights on such property (Supreme Administrative Court, 21 December 2012, Commune de Douai, No. 342788). At the end of the contract, if assets of compulsory reversion are not fully amortised, the co-contracting party is entitled to a payment equal to the net book value shown on the balance sheet if the depreciation period of the assets involved is less than or equal to the duration of the contract, or the net book value resulting from the depreciation of these assets over the term of the contract, when the term of the agreement is less than the normal depreciation period of the assets.

32 Supreme Administrative Court, 8 October 2014, Société Grenke Location, No. 370644. It must be noted that: (1) the case law did not concern a concession agreement or a partnership contract but there is a reference to administrative contract; and (2) the termination is not automatic. Indeed the public authority shall have the possibility to contest the termination.

33 Supreme Administrative Court, 19 April 1974, Société Entreprise Louis Segrette, No. 82518.

34 The Supreme Administrative Court has recently held that financial expenses can be considered as useful expenses (Supreme Administrative Court, 7 December 2012, Commune de Castres, No. 351752). However, it must be specified that in this case, the concession agreement was not terminated on the grounds of a force majeure.

35 Article 89 of the Partnership Contract Ordinance.

36 Article 56 of the Concession Contract Ordinance.

37 Article 80 of the Partnership Contract Ordinance.

38 Article 82 of the Partnership Contract Ordinance.

39 The legal regime applicable to the security agent has been modified by Ordinance No. 2017-748 dated 4 May 2017.

40 Supreme Administrative Court, 14 February 2017, No. 405157.

41 On 23 December 2010, the State entered into a concession agreement with the construction group VINCI for the design, financing, land acquisitions, construction and operation of the Notre-Dame-des-Landes international airport. Such airport, located near Nantes, intended to be the gateway to western France. However, for decades, this project was controversial, mainly for environmental reasons, and many opponents were occupying the land of the future airport to ensure the non-performance of the construction works.

42 In 2011, the state and the company Ecomouv entered into a 13-year concession agreement for the design, financing, delivery and operating of a heavy vehicle satellite tolling project. But in 2014, the state, facing heavy political lobbying against the tax from truck drivers and consumers over pass-through costs, terminated the agreement just before the beginning of the operating phase.