The Public-Private Partnership Law Review: France
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 was reshaped a few years ago through the transposition of the European directives pertaining to public procurement and concession agreements under Ordinance No. 2015-899, dated 23 July 2015,2 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 2016,3 relating to concession agreements (the Concession Agreement Ordinance) and its implementing Decree No. 2016-86, dated 1 February 2016 (the Concession Agreement Decree).
Even though the transposition of the European directives and the enforcement of the aforementioned ordinances and decrees were aimed at clarifying and modernising the French legal framework, the legal rules governing public procurement agreements (including partnership contracts) and concession agreements remained scattered in about 30 different texts. Therefore, in 2018, it was decided to carry out the adoption of a Public Procurement and Concession Agreements Code (the PPP Code). The main purpose of this codification project is to gather in one single document all rules related to public procurement and concession agreements so as to offer all companies a better access to it, with a focus on small and medium-sized companies (i.e., there are no major changes on the substance of the legal provisions).
The PPP Code was finally enacted at the end of 2018 through Ordinance No. 2018-1074, dated 26 November 2018, Decree No. 2018-1075, dated 3 December 2018 and Decree No. 2018-1225, dated 24 December 2018. The new PPP Code entered into force on 1 April 2019.
In this chapter we will focus on the two main forms of PPP implemented in France: concession agreements and partnership contracts, as regulated by the PPP Code.
The year in review
The French PPP market remained dynamic and appealing despite several events that slowed it down in 2018.4
In particular, the refinancing processes of major PPP projects in the judicial sector have been launched, such as the new Paris judicial court project, considered to be the largest judicial centre in Europe; the Beauvais penitentiary centre project; and the penitentiary establishments located in Riom and Valencia.5
During 2019, public local authorities also signed several PPP projects, including:
- the financing, design, construction, operation and maintenance of the new market of national interest (MIN) of Nice (approximately €150 million);
- the partial financing, design, construction, operation and maintenance of two high schools in the municipality of Palaiseau and Pierrefitte-sur-Seine (approximately €150 million);
- the financing, design, construction, operation and maintenance of the new building complex known as the Forum located in the centre of Lille (approximately €83 million); and
- the financing, design, construction, operation and maintenance of the Arena Futuroscope with a capacity of 6,000 seats, near Poitiers in the department of Vienne (approximately €63 million).
Moreover, 2019 proved to be quite active regarding the involvement of public authorities, thanks to a high level of public investment.
First, 2019 is the year in which the Léman Express, Europe's largest cross-border RER, was commissioned. France and Switzerland have jointly financed the €1.8 billion project with the support of the EU. The Léman Express covers the railway networks of two French departments (Ain and Haute-Savoie) and two Swiss cantons on 230km of railway lines.
The dynamism of public investment in transportation sector is also illustrated by the signing of the Charles-de-Gaulle Express PPP project, worth €2.8 billion.
In addition, in the road sector, French Guyana signed a major PPP project (approximately €135 million) relating to the financing, design and supply of a bus network.
Also SNCF Réseau, the company in charge of the operation and the maintenance of the French railway infrastructures, announced €6.2 billion of investments for 2020 to modernise the French railway network.
From the point of view of foreign investments, the French market took a step toward an increased control from public authorities in limited areas but also greater transparency and accessibility.
Decree No. 2018-1057, dated 29 November 2018, widened the scope of foreign investments subject to the prior authorisation of the minister in charge of the economy.6 Among the narrow list of activities subject to such authorisation, such as those involving the participation to public authority powers or relating to sensitive fields such as public safety or the development of military weapons, are now aerospace, cybersecurity, artificial intelligence or the storage of sensitive data.
To speed up the authorisation process, the same Decree states that not only the investor will be able to submit an application to obtain the said minister's authorisation, but also the company in which the investments are planned to be made. This provision fosters efficiency since French companies are in a better position than foreign investors to understand the applicable regulation and exchange information with French public authorities.
Furthermore, Law No. 2019-486 dated 22 May 2019 improved the sanction mechanisms in case of infringements to this authorisation process. The minister in charge of the economy can now resort to a variety of options to adapt to specific scenarios. In particular, before unwinding the transaction, said minister may first decide to enjoin the investor to file a proper application for such authorisation to remedy its situation. Said minister may implement interim measures, such as a temporary suspension of foreign investors' voting rights as shareholders, to save the necessary time to solve the issues.
