New Dawn

1 July 2017 France’s new president has insisted he is from neither the left nor the right. So what will his infrastructure policy look like, asks Paul Jarvis

“We think there could be a positive mindset in respect of PPP in France,” says Xavier Darrieutort, a senior manager in bank SMBC’s Paris office.

This positivity comes from “the strong business-oriented background of the new president, who pledged to support investments in transport (rail and road), broadband and fibre and prisons,” Darrieutort adds.

Charismatic, young, and offering to lead from the centre, being of neither left nor right, it is easy to see why many people across the Channel are comparing President Emmanuel Macron with Tony Blair in 1997.

And given that Blair saw the UK’s PFI structure as the ideal tool to get his ‘third way’ of neither socialist nationalisation nor rampant capitalism off the ground, many are hopeful that Macron might be tempted to follow that lead and use private finance to boost public infrastructure.

“The president has been elected with a clear €50bn pro-investment programme,” says Julien Touati, corporate development director & investment director at Meridiam, although he adds that it is not yet clear whether this €50bn will be additional to existing spending or all completely new money.

While the French presidential campaign was hardly fought on a platform of infrastructure investment, there is a growing feeling that the sector cannot be ignored if Macron wants to deliver on his policies.

“After the 2008 financial crisis, there was a big focus placed on public spending in infrastructure, in a move to foster activity, but the increase in public spending has led to the rise of the debt and then austerity measures, of which infrastructure spending has been the first victim,” says Bruno Cantier, partner in Hogan Lovells’ Paris office. “I suspect in the coming years that will shift back towards infrastructure: it is the shortest way for public spending to create jobs directly in the country.”

Andrew Charlesworth, formerly lead investment adviser to the John Laing Infrastructure Fund, agrees. “One tap that is easy to turn on in Western economies is private investment in infrastructure. The government can provide the political regime to promote private investment.”

The good news for Macron is that most of the hard work has already been done here. Sarkozy’s infrastructure push a decade ago set the groundwork for modern PPP schemes in the country and led to a proliferation of the model, covering areas as diverse as high-speed rail and sports stadia.

“France is one of the most interesting markets in Europe at the moment,” concludes Luca Gatto, head of infrastructure at SMBC. “It has got size, maturity, and an established legal framework.”

That solid base may yet become a little stronger for the industry in the future, too. It is understood that plans are afoot among officials to develop a new infrastructure unit that would deliver a more strategic approach to infrastructure. Like the National Infrastructure Commission in the UK, it would also have responsibility for delivering a national plan that would give clarity of pipeline to the industry.

Currently in the preliminary phase in the transport department, it is not yet policy, but such a move could be hugely beneficial.

Cantier believes a more strategic approach is necessary. “Securing the infrastructure project pipeline is key to the market,” he suggests. “At the moment, there is very little visibility as to the pipeline of infrastructure projects for the next five to 10 years – the process is opaque and poorly organised.

“Each time a new minister of transport is appointed (generally every two to three years), she or he will have to make their own selection or priority list of between 100-200 infrastructure projects, based on unclear criteria, or sometimes general audits.”

However, France already has a PPP unit: the MAPPP within the ministry of finance. Touati suggests that any unit developing out of the transport ministry would nonetheless be sure to take PPP into account as a procurement option.

“They are very much aware of PPP arrangements so I wouldn’t be surprised if more guidance comes out from the ministry.”

The fact that it is the transport ministry that is driving this initiative is no accident. Many in the market expect the transport sector to be among the main areas of activity over the coming years in France, driven by strong leadership from the new transport minister, Élisabeth Borne. As a former head of SNCF, Borne enters the ministry with what one would expect to be a strong handle on her brief from the outset. She also brings the corporate edge of someone who has worked at the highest levels of the private sector in the transport industry in France.

Darrieutort and Cantier are confident that her background bodes well for the infrastructure market. “The transport minister is a transport expert. She is certainly aware that what is missing in the market is a sustainable pipeline and the department is looking at how to secure that,” says the latter.

However, Borne may face some resistance if she attempts to drive through too many major infrastructure changes – from her own boss. The transport brief sits within the wider Ministry for the Ecological and Inclusive Transition, which is headed up by the environmental activist Nicolas Hulot.

Getting Hulot to sign off on a host of transport projects could be difficult given his inclination to support environmental causes. While he may be persuaded of the need for new train lines to reduce reliance on cars, such investments would need to have a rigorous assessment of the ecological benefits before he would be likely to approve them.

“There will probably be a renewal of high-speed rail [HSR] projects towards the end of the five-year period [of President Macron’s tenure],” says Cantier. “It is five years since there have been any new HSR PPPs in France.”

Work is already underway, too. The Gare du Nord redevelopment project has been launched in Paris, with hopes that it could be the first of many schemes to revamp France’s large stations.

“If the Gare du Nord redevelopment procurement is successful, it may be expanded to other stations across France,” says Touati.

Hulot’s appointment could prove to be particularly good news for France’s nascent renewables market. “Renewables, in particular offshore wind, has been one of the big things of the last five years and that will continue over the next five years,” adds Cantier.

Darrieutort agrees. “In the renewables sector, it is more obvious that there is a strong pipeline already, which was started under the former government,” he explains. “That will most probably be reinforced under Hulot.”

