Italy is routinely cited as one of the markets in Europe with the most potential for future PPP and project finance business. The Italian government has warmly embraced the concept of PPP and legislation has long been in place to facilitate these types of transactions. But, not surprisingly, not everything has gone according to plan. The need is certainly there: 1998 figures show that the country had an infrastructure spending gap (the level of infrastructure spending compared as a percentage of that required) of 54.1%. And the desire to get the private sector involved is certainly there in the form of the Merloni Law (passed in 1994 and 1998) which was designed to get the PPP process going. But somehow things have never got going as fast as everyone would have liked. ?We are 10 years behind the UK in this market,? admits Luigi de Pierris of the Unita Tecnica Finanza di Progetto (UFP), an ad hoc team of professionals set up in 2000 with a mission to promote PFI and PPP techniques in the infrastructure sector. ?The market is still very young,? says de Pierris,

Despite this, however, deals are getting done. The most active sectors so far seem to be healthcare and wastewater services with a series of PPP contracts having been awarded. For example, in July 2001 Astaldi SpA won the Eu200 million contract to run the 680-bed Hospital de Mestre Umberto in Venice. The contract was awarded by the local health authority (Aziende Sanitarie Locali) Azienda ULSS 12 Veneziana. The deal had been a contest between Astaldi (which has done previous hospital deals, for example the Santa Anna Hospital in Como) and Impregilo. The project also involves the construction of ancillary facilities to the hospital such as offices, bars and restaurants. Other hospital concessions include the Eu100 million construction of new hospital facilites in Brescia. Bovis Lend Lease's proposal for the deal has been approved and preferred bidders should be shortlisted in the first half of this year. Bovis Lend Lease is also bidding (together with Dexia Crediop) for a Eu100 million contract to build 150-bed accommodation for the elderly in Desenzano sul Garda.

On the wastewater front three contracts have been awarded for a purification plants at Nosedo, south-east of Milan, South Milan and Peschiera Borromeo (due for completion between 2002 and 2005). The progress of deals in the water sector has been helped by the passing of the Galli Law, specifically designed to improve legislation for this sector. The Nosedo plant is being financed by Banca Intesa and RBS Natwest. There is a particular need for new plants around Milan as the city still discharges untreated wastewater into the Lambro-Olona river. Another wastewater project, the Campania project near Naples, has been postponed. This Eu200 million, 15 year concession attracted nine bidders when it was announced in March 2001 but the June 2001 deadline for evaluation of these proposals was postponed. A 30-year concession to manage the network of acqueducts in Calabria was, however, awarded to Enel Hydro and Acquedotto Pugiliese in August 2001. Similar schemes have been proposed at Latina and Frosinone. A consortium led by Vivendi Water (40%) and Enel Hydro (23%) won the 30-year Latina contract in July last year and will invest Eu370 million in the water supply system. Acquedotto Pugliese also has a 23% stake in the consortium. The Province of Frosinone invited tenders for a water supply contract in May last year. Italy's first project-financed PPP scheme to be completed was in the waste sector: the Eu80 million Tecnoborgo waste-to-energy project at Piacenza, which closed in July last year (see Project Finance September 2001).

The transport sector has also been an obvious target for PPP transactions. Indeed, two of the original ?pathfinder? projects identified in 1999 (the third was the fixed link between Italy and Sicily) were motorway projects ? the Pedemontana-Veneta and Salerno-Reggio Calabria roads. Italy has an urgent need for improvements to its motorway network as 90% of trips in the country are taken by lorry or car and it has the highest number of cars per capita (54 cars per 100 persons) in Europe. Eu30 billion investment in the sector is planned over the next 10 years. Mass transit seems to be less high-profile for the time being but PPP schemes have been proposed for the metro systems in Rome, Milan, Bologna and Genoa.

A number of road concessions have been awarded by the highways agency ANAS (Ente Nazionale per le Strade) including the Eu816 million greenfield Bre-Be-Mi toll road which will run from Travagliato in Brescia to Melzo in Milan (awarded to a large consortium including Banca Intesa). This deal was given the green light in November last year after a deal had been struck between the two competing bidders. The A3 Salerno Reggio Calabria ?pathfinder? deal involves the Eu1.5 billion upgrade of 430 km of road in southern Italy. A consortium of KPMG, Sotecni and Geodata undertook a feasibility study for the deal in March 2001 but it is symptomatic of the PPP environment in Italy that the deal has been held up by political squabbling over whether tolls should be introduced and a private concession awarded. The Eu1.8 billion Pedemontana Lombardo motorway is being sponsored by Societa Autostrade (IRI) and Milano Serravalle and ran into municipal resistance on the basis of cost ? but this has now been resolved. But while some projects languish, others progress. ANAS is now asking for bids to be submitted for the upgrade of the existing A24 Rome to L'Aquila motorway via a reverse BOT scheme. Bids are likely to have a minimum NPV of Eu500 million. Another motorway deal likely to take shape this year is the Autostrade Asti-Cuneo in the Piedmont region to the south of the country.