This Law also requires the minister in charge of the economy to publish statistics each year relating to the government's control of foreign investment in France in a way that preserves the anonymity of the concerned foreign investors. Those statistics will become a useful tool in understanding the French government's general approach to foreign investment and in anticipating its future trends.
Further regulation is expected to fully comply with Regulation (EU) 2019/452 of the European Parliament and of the Council, dated 19 March 2019, establishing a framework for the screening of foreign direct investments into the European Union.
Several further clarifications to the French PPP legal framework were also brought in the past year.
Thresholds for the formalised procedure applicable to partnership contracts and concession agreements as of 1 January 2020 have been published in the Official Journal of the European Union on 31 October 2019. The thresholds are slightly decreased: from €5,548,000 to €5,350,000 before tax for public works, partnership contracts and concession agreements in particular.
Finally, Decree No. 2019-1083 of 24 October 2019 on the terms and conditions for the conclusion and execution of public service contracts for rail passenger transportation was enacted. This Decree has been issued in application of Articles L. 2121-17-1 and L. 2121-17-2 of the French Transportation Code created by Ordinance No. 2018-1135 of 12 December 2018. The said Order and Decrees subjected public service contracts for rail passenger transportation to the concession agreement regime stated in the PPP Code, with some adaptations.
i Types of public-private partnership
As stated above, there are two types of PPPs that are mainly used in France: concession agreements, which serve to implement major infrastructure projects such as canals, motorways, water distribution systems and toll bridges; and partnership contracts, which can be compared to private finance initiative contracts.
Concession agreements and partnership contracts7 are both administrative contracts under French law, save for narrow exceptions. 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.
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: 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; a fee in favour of the entity can be added to such operation right; and the risk transfer to the economic entity necessarily implies a real exposure to the market's fluctuation.8
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. Dismantling and destruction works, as well as the management of a public service, can also be transferred to the private party under a partnership contract.9
The two main PPPs can be differentiated according to their payment terms: under a partnership contract, the grantor pays a rent to the private partner in exchange for the performance of the mission, while under a concession agreement, the compensation of the concessionaire mainly arises from payments made by users of the service.
ii The authorities
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) are allowed to grant concession agreements and partnership contracts.10
In particular, public health facilities, social security bodies and some public or private entities pursuing a public-interest mission and mainly financed by public funds11 (i.e., public-private joint ventures and state-owned public industrial and commercial institutions) can also do so.
Nevertheless, central administrations other than the state, public health facilities and medical cooperation public structures that used to be grantors before the European directive are not able to enter into partnership contracts on their own.12
For partnership contracts executed by the state, the ministries that are involved in the tendering procedure depend on the subject-matter of the particular contract. Moreover, approval by the Minister of the Economy and the Budget is required before signature.13
Another important actor in the PPP sector in France is the PPP Support Service (FIN INFRA).14 The FIN INFRA is a dedicated unit within the Ministry of the Economy that assists grantors in the implementation of partnership contracts.15 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.
The FIN INFRA is a major actor given that it also has to issue an opinion about the financial sustainability of each partnership contract.16 This requirement is 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 to be satisfied to resort to a concession agreement or a partnership contract are different.
Concession agreements must include provisions pertaining to the duration of the contract and the tariffs applicable to service users. They may also include provisions relating to sustainable development and social objectives. Moreover, to optimise cost monitoring, the current concession agreement legal regime 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. First, a preliminary evaluation has to be carried out 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.
Bidding and award procedure
Bidding and awarding procedures for partnership contracts are closely regulated.
The PPP Code provides detailed regulation applicable to bidding and award procedures for concessions of a value greater than or equal to €5.350 million, excluding tax.17 This legal framework applicable for concessions remains flexible, with the aim of ensuring effective and non-discriminatory access for all potential bidders (including small and medium-sized companies).
As regards partnership contracts, three main granting procedures can be implemented:
- a competitive dialogue,18 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;
- a negotiated procedure;19 or
- a restricted call for tenders.20
We will focus on the rules applicable to the competitive dialogue since it is the most common procedure for the tendering of partnership contracts.
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.21
Nevertheless, partnership contracts may only be used in the following cases: if the value exceeds €2 million for immaterial assets or if the contract contains specific targets on performance; if the value exceeds €5 million for network infrastructures; or if it exceeds €10 million in the other cases.22
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 are communicated to shortlisted applicants.23
Regarding concession agreements, the grantor must deliver reference documents to the applicant that define 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 has to meet in a functional programme that is transmitted to the applicants selected for the dialogue.
