Author: | Published: 9 Jul 2001
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When discussing the merits of Anglo-Saxon project financing techniques with French colleagues, the suggestion is often made that it was in fact the French that invented project financing. Although there is evidence to suggest that project financing techniques were used by the Ancient Greeks, the French concession model has certainly been in existence for centuries, providing the basis, for example, for the construction and operation of the Suez Canal. However, as sponsors continue to look to finance projects on a limited recourse basis in both developed and emerging markets, and governments throughout the world show an increasing interest in Private Finance Initiative (PFI)/Public Private Partnership (PPP) models as a means of financing infrastructure and other projects, with French sponsors and French banks very actively involved in such projects, project finance has seen limited application France itself. This article looks at some of the reasons for this, before examining the legal background against which projects (and in particular, concession-based projects) can be financed on a limited recourse basis.

There appear to be a combination of economic, political and cultural reasons for the relatively low level of project finance activity in France, where sectors in which project finance has been most commonly employed elsewhere tend to be under state control and/or dominated by national monopolies. An obvious example of this is the power sector, where EDF continues to enjoy domination of generation, and (through RTE) transmission and distribution. This leaves limited scope for private participation in the sector. There are exceptions however. The French government is placing increasing emphasis on renewable energy as a clean source of power, and with the launch of the Eole 2005 programme, wind energy will offer opportunities for new entrants into the power sector. Co-generation is an area in which new players have already entered the market. The European Commission continues to take a keen interest in the impact of cross-border corporate acquisitions on the European electricity market, with incumbents in some cases being required to dispose of generating capacity.

The political climate in France does not at present appear conducive to any significant change in the status quo. A government which relies on the support of the French communist party as a constituent element of the majorité plurielle is showing little sign of following a PFI/PPP approach to finance new projects. The opposition to any form of market liberalization has been particularly evident in the delays affecting implementation by France of the European gas and electricity directives. These directives were themselves heavily negotiated by France (which has recently successfully opposed an extension of the scope of the directives), and parliamentary debate on the text of implementing legislation focussed on the same issues as those that characterized the French position during negotiations with other European member states.

Central to any discussion on market liberalization in France is the principle of ensuring the continuity of "le service public" - a notion that some would suggest received little focus in the UK in the context of the debate on rail privatization. This is a recurring theme in French public law, which (in part as a result of French insistence) is also reflected in European legislation. In the political arena, those that oppose opening up public services to the private sector argue that private control of public services is incompatible with this principle. Events such as the energy crisis in California are cited by such opponents as the inevitable consequence of exposing public services to the vagaries of market forces.

Market liberalization does however enjoy support from other quarters and, in addition to the areas in the power sector identified above, a number of other public services have been contracted out to the private sector and financed on a limited recourse basis, notably autoroute concessions. The traditional approach to public services inevitably places a significant strain on the public purse. It has been suggested by some that France's demographic profile, coupled with the fact that private pension plans are relatively uncommon, will require a radical reassessment of public finances in the years to come, and that the private sector will need to have a much greater role in the provision of public services.

If there is a political will to allow the private sector a wider responsibility, does a legal framework exist to allow projects to be structured using techniques with which practitioners of project finance elsewhere in the world are familiar? Set out below is an analysis of some of the key components of limited recourse structures in a French context, with particular focus on concession-based projects.

Allocation of risk

A central principle of the French concession is that the entity which is awarded the concession (referred to below as the concessionaire) assumes full responsibility for the public service/works which are the subject of the concession, accepting the concession from the relevant grantor (referred to below as the "authority") "à ses propres risques et périls".

There is scope, however, for risk allocation between the concessionaire and the authority. Under provisions referred to as Clauses de paysage the parties may agree to define contractually the "landscape" against which the concessionaire is accepting the concession. To the extent that the landscape changes, the concessionaire may be entitled to variations in tariff, extensions to the term of the concession or other remedies under the terms of the concession agreements.

This approach has been used in certain French projects to insulate the concessionaire from changes in law and taxation. By including detailed calculations as to the financial feasibility of the project and the projected equity return of the shareholders against certain accepted assumptions (such as the impact on the project of specific taxes), the parties may establish a "balance" against which variations can be measured and compensated.

