Participants in the Italian PPP sector are used to false hope. Eight years ago a piece of legislation, the Legge Obiettivo, was supposed to herald the dawn of consistent PPP deal flow by giving priority to key transport infrastructure projects and streamlining their permitting process.

Unfortunately the Legge Obiettivo did not counter the capricious effects of litigation from local bodies and losing bidders, a lack of public funds or changes in subsequent legislation, so projects continued to be stuck in a typically Italian quagmire. Aside from a few construction financings for highways under Italy's general contractor provisions – most notably three sections of the Salerno-Reggio-Calabria highway – and a clutch of four hospitals, the reality fell far short of the expectation.

Fast forward eight years, however, and Italy is on the cusp of closing financing for four or five large road projects, which has come about more by the passage of time than legislative design "We are in a situation where we thought we were seven or eight years ago," says the head of infrastructure at one Italian bank.

Today's optimism is tempered with a large dose of realism. Among the roads closest to financing, BreBeMi and Pedemontana-Veneta have both been in gestation for more than five years.

Promotore perils

In late April, an Italian administrative court ruled in favour of the Spanish Sys consortium in a dispute with the promotore (promoter) of the Eu2.1 billion ($2.86 billion) Pedemontana-Veneta highway PPP concession. Sys, led by Sacyr/Itinere, bid 25% lower than the promotore in the second round of bidding under the Merloni concession law. The dispute centred on whether the promotore – the SocPV consortium led by Impregilo and Autostrade – exercised its matching rights within the legislative time frame. The court found that it had not.

The project has been dogged by delays. The tender was changed after the project was refereed to the European Court of Justice in December 2003 by the European Commission because of the lack of competition in the tendering procedure, and the litigation between the two competing bidders has rumbled on since the promotore was awarded the project in November 2007. It now appears likely that the Veneto region will progress with a negotiated procedure with the Sys consortium, or it could feasibly order a new bid.

The project has been procured under the Merloni law template, which contained provisions for a three-stage promotore process, whereby a prospective developer could propose a project to the public authorities. If accepted the project would go out to a wider tender, but with the initial developer obtaining the preferential status of promotore, upon which the legislation conferred controversial matching rights. The Merloni law process was long and protracted and subject to litigation from losing bidders.

"Fortunately the Merloni law has been superseded by a new code for public contracts which streamlines the tendering process," says Franco Vigliano, head of Ashurst's energy, transportation and infrastructure group in Italy. "The concept of a promotore still exists but is synonymous with preferred bidder in other PPP jurisdictions, without any matching rights."

Under the new code the tendering authority chooses a promotore from a single bid stage and then enters a negotiation procedure whereby the authority can go back to the second-place bidder if the talks break down. The process is halfway between the EU's concept of a competitive dialogue and a multiple rounds procedure.

All of the large road concessions edging to financial close have been in gestation for over five years – such as the Milan ring road (TEM), Pedemontana Lombarda and Cremona Mantova – and are slowly overcoming the obstacles of the old regime. The Eu1.5 billion BreBeMi highway should be first to close later in 2009, and will be the first toll road under the regulated asset base (RAB) regime.

The Pedemontana-Veneta project involves the development of a 132.4km toll highway connecting the A31 near Vicenza to A27 in Treviso. The Eu2.1 billion project will be developed under a 30-year build-operate-transfer (BOT) concession.

Big balloon for BreBeMi

Details have emerged about the concession structure for what is expected to be Italy's first long-term project financed toll road, the Eu1.5 billion 50km motorway connection between Milan and Brescia (BreBeMi). The project pushes the build-now-pay-later ethos of PPPs further than any other PPP closed to date and sets the template for other Italian toll road projects.

BreBeMi will also be the first toll road closed under the regulated asset backed (RAB) tariff regime, which caps the profit the concessionaire can make from tolls whilst limiting the concessionaire's traffic risk. The tariff can be adjusted at three-yearly reviews to adjust for higher-than-expected operating costs or low traffic.

The financing structure is unique in that the cumulative tariffs during the concession period are not sufficient to recoup the capital expenditure, operating costs and equity return of the project. Rather than being completely compensated through tariffs, a portion of the concessionaire's consideration will be deferred to a balloon payment that will be due at the end of the concession. BreBeMi has a three-year construction period, with a 19.5-year operating period. There is no operating tail because the debt's tenor will exactly match the concession length.

