Vito GamberalePrivate financing of infrastructuresVito Gamberale13thfinance meeting for public worksDEXIA CREDIOPRome, November 8, 2012
Vito GamberaleTable of contentsInfrastructures in Italy Pg. 3– History Pg. 4– Privatisations Pg. 5– New privatisations to overcome the difficulties of local bodies Pg. 6Who finances infrastructures? Pg. 7– Project financing Pg. 9– Aggregations and «national champions» Pg. 14The financing of infrastructures: the role of F2i Pg. 16– Examples of industries Pg. 25Conclusions Pg. 39
Vito GamberaleInfrastructures in ItalyHistoryItaly was historically recognised for being a country with a great tradition ofbuilding big productions, mainly promoted by public financincing of institutions,and national and local public bodies:– IRI: transportation (Autostrade, Alitalia, Tirrenia), telecommunication (STET, RAI), buildingsector (Finmeccanica, Fincantieri)– ENEL: power energy– ENI: natural gas transportation and distribution (SNAM, Italgas, etc.), petrochemical sector(Snamprogetti)– Mainly former municipality entities, operating within the integrated water cyclemanagement, local distribution (power and gas), waste disposal management (especiallyin northern Italy), local highways, airports, intermodal ports, etc…Until the 80’s the high cash flow from existing infrastructures contributed to thedevelopment of new projects.This model worked usually well, while the government could supportdevelopment through national debt.
Vito GamberaleInfrastructures in ItalyPrivatisationsPrivatisations are usually seen negatively. Contrary to popular belief, they oftenhave positive effects, even if they are different, based on the applied strategies:1. Suffering manufacturing companies. Such privatisations were usually achieved byselling to private entities operating in the same business sector, which ensured thesuccessful result of the privatisation itself (e.g. Nuovo Pignone in 1994 and ILVA in 1995)2. The second step was to extend privatisation to companies operating in the serviceand infrastructure sectors, which earned the greatest revenues. Theseprivatisations were accomplished through:a) Quotation of part of the assets at the stock exchange, with very successful results forthe government (ENI since 1994, ENEL since 1999), but not always for the investors(ENEL).Former public bodies became (and still are) real and efficient «public companies» able tocompete at an international level.b) Direct sales to private entities, often on a «family-like» basis (Telecom, 1997; Autostrade,1999; AdR, 2000), and with disappointing or contradicting results (in particular for TLCcompanies).This model generated a «hit and run» attitude, risking the foreign ownership of strategicItalian assets (together with their cash flows), which would locally be managed from afinancial point of view only.
Vito GamberaleInfrastructures in ItalyNew privatisations to overcome the difficulties of local bodiesJust like it happened for the central government in the past, the local bodies todayare facing critical financial conditions:− high debt, more and more frequently used to cover the current costs, and not just for investments− decreasing transfers from the government− more and more binding restrictions for the internal stability pact.The difficulty in raising funds to develop the existing infrastructures and finance newprojects is what attracts the local bodies’ interest in privatisations.
Vito GamberaleWho finances infrastructures?– Infrastructures have to be financed through the balance of debt andequities.– The problem of debt has been addressed in the previouspresentations today. I will just add a few remarks.– I will provide further details on the equity topic.
Vito GamberaleWho finances infrastructures?Project financing– As discussed, infrastructures have, in the past, played a fundamental role in thedevelopment of the country.– It is therefore necessary to understand how the infrastructure’s contribution topush development can be reactivated, in Italy as well.– Throughout the past decade, there have been attempts in Italy to financeinfrastructures through project financing (PF), a widespread practice in Anglo-Saxon countries in particular.– To this extent, national and foreign banks have been involved in the projects, as havebeen local institutions. However, the results were not always positive. In fact, PF:o worked well with projects promoted by private entities and with returnsthat could have been predicted more easily (power and health sectors)o faced more difficulties with projects involving public sponsors (e.g. inthe highway sector), often resulting in heavier burdens on the banks’accounts and, in particular, on the promoters.– The project financing in the highway sector, especially for the EXPOhighways, is a clear example of this.
