The new law on project financing was introduced by Law 415/98 on November 18, 1998 by way of an amendment to the Public Works Act of 1994 (Law 109/94), better known as the "Merloni Law" and renamed "Merloni ter" after the 1998 amendment.

The project finance bill had no easy Parliamentary course because its innovative content departed from the traditional Civil Law approach and introduced typical Common law institutes such as the floating charge and the step-in right of the lenders. It took more than three years of drafting and lobbying by the Bankers' Association and CNEL (the National Council for Economy and Labour). In the end, following...

(i) the success of big power projects (such as Sarlux, Isab Energy, Api Energia, Rosen, Serene and Centro Energia),

(ii) the enactment of new regulations in the energy, water, waste and transport sectors which take into account the needs of limited recourse lenders,

(iii) new projects in progress in all such sectors, and

(iv) the Government and Regional plans for the development of new infrastructures, a general consensus developed within the Government and the majority coalition about the need to support infrastructure financing.

The legislation concerning project financing is contained in five new articles of Law 109/94 (Articles 37 quinquies to nonies and Article 19 bis). The main features are:

(a) the right to use a special purpose company for ring-fencing the project risks;

(b) the ability of such company to contract out its own shareholders with no need for public procurement procedures;

(c) the right to issue bonds secured by the project assets and not subject to the limitations generally applicable to corporate issuers;

(d) detailed provisions regarding the circumstances, procedures and indemnities due on termination and withdrawal from the concession;

(e) the preference of the lenders in the allocation of any compensation and indemnity payable to the project company in case of termination of the concession;

(f) the termination of the concession being conditional upon the payment of all such compensations and indemnities;

(g) the adjustment of the tariff payable to a provider of public service (and/or of the terms and conditions of his concession) in case of change of law or other circumstances which have an adverse effect on the financial model of his project;

(h) the ability of the lenders to step-in the project and replace the project company in case of default under the financing or to cure the default of the concessionaire and avoid the termination of the concession;

(i) the possibility to resort to arbitration with the public administration;

(j) a special privilege (i.e. a first priority security right) of the lenders over the project company's assets (including variable assets, such as inventory and bank accounts).

Under Article 14 of Merloni ter the planning of infrastructures and public works is made by the competent public bodies on a three-year basis, and must give preference to the initiatives which are bankable on a project basis.

In addition, a new procedure has been introduced by Articles 37 bis to quater (known as the "Promotore" rules), whereby private initiatives may be proposed to the competent authorities for the development of new projects and infrastructures, to be financed in whole or in part through private lending.

Implementation rules and circular letters of interpretation were issued in 1999 and Merloni ter has received a wide application. New BOT concessions have been awarded under the new law and projects already under construction or in the development phase have also benefited from the new rules.

With some initial difficulties (due to the need to combine the new rules with the existing public planning system), the Promotore initiatives are also beginning to take off. A few projects, such as the tunnel under/bridge over the port of Genoa, were driven by a Promotore proposal.

Although the Promotore rules might be a driving tool for the development of new projects, there is concern that the mechanism of the law may limit their practical application. The competent authorities must evaluate each year the proposals submitted to them and call a bid contest for those which are deemed to be feasible and of public interest.

The project is awarded on a BOT basis to one of up to three short-listed bidders, including the Promotore. The winner is bound to pay the Promotore the cost of his original proposal. That cost is approved by the awarding authority before the call for the bids, which cannot exceed 2.5% of the project value, is made known to the bidders in the invitation to bid, and included in the bid bond.

If the preferred bidder is the Promotore, it must pay the same amount of money to the other short-listed bidder/s. If there are two of them, they share 60/40 the payment of the Promotore depending on their ranking in the contest. All such payments are made by the awarding authority from the bid bond of the winner.

The PFI Unit

Since the enactment of Merloni ter, interest in project financing has been snowballing. Besides the power sector, which opened the way more than six years ago and where this technique is now also applied to smaller waste-to-energy, biomass and wind farm projects, the use of project financing is spreading to all sectors of infrastructure, from water to transports to hospitals.

The Government and local authorities encourage and promote private lending on a project basis. Bid contests are launched by public entities, designed to support non-recourse financing.

This is the environment which led to the establishment of a PFI Unit in May 1999. Article 7 of Law 144/99 sets forth that the Unit serves three purposes:

(a) to promote project financing within the public administration;

(b) to assist public entities in structuring the terms of their concessions so that they may support private financing; and

(c) to provide advice in the evaluation and selection of the Promotori's proposals.

The Regulation of the Unit, issued by the Inter-ministerial Committee for Economic Planning (CIPE) on July 9 (Res. 63/99), has added a further function - to standardise the documentation and to streamline the procedures, in order to facilitate private lending. The Unit will also act as a project finance troubleshooter.

Finally, under Article 3.2 of Res. 63/98 the Unit shall support the sub-committees of CIPE by

(i) identifying the business areas which may be financed by private resources;

(ii) collecting information and documentation concerning project financing;

(iii) monitoring the primary and secondary legislation in this field;

(iv) liaising with institutions and associations, and

(v) providing advice on the guidelines for the regulation of public services.

In anticipation of the Unit's work, the Treasury (in consultation with other Departments, banks, and law firms) is currently drafting a Vademecum on Project Finance. It will explain the initiatives the Government is taking to develop project financing and how they will work in practice.