The concessionaire may also benefit from certain protections as a matter of French administrative law. Under the doctrine of "Fait du Prince" a concessionaire may be entitled to claim compensation from the authority for "unforeseeable" acts or circumstances for which the authority is responsible and which adversely affect the fundamental basis on which the concessionaire accepts the concession.

The concessionaire may seek to negotiate contractual protection against acts by the authority. An obvious example of this would be a non-competition clause in the concession documentation. While the concessionaire may benefit from a degree of protection in this respect as a matter of French administrative law (if the authority were to award a concession to operate a competing scheme a stone's throw away from the concessionaire's project, a claim under the doctrine of Fait du Prince may well be available), a project will be more effectively insulated by defining the scope of exclusivity to which the concessionaire is entitled. The Orlyval project is an example of a project which ran into difficulty for a variety of reasons, but the viability of the project was notably affected by competing schemes such as an increase in the number of bus services operating between Paris and the airport and in the number of car parking facilities at the airport.

Additional protection may be available under the French administrative law principle of "Imprévision", pursuant to which a concessionaire may be entitled to claim a measure of compensation where it is adversely affected by unforeseeable events or circumstances for which the authority is not responsible and the effect of which is so fundamental to the financial equilibrium of the concession that the concessionaire would effectively no longer be able to operate the concession if such indemnity were not paid.

Force majeure is in principle the only ground on which the concessionaire is entitled to suspend operation of the concession. In order to constitute an event of force majeure, the event must be unforeseeable, unavoidable and outside the control of the parties to the concession agreement. The fundamental principle is that the concessionaire must continue to fulfil its obligations under the concession unless it is impossible for it to do so. Even in circumstances in which the concessionaire is affected by Faits du Prince or Imprévision, it will generally remain obligated to ensure the continuity of the service public, and to look to the compensation referred to above for remedy.


In accordance with the principle that the concessionaire accepts the risks associated with the concession, the concessionaire must look to the concession itself to secure a return on its investment. Revenue may be received either directly by charging and collecting a tariff from users of the public service or works that constitute the concession, or indirectly through payment by the authority, provided, in the latter case, that payment is linked directly to performance under the concession. This leaves open the possibility for "shadow tolling", although it is submitted that specific legislation may be required to support such a structure.

Public domain

Another central principle of French administrative law is that assets falling within the public domain are "inalienable". As a matter of jurisprudence, an asset will fall within the public domain if it belongs to a public entity, is assigned for use by the public, or is required for the operation of a public service, and is specifically designed (aménagé) for such use. Assets and/or works required for the operation of a public service concession are considered to fall within the public domain as and when they are created (eg in the context of a concession involving new construction/development). Such assets constitute "biens de retour" and will revert to the authority at the end of the concession period. Assets which fall outside the public domain will fall within the property of the concessionaire, although concession documentation will frequently include an option in favour of the authority to acquire the asset at the end of the concession period (biens de reprise). The concept of inalienability (together with the obligation to revert) will restrict the extent to which a concessionaire can offer asset security to its lenders.

Share security

Security over the shares in a project company will generally be available to lenders. The concession documentation frequently includes restrictions on ownership of the concessionaire and, as a matter of administrative law, a change in ownership which fundamentally alters the competence of the concessionaire, or the basis on which the concession was awarded, may constitute grounds for termination. A change which leads to a conflict of interest or which threatens to interrupt the public service would be likely to constitute legitimate grounds for termination. The city of St Gervais sought to terminate the concession held by the Société des Télépheriques du Massif du Mont Blanc on similar grounds in 1986.

It should also be noted that the enforcement of share security in France is cumbersome. As with many other forms of security in France, court intervention is required in order for the lenders to enforce their security over the shares, whether this is by way of judicial attribution (whereby the lenders themselves become shareholders, or by way of sale to a third party). Any agreement which seeks to circumvent such requirements (such as put/call arrangements exercisable on an event of default) may be invalid as a "pacte commissoire". Alternative structures, such as creating security over the shares of an offshore intermediate holding company may be considered to allow the lenders an efficient means of taking control of the concessionaire through share security .