The balloon, which is likely to be equal to the accumulated financing costs but could be as much as half of the capex, will be repaid in one of three ways: as a concession fee from a new concessionaire, by the existing concessionaire assuming the costs if its contract is renewed, or by the procuring authority paying the balloon, at which point the road will return to the public authorities. To make the template financable the government has authorised the state-owned Cassa Depositi e Prestiti (CDP) to guarantee the public authority's payments to the concessionaire via a new fund for the guarantee of public works, or FGOP. The rules under which CDP guarantees would be implemented are pending, and the cost of the guarantees is still unclear.

According to Vigliano, "There is great expectation for the implementation of the new State fund for the guarantee of public works, but what is missing are mechanisms to spread the public spending over the whole operating period, like availability fees (currently used only in the healthcare sector) or shadow tolling."

Currently, outside of healthcare, public contributions can only be made for a maximum of five years, which is big driver behind the evolution of the RAB real toll road concessions. The probable rationale for using quasi-government entities rather than a direct government guarantee is dodging the consolidation of these guarantees on the state's balance sheet. Italy has long played a game of cat-and-mouse with Eurostat over these obligations and this initiative extends the sparring.

BreBeMi's sponsors are Intesa Sanpaolo subsidiary BIIS and Autostrade, together with 25 other regional private and public shareholders. The next milestone for the project is CIPE (Interministerial Committee for Economic Planning) approval of the final design: the meeting is scheduled for 15 June. BIIS is also the lead arranger for the project's debt, and is looking to assemble a club of around 10 banks. Financial close is scheduled for July or August.

More than a one-off?

The other toll road concessions that should close within the next 24 months, and follow the BreBeMi template, include the Eu1.5 billion Milan ring road (TEM) project, awarded to an Impregilo-led consortium, the Eu3 billion Pedemontana-Lombarda, awarded to an Impregilo-Astaldi consortium, the Eu640 million Cremona-Mantova motorway project and the Cispadana Highway.

Beyond the road concessions, the fourth section of the Salerno-Reggio-Calabria, awarded to Pizzorotti, is nearing financing under a revised, properly non-recourse, general contractor scheme. The adviser and lead arranger is Calyon subsidiary Cariparma.

In April 2009, the financing of the Eu700 million Florence high-speed rail project was closed under the general contractor provisions. The borrower was Nodavia Scpa (the project company owned by sponsors Coopsette 70% and Consorzio Stabile Ergon 30%) and lenders were Unicredit and Fercredit, factoring company of the Gruppo FS (Italian railways), assisted by Ashurst.

The Milan Metro line D is rumbling on, although the project, with a current capital cost of around Eu2 billion, is likely to be reduced because of budget constraints at the Municipality of Rome. The municipality was expected to launch an official tender for the Line D concession in the summer of 2008, and invite competing bids to the promotore, a joint venture between Condotte d'Acqua and Impresa Pizzarotti, but the schedule has slipped considerably.

Hopes that the proposed transport projects within and connecting Milan will be boosted by the political impetus from Milan's hosting of an Expo in 2015 are tempered by realism. As one market participant says: "Although the Berlusconi government has become more sophisticated with its infrastructure aims by improving legislation and combating organised crime, most projects are held back by constraints on the public purse. The leading projects in the Legge Obiettivo will likely become reality, but only spread out over the next ten years."

Better tendering, different funding

While projects that have been in gestation for years battle on with the Merloni provisions, the new code for public contracts should smooth the path to close for future projects. By reducing the time from tender to award, litigation should be reduced. A common avenue of complaint for losing bidders – contesting the fairness of tenders – should also be blocked.

A chronic problem for the old system was that projects were bid using a preliminary design on which the cost was invariably underestimated. Knowing this bias, Italian constructors would bid aggressively to secure the award and then negotiate an inflated capital cost once the final design was nearing completion. These negotiations, invariably between the promotore and procurer, were widely seen as anti-competitive and subject to litigation from losing bidders.

For example, the initial cost for BreBeMi was set at Eu700 million, but now financial close is near, the figure has more than doubled to Eu1.5 billion. As a further illustration of the grinding progress of these projects, the preliminary design, drafted 10 years ago, for the Pedemontana-Lombarda highway had to be re-routed, causing many further months of delays because rural land had become urbanised. By reducing the tendering time and having a structured negotiated procedure, whereby the procurer can fall back on the next-best bidder, serial rounds of litigation should be a thing of the past.

Beyond permitting and tendering, Italian banks are also wrestling with poor liquidity, so where once one bank could have underwritten Eu60 million, a Eu50 million project requires the participation of two or three banks. "We need to forget about the deals done two or three years ago, and focus on structuring shorter-term deals – such as miniperms – with more sponsor equity," says one banker.

