By partner Thomas Courtel
During the 2014 Infrastructures Conference organised on 30 April 2014 by the Magazine des Affaires, a French specialised industry magazine, speakers Anne-Christine Champion, Mathias Burghardt and Daniel Benquis raised the question of the regulatory risk that comes with infrastructure projects. In France, this concept applies to various situations.
For instance, the risk of appealing against the administration’s project award decision does not constitute a regulatory risk. This risk, inherent to the rule of law, is what takes up most of closing negotiations. Indeed, public-law entities demand that works be launched without delay, while rules for the repayment of incurred costs applicable in the event the project is cancelled are imprecise.
The result is that, from 2008, several contractual instruments had to be implemented in order to cover the repayment of such costs. The judge has confirmed the validity of said instruments but, considering the guarantees they require from sponsors, their sophistication and sometimes their late implementation, the solution may in fact be worse than the problem.
Another concept that does not constitute a regulatory risk is the lack of good faith in the application of agreements, as stipulated in the Civil Code, or of loyalty in contractual relations, as stipulated by the Conseil d’Etat (French administrative Supreme Court). All PPP actors have, at one time or other, had to face a public person refusing to apply a hardship clause, thereby delaying the completion of a project and the ensuing lease payment, or off-setting lease payments, in all or part, with penalties.
Following the global economic crisis, the behaviour of these public bodies is dictated by both budget and operating considerations. The judge may undoubtedly give reason to the project’s sponsors. But before reminding all parties that the administration’s prerogatives do not justify everything, time may have been fatal to projects that have no extra remuneration prospects. Ultimately, the State runs the risk of private bodies ascribing lesser importance to its undertakings.
Changes in industry norms that impact cash flows, however, do constitute a regulatory risk. An infrastructure project is characterised by the prospect of stable operating income on the long term. For regulated assets, public authorities may wish to periodically reconsider the level of such income, for instance to prevent the enactment of rumoured privileges and advantages of established positions. One may be reminded here of the frequent changes in the mandatory purchasing rules applicable to green energy.
The best way to minimise this risk is to emphasise that these changes must remain within reason or must be compensated for, in such a way as to maintain return on capital or profit margins in line with market conditions. Theories of arbitrary acts of State and hardship agree with this principle, as reminded by the Conseil d’Etat’s decision in late 2013 on the complaint filed by several motorway companies concerning a rise in charges decided by the State – and benefitting the State.
Another form of regulatory risk is all institutional developments that lead to a change in public partner. It is possible, in this case also, to enter into agreements that attempt to set forth the financial consequences of such developments. Unlike the risk of appealing against the administration’s decision mentioned above, this is no longer a question of anticipating a judge’s decision, rather that of the law-maker.
The French government is looking to merge regions and do away with its counties (départements): we will soon find out whether such agreements will withstand the ordeal of fire.