Cablegate: French Government Privatizes Toll-Road Companies

This record is a partial extract of the original cable. The full text of the original cable is not available.

211235Z Dec 05

UNCLAS SECTION 01 OF 02 PARIS 008573

SIPDIS

PASS FEDERAL RESERVE
PASS CEA
STATE FOR EB and EUR/WE
TREASURY FOR DO/IM
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER
USDOC FOR 4212/MAC/EUR/OEURA

E.O. 12958: N/A
TAGS: EFIN ECON PGOV FR
SUBJECT: FRENCH GOVERNMENT PRIVATIZES TOLL-ROAD COMPANIES

NOT FOR INTERNET DISTRIBUTION

1. SUMMARY. The government announced winning-bidders for
its stake in toll-ways companies, ASF, APRR and SANEF
December 14. The sell-off, which aroused widespread
overseas bid interest, encountered political opposition in
the National Assembly. Bidders were selected on their price
offers, but also on a number of commitments. The government
will use privatization proceeds of 14.8 billion euros to
reduce the public debt (10 billion euros) and to fund
highway infrastructure investment (4.8 billion euros). END
SUMMARY.

Selection of Bidders was a Long Process
---------------------------------------
2. Breaking through years of debate over toll-road
privatization, one of the first major decisions of the new
center-right government of Prime Minister Dominique de
Villepin was to sell off the government's stake in the
national toll-road system, which is held both directly and
through its share of "Autoroutes de France" (ADF). On July
18, 2005, the government floated a call for bids for its
holdings in three toll-way companies - a 50.4% stake in
South-of-France motorways "Autoroutes du Sud de la France"
(ASF), a 70.2% stake in motorways between Paris, and Rhine
and Rhone rivers "Autoroutes Paris Rhin Rhone" (APRR) and a
75.7% stake in Northern and Eastern highways "SANEF". On
August 22, at the end of the first tour of the bidding
process, 18 French and Foreign investors made preliminary
offers, including Spanish groups Albertis, ACS and Cintra,
Autostrade of Italy, and Macquarie and Transurban of
Australia.

3. On December 14, Finance Minister Thierry Breton and
Transportation Minister Dominique Perben announced their
choices:

-ASF: The French construction group Vinci, which already
held a 23% stake in ASF and was the only bidder, for its
offer price of 50 euros per ASF share. The price will be
raised to 51 euros once ASF is granted the concession for
the Lyon-Balbigny section of the A89 highway. ASF has 2,943
km (1,828 miles) of toll-roads and revenues of 2.8 billion
euros, and market capitalization of 11.5 billion euros.

-APRR: The French construction group Eiffage, which already
owns one transport firm, Cofiroute, in South West France,
and its Australian partner, the infrastructure group
Macquarie for their offer price of 61 euros per APRR share.
The Spanish Cintra was not selected although its offer was
the highest (62 euros per share). APRR has 2,205 km (1,370
miles) of toll-roads, revenues of 1.84 billion, and market
capitalization of 6.8 billion euros.

-SANEF: the consortium led by Albertis of Spain and
composed of the French insurer Axa, state-owned financial
Institution Caisse des Depots et Consignations, CNP
Assurances, Financiere et Fonciere de Participations and
Predica, the Credit Agricole's life insurance company, for
its price of 58 euros per SANEF share. SANEF has 1,684km
(1,027 miles) of toll-roads, toll revenues of 1.25 billion
euros, and a market capitalization of 5.2 billion euros.

As Politicians Opposed the Privatization . . .
--------------------------------------------- -
4. Opposition politicians, members of the ruling UMP party
and head of the center-right UDF party Francois Bayrou
denounced the privatization, saying it was "a strategic
error" to sell "family's jewels" for short-term financial
gain, and claimed it could hurt efforts to increase French
use of public highways. Breton responded in November that
"aside from the proposed price, the government will consider
the social and industrial projects bidders envisage in their
offers, as well as their guarantees to maintain the quality
of public service."

. . . the Government was More Selective
---------------------------------------
5. Bidders were required to provide guarantees that they
would respect existing concession contracts, maintain the
quality of public service including safety and security, and
contribute to the expansion of employment in the highway
sector. Selected bidders, which include construction
groups, had to accept dispositions aimed at preserving
competitive bidding on contracts for highway construction
and services. They will also have to follow the December
11, 2005 Competition Council's opinion that privatized
highways must maintain a separate legal identity from
acquiring companies' other activities. Selected bidders also
committed to respect existing agreements and to continue
pending negotiations with employees regarding future lay-
offs or job transfers due to automation of toll-collections.

The Effective Sale will Take Place in early 2006
--------------------------------------------- ---
6. Sale contracts will be signed after companies have
informed and consulted employees' representatives, giving
details on future plans and commitments. In line with the
stock market regulations, selected companies will also have
to offer a guarantee on share price, allowing small
shareholders who wish to sell their shares to get the same
price as the government and ADF. Decrees authorizing the
privatization of ASF, APRR and SANEF will be published when
all procedures are completed, and the Commission of
Participations and Transfers gives the green light. The
effective sale of Government and ADF stakes in ASF, APRR and
SANEF is expected to take place early 2006.

Government Expects to Raise 14.8 billion euros in Proceeds
--------------------------------------------- ------------
7. The government estimated proceeds from the privatization
of ASF, APRR and SANEF at 14.8 billion euros, twice the 2005
total privatization proceeds and the bulk of proceeds
planned for 2006. (Other 2006 proceeds will include 1
billion euros from the sale of EDF shares to EDF employees,
and less than 1 billion euros from the sale of shares of
Paris Airports "Aeroports de Paris" (ADP) when it opens its
capital.)

8. About 10 billion euros in proceeds from privatization of
highways will be used to reduce the public debt (66% of GDP)
and the rest to fund infrastructure investment handled by
AFITF ("Agence de Financement des Infrastructures de
Transports en France.") Because of general protest against
the government objective to earmark the bulk of proceeds to
the reduction of the public debt, the government increased
the portion of proceeds attributed to AFITF from 1 billion
euros to 4.8 billion euros.

ASF, APRR and SANEF will be 100% Investor-Owned
--------------------------------------------- --
9. At the end of the privatization process, ASF, APRR and
SANEF will be completely privatized. They are already
publicly traded companies subject to corporate regulation
and accounting standards. Until now, the government has
retained a majority interest and controlled the appointment
of the boards of directors.

But Government maintains a role
-------------------------------
10. The concession law lays down some rules for adjusting
toll rates for inflation, but other aspects of toll setting
and expenditures will be set in negotiations with the
government every five years. Breton confirmed that the
government would remain in control over the toll-road rates
after the highway companies are privatized.

Comments
--------
11. The government has made the right choice in
accelerating its privatization program, but largely for the
wrong reasons. It was primarily motivated by the short-term
appeal of reducing the public debt, rather than the longer-
term benefits that would come from modernizing the toll-road
system. By including contract provisions designed to
maintain jobs and guarantees of "public service," the
government has made clear that it still views toll-roads as
something of a regulated monopoly, over which it will
continue to maintain a measure of control.
STAPLETON

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