The financing of public works and public utility infrastructures with the support of private investments has been widely debated in Italy, and the public private partnership (PPP), which allows the public administration to reduce upfront capital expenditures and convert the infrastructure costs into operating expenditures spread over the medium to long term, is considered one of the more realistic methods to obtain the necessary renewal of existing public utility infrastructures and the creation of new ones.

Regulatory framework

Together with the early stages of the PPP market in Italy, significant development of a specific legal framework started in the 1990s. The new regulation aimed at encouraging project initiatives as well as the investment of private funds in the construction of public infrastructures (and the provision of public services) in cooperation with the Public Administration (PA).

A model similar in many respects to the BOT developed in the UK, has been the centre of the framework law on public works: Law 109/1994 or the "Merloni Law". Under such regulation, although the PA retains the prerogative of planning all public works, the initiative to develop individual projects may now also be taken by the private sector.

Two other pieces of legislation were introduced afterwards, aimed at simplifying the tenders' process and provide the PA with further instruments to support their activity in developing public infrastructures, among which the "General Contractor" scheme. This scheme is based on a Design, Build, Finance and Transfer model, which has been applied in a number of large-scale infrastructures in Italy.

The most recent bill, issued in 2006, is a unitary code of all the above mentioned laws related to the procurement of public works and services and regroups them all under a single piece of legislation, with the Merloni Law being retained as the basis for the code.
In essence, the current regulatory framework allows the PA to carry out public works on a project financing basis through the awarding to the private sector of construction and management concession contracts.

In particular, the Merloni Law provided for the introduction of project finance schemes, mainly BOT, DBFO and DBFT through special purpose vehicles, in particular through Article 37 ("sponsor initiative", with the "Promotore" process) and Article 19, which is essentially an "open tender" process.

Article 37 deals with the Promotore procedure which allows private sponsors to present proposals to the awarding administration – including draft concession contract and the economical and financial base case (the so called "Piano Economico Finanziario"), which has to be reviewed by a bank or an authorised company ("asseverazione") in order to assess its compliance with the tender documentation (included the draft concession agreement).This is then open to competition, but it is usually won by the Promotore, thanks also to its "right to match" the best offer received by the awarding authority.

Article 19 means a direct step into procurement, to award the concession without the preliminary step of Article 37 (the Promotore phase) and based on preliminary design, concession contracts and documentation presented by the awarding authority. Beside such laws, there also exists regulation at regional level, which is in part modelled on the national framework and regulates PPP contracts awarded by local bodies.

In the past 12 months, the Italian legal framework for PPP has undergone improvements aimed at simplifying the public works legislation in general, and more specifically at reforming the motorway concessions general principles.

The main features, which are in the process of being reviewed by the Parliament and for which a final decision is expected within August 2007, follow, among other, the implementation of European directives, and relate to the following:

• the possibility to "borrow" from other companies the requirements to qualify for tenders (turnover, workforce and equipment);
• the so-called procedura negoziata, by which the PA negotiates with one or more bidders the offers received;
• the possibility to integrate in a single tender both design and construction.

As regards the motorways concessions scheme, Italy's government infrastructure committee CIPE has recently approved the government's reform of motorway concessions and tariff increases pushed forward by the Italian Infrastructure Minister. As one of the main features, the reform will include a profit clawback provision in favour of the government in case the planned infrastructure investments are delayed.

Deconsolidation – Eurostat compliance

Deconsolidation issues are also integral to PPPs, as the accounting treatment of public investments for the purpose of calculating the government budget and debt is one of the key arguments at the basis of the PA's decision process.

Risk analysis is the core element of assessment of a partnership project, as regards classification of the assets involved in the contract, in order to ensure the correct accounting of the impact on the government deficit of PPPs.

Eurostat recommends that the assets involved in a PPP project should be classified as non-government assets, and therefore recorded off balance sheet for government, if both the following conditions apply:

• the private partner bears the construction risk;
• the private partner bears at least one of either availability risk or demand risk.
This approach applies to cases where the government is the main purchaser of the services supplied by the private partner, i.e. the majority of the project's income comes from the government, on the basis of a services contract, as it is usually the case for healthcare and schooling projects, and even some transport infrastructure (e.g. shadow toll roads).

Market overview

Since the establishment of a reference regulatory framework, the Italian PPP market has shown significant growth: PPP tender procedures increased from 600 in 2002 to 1336 launched in 2006.