The possibility of an unsolicited proposal is contemplated neither for concession agreements nor for partnership contracts under the PPP Code.
iii Evaluation and grant
For partnership contracts, a dialogue is 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 invites the candidates to submit a tender based on the considered solutions. After analysis of the tenders, a partnership contract is 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 tender and performance objectives defined according to the purpose of the contract.24 As soon as the preferred bidder is selected, the contracting authority must 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 contract25 to allow for any eliminated candidate to initiate a summary proceedings challenge on grounds of a breach of the relevant procurement rules.26
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.27 Once they have been selected, applicants have to submit tenders that are freely negotiated with the contracting authority. At the end of these negotiations a concessionaire is chosen and the applicants who have had their offers rejected are notified thereof. A similar standstill period, however, must be respected.28
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 must 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:
- 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 the case of a delay in completion) may reduce the amount of the rent to be paid by the grantor; and
- the collection of ancillary revenues29 – the private partner may develop structures and equipment in order to benefit from complementary incomes.
Should a partnership contract include the transfer of the management of a public service, 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 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 INFRA30 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.31
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 public 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 clauses32 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. The PPP Code establishes such 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. Embodying the protection offered by administrative case law, the PPP Code protects the co-contracting party of the administration: the economic balance of the contract must be maintained, and the private co-contracting party must be adequately compensated for the damages suffered.33
Similarly, administrative case law regarding hardship34 has been codified in the PPP Code and is applicable to both concession agreements and partnership contracts. Thus, the private party is entitled to an indemnity to be paid by the grantor when an unforeseen event beyond the control of parties temporarily disrupts the balance of the contract.35
The 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.36
The provisions of the PPP Code pertaining to the modification of concession agreements apply even for contracts entered into before 1 April 2016.37 This improvement clarifies the legal regime and provides for greater flexibility in the implementation of concession agreements. However, no such provision exists for partnership contracts.
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:38
- assets of compulsory reversion that must 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,39 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;
- 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
- 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: the acquisition of assets; the cost of the works; and 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 several types of termination.
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 public authority's contractual breach
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.40 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
The PPP Code provides that a concession agreement or a partnership contract may be terminated by a grantor if the Court of Justice of the European Union states that the state has committed a serious breach of its European Union obligations relating to markets and if the concession agreement or the partnership contract should not have been awarded because of the said breach.
Termination for force majeure
If a force majeure event or an unforeseen event occurs, the contract may be terminated. The contract usually provides that the private entity will be indemnified on the basis of the 'useful expenses' theory developed by the Supreme Administrative Court.41 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.42
Termination for private contracting party's contractual breach
The grantor may also terminate the contract for breach by the private contracting party, as long as such breach is sufficiently severe.43 Such power to terminate the contract exists even when no contractual provisions address such power.
When the contract is so terminated, the private contracting party is not entitled to any compensation.44
In addition, the grantor can decide to terminate the contract 'at the expense and risk' of the private contracting party, meaning that the latter will have to bear the additional costs related to the new tendering procedure that the grantor will have to launch to find a new contracting party.
However, doing so requires satisfying two conditions:
- the new contract cannot include any new obligations compared to the terminated contract; and
- the initial private contracting party must be notified of the new tendering procedure and has a right to monitor its implementation as well as the execution of the new contract to protect its own interests.45
One of the major points of the PPP Code is the enshrinement of the principle of indemnification of financial expenses incurred under the partnership contract or the concession agreement in case of judicial cancellation following a third-party challenge.
Indeed, in such case, 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.46
However, the indemnification of such financial expenses in particular can only apply when a schedule to the contract specifies the main characteristics of financing to be set up for the purposes of the contract performance.
Finally, the PPP Code provides 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.
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.
In any case of termination, it is preferable to anticipate at a contractual level the financial consequences and terms of payment of owed indemnities resulting from contract termination.
vii Dispute resolution
As administrative contracts under French law, concession agreements and partnership contracts are traditionally subject to the jurisdiction of French administrative courts.
Indeed, public authorities are in principle forbidden from entering into arbitration agreements under Article 2060 of the Civil Code, except for matters. Several other narrow exceptions are also provided under Article L. 311-6 of the Administrative Justice Code.
However, the PPP Code has brought some clarifications about the possibility to resort to arbitration for disputes arising from the implementation of such agreements and contracts.
In both cases, if such dispute only involves private parties, the said parties can submit their dispute to arbitration.47
Regarding partnership contracts, public and private parties are expressly allowed to submit their dispute to arbitration, provided that the governing law is French law.48
On the contrary, arbitration is forbidden for parties to a concession agreement.49
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 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 the 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.