Like in many other mature markets, social infrastructure is expected to be less prominent in the new government’s infrastructure activities.

“The new government will probably be less reluctant intellectually or politically to use PPP [than the previous regime], but that doesn’t mean it will use the model without any restriction,” says Cantier. “The new government may be tempted to use it more for major transportation projects with high financing challenges, than for social infrastructure.”

Nonetheless there is certainly likely to be a need for investment. “The market has been stalled for the past five years,” says Cantier.

“There has been a halt on infrastructure public spending, which means the pipeline has been reduced to almost zero at a national level.”

“Under the last government, the PPP sector has been a bit less active,” adds Gatto. “We have mainly been working on projects that were launched under the previous government (Sarkozy’s), who launched a lot of projects.”

Paris is leading the way in the upturn. The so-called Grand Paris programme is seeing new investment opportunities being developed across the city. “There are innovative smart city real estate projects where the authorities ask the private sector to come in at an earlier stage to develop them on a global basis (real estate and associated local infrastructure),” explains Touati.

“We are looking at this and how we can invest in long-term concession arrangements to develop and finance the infrastructure part,” he adds.

Schemes include everything from traditional infrastructure to smart city technology, solar energy schemes and energy efficiency programmes.

One of the most important features that will help promote the model – and provides investors with an important degree of certainty – is the so-called Dailly loans system. Under this mechanism, a public authority accepts to guarantee a portion of payments to the lenders provided that project completion has occurred.

The authority undertakes to pay the amounts due whatever happens under the underlying contract.

As a result, lenders consider these loans as public sector risk rather than project finance risk. “We have witnessed strong appetite from institutional investors, especially for Dailly loans, as well as French and German banks,” says Darrieutort. “So we expect there to be strong liquidity.”

“For large banks the interest will always be more in the large projects that involve Dailly loans,” adds Gatto.

Local view

This focus on larger projects then raises questions about whether the French market can deliver a municipal pipeline to attract investment. In recent months, a number of new projects have emerged at city and regional level, with energy schemes proving particularly popular.

Among the projects to have come forth are solar schemes and, more prevalent, district heating and/or energy/heating from waste initiatives.

Some of these are small, but others look big enough to attract the attention of international investors – for example Rouen’s €225m heating project, or the €230m waste-to-heat scheme in Rambervillers.

Broadband initiatives are also growing across the country, and again should be large enough to attract the big players, such as the €260m Val d’Oise broadband PPP.

However, while these in themselves may look like good opportunities, the issue for many international players is that they are too disjointed to amount to an investable opportunity. “The pipeline is not big enough or consistent enough. Like in the UK, what is really important is what comes out of the national government,” says Cantier. “So you will have some local projects, but it’s not enough to sustain a large pipeline.”

“There are regional banks in France and also large indigenous banks,” adds Gatto. “We have not seen enough of a pipeline to attract global interest.”

Another big issue for many here is the traditional protectionist view of French authorities when procuring infrastructure. Many in the market talk about trying to break into the country, only to find their path blocked in favour of local players.

“Getting a foot in the door in France is very difficult,” admits one adviser. “We are sometimes asked to put bids in to support bidders on French projects, but we never expect to get the contract – and that is with private parties that we know and have a relationship with.”

And while Macron is undoubtedly markedly different in his outlook compared to, say, US President Donald Trump, most still expect him to follow the trend of developed countries becoming more protectionist. If Macron is determined to boost French jobs, then infrastructure projects may offer a quick solution – but they will also no doubt largely end up in the hands of French companies.

One man, of course, cannot do all this by himself, particularly if he does not have the support of his colleagues in parliament. Macron, however, is now in the enviable position of having a huge party of newly elected MPs standing behind him.

Despite his La République en Marche (Republic on the Move) party only being formed last year, it is now the dominant force in French politics, sweeping aside all the established parties and taking a huge majority in June’s National Assembly elections. The result gives Macron the whip hand when it comes to implementing all the policies that he has talked about to change the country’s fortunes – and means he will face minimal opposition as he goes about his work.

It should also embolden him in some of the early key reforms that he plans. “One of the critical reforms that Macron is undertaking is of the labour market in the next few months,” says Darrieutort.

There is still an expectation that when it comes to infrastructure it will be a long-term process, rather than a lightning assault.

“My understanding is – and nobody really has a clear understanding of what will happen at the moment – that there will be at some point an increase in infrastructure spending but there will not be a complete revolution from day one,” says Cantier. “There has been an almost complete stall and at some point the government has to restart the machinery on that.

“If it happens, and if the shift in public policy occurs this year, we would probably see the bulk of the PPP activity after about three years, not in the immediate term.”

Macron may have swept to power on the back of offering something new and different, but when it comes to infrastructure, he may well find that a steady escalation of an established and previously successful PPP model will serve him well.

This page was last updated on:
2 October 2017.


The siren call of ‘bring-backery’

There is a pernicious and increasing trend towards a belief that things were ‘better in the past’. This must be combatted if real progress can be achieved


‘A Great Journey’

Phillip Hall, MUFG’s head of structured finance for EMEA, tells Paul Jarvis how the bank is evolving to thrive in the changing PPP world


Register now to get un-restricted access to all sections of the website.

Want to see more first? Try our free preview...