Limited syndication of the Eu229.5 million project debt for the 35-year Tram di Firenze (Florence metro) concession – the first urban transport public-private partnership (PPP) in Italy – has closed.

The Italian PPP market has become a reality in the past year with deals like SRC 1 and SRC 2 and the Mestre hospital financing. But Florence Metro appears to be a step back for Italian PPP, with the lenders taking on little, if any, meaningful risk transfer from the public sector.

Line 1 is already under construction between Santa Maria Novella station and Scandicci (7.5km) and is due to open in 2008. This line is being funded by the public sector and will cost Eu195 million.

The 7.5km Line 2 will link Peretola Airport, the cathedral, and Piazza della Liberto. The first stage of Line 3 will be 4.5km long and will run from Careggi Hospital to Fortezza. The cost of these two lines is estimated at Eu292 million, of which Eu140 million will be funded by the private sector. Lines 2 and 3 are due to open in 2009.

The project operator/developer – Tram di Firenze consortium – consists of RATP and Florence Transport (Ataf), with 49% of the shares, Architecna with a 2% holding, and a group of civil engineering and railway equipment suppliers with the remaining 49%: the latter includes Ansaldo Trasporti Sistemi Ferroviari, AnsaldoBreda, and Alstom.

The deal is highly leveraged, comprising only Eu7 million in equity as compared to six debt tranches; a Eu92.7 million 15-year term loan; two 28-year term loans totalling Eu111 million; two standby facilities totalling Eu12 million; and a Eu13.8 million 10-year VAT tranche. The debt is priced at 120bp to 130bp over Euribor.

Lead arrangers, Banca Monte dei Paschi di Siena (MPS) (bookrunner), Calyon (bookrunner) and Infrastrutture/ISPA have been joined at co-arranger level by Banca Intesa, Banca Opi, Dexia, Royal Bank of Scotland and WestLB.

ISPA did not syndicate its debt and holds Eu50 million over 28-years. Most of the syndicate banks were scaled back by a third – MPS and Calyon now hold around Eu25 million each.

The debt funds the construction and 35-year operation of three tram lines running for more than 25km around Florence and neighbouring municipalities. The commercial banks are taking construction risk and availability and performance risk on the project. But markedly, ISPA is committed to taking out all of the commercial bank debt in a refinancing after 10 years of operation. At this time traffic risk is also transferred from the Florence municipality to ISPA.

Not only does the deal come with a short tenor and, given ISPA's commitment, little refinancing risk, but the municipality of Florence has agreed to provide an indemnity to the lenders if the concession is terminated even if the fault on termination lies with the concession!

The burden on the municipality does not end here. Effectively the project is supported by a shadow toll, with revenues from customers' purchase of tickets. If the base case usage is not achieved the municipality will step in – so the sponsors and lenders have the upside of both availability and shadow toll regimes.

Fortunately the business plan was drawn on very conservative assumptions so the usage levels are unlikely to dip this low. But as an Italian infrastructure market participant says: "it is generally accepted that this deal is very painful for the municipality".

ISPA will only step in to refinance the commercial banks and assume traffic risk, if a technical report can show there is adequate usage to support the project. Under the Merloni law there is provision that the concession can be revised if there is not a financial equilibrium, i.e. too much upside to the private parties. This would invariably result in a dispute between public and private sector that would lead to a rebalancing in the allocation of risk and reward of the parties, or a termination of the concession.

The quirk of transfer of traffic risk to ISPA is a legacy from when many market participants believed that to achieve off-balance sheet status traffic risk must be transferred to the private sector – ISPA is considered hybrid public/private (search 'ISPA' for more details). This was later clarified by a Eurostat guidance note that stated availability risk is sufficient risk transfer, yet this quirk remains in the Florence metro project.

The political risk regarding the future of ISPA– whether ISPA will still be here in 10 or 15 years time – was an issue at first but was later dispelled by lenders' counsel: ISPA was created by a state law and the state would have to transfer the obligations to a new subject if ISPA was terminated. Furthermore, the terms of such a transfer could be challenged on appeal within 120 days.

The biggest question hanging over this financing is whether the deal could have been done without as much padding from the municipality and ISPA. One banker on the deal acknowledges that the banks would have taken more risk, across a longer tenor, with no change in pricing, and that it could have been banked, albeit with a longer lead time, without ISPA.

A key issue in any PPP is the attainment of value for money and an optimal level of risk transfer. This deal clearly fails at the risk transfer level. And the debt pricing, although comparable with the PPP norm, appears expensive given how little real risk transfer is involved.

Although the first urban transport public-private partnership (PPP) in Italy – Florence Metro should also be the last that follows this kind of PPP structure.

Tram di Firenze
Status: Closed 20 June 2005; first
drawdown due 21 July but may be delayed by a few days
Size: Eu229.5 million
Description: Promotore project financing for three metro lines
Sponsors: RATP, Florence Transport (Ataf), Architecna, Ansaldo Trasporti Sistemi Ferroviari, AnsaldoBreda, Alstom
Lead arrangers: MPS (bookrunner), Calyon (bookrunner), Infrastrutture
Co-arrangers: Banca Intesa, Banca Opi, Dexia, RBS, WestLB.
Lender counsel: Allen & Overy
Sponsor counsel: Massilamo Lombardo