The PPP Code also 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.50
The PPP Code 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.
In respect of financing adjustment, the procuring authority may provide that financing terms referred to in the final tender can be adjusted, provided that this adjustment does not affect the conditions of the bidding procedure by exempting the procuring authority of the obligation to comply with the principle of selecting the most economically advantageous tender or by allowing the prospective candidate to affect the economic balance of its tender.51
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:
- 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;
- senior facility agreements – agreements between the lenders and the project company (in its capacity as borrower) setting out the rights and obligations of each party regarding the senior debt;
- 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;
- 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;
- 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;
- an intercreditor agreement – an agreement between the project company and the lenders (senior lenders, mezzanine lenders, hedging counterparties, 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;
- 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;
- 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;
- 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);
- public sector support – public sector support instruments may also be set up (e.g., direct funding support by way of public sector capital contributions);
- 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
- 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.
French law recognises the role of security agents. 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.52 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:
- a pledge over bank accounts (governed by Article 2355 et seq. of the Civil Code);
- 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);
- 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;
- a pledge over equipment (governed by Article L525-1 et seq. of the Commercial Code or Article 2333 et seq. of the Civil Code);
- a pledge over intellectual property rights (governed by Article 2355 et seq. of the Civil Code);
- a pledge over receivables – including future receivables, if such receivables are sufficiently identified – (governed by Article 2355 et seq. of the Civil Code);
- 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:
- the assignee is a credit institution licensed in France or otherwise licensed to carry out its activities in France through the European Passport, a financing company or, since Ordinance No 2017-1432, dated 4 October 2017 and applicable as of 3 January 2018, an alternative investment fund;
- the assigned receivables secure a credit granted by a credit institution (the assignee) to the assignor in connection with its business activities; and
- the assigned receivables relate to business or professional activities;
- a trust by way of security (governed by Article 2011 et seq. of the Civil Code) whereby a debtor assigns the ownership of its assets on a temporary basis into a dedicated estate. Such a dedicated estate is managed by a fiduciary specifically appointed for this purpose;53
- 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 (i.e., insurance company) agrees to make payments directly to the secured creditor; and
- 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 to become enforceable against third parties.
In addition to the above-mentioned security interests, creditors may require the sponsors to provide personal guarantees, notably independent guarantees such as first-demand guarantees and standby letters of credit.
Article 60 of the Law No. 2019-486 dated 22 May 2019, relating to companies' growth and transformation (the PACTE Law) has enabled the French government to reform French security law through the procedure of Ordinances within a period of two years following publication of the PACTE Law. Such Ordinances have not yet been published but, based on the objectives set forth in the PACTE Law and insofar as it relates to the security interests listed above, the main changes expected would be:
- clarification and better efficiency of guarantees (cautionnements);
- harmonisation of publicity rules and formalities;
- clarification as to the pledge of receivables;
- creation of an ordinary-law assignment of receivables by way of security;
- creation of a regime for the cash collateral in the French Civil Code;
- facilitating the creation of security interests by electronic means; and
- amendments of the rules governing security interests within the framework of insolvency procedures.
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 interest filings; availability of funds; related equity documents; sponsor support documents; third-party support documents; guarantees; enforceability of project contracts; permits; insurance 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 reports; consultant reports; environmental review; legal opinions; 'know-your-customer' processes; no material adverse change; no defaults; and no litigation.
In 2019, few major rulings were issued by administrative judges regarding the French PPP legal framework.
In a decision dated 1 July 2019,54 the French Supreme Administrative Court decided that an action challenging the validity of a partnership contract or a concession agreement brought by a party during their execution is not subject to any statute of limitations. The principle of loyalty in contractual relations, in particular, requires that such legal actions tending to the annulment of the said contracts are open to parties throughout the whole duration of the contracts.
In a decision dated 9 October 2019,55 the French Supreme Administrative Court ruled that the procedure for selecting the consortium formed by the Chinese companies Shandong Hi-Speed Group Co and Friedmann Pacific AM as the acquirer of a 49.99 per cent stake in the Aéroport Toulouse-Blagnac owned by the French state complied with all the relevant legal requirements. The French Supreme Administrative Court also stated that the decision of the minister in charge of the economy to select the said consortium was not manifestly mistaken. It therefore dismissed the legal actions requesting the annulment of the minister's decision.