According to the Osservatorio Nazionale del Project Financing Report (Dec 2006), the Italian PPP market performed well in 2006 compared to 2005 in terms of market values, although the number of projects tendered is lower when compared with the 2005 figures.

The following figures summarise the Italian PPP market in 2006: 1,336 new initiatives accounting for a value of Eu17.8 billion to be added to the existing projects for which the tendering process has been started in the recent past. If compared with the 2005 market performance, the market expressed a significant growth in terms of value (+5.3% on the Eu16.9 billion of 2005), whereas the number of projects decreased from the 1,699 initiatives presented in 2005. Anyway, this trend allows for a growth in the average size of the projects that increased from Eu14.3 million in 2005 to Eu18 million in 2006 (taking into account that the actual value of project is known only for 988 initiatives).

Notwithstanding the positive signals coming from the market, some features, which currently still characterise the Italian market, are limiting its full development:

• the bid phase is usually long and complex and its outcomes can be easily challenged in court;
• the average size of each transaction, with the exception of the transport sector, is very small, which makes these projects hardly fit for a project finance scheme; and
• though the number of initiative at some stage of the tendering process is very high, very few of them reaches financial close.

Projects pipeline

The total cost of public works the government currently considers a priority amounts to Eu90.9 billion, of which Eu45.3 billion are still to be covered. Consequently, the current PPP deals pipeline shows a number of tenders launched in the motorway concessions sector (see below), mainly thanks to the strong political will to advance transport infrastructure investments.

• Pedemontana Veneta: The project involves the development of a 132.4km toll highway connecting A31 near Vicenza to A27 in Treviso. The Eu2.1 billion project will be developed under a 30-year concession to build, own, operate and transfer the toll road.
• Cispadana Highway: The scheme will involve the upgrade of the current infrastructure in the Emilia-Romagna region of northern Italy. Six consortium have submitted an offer (the process is under the Merloni Law) and are currently waiting for the awarding of the Promotore role.
• Cremona Mantova: The Eu640 million Cremona- Mantova motorway project is at the tender stage of procurement and will be financed as a PPP with a 35-year concession (under the Article 37 provisions).
• BreBeMi: Two-lane, 61km toll road from Milan to Brescia in the Lombardy Region (North Italy) for a total amount of capital expenditures around Eu1.25 billion.
Other important projects, currently under tender phase or in finance are highlighted below...

Important Italian projects currently under tender phase or in finance

Transport
Pedemontana Lombarda: Eu4.3 billion of a 87km of highway in the Lombardy Region
Prato – Signa Eu 242 million development of a 12km motorway link in the region of Tuscany

Healthcare
Tuscany Hospitals: Eu353 million PPP scheme to design, build and operate four hospitals in the Tuscany Region
Niguarda Hospital: Eu270 million 30-year concession to refurbish and expand the existing H Niguarda in Milan
Thiene & Schio Hospital: Eu144 million to provide a new PPP hospital for the towns of Thiene and Schio near Vicenza in north-east Italy and involves a 30-year concession

Light rail
Milan Metro 5: Eu500 million concession to build and operate the fifth metro line in Milan
Rome Metro D: Eu1.8 billion. In April 2006 the Rome municipality launched a 25-year DBFO tender to be procured under the Art.37 of the Merloni Law

A milestone project in the Italian transport PPP market – the first transport deal to apply project finance principles within the Merloni legal framework – financing for the Eu277 million Florence Tramway signed in 2005.

The project was structured by the lead arrangers (Calyon, Monte Paschi di Siena and Cassa Depositi e Prestiti) under an innovative structure that sees the local authority share part of the scheme's risks: the granting authority (the Municipality of Florence) was funding a great part of the project (public grants), assuming the traffic risk for the first 10 years of operation (start up period) and granting a step-in guarantee, whereby it will guarantee the refinancing of the deal at the 10th operating year. Notwithstanding its commitment, the impact on the financial position for the Municipality of Florence is limited by the application of the Eurostat recommendations described above.

Authors' contact details:
Mirco Bondi, Structured Finance – Associate Director
Tel: +39 02 72303238 Fax: +39 02 72303756
Email: mirco.bondi@it.calyon.com

Elisabetta Del Re, Structured Finance – Associate Director
Tel: +39 02 72303662 Fax: +39 02 72303756
Email: elisabetta.delre@it.calyon.com