Chocks away!: Privatisation of Aéroports de Paris gets ready for take-off

The privatisation of the French airport sector is an ongoing process.  As is the case for any key infrastructure, the process is slow but it is moving forward.  The regional airports at Toulouse-Blagnac, Nice Côte d'Azur and Lyon-Saint Exupéry have all been partly privatised (in 2015, 2016 and 2016 respectively).  Marseille Provence airport and Bordeaux-Merignac airport are on the starting blocks, slated to come on the market in the course of 2019.  It is now the turn of ADP to come on the market, possibly as soon as Q2 2019.

ADP comprises Roissy-Charles de Gaulle airport (CDG), Orly airport (Orly), Le Bourget airport, ten further smaller aerodromes around Paris and one heliport.  ADP also owns and operates a number of other airports around the world (e.g. in Jordan (through ADP International SA) and in Turkey (through TAV)).  Aggregate traffic volume for CDG and Orly was 102 million passengers in 2017 and 50 million in H1 2018.¹ ADP is listed on the Paris Stock Exchange and has a market capitalisation of approximately EUR 18 billion.

The French State, which still owns 50.63 per cent of the capital and 58.5 per cent of the voting rights of ADP,² has now formulated its detailed position on the organisational and regulatory model to be adopted for the privatisation of ADP in a bill (the "Bill") which was presented to Parliament on 19 June 2018, and titled the bill "for the growth and transformation of enterprises".³ Parliamentary discussion of the Bill began on 5 September 2018 and the relevant provisions of the Bill (articles 44-50) were adopted by the National Assembly with limited amendments on 3 October 2018.  In the coming weeks, the Government will also have to determine the strategy to be adopted for the privatisation and, in particular, whether to dispose of all or just part of its holding in ADP, as well as selecting the privatisation method (i.e. a sale to one or more strategic investors, and/or a flotation for the benefit of smaller investors).

As a major player in both the French and the international airports markets, ADP's capital structure, organisation and regulation are particularly complex and substantially different from those of the regional airports.

The initial shareholding of major regional airport companies (Sociétés aéroportuaires regionals or SARs) comprises the State (60 per cent), local chambers of commerce (CCIs) (25 per cent) and local authorities (15 per cent).  The "privatisation" of a regional airport essentially involves the State selling all or part of its 60 per cent stake, as was the case for Toulouse airport,⁴ Nice airport ⁵ and Lyon airport.⁶

The situation is very different for ADP.  Unlike the regional airports, the current structure of ADP is not deemed suitable for privatisation.  In addition, by law, the majority of ADP's capital must be held by the State, which means that the law will need to be changed to enable the privatisation of ADP to go ahead.  Indeed, the precise purpose of articles 44-50 of the Bill is to authorise the privatisation, once a substantial restructuring and reorganisation of ADP has taken place.

Key issues raised by the proposed privatisation of ADP

As mentioned above, ADP is a complex asset.  Even though the French Government may no longer deem ADP to be a "strategic enterprise" which must remain in State ownership, it is nonetheless considered by the Government to be "an important asset", which cannot be privatised in its present state.

The particular issues which need to be addressed in order to prepare ADP for privatisation include the following:

• State ownership requirement.  The legal limitation set out in article L. 6323-1 of the Code of Transport, which requires the majority of the capital of ADP to be held by the State will need to be removed.
• Unbundling of Paris airports?  Should ADP be retained as a group operating all of the main airports in the Paris region, or should the group be unbundled and CDG and Orly airports privatised separately? 
• Asset ownership regime.  An arrangement needs to be put in place to ensure that ADP's airport and non-airport infrastructure assets, as well as the substantial land reserves which it currently owns, remain in some form of public ownership so that they cannot be freely disposed of by ADP after privatisation, while at the same time maintaining the value of ADP at the time of privatisation and over the longer term.
• Which airport regulation system should be adopted?  Should the "dual-till regulation" (système de double-caisse) system be maintained or should there be a move to "single-till" regulation whereby profits derived from airport commercial activities (i.e. car parking, car rental services, food and beverages, duty-free shopping, etc.) may be used in addition to the infrastructure charges charged to airlines to cover the fixed cost of the airport’s aeronautical services

Key features of new regulatory regime as set out in the Bill

As mentioned above, the French Parliament began discussing the Bill on 5 September 2018.  Most of the 73 articles in the Bill address issues other than ADP.  Therefore, parliamentary discussions will take time and it is not anticipated that the Bill will be adopted before the beginning of 2019.  The contents of the Bill have already been amended during parliamentary debate, e.g. to provide a right for regional local authorities (Ile de France, Oise) to acquire shares in ADP, but we anticipate that the largely "technical" provisions set out in articles 44-50 which relate to ADP will not be subject to substantial further alteration.⁷

The Bill removes the current requirement for the majority of ADP's capital to be held by the State.  It creates an "exclusive right to operate" (droit exclusif d'exploitation) for a period of 70 years in favour of ADP, thereby triggering a substantial restructuring of ADP's asset ownership regime.  It also maintains the dual-till regulation regime currently in use, under which the profits derived from commercial activities at ADP airports are not integrated with the income from airport charges.