In a decision dated 21 October 2019,56 the French Supreme Administrative Court clarified the theory of hardship. This theory entitles the private contracting party to a partnership contract or a concession agreement to compensation from the grantor when the economic balance of the contract is disturbed by the occurrence of an unforeseeable event that is external to the parties. Such event may be economic or natural. The French Supreme Administrative Court added the following precision: the private contracting party can only be compensated for operating losses that are the direct consequence of the aforementioned event. Other indirect costs are thus not covered by the theory of hardship.
Finally, in a decision dated 27 December 2019,57 the Administrative Court of Appeal of Marseille affirmed the ruling of the first instance judge who cancelled the decision approving the use of partnership contracts relating to the demolition of 31 schools and the construction and maintenance of more than 30 of them. According to this ruling, the mandatory preliminary assessment carried out by the City of Marseille lacked accuracy and did not show that the use of a partnership contract for its project was more advantageous, especially regarding financial terms, than other methods for implementing the project.
The year 2019 brought changes to the French PPP law through the entry into force of the first comprehensive PPP Code. Even though this new PPP Code does not substantially change the legal rules governing partnership contracts and concession agreements, it definitely clarifies the French PPP legal regime by gathering all the essential legal provisions in a single instrument. In addition, legal principles resulting from existing French and European case law were also codified, provided that such case law was deemed stable.
The entry into force of the PPP Code, comprising around 1,747 articles, undoubtedly simplifies the legal framework governing PPP contracts, to the benefit of public authorities, companies and practitioners. Such changes, along with the renewed support of certain local entities, would normally foster better dynamics concerning PPP projects in several key sectors (e.g., transport, health, education, urban equipment, environment, energy efficiency and telecommunications).
However, the recent spread of COVID-19 throughout the world will most certainly have a negative impact on the global and French markets. As the number of people contaminated in France increased during the first trimester of 2020, the French government first enacted several measures to contain the propogation of the disease. Such measures, which include a strict limitation on the use of public transportation and the general confinement of the population, will also have a natural detrimental effect on the French economy.
Nevertheless, the French parliament quickly adopted a set of legal instruments to fight and mitigate the consequences of COVID-19, including Law No. 2020-289 and Law No. 2020 dated 23 March 2020, which are implemented in particular by Decree No. 2020-293 dated 23 March 2020 and Order No. ECOT2008090A dated 23 March 2020. As a result of this new legal framework, the French state intends to (1) provide companies and employees with a total of €45 billion of immediate subsidies and relief measures; and (2) implement a €300 billion state guarantee mechanism for loans issued by credit institutions. Furthermore, the government is thereby authorised by parliament to adopt measures relating to the adaption of rules governing the conclusion, time schedules, execution, early termination and contractual penalties applicable to all public contracts, such as concession agreements and partnership contracts.
Several of the latter measures have been embodied in an Order, which remains to be published in the French Official Journal, voted by the French Council of Ministers on 25 March 2020. Among them can be found:
- the possibility for the private contracting party to request an extension of the contract duration if the performance of its obligations would involve a manifestly excessive burden;
- the interdiction of sanctioning, applying contractual penalties to, or seeking the liability of the private contracting party when the circumstances make it impossible to perform part or all of its obligations; and
- the right for the private contracting party to a concession agreement to be compensated when the conceding authority has to request significant changes regarding the performance of the agreement requiring new investments deemed as a manifestly excessive burden in light of the financial situation of the private contracting party.
It seems, therefore, too soon to infer from the expected decrease of worldwide and national economic activities that the French PPP market will slow down in every sector to a freezing point in the long term. On the contrary, COVID-19 will likely trigger a renewed focus on the development of national PPP projects in certain sectors, especially those contributing to public health. It is also expected that French and European political authorities will engage in strong economic revival policies that could translate into substantial public subsidies to the benefit of several PPP projects.
A number of interrogations remain regarding the structural changes that COVID-19 could bring to the French economy. For instance, the privitisation process of Aéroports de Paris might be delayed while the possibility of nationalising companies facing severe economic difficulties is contemplated by the government. In any case, 2020 will definitely involve critical developments regarding the legal and economic environment of PPP projects.
1 François-Guilhem Vaissier is a partner, Louis-Jérôme Laisney, Olivier Le Bars and Diane Houriez are associates, and Sacha Ruffié is a lawyer 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 In January 2018, the state put an end to the Notre-Dame-des-Landes airport project. This termination echoes the termination of the Ecotaxe partnership contract by the French state in 2014.