Assignment of receivables

Assignments under the loi Dailly are a relatively straightforward means of taking security over the concessionaire's revenue streams. The receivables will need to be specifically identified (typically by reference to the agreement under which the receivable is payable, the parties to the agreement and the date of execution), and set out in a schedule ("bordereau") to the assignment agreement. Notification is not a requirement for perfection of the security, however, having been notified of the assignment, a third party debtor must make payment to the beneficiary of the assignment (the lender) in order to see its debt discharged.

A Dailly assignment is only available as security to credit institutions (établissement de credit). The view is generally held that bondholders do not fall within the category of établissement de credit and therefore will not be able to benefit from this form of security. This problem was addressed in the Stade de France financing (in which a credit wrapped bond was used) by providing for back-to-back loans between the project company and a bank and the bank and the bondholders/issuing vehicle.

Assignment may also be effected by way of délégation under a tri-partite agreement between borrower, lender and the third party counterparty to the relevant project agreement. This is commonly the method chosen for assigning insurances. Again, the concession documentation may include restrictions on the application of insurance proceeds.


Substitution/step-in may be considered as a remedy for lenders to a defaulting project company, although the following issues (among others) will need to be closely examined:

  • the administrative law principle that a concession is granted "intuitu personae" - separate approval may therefore be required from the authority for a right of step-in to be exercised (and is, in any event, preferable to avoid any threat of exercise of the residual power referred to in the paragraph entitled "Share security" above). Article L.34-2 of the Code du domaine de l'Etat (for concessions awarded by the State) and article L 1311-3 of the Code général des collectivités territoriales (for concessions awarded by local authorities) effectively require the prior consent of the relevant authority to the exercise of step-in rights;
  • the fact that substitution rights may be vulnerable against an administrator (administrateur judiciaire) after the commencement of bankruptcy proceedings;
  • lenders may incur liability for actions carried out at their instigation during the "suspect period" (période suspecte), and such actions may also be considered invalid; and
  • the impact of procurement rules (see below)

Procurement issues

Authorities proposing to award concessions and the entities approached to submit bids for such concessions will need to comply with European and domestic rules relating to public procurement.

Domestic legislation was passed to implement the requirements under European legislation in 1993 under law no 93-122 (the Loi Sapin), which sets out additional specific requirements. This covers contracting authorities at a national level and, through incorporation in the Code général des collectivités territoriales, local authorities. The legislation and Code set out detailed tender procedures to be followed in relation to various types of contract (eg concessions de travaux/service public; marchés publics de travaux et de fournitures).

The interaction between EU/domestic procurement rules and French administrative jurisprudence on concessions were evident in disputes surrounding the award of the Stade de France concession.

The right to design, build, finance and operate the Stade de France was awarded to a consortium on a concession basis. The award was subsequently challenged by an unsuccessful bidder on the grounds that the financing of the project comprised very significant state subsidies and that this ran contrary to: (i) EU rules governing state subsidies (ii) the concept of the concession as a matter of French administrative law; and (iii) EU/domestic legislation governing the procurement process. The challenger maintained that the competition should have been run as an award of a public works/service contract (as opposed to a concession), which: (i) should have been conducted according to different tender procedures; and (ii) would have elicited more competitive bids from other competitors (a bidder seeking award of a project on the basis of a public works/service contract as opposed to a concession would be assuming less project risk and could therefore afford to bid at a lower price). Following the challenge, specific legislation was required in order to validate the concession.


While an appreciation of the subtleties of French administrative law is indispensable in structuring a limited recourse project in France, many of the issues that arise in French projects are similar to those that one encounters in projects that have been successfully completed elsewhere in the world, notably in civil law jurisdictions. On closer inspection, the French concession structure, with its emphasis on ring-fencing project risk with the concessionaire, would in fact appear to lend itself to a limited recourse analysis, while the protection afforded under French administrative law to an entity responsible for the provision of a public service should not be underestimated. Project finance should certainly not be considered an exclusively Anglo-Saxon preserve.

Allen & Overy

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