The Italian project finance market is becoming more than just a tale of IPPs and CIP6 tariffs. With deregulation of the power market, an increasing need for spend on infrastructure, the explosion of the telecoms market and movement of Enel into new fields, the private sector is set to take on a new role in an economy traditionally resistant to tapping private resources for public needs.

The market has the potential to mature rapidly. However, there are still obstacles to overcome, largely centered around the implementation and familiarisation of necessary legislation in a climate that, if not exactly hostile, is certainly suspicious.

A host of decrees and laws have been passed over the last two years in order to facilitate the development of large-scale project finance. But, still requiring refinement and clarification, the door into the market seems to be stuck ajar.

The privatisation of Enel, the sell-off of its generation companies, wider deregulation of the power market and a host of related developments are the main attraction at the moment. Riding on the same wave of commercialisation is a host of potential infrastructure deals ? 2000 having seen financial close on the TAV High Speed Rail Link and privatisation of Aeroporti di Roma.

Typically, as the sectors diversify, so too will the methods and structures of financing. Securitisation is highly anticipated and can already be cited in isolated deals. But as Emmanuel Rogy, head of power project finance of BNP Paribas states, ?The question is how long it will take to become a norm. New projects lack the certainty that securitisation demands.?

Powerful Changes

Nevertheless, change is afoot. Following the decision in January not to grandfather CIP6 tariffs, 2000 has seen the market absorb an influx of financings and re-financings of IPPs. CIP6 basically set up generous tariffs for the construction and operation of independent co-generation plants, effectively subsidised by the state through Enel. Most recently Deutsche Bank has just won the mandate for re-financing of Tractebel's Eu200 million Rosen combined heat and power plant and Fortis Bank, Mediocredito Centrale and Royal Bank of Scotland have closed syndication for the L731.5 billion IVPC4 wind farm project.

Beyond these there may be a last trickle of such re-financings in the pipeline, but this source of project financing, that attracted bank funds with relative ease, has basically run dry.

Discussions about a new system of subsidies are underway, but will incorporate only truly renewable resources such as wind or waste-to-energy. The heyday of co-generation plants is over. One of the most interesting proposals is that of green tickets. Plants fired from traditional resources would have to buy ?vouchers' equivalent to 2% of their production capacity from plants running from renewable sources.

The end of CIP6 is only one development incorporated within the complex process of deregulation in Italy. Privatisation and increased competition will aim to lower the price of electricity, considerably higher than the EU average, and improve transparency of price regulation. The EU directive on de-regulation was translated and implemented in Italy through the Bersani Decree and it is according to this that Enel has bundled 15,000MW (¼ of its total capacity) into its three generation companies (gencos) that are to be sold.

Bids for Elettrogen, the first of these to come to the market, are currently being submitted (see box). In terms of generation, Enel will certainly remain the dominant player in the Italian market for the foreseeable future. Despite a recent ruling that any client consuming more than 1GW/hr per year is eligible to choose their supplier directly, it is unlikely that any of Enel's competitors will produce enough to compete. Apart from the issue of mere size, many of the gencos' plants need a revamp and the recently constructed low emission IPPs have already committed their output in long term PPAs. A large increase in international imports is also unlikely given that current networks are reaching saturation point and the peninsular geography of Italy creates problems for citing new inter-connectors.

In this context, the level of commitment to full liberalisation is difficult to measure ? especially given lack of clarity on the part of Enel and the government. Full privatisation is unlikely and unnecessary for liberalisation. The treasury has so far only floated 32% of Enel's shares and although announcement of another tranche has been released, it notably omitted details of quantity or date.

Generation aside, the Bersani Decree also stipulates reforms in transmission and distribution. In August 1999 a new body, the GTRN, wholly owned by the treasury, was set up to manage the national grid and regulate prices and all of Enel's transmission activates, including the PPAs, passed over. All distribution network owners are now required to obtain 30-year operating networks and to promote local consolidation and thus hopefully reduce the dominance of Enel, only one license may be issued per municipality.

Liberalisation of the gas market must also be taken into account and there are some positive feelings running high. ?From a sponsors' standpoint, we believe that the market will become a reasonable playing field,? says Thieri Demari, Director of international project finance of Foster Wheeler Corp. in the US. ?Smaller companies will not have trouble finding funding and although prices of equity may be higher, lenders are not afraid.?

Project financing in the Italian power market is in wait-and-see mode. Consensus is that the new system will be similar to the UK post-privatisation, characterized by a decline in prices and relatively little volatility in the market. However, this remains to be seen and activity is likely to be minimal until the sale of the gencos and establishment of other major players.