The debt pricing for projects starts at 300bp as a floor, and upfront fees weigh in around 200bp. In the solar sector, for instance, private equity players are approaching banks seeking leverage of 95%, but are having to accept the reality of roughly 80% gearing.

Although the Italian banks have escaped direct exposure to toxic debt instruments, they have seen their cost of funding jump. Unicredit, which has a large exposure to Eastern Europe, has seen pressure on its margins, and it will pass these costs on to borrowers. A recent three-year Unicredit bond priced at 200bp over mid-swaps.

The Italian government is taking steps to help the commercial bank market, by controversially unlocking and using CDP postal deposits as security. This controversial step is still awaiting the adoption of new bylaws at the CDP. The government is also allowing Sace to guarantee debt for domestic projects. But few, if any. major infrastructure projects have approached the European Investment Bank as a source of funding. A common refrain among Italian banks is that the EIB processes are too cumbersome and time-consuming – quite a complaint, given the gestation period of domestic toll concessions.

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Power and renewables keep rolling

While bankers and law firms may lament the progress of the PPP sector, the energy part of their business has remained fairly robust, since Italy is a power island. Italy needs to wean itself off importing electricity, via interconnections with Switzerland and France, generate more capacity and diversify its energy sources.

The most vibrant energy sector is solar photovoltaic (PV), followed by wind. Southern Italy, in particular, is witnessing an influx of private equity capital from across Europe. Investors are attracted to the most hospitable tariff regime for PV plants in Europe. The outlook for Puglia, Calabria and Sicily is very optimistic, with many plants of 10MW and under securing permitting and tapping individual banks.

A notable exception is Spanish investor Global Solar Fund, which is seeking financing of roughly Eu250 million for a 48MW chunk, possibly followed by a single 90MW deal or two further deals. Several banks are looking at the credit, including the commercial lending department of Cassa Depositi e Prestiti, along with Intesa, Unicredit, SG and WestLB among others. Close is expected by July. Foresight, SunRay, Enfinity are also close to the market with smaller deals.

In the conventional energy sector the Eu600 million ($773 million) 10-year debt financing for Sorgenia's merchant combined-cycle gas-fired projects in Italy is near. The deal backs development of the Lodi and Aprilia greenfield plants, in Lombardia and Lazio respectively, and includes the operational 770MW Termoli plant.

Mediobanca, Intesa, WestLB and MPS are arranging the loan, and the pricing has been increased slightly to around 320bp over Euribor during construction and is backed by Sorgenia warranties. The margin then steps up in 25bp increments to reach around 450bp in year seven. The debt also has a 30% balloon payment and the upfront fee is 200bp.

Beyond Sorgenia the Eu700 million Livorno LNG regasification terminal should close in August or September, with the sponsors seeking around Eu550 million from banks, with CDP and Sace likely to have a role. The debt will refinance a $185 million bridge loan made available by Unicredit and Unicredit Infrastrutture in June 2008 to purchase the Golar Frost vessel.

Some banks looking at the deal, which is structured around tolling agreements, have expressed concern over where the plant's gas supply will come from. The supply is not yet public knowledge, but it is likely the sponsors will secure gas from Egypt.

In total there are plans for around 20 LNG terminals in Italy, but only around 12 of these are likely to get planning permission and still fewer will obtain financing. Arguably the two most advanced after Livorno are facilities at Priolo and Port Empedocle. Shell and ERG have received permitting permission for an LNG terminal at Priolo, while Enel has been given the green light for Port Empedocle LNG Terminal. The Brindisi LNG terminal, sponsored by BG, which long looked favourite to be Italy's second LNG terminal after a small facility at Panigaglia, is set for a slow death in litigation because of to local opposition.

The LNG termainals will compete with each other, two probable pipelines and in the longer term the governement's desire to pursue a nuclear generation programme. The two pipelines, still at formative stages, are the Edison-IGI Poseidon Greece-to-Italy pipeline which is likely to be fed by upstream gas operators in Azerbaijan (IGI Poseidon is a 50-50 joint venture between Edison and Greece's state-owned Depa). And the Eu2 billion Galsi pipeline, which will link Algeria to mainland Italy via Sardinia is sponsored by Sonatrach (41.6%), Edison (20.8%), Enel (15.6%), Sardinian firm Sirs (11.6%) and Hera Trading (10.4%).