State ownership no longer required

The Bill provides that article L. 6323-1 of the Code of Transport (which requires that the majority of ADP's capital is held by the State) is removed, and article 49 of the Bill expressly authorises "the transfer of the majority of the capital of the company Aéroports de Paris to the private sector".  

The Bill does not provide for the unbundling of ADP's airports: CDG and Orly will not be sold separately and ADP is to remain the sole operator of all airports and aerodromes in the Paris region (aéroports franciliens).

The Bill does not set out the method and detailed terms of the privatisation.  It requires, however, that, during the privatisation process, the Minister of the Economy and the minister responsible for civil aviation "remind" the candidates of the public service obligations (obligations de service public) to which ADP is subject, and of the possibility that the State may impose a lock-up period for shareholders in the privatised ADP.

Although the State is intending to privatise ADP as a company, it is important to point out that it is not intending to effect a once and for all "privatisation" of the right held by ADP to operate the Paris airports.  Therefore, the Bill provides that the sale by the State of its shares in ADP does not include the irreversible transfer of ADP's current right to operate the airports; in other words, following the restructuring provided for in the Bill, the privatised ADP will no longer benefit from a perpetual right to operate the Paris airports. 

ADP granted exclusive but temporary right to operate Paris airports

The Bill reorganises the legal regime of ADP's airports and related assets to ensure that "public ownership rights over assets that are essential for the public service" are secured after privatisation.  

This involves a fundamental change in the legal basis of ADP's right to operate the relevant airports.

Under the Bill, ADP will no longer operate the French airports that are owned by it in perpetuity, as is currently the case: instead it will be granted by law an exclusive right to operate these airports for a period of time limited to 70 years. Upon expiry of the 70-year period of operation (période d'exploitation), ADP will have to transfer ownership of its assets (other than its international airport assets)⁸ to the State, on receipt of appropriate compensation determined in accordance with the terms set out in the Bill. 

As it currently stands, the State is under a statutory obligation to maintain majority ownership in ADP, and therefore the fact that the airports, characterised in law as "public infrastructure" (ouvrages publics),⁹  are fully owned by ADP has not been an issue, particularly since the State has the right to oppose the sale of (or the granting of security over) ADP's public service assets,¹⁰ meaning that there was no risk that the State could ever lose ultimate ownership of these public assets.

The "exclusive operation right" granted to ADP under the Bill is designed to maintain ultimate State ownership over the assets operated by ADP once it becomes a privately held company, both for the duration of that exclusive operation right and following its expiry.

The "exclusive operation right" created by the Bill is a new, ad hoc right, for which there is no precedent under French law.  One of the reasons for adopting this complex solution, rather than a more typical arrangement based on the State granting a public service concession (concession de service public) for the operation, maintenance and development of the airports, is that the State would first have had to acquire the airport and non-airport assets currently owned by ADP before tendering and granting a concession for the operation and development of those assets.  In view of the valuation of ADP and the legal complexity and timeline of such an acquisition and tendering process, this was not deemed to be an option.  More importantly, this would not have allowed the State to extract value from the privatisation of ADP itself.

The detailed terms and conditions governing the exclusive operation right granted to ADP, and its performance of the public services relating to the operation of airports (service public aéroportuaire), are to be set out in "operational specifications" (cahier des charges) produced by the State.  ADP's airport public service activities are currently already regulated in a cahier des charges, but the new cahier des charges to be created under the Bill will be substantially more developed and will grant the minister responsible for civil aviation more extensive control over ADP's compliance with the public service obligations associated with the exclusive right to operate the airports. ¹¹

Among other requirements, the cahier des charges will set out key performance indicators (niveaux de performance) and sanctions for non-compliance (penalties, termination), as well as specifying the circumstances in which the State may require ADP to carry out certain investments or authorise a change in the control of ADP.  In addition, it will set out certain specific procurement rules applicable to ADP as well as including a right for the State to regulate and authorise any substantial modification affecting the capacity of the airports.  It will also contain a right for the State to have approval rights over the appointment of ADP's key managers. 

The State will also have the right to monitor the disposal of, or the granting of security over, ADP's key assets.  Any such disposal will be authorised by the State to the extent that it does not adversely affect ADP's performance of its public service obligations over the entire 70-year operation period.¹² In particular, ADP is not permitted to grant security over land and buildings which are required for the performance of public service obligations, nor may such land or buildings be the subject of commercial leases (baux commerciaux).  These provisions give the State the power to prevent the granting of security over, or the disposal by ADP of, its substantial land reserves (réserves foncières) if the State considers that such a disposal or granting of security would not be compatible with the future development of ADP's public service obligations (e.g. the development of new runways at CDG and/or Orly, in particular).