Infrastructure deals begin

The Italian infrastructure sector has traditionally made power look cutting edge. But deals are starting to come to market. Realising that investment need considerably outweighs capacity for public spending, the Italian government is seeking private sector support. The majority of initiatives are in the form of the Merloni-ter law concerning infrastructure, the Galli Law, aimed at reforming the water sector ? both a spin off from the EU directive on public works ? and the Securitisation Law passed in 1999.

The interest is there ? but so are a number of barriers. Vitto Semeraro, head of project finance of SG in Milan points to a particular issue with the Merloni-ter. ?The stipulation that sponsors can suggest a project by submitting an offer, but must then subject it to a competitive bid, means that the process can be very expensive. As a result, deals dictated by this law have typically been limited to about Eu1.5 million, generally not large enough to reach the project finance market.?

Although some believe infrastructure project finance will boom within the next year, head of project finance at Mediobanca, Mr. Mauro Maia claims that there will be no significant movement for at least that time. The two projects heralded as landmarks are technically not project finance deals. The TAV rail link signed in July was fully guaranteed and the Aeroporti di Roma privatisation, for which Meodibanca was one of the two lead arrangers has so far been a straightforward acquisition, despite rumors that a project facility will eventually replace this bridge loan.

One sector in which momentum is gathering, albeit at the end of a long and drawn out process, is water.

The Galli Law was introduced in 1994 and aimed to reform the water and sewage system by consolidating the previously highly fragmented sectors and then contracting out a utilities concession. Arguably typical for the Italian market, this implementation of legislation has not run smoothly, with problems including the definition and division of territories and the nature of companies that will manage the integrated services. Moreover, there are very specific stipulations concerning concession and ownership rights, which may have appeared unduly complicated for a system with no history and thus had trouble attracting sponsors. The first scheme to get under way is the Arezzo water concession, for which the 25 year tender was won by a consortium led by Suez Lyonnaise des Eaux in 1999, which will form a special purpose vehicle, majority owned by the public authority, to carry out the operation. This model is to be continued for the two further concessions pending, Latina and Calabria. Six years after the Galli law has passed, then, deals are emerging and success in these may well instill the confidence needed to speed up water reform across the country.

Enel is among the bidders for both of the water concessions currently in tender and this is indicative of the company's wider bid to transform into a multi-utility sector, which could have a positive effect on the growth of project finance in new areas. Besides Telecoms (see box), water and gas are the main areas of current interest, using its existing client base to leverage itself. Speculations on the development of a multi-utility monopoly were dismissed by Paolo Espositio, project finance lawyer at Allen & Overy.

New partnerships

The notion of Italian PPP/PFI has bee talked about with gusto, but translating theory into practice is proving arduous. Inspired by the UK Treasury's Private Finance Initiative Task Force, the UFP (Unita Tecnica Finanza di Progetto) was launched in July 2000. This unit is to play a consultative and advisory role, disseminating the concept throughout central and regional administrations and identifying problems in order to shape development of public private partnerships as a whole.

In addition to cultural barriers, administrative problems are also numerous, such as the relative autonomy enjoyed by regional authorities and the confusion of sponsor suggested projects. It is worth noting that the UFP taskforce has been recruited almost entirely from the public sector, reflecting the focus of teaching the public sector about the private.

Despite the problems, however, confidence remains high that PFI will become a major force driving the development and modernisation of Italian infrastructure services. ?The Government is ambitious in terms of the scale and number of projects they want to implement under PPP,? according to Luigi Depierris, head of UFP. ?They do not want to limit it to one sector.? There are a number of road projects in advisory stage, likely to evolve into shadow toll systems similar to those in the UK and Portugal. The Stretto di Messana Bridge, priced at roughly Eu4 billion, is turning heads all over the project finance world, but sources closer to its home suggest it will not come to market within the next year and is likely to be preceded by smaller deals. Hospitals are under discussion for the implementation of PFI and Turner & Townsend Project Management Italia have been appointed as a technical advisor to Communi di Roma for a PFI to extend the metro, so opportunities are prevalent.

A recent deal that should not go unnoted was financing for construction of a military school in Bari, Southern Italy. Eu125.7 million zero-coupon discounted bonds were placed privately by Academy Finance SpA, sponsored by Impresa Pizzarotti & C SpA, and Dioguardi Immobiliare Srl. Prior to the date of the bonds' maturity, the Ministry of Finance will make a single contractual payment, sufficient to cover both the price of the bonds and to meet the contractors profit margins.

The deal throws up some innovative aspects, in particular, it is the first project bond and the first real estate asset backed securitisation undertaken in the Italian market, setting a precedent after the Securitisation Law of 1999. Tom Hardy, managing director and global head of projects and export finance of The Royal Bank of Scotland, who arranged the deal, is looking to implement similar structures again. And with the asset-backed securitisation of Telecom Italia still set to go ahead at the beginning of next year, this form of financing may well be becoming more mainstream in the Italian markets.