Waste management is estimated to be the largest environmental sector in the European Union in terms of cost, accounting for 40% of all environmental expenditure, estimated to represent 0.6-0.7% of European Community GDP, and up to 400,000 jobs.

After the introduction of the European regulatory framework on waste policy and management, during the 1990s member states introduced legislation to implement the legal framework. But significant differences between states still exist with regard to investment in waste management.

Not only does the level of investment vary widely between member states, but also it varies greatly within each country, region by region, partly because of the increasing costs of MSW treatment. This is the case, for example, in Germany, Italy and Spain.

Municipal solid waste (MSW) - a growing problem

As in other member states during the 1990s, Italy also renewed its waste management regulatory system in accordance with the European framework. In 1997, Law 22/1997 (the so called 'Ronchi Decree') laid down priorities for abandonment of landfill and introduced separate collection at source as a basis for recovery and recycling. In the seven years since the law came into force, great steps forward have been made.

MSW disposal still represents a considerable problem to deal with in Italy, where more than 65% of total waste is landfill, as shown in Table 1. This implies serious risks of soil pollution and increasing management costs. Developing new models for managing MSW is a necessity because the present situation is unsustainable.

Table 1: Treatment methods for Municipal Waste in Italy (2001)

Incineration 8.8%

Landfilling 66.7%

Composting of selected organic matter 5.9%

Compost and CDR 12.8%

Other forms of recovery 5.8%

Source: International Solid Waste Association, 2004

The evidence in Italy regarding these various issues shows that in some cases weak institutional capacity, changes in the regulatory framework at the local level and competition from other facilities within the country or from outside were significant factors in projects facing problems or failure. Although significant improvements have been made throughout the Country over the last decade, still Italy shows a large contrast between the wealthy North and the less affluent regions of the South, where the use of separated waste collection is lower and incineration sites are fewer.

According to some research into MSW incineration sites in Europe, in Italy two-thirds of the projects for thermal treatment facilities are in the North. The public authorities of the northern regions are also more active in educating the public in new attitudes about waste disposal and separated collection.

PPP opportunities in waste

This inconsistent and developing situation in the solid waste management sector in Italy nonetheless offers many opportunities for the Italian banking system to add significant value.

The public authorities concerned, although eager to look to the private sector to find the right partners to develop and implement their investments, often have very limited experience and expertise in successfully finalising public-private-partnership (PPP) initiatives in the waste management sector. The willingness of banks to apply their financing capabilities in the sector and the fact that several projects have achieved financial close in the last five years indicates that a healthy level of bankable opportunities exist in the sector.

Furthermore, waste management and waste to energy projects have generally been delivered on time and on budget. The situation has been helped by the fact that banks know the technology well and have generally appraised projects accurately. BNL's own experience supports this view. However, the experience has perhaps not been up to the rest of the sector for composting and recycling projects, which are relatively uncommon and suffer from uncertainties in the technologies employed and from an inability to account fully and accurately for these risks in project appraisal.

In general, experience has shown that the appraisal process has also allowed financial institutions to add value by bringing financial and economic expertise to enhance project viability. Banks have often requested the sponsors to make changes to the project specifications, in some cases making these changes conditional to the finalisation of the financing, to improve the allocation and mitigation of key project risks.

During the project development phase, the most common delays in implementation were related to problems in obtaining permits to operate or to changes in the project's requirements or specifications. Local objections to a project also caused delay in several cases. Also common were problems associated with determining the volume of waste required for operation.

With regard to construction and operational performance, nearly all projects financed on a limited recourse basis in recent years have been built and are operating as planned, although some of them experienced difficulties in commissioning or in the early years of operation. This was mainly due to technical reasons (including fine tuning of the integrated system of upstream and downstream plants) or to a shortfall in the expected amounts of waste delivered to the upstream collection and treatment plants, in some cases necessitating additional expenditure. However, once the development phase has been completed, construction and operational milestones in most cases have been regularly achieved.