5 Press release from the Minister of Justice dated 29 November 2019 about the refinancing of PPP projects.
6 Articles L. 151-3 and R. 153-2 of the Monetary and Financial Code.
7 Article L. 6 of the PPP Code.
8 Article L. 1121-1 of the PPP Code.
9 Article L. 1112-1 of the PPP Code.
10 Article L. 1211-1 of the PPP Code.
11 As mentioned under Article L. 1211-1 of the PPP Code.
12 Article L. 2211-1 of the PPP Code.
13 See article R. 2223-1 of the PPP Code stating that a partnership contract may be signed by the state or a state public institution only after approval by the Minister of the Economy and Minister of the Budget. In addition, under article R. 2223-2 of the PPP Code, a public body established by the state must obtain the approval of the 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 Ministers of the Economy and the Budget is not needed.
14 The FIN INFRA was created by Decree No. 2016-522, dated 27 April 2016.
15 Before 2016, the FIN INFRA was known as 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.
16 Article L. 2212-4 of the PPP Code.
17 Notice relating to the procedural thresholds and the list of central public authorities (JORF No. 0286 dated 10 December 2019).
18 Article L. 2124-4 of the PPP Code. 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.
19 Article L. 2124-3 of the PPP Code. 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.
20 Article L. 2124-2 of the PPP Code.
21 Articles L. 2131 and L. 3122-1 of the PPP Code.
22 Articles L. 2211-5 and R. 2211-1 of the PPP Code.
23 Under Article L. 3123-18 of the PPP Code, in case of a tendering procedure relating to a concession agreement, 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.
24 Article R. 2152-8 of the PPP Code.
25 The duration is either 11 days (when the decision has been electronically transmitted to the rejected bidders) or 16 days.
26 Article L. 551-1 of the Administrative Justice Code.
27 Articles R. 3123-11 and R. 3123-12 of the PPP Code.
28 Article R. 3125-2 of the PPP Code.
29 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.
30 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.
31 Under concession agreements, the risk of the works being used by the end user is borne by the concessionaire.
32 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.
33 Article L. 6 of the PPP Code.
34 Supreme Administrative Court, 9 December 1932, No. 89655.
35 Article L. 6 of the PPP Code.
36 Articles L. 2194-1 and L. 3135-1 of the PPP Code.
37 Article 20, II, of the Ordinance No. 2018-1074 dated 26 November 2018.
38 Article L. 3132-4 of the PPP Code.
39 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.
40 Supreme Administrative Court, 8 October 2014, No. 370644. It must be noted that: the case law did not concern a concession agreement or a partnership contract but there is a reference to administrative contract; and the termination is not automatic. Indeed, the public authority must have the possibility to contest the termination.
41 Supreme Administrative Court, 19 April 1974, No. 82518.
42 The Supreme Administrative Court has recently held that financial expenses can be considered as useful expenses (Supreme Administrative Court, 7 December 2012, No. 351752). However, it must be specified that in this case, the concession agreement was not terminated on the grounds of force majeure.
43 Articles L. 2195-3 and L. 3136-3 of the PPP Code.
44 Supreme Administrative Court, 20 January 1988, No. 56503; Supreme Administrative Court, 12 November 2015, No. 387660.
45 Supreme Administrative Court, 10 June 1932, Sieur Bigot, Rec. p. 572.
46 Articles L. 2235-1 and L. 3136-7 of the PPP Code.
47 Articles L. 2197-7 and L. 3137-5 of the PPP Code.
48 Article L. 2236-1 of the PPP Code.
49 Article L. 3137-4 of the PPP Code.
50 Articles L. 2213-4 to L. 2213-7 of the PPP Code.
51 Article L. 2222-1 of the PPP Code.
52 The legal regime applicable to the security agent has been modified by Ordinance No. 2017-748, dated 4 May 2017. However, please note that, according to most French practitioners, this modification establishes an incomplete legal regime and does not address many uncertainties.
53 Although this mechanism appears to be quite akin to the mechanism of 'trust' in common law jurisdictions, it differs from the trust as it is not based on a dismemberment of the right of ownership of the assets transferred into the dedicated estate (i.e., beneficial ownership versus legal ownership).
54 Supreme Administrative Court, 1 July 2019, No. 412243.
55 Supreme Administrative Court, 9 October 2019, No. 430538.
56 Supreme Administrative Court, 21 October 2019, No. 419155.
57 Administrative Court of Appeal of Marseille, 27 December 2019, No. 19MA01714.