In recent weeks, the French airport industry has seen two major and unexpected setbacks, with the cancellation of the privatisation of Toulouse airport and the postponement of the sale of the Paris airports company.
For months, the infrastructure world has been scrutinising the French market, with all major players in the airport sector eagerly lining up for the sale of 49.99% of the shares in the Toulouse airport company, announced by its current Chinese owners, and the sale of 51% of the shares in the Paris airport company (Aéroports de Paris, ADP) announced by the French government. The size of ADP, which not only runs three of the four Paris airports (CDG, Orly and Le Bourget), but also runs eight other major airports around the world, makes this an extremely lucrative prospect for private sector investors.
However, the last two weeks have seen major and quite astonishing setbacks in both these transactions, leaving the industry in turmoil with many unanswered questions about the future of these projects. The resulting uncertainty has both political and legal implications.
On the one hand, Toulouse airport finds itself owned by a consortium that is no longer authorised to own it, leaving it in a legal quagmire that will take months to unpick. On the other hand, the sale of ADP may find itself being put out to a national referendum following a constitutional challenge using a procedure that has never been used before.
The privatisation of Toulouse airport closed in 2015 and was the first major airport privatisation in France. At the time, it was already a controversial decision to award the airport to a Chinese consortium composed of Shangdong Hi-Speed Group and the Hong Kong based investment fund, Freidmann Pacific Asset Management.
Many questions were asked about whether the Government should use its discretion under foreign investment control laws (art. 151-3 et seq. of the French Code Monétaire et Financier) to block the sale. These concerns seemed to be overcome, however, by the desire to promote Franco-Sino economic relations and to settle for the best price.
After a notoriously unhappy marriage between the Chinese and other shareholders, comprised of local and regional government authorities, and some sharp criticisms by the French State Financial Controller (La Cour des Comptes) about the absence of investment and the lack of independence from the Chinese Government, the Chinese shareholders announced to the market they were selling their stake in the airport company. Many of the original bidders, disgruntled at having lost the initial tender, were already lining themselves up for a second attempt to purchase the airport.
At the same time, there was a long-running court battle led by an environmental NGO, trade unions and employees, which sought to overturn the original award to the Chinese consortium on a number of grounds.
After an initial rejection by the Paris Administrative Court of first instance in 2017, the Paris Administrative Court of Appeal (Cour d’Appel Administrative de Paris) overturned this decision on April 16, 2019 declaring that the authorisations granted by the French Ministry of Economy and the Ministry of Finance, as required under the tender rules and foreign investment laws, were both cancelled.
The decision was based on the fact that the award was not compliant with the tender rules due to the withdrawal of a consortium member, SNC Lavalin, during the tender process, when the tender rules did not allow for this. It is worth noting that the tender rules for subsequent tenders for the privatisation of Lyon and Nice airports contained comprehensive rules and procedures for the withdrawal of a consortium member. Also, interestingly, the Supreme Court held that the trades unions and the employees had demonstrated a legitimate interest in the project, thereby giving them locus standi for the appeal, whilst the other plaintiff, the environmental NGO, was denied such standing.
It is well established in French law that a sale of shares that contravenes a requirement for approval is null and void. Consequently, the cancellation by the French court of the Government’s authorisation to award the sale to the Chinese consortium should result in the sale being invalidated. However, the nullity of the sale must be formally pronounced by the commercial court.
Under such a decision, the transfer of title would be rescinded, in order to put into the same position as if the sale had never occurred. As such, the French State would be required to reimburse the original price of the shares and the Chinese shareholders would have to return the shares. The French State would thus retain any increase in the market value of the shares, although, it is not difficult to envisage the disputes to come about improvements and investments made by the Chinese consortium from their own funds.
If the share transfer is declared null and void, the Chinese shareholders would no longer be entitled to exercise voting rights or receive dividends and they would have to return any dividends received from the date of the nullity decision. If it is shown they acted in bad faith, dividends could be reclaimed right back from the date of the original transfer of ownership.
A court decision is expected in the upcoming months. This leaves the airport in a complex situation in the interim period, whereby the Chinese remain shareholders but the transfer may be invalidated. It is unclear how the French Government will manage this. At a practical level, the continued participation of the Chinese shareholders in the corporate governance of the airport is likely to cause some tensions.
Politically, this will leave an unexpected hole in the Government’s finances to the tune of around €300 million with any recovery of these funds by a re-tendering of the airport likely to take up to two years to complete. Given that President Macron himself was the Minister of Economy that authorised the contested award, this is not going to ease current political tensions.
Paris Airports Group
By a slightly unnerving coincidence, the privatization of ADP has also suffered a major setback in the last few weeks, following the unprecedented use of a constitutional challenge procedure, the Shared Initiative Referendum (Référendum d’Initiative Partagée, RIP). This was introduced into the French constitution by the Sarkozy Government in 2008 and came into effect in 2015, but it has never been used until now.
The basis for the privatisation of ADP was enacted on March 14, 2019, when the lower house of parliament (L’Assemblée Nationale) voted in favour of a law abolishing the obligation of the French State to hold a majority shareholding in ADP. So far so good. The detailed implementation laws for the public tender process for the sale of ADP were expected to follow shortly thereafter. However, on April 9, 2019, a group of members of parliament from across all political parties successfully launched an RIP to block the privatisation process and submit it to a referendum.
This procedure involves three steps. It is commenced by a vote of one-fifth of all members of parliament to subject the law to a referendum. In today’s parliament, that was at least 185 members, although 248 members actually signed up. The second step requires the Constitutional Court (Conseil Constitutionnel) to review within one month the referendum proposal and determine whether it is valid or not. In order to be valid, in addition to having the requisite number of signatures, the proposal must concern one of the matters specifically listed in article 11 of the French Constitution (being the organisation of the public powers, reforms to economic and social policies, reforms to public services or the ratification of an international treaty) and must not relate to a law that has been promulgated less than a year ago. Thirdly, within one month of this Constitutional Court decision, the Government must open a dedicated website for a public vote. Citizens may vote by electronic signature, with voting open for nine months. If 10 percent of the active population votes in favour within the nine months, then the Government is required to hold a national referendum, unless a new text concerning the same subject is examined by both houses of parliament within six months of the end of the nine-month voting period.
With the best will in the world, the Government and the hungry private sector are going to have to wait at least another 15 to 18 months for the tender for the privatisation of ADP to be launched and another 18 months before the privatisation becomes a reality.
In the meantime, the Government will no doubt be turning its attention to the other airports that it has in mind to privatise, notably Lille (for which the public tender is already underway), Bordeaux and Marseille.