BNL's waste experience

BNL has dedicated a great deal of interest and resources to the opportunities in the waste management sector for some time. This is because we believe that the environmental sector provides an opportunity for the bank to combine its objectives of value creation on the one hand and social responsibility and consideration of environmental and local community issues on the other. The experience we have gained in the sector allows us to add value in a number of areas:

* the timing of the Bank's involvement in projects, which often takes place at the development stage;

* highly qualified assistance to local public authorities to develop new initiatives with private sector partners aimed at improving social and environmental issues, diverting biodegradable waste from landfill, using the waste more efficiently;

* support to sponsors and contractors to understand the significant economic advantages arising from opportunities in the waste sector;

* backing providers of technology and giving support for new technologies.

Within our loan portfolio, the number of financings arranged by BNL to assist and support initiatives in the Italian waste management sector has increased significantly over the last five years. The majority of these have been arranged on a limited recourse basis and most of them involve a public-private partnership between private sector sponsors and local public authorities, mainly municipalities. Others have been structured with SPV's owned by the various public authorities whose communities are benefiting from the project.

The latest addition to our portfolio is refinancing of the Prima srl waste to energy project, for which BNL acted as adviser and arranger of the debt. Prima is an SPV located in Trezzo d'Adda, a city close to Milan, which owns and manages an integrated plant that collect, treat waste and generate electricity under a concession from the local authority, the Municipality of Trezzo sull'Adda. The financing, for which BNL also provided hedging instruments, amounts to Eu77 million with a final maturity of 9.5 years. The financing has been arranged on a limited recourse project finance basis and has now been successfully syndicated.

The plant can process up to 500 tonnes of waste per day and is fed with solid waste deriving from waste disposal from the Municipality of Trezzo sull'Adda, at no cost, and from other Municipalities in the North-Eastern area of the Milan Province (Amministrazione Provinciale di Milano) at a variable price, according to the calorific value of the waste. Through the waste treatment, the 18 MW plant produces approximately 120,000 MWh of electricity per annum, sold under a take-or-pay contract to the GRTN, the Italian operator of the national power grid, at market price plus an incentive, as per the 'CIP 6/92' (a specific law that is aimed to encourage the generation of power from environmentally friendly and renewable sources), for the first 8 years.

During the refinancing process, BNL worked with the sponsors to mitigate, as far as possible, all the main risks of the project, to the extent these risks were not already mitigated. The main points are summarised below:

No construction risk: The plant was already built and operating prior to the refinancing.

No delay in the approval process: The plant encountered no problems during its approval process; both the local administration and the local community were in favour of the project. On the one hand Municipality paid no cost to process its waste and on the other the SPV paid royalties to the Municipality resulting in lower local taxes.

Consistent and economically viable tariff structure: Prima is one of the last remaining projects that can benefit of the incentives under the CIP/6 tariff regulations. Incentives to the generation of power from environmentally friendly and renewable sources are now differently regulated in Italy, mostly through the mechanism of the 'Green Certificates'.

Excess waste: The Lombardia Region produces more waste than all the plants in the Region are able to treat. This avoids any under supply of waste to the upstream collection and treatment plants.

Strong sponsors: The SPV and the operator of the plant have strong sponsors and with the appropriate skills in managing and operating waste to energy plants.

Interest rate risk: This has been mitigated by putting in place an innovative, flexible hedging strategy.

The plant was originally authorised in December 1996 by the 'Commissario Delegato' for dealing with the waste collection emergency of the Lombardia Region. The project is part of the plan for waste disposal for the Milan Province, which aims at collecting and disposing of waste from the areas in the north east of the Province, with the plants working at near to full load. The project is in line with the environmentally friendly plan, promoted by the local authority in the Milan Province, aimed at promoting effective and efficient waste disposal and the progressive abandoning of the use of landfill. It falls within the Decreto Ronchi, the legal framework designed by the Italian Parliament to promote and support waste recycling.