Energy renovation of public buildings – New perspectives in France

To facilitate and accelerate the energy renovation of public buildings, the law of March 30, 2023 opens up third-party financing to the State, local authorities and their public institutions. This new legislation proposes to experiment for five years with a system that derogates from the law on public procurement, to massively increase the energy renovation of public buildings.

This law is clearly inspired by some of the features that already exist and apply to partnership agreements (public-private partnerships) in the public procurement Code.

The aim is to remove the barriers to investment that result from the high cost of renovation work and to promote the achievement of the objectives of reducing the energy consumption of public buildings by at least 40% in 2030, 50% in 2040 and 60% in 2050, compared to 2010, as provided for in the 2018 law on the evolution of housing, development and digital.

Achieving these goals requires massive investments estimated between 400 and 500 billion euros. Indeed, nearly 400 million square meters of public property must be renovated. Surely, an area of interest for economic operators in the field of public procurement and the energy and utilities sectors.

What scope of work is covered by the experiment?

Energy performance contracts can be concluded for the energy renovation of one or more public buildings, but also for the undertaking of the work provided for in the last paragraph of Article L. 2224-34 of the French General Code of Local Authorities, i.e. the carrying out of studies and all or part of the work required to improve the energy performance of buildings.

Which contractual form?

The law allows for the conclusion of energy performance contracts that derogate from the provisions relating to the financial performance of public contracts governed by Articles L. 2191-2 to L. 2191-8 of the Public Procurement Code. These contracts take the form of a global performance contract mentioned in article L. 2171-3 of the same code, which states that "The contract combines operation or maintenance with the execution or design and implementation of services in order to meet quantified performance objectives. These objectives are defined in particular in terms of level of activity, quality of service, energy efficiency or ecological impact. The global performance contract includes measurable performance commitments”.

Also, please note that the government has clearly stated that as this mechanism only aims to delegate the works, and not the management of the building, it differs from public-private partnerships, also commonly called PPP.

Finally, it should be noted that these exemptions allow the State, its public institutions, local authorities and inter-municipalities to make exceptional use of deferred payment for construction work within the framework of energy performance contracts. This is an important exception that should facilitate the financing of such projects.

With whom is the contract to be concluded?

The law of March 30, 2023 provides that the global performance contract may be concluded with the State and its public establishments, local authorities, their public establishments and their groupings, but also for the realisation of an operation meeting the needs of another legal entity (different from the public purchaser) under public or private law with a view to carrying out its missions. This possibility has been extended to public establishments and groups of local authorities so that EPCIs and energy syndicates can have recourse to third-party financing for the energy renovation works they carry out on behalf of the municipalities that are members. The law also allows EPCIs to take charge of studies in this field.

In this case, an agreement is signed between the purchaser (contracting authority/entity) and the legal entity that will have its needs satisfied by the global performance contract.

Also, article 2 of the law specifies that when the implementation of a project falls within the competence of several purchasers at the same time, they may designate by agreement which of them will conduct the award procedure and, if necessary, sign the contract and monitor its performance, just like it would occur in case of a public order grouping.

Is the purchaser required to carry out any formalities prior to the conclusion of such a global performance contract?

Like the preliminary studies required for partnership contracts, Article 2 of the law provides that before deciding to use a global performance contract, the purchaser must carry out a preliminary study to demonstrate the advantages of using such a contract. The procedure for awarding this contract may only be initiated if this preliminary study demonstrates that the use of such a contract is more favourable than the use of other methods of carrying out the project, particularly in terms of energy performance. However, the criterion of deferred payment alone cannot constitute an advantage.

Similarly, the purchaser is required to carry out a budgetary sustainability study, which assesses in particular the consequences of the contract on public finances and the availability of funds.

Finally, the conclusion of global performance contracts is subject to the authorization of the competent administrative authorities, which may vary according to the contracting public entity.

What is the duration of the contract?

The duration of the global performance contract is determined according to the amortization period of the investments or the financing terms chosen. This precision is necessary as, unlike the regime applicable to concessions, no rule governs the duration of global public contracts in the French Public Procurement Code, except that they have to be periodically re-opened to competition.

How is the contractor's remuneration calculated?

In accordance with Article 1 of the law, for the calculation of the contractor's remuneration, the global performance contract specifies the conditions under which are taken into account and identified:

• The investment costs, in particular the study and design costs, the construction costs, the costs ancillary to the construction and the interim financial costs;
• Operating costs, in particular the costs of upkeep, maintenance and renewal of the works and equipment;
• Financing costs; and
• Where applicable, income from ancillary activities or from the development of the property.

What are the specificities of the financing terms?

First of all, the purchaser may decide that the financing terms indicated in the final offer are adjustable. In this respect, the adjustments may not have the effect of challenging the conditions of competition by exonerating the purchaser from the obligation to respect the principle of choosing the most economically advantageous offer, nor may they allow the prospective contractor to change the general economy of the offer. The adjustment of the offer relates only to the financial component of the overall cost of the contract and is based solely on the variation in the financing arrangements, to the exclusion of any other element.

Secondly, and more interestingly, the law allows the remuneration due by the purchaser under the global performance contract to be assigned in accordance with Articles L. 313-29-1 and L. 313-29-2 of the French Monetary and Financial Code (“MFC”).

This assignment or receivables is subject to acceptance, which is conditional on the contracting public entity's determination that the investments have been made in accordance with the contract. Once this is established, and unless the assignee, in acquiring or receiving the debt, has knowingly acted to the detriment of the public debtor, no set-off or exception based on the debtor's personal relationship with the holder of the contract, such as cancellation, rescission or termination of the contract, may be set up against the assignee, except for the four-year statute of limitations provided for in Law no. 68-1250 of December 31, 1968 relating to the statute of limitations for debts owed to the State, the departments, the municipalities and the public institutions (Art. L. 313-29-1 MFC).

In this context, when the contracting public entity accepts one or more assignments of receivables, the total commitment of the public entity in respect of this or these acceptances may not exceed 80% of the remuneration due in respect of the investment costs and financing costs (Art. L. 313-29-2 MFC).

What are the consequences of these new provisions for subcontractors?

Under Article 1, notwithstanding Articles L. 2193-10 to L. 2193-13 of the French Public Procurement Code, the direct subcontractor of the holder of the global performance contract is paid, for the part of the contract for which he is responsible, in accordance with the conditions laid down in Title III of Law No. 75-1334 of December 31, 1975 on subcontracting (i.e. right to direct payment from the purchaser).

Are there any specifications in the event of cancellation or termination of the contract?

Paragraphs 16 to 18 of article 2 of the law of March 30, 2023 specify that in the event of cancellation or termination of the contract by the judge, the contractor is entitled to compensation for expenses incurred in accordance with the contract, provided that they have been ‘useful’ to the buyer. Among the latter, the contractor is entitled in particular to the reimbursement of the costs related to the financing put in place in the framework of the performance of the contract, including, if applicable, the costs for the contractor related to the financing instruments and resulting from the early termination of the contract.

It should be noted that the inclusion of costs related to financing is subject to the mention, in the annexes to the global performance contract, of the main characteristics of the financing to be put in place for the purposes of the performance of the contract.

Finally, the clause setting out the terms and conditions of compensation for the contractor in the event of cancellation or termination of the contract by the judge, is deemed to be divisible from the other stipulations of the contract.