The stop-go nature of progress illustrates how PPP is still a contentious issue in Italy (as it still is in many other markets) and there is still a lot of work to be done on both the concession awarder and concessionaire sides. The legislative framework for PPP was drawn up with this in mind and included a concept unique to Italy in this field: the promoter. ?This is quite different from a promoter in the Anglo Saxon sense of the word,? says de Pierris at UFP. When a PPP contract is being considered in Italy the administration solicits offers from the private sector at a relatively early stage of its own analysis of the project. It thus asks the private sector to come forward with proposals at a very early stage. Private sector companies submitting proposals at this stage are known as promoters. The administration subsequently determines whether the proposal is in the public interest and negotiates with the promoter over a four-month period. If it is deemed to be in the public interest then the administrator launches a procedure aimed at identifying two competitors to the promoter. All parties then have a competitive dialogue and the concession is subsequently awarded to the most economically advantageous tender.

This concept was encapsulated in the 1998 article 37 bis of the Merloni Law. What it essentially does is add in an extra stage, whereby bidders have to put their proposal together, submit it and if it is accepted then agree to have other bidders compete with it to win the concession. ?The concept of the promoter provokes a lot of discussion,? explains Lucilla Mazzetti, head of project finance at Societe Generale in Milan. ?It is an extra stage which adds to the cost of bidding for the project.? De Pierris points out, however, that some of these costs are rewarded. ?The costs incurred by the private sector in the preparation of the offer are refunded according to a formula,? he explains. ?The administration has not had to invest its own resources in the preparation of the tender documents and the effort made by the private sector should be remunerated in some way.?

?If the decision-making process within the local administration was efficient and was up to the standards of other northern European countries then the concept of the promoter would be odd,? admits Nicola Beretta Covacich, director of project finance and privatisation at PricewaterhouseCoopers in London. ?But in Italy the public sector has been unable to keep up with the pace of capital investment so the concept of introducing a private sector promoter is positive.? He says that as these deals become more commonplace in Italy the need for a private sector promoter will ease and it could eventually become redundant ? ?but only after a decade or so of successful experience.? But some remain deeply uncomfortable with the system. ?Administrations should do a lot more homework instead of going straight to the promoter,? grumbles one industry expert. ?The promoter was said to be a shortcut but no shortcut is possible.? He says that a lot is required of the private sector at a very early stage. ?Some administrations ask too soon for things such as the business case and draft concession agreement and things therefore have to be changed at a later date when other factors have come to light.?

So ? love it or loathe it ? the promoter is here to stay. Or is it? One Milan-based banker raises the rather alarming assertion that the role of the promoter could be contrary to EU legislation. ?Any project could be challenged in Brussels on the basis that the award of the contract may not be in conformity with EU legislation,? he claims. ?The promoter is not in itself against EU rules,? counters de Pierris. But he adds, cryptically ?It depends how it [the contract award] is handled.? It seems that the problems lie with the timing of pre-information notices issued by the local authorities. If they are issued shortly prior to the deadline for entries then the process could be seen to be in violation of EU rules ? in general they should be issued no less than six months prior to the deadline. If this is not the case the door may be left wide open for a disgruntled bidder to challenge any award in Brussels.

Despite questions such as these, there seems to be general satisfaction with the regulatory framework for PPP deals in Italy. ?90% to 95% of the Merloni Law works fine,? reckons Beretta Covacich at PwC. Compared with other countries the law places a greater emphasis on the construction phases of the project rather than the operational phase and (as the issue of the promoter has shown) the procedure is highly regulated and prescriptive. Two areas that have been of concern to de Pierris are the fact that concessions are limited to 30 years and that compensation from the public sector is limited to 50% of the project's construction costs. The latter has caused problems with with projects such as schools, hospitals and prisons where 100% of revenue comes from the local authority. De Pierris explains that a bill has now been drafted to abolish these limits and it will become law ?very soon?.