Who finances infrastructures?Project financingVito GamberaleThe main sponsor for the EXPO highway is Milano-Serravalle Tangenziali SpA, a very smallcompany in comparison to European operators…… however, it is committed to the construction of newhighways with significant shares (about one-third):– Pedemontana Lombarda (87 km + 70 km): 4,945 mil €– Bre-Be-Mi (62 km): 2,518 mil €– East External ringroad in Milan (33 km): 2,225 mil €9,688 mil €The Milano-Serravalle is acompany of mainly publicassets, controlled by theProvince of Milan throughASAM:ASAM 52.9%Milan municipality 18.6%SIAS 10.7%Other public partners 15%Others 2.8%EBITDADatain mil €Network (km) Revenues EBITDA % Profit % PFN NFP/EBITDAMI - Serr. 185 211 10 48% 17 8% 22 2.25xAtlantia 5,079 3,976 2,385 60% 84 21% 8,970 3.76xAbertis 3,772 3,915 2,454 63% 77 20% 13,882 5.66xBrisa 1,305 670 45 69% (82) -12% 3,517 7.66xAPRR 2,244 2,181 1,399 64% 39 18% 6,202 4.43xASAM52.9%Milanmunicipbiggest fund operating in Italy and counts among thebiggest country infrastructure funds worldwide.– Recently, F2i has performed the first closing of asecond fund, which already raised 575 mil € (finaltarget: 1,200 mil €).– F2i was created as a private, yet institutional tool bysponsors of high standing, who contributed to theestablishment of the Fund’s solid reputation:o the government, through CDPSource: balance 2011
Vito GamberaleWho finances infrastructures? Project financingThe aggregate financial plan for all 3 projectsInvestments M€ % Coperture M€ %Construction 7,321 76%Other costs 2,367 24%Equities 1,640 17%Public financing 1,245 13%Banks 6,580 68%Self-financing 223 2%Total investments 9,688 100% Total coverage 9,688 100%Milano - Serravalle 31% 513 EBITDA 11: 101 mil €Autostrade per lItalia 5% 89 EBITDA 11: 2.385 mil €Other highway concessory companies 10% 171Intesa SanPaoloGroup 21% 346Builders 17% 282Other 15% 240The efforts are seemingly exaggeratedcompared to the economic «potential»of both entities.TOTAL 100% 1.640 Of which about 480 (29%) already committedAlthough the Milano-Serravalle financial structure seems to be solid today (see previousslides), the efforts still needed to create these three projects works are considerable:– Milano-Serravalle has already given out about 150 mil € for the 3 EXPO projects, with 360 mil €more to be committed (which could further rise), which is 3.6 times its EBITDA and equal thecurrent net assets (366 mil €), and should therefore double. The majority of its partners,however, are public and may encounter obstacles when raising funds.– Although the company accepted a NFP/EBITDA ratio equal to that of Atlantia (3.8 times), it shouldraise a debt of 160 mil € more, and collect at least 200 mil € from the partners (which are stillconsidered high amounts for public entities).The main sponsor’s limited dimensions account for the obstaclespreventing the progress of the project construction.
Vito GamberaleWho finances infrastructures? Project financingThe M6 Toll Highway in Great Britain is an example of successful projectfinancing in Europe.Characteristics − M6 Toll (43 km), is a toll bypass for the overcrowded M6 (160,000 vehicles/day compared tothe estimated 72,000) in the Birmingham area.− The production was achieved thanks to the project financing through privateentities (25% Highway Group, 75% Macquarie Fund), who acquired the M6 Tollconcession for the following 53 years.HistoryCosts/Financing− 1989: birth of project− 1992: concession assigned− 1997: project approval− 2000: start of construction work− Opening to traffic: 2003 (3 monthsin advance) – average: about 14 km/yearTimespan: 6 years after project approval− Total cost was about 880 mil € (about 20 mil €/km).− The project financing was characterised by a financial leverage of about 80% (debt ratio≈4:1).− This was made possible thanks to two promoters (one of which was Italian), and to aninnovative toll regulation that grants the concessionary company complete freedom insetting the tolls.
Vito GamberaleWho finances infrastructures? Project financing– Italy’s main highway projects are, on the contrary, largely delayed.– The heterogeneity of partners and the cost increase – which ranges from 8to over 100% during the approval process (usually due to compensations,variables and higher expropriation costs) – are the main causes behind thedelays on the set timelines.– The cost per km is at least 3 times higher than the European benchmark (M6Toll – UK).*If currently estimated timelines are met. ** Forecast. Construction has not yet started.Due to cost and time increase, the projects have not initiated because thefinancial sources could no longer deal with such increased expenses.It should not come as a surprise that no project financing has beencompleted on the due date!
Vito GamberaleWho finances infrastructures? Project financingAggregations and «national champions»As far as debt is concerned, as we discussed, project financing is stillfacing some obstacles in its application in Italy.Who, then, can finance infrastructure nowadays, as far as equities areconcerned?– My self-evident answer to this question is:New infrastructures need to be financed by existing infrastructures!– Indeed, infrastructures generate significant profits (EBITDA margin ≥50%),which can, and must, finance development.Obviously, in order to be able to finance new projects, the existinginfrastructures need to have considerable dimensions and shouldnot be fragmented.
Vito GamberaleWho finances infrastructures? Aggregations and «national champions»– The infrastructure sectors in Italy are sometimes very fragmented. They are managedaccording to the (often political) needs of the local entities in which they are set, far from aglobal vision of strategic network for a «country economic system».– Besides a few «national champions» (ENI, ENEL, Terna, Autostrade) and entities that could beleaders in their respective sectors (AdR, SEA, Italgas, F2i Reti Italia, Metroweb, etc.) thereare operators of embarrassingly small dimensions (38 regional/national airports – 100 includingthe smaller ones –, 3,000 water operators, 250 in gas distribution, etc.), that prevent to «createthe system».– Even the so-called «multi-utility» companies have, at best, only an interprovincial outreachand manage local assets. The parallel management of differentiated businesses budernsheavily the service efficiency and the company accounts.– In addition, the lack of an Italian strategy for infrastructures allowed foreign «national champions»(E.On, GdF, EdF, etc.) to get control of important assets in Italy. The opposite practice has beenvery rare in Italy and, when it did happen, it had significant restrictions on the cash flow for thebuyer.– To date the concepts of «aggregation» and «industry» are missing in the single sectors. Inthe infrastructure sector, Italy should favour homogeneous aggregations, able to create