In addition to the cahier des charges imposed by the State, ADP and the State will enter into a negotiated "economic regulation contract" (contrat de régulation économique), whose purpose is essentially to regulate the level of airport charges for the use of aeronautical infrastructure during the contract period, whose maximum term will be five years. In the absence of agreement on the terms of the renewal of the economic regulation contract, the Government will be entitled to determine the amount of the charges by decree. 

On termination of ADP's exclusive right of operation (whether at the end of the 70-year operation period or upon earlier termination for breach or in other similar circumstances set out in article L. 6323-1.II of the Code of Transport), ADP's assets will be transferred to the State in accordance with the terms of the cahier des charges.

State compensation for limitation of ADP's right to operate the Paris airports

Under the legal regime created by Law N° 2005-357 of 20 April 2005, ADP was granted the right to organise, operate and develop CDG, Orly, Le Bourget and the other Paris airports indefinitely. Subject to the right of the State to oppose the sale of airport assets required for the performance of the public services, ADP enjoyed full and unlimited ownership of the assets entrusted to it pursuant to the terms of the Law.  As mentioned above, this was not considered to be an issue for so long as the State was required to retain a majority interest in ADP.

However, the proposed change in the legal regime applicable to ADP's public service assets and the granting of a temporary right to operate the Paris airports, as provided in the Bill, will effectively result in the expropriation of ADP.  It will adversely affect the valuation of ADP (which is a listed company) and will therefore have significant financial implications for ADP and its current shareholders.  ADP therefore needs to be indemnified for this loss of future revenue in accordance with the Constitution.

The Bill sets out detailed (and complex) arrangements for the calculation and payment of financial compensation by the State to ADP in respect of ADP's loss of future revenues as a result of the restructuring and, in particular, the time limitation placed on ADP's right to operate the airports in the future.

The Bill provides that ADP will be indemnified for the (future) transfer of its assets at the end of the operation period as follows:

(a) on the date of privatisation:  payment by the State to ADP of an amount equal to the present value of ADP's (future) after-tax cash flows following the term of the operation period (70 years) using a discount rate equal to ADP's weighted average cost of capital as determined at the date of the transfer of ADP to the private sector (ADP's WACC) minus the (estimated) net book value of ADP's assets at the end of the operation period actualised using ADP's WACC; and

(b) on transfer of ADP's assets (other than its international airports operations) at the end of the 70-year operation period:  payment by the State of an amount equal to the (actual) net book value of ADP's assets at the end of the operation period.

The above amounts will be determined by the Minister of the Economy, with the assent of the Commission des participations et transferts, an independent authority set up under France's privatisation laws.

The determination of ADP's net present value under (a) above is especially complex as it applies to a period of time that is particularly remote (starting in 70 years) and is determined with respect to an unlimited period of time after the end of the operation period.  In its opinion (avis) on the Bill, the State council (Conseil d'Etat), acting in its State advisory capacity, points out the difficulties and uncertainties of the proposed calculation, but ultimately concludes that it is compliant with the constitutional principles governing the valuation of public assets transferred to the private sector (entreprises transférées du secteur public au secteur privé).

The proposed 70-year term of ADP's exclusive operation right was determined by taking several factors into consideration, in particular the fact that ADP is a listed company whose long-term stability must not be adversely affected by the restructuring triggered by the privatisation, as well as - from the State's perspective - the reduced budgetary impact (in terms of the indemnity payments owed by the State to ADP) resulting from setting a longer term for exclusive operation.

1. See https://www.parisaeroport.fr/en/homepage-group.
2. The remaining share capital is held by Vinci (8%), Royal Schiphol Group (8%), Predica (5.1%), employees (1.9%) and other institutional and individual investors (26.4%).
3. Projet de loi relative à la croissance et la transformation des entreprises submitted to the National Assembly by the Prime Minister and the Minister of the Economy on 19 June 2018 and also called "projet de loi Pacte".
4. Sale of 49.9 per cent  to Chinese consortium CASIL.
5. Sale of 64 per cent to Azzura Aeroporti formed of Atlantia and EDF Invest. The Principality of Monaco has recently acquired 12.5 per cent of the capital of Azzura Aeroporti.
6. Sale of 60 per cent to a consortium formed of Vinci Airports, la Caisse des dépôts et consignations and Predica.
7. The online version of this article will be updated should this be the case.
   
8. Article 44 of the Bill which amends article L. 6323-2-1 of the Code of Transport. The purpose of the carve-out of ADP's international airport operations is to limit the compensation payable upon termination of the 70-year operation period - see further below.
9. Art. L. 6323-5 of the Code of Transport (Code des transports).
10. Art. L. 6323-6 of the Code of Transport.Article 45 of the Bill.
11. Article 45 of the Bill.
12. Article 46 of the Bill.
13. Article 47 of the Bill which amends article L. 6323-4 of the Code of Transport.