Other legislation now being drafted is a supplement to the Legge Obiettivo legislation that was passed in December 2001. What it does is give special status to high priority larger projects ? of which there are over 30 nationally (the majority being transportation and water projects). Under the Legge Obiettivo the management process of these projects is centralised whereby CIPE (the Ministerial Committee for Economic Planning) is empowered to have special responsibility jointly with the regions involved in these deals. The aim is to make the process much speedier as they will jointly manage aspects such as the public sector contribution, the tender process and the concession itself. Legge Obiettivo is in addition to the Merloni Law which still applies.

?This is an attempt to create a special regulatory framework for high priority large projects,? explains Beretta Covacich at PwC. And it is legislation with which he is very familiar as PwC is advising on the largest project of them all ? the Messina Strait Bridge ? which will link mainland Italy with Sicily. This is a project that has been under discussion for decades (much like the Channel Tunnel was in the UK) but the green light was finally given on December 21 last year for the project to go ahead. The bridge is expected to take seven years to build and at a total length of 5,070 metres will be the longest suspension bridge in the world. It will be 60 metres wide and will have 12 lanes for traffic and two lanes in the middle for trains. The scheme will cost Eu5.6 billion ? Eu3.4 billion for construction and Eu1.4 billion for highway and rail links.

Finalisation of the technical project is underway and the authorities now need to refine which financing structure they want. There are two options: Public sector finance for construction with the possibility of a private concession once the bridge is built or a BOT scheme. Both regions (Calabria and Sicily) are in a position to consider 100% public financing but the BOT route would likely involve 60% public finance and 40% private.

The Messina Strait Bridge financing ? if and when it happens ? will eclipse all other project financings in the country (and most of the region). The largest Italian project finance deal to date was the Eu1.725 billion 16-year facility for Rome Airport signed in August last year (see Project Finance September 2001). But deals of this magnitude are few and far between. ?Many of the projects completed so far have been smaller schemes such as parking lots and water treatment plants valued at under $5 million,? says Beretta Covacich. But he expects to see a market in excess of 100 projects a year by 2003. This will only happen, however, if the staggering level of project mortality in the country can be improved. ?Of all the proposals that arrive I would say that probably only one in 10 is declared of public interest,? admits de Pierris. ?There is still a lot of work to do to fully implement the legislation and overcome cultural problems,? he says.

Power: Still the deal dynamo

Power deals have traditionally been the mainstay of Italian project finance and despite liberalisation of the electricity market in the country that is unlikely to change. The market was liberalised by the Bersani Laws (Decreto Bersani) in 1999, which have seen state electricity supplier ENEL compulsorily begin to divest itself of its assets (which include power stations with a global capacity of around 15,000MW) and new merchant opportunities spring up for independent players in the field.

2002 should be a very interesting year for the power sector in Italy for two reasons. Firstly it will see the first deals being done under the new post-CIP6 environment.?The risk profiles of deals have now completely changed,? explains Lucilla Mazzetti, head of project finance at SG in Milan. ?Before you were entering into a PPA with a state-owned company, but bilateral contracts will be permitted from 2002.? Mauro Maia, head of project finance at Mediobanca in Milan, says that the market will change to mitigate this risk. ?The level of covenants will be much higher,? he says. ?Under CIP6 leverage was around 80:20 or 85:15 but post-CIP6 it will be more like 50:50 or 55:45. There will be much more equity involved,? he says.

The second interesting feature of the year will be the landmark Eurogen deal, which will see ENEL divest itself of eight power plants (five thermal, three hydro) in one deal ? around 7000MW of capacity. The deal could be around Eu3.5 billion to Eu4 billion in size. Binding offers for the deal must be submitted by February 20 and three consortia are shortlisted: Iberdrola is bidding alone; Electrabel is bidding with Cir and ERG of Italy (the Sinergia consortium) and thirdly Edison is bidding with AEM Milano, AEM Torino and ATEL of Switzerland (Edipower consortium). Dynegy, International Power and AES are understood to have pulled out of the contest earlier last month. The smart money is reportedly on the Edipower consortium, which is politically well-placed and is understood to have put forward a more leveraged bid. It is believed to have mandated Rothschild and Morgan Stanley to arrange a Eu4.5 billion loan for the deal.

Eurogen is the second genco to be put on the block by ENEL. The first was Elettrogen, which had a generating capacity of 5,500MW and was sold to Endesa of Spain in July last year for Eu2.63 billion. ENEL is obliged to sell all three of its gencos by the end of 2002 and the third deal ? which may be called InterPower ? will take place later this year. It will, however, be much smaller at around 1000MW to 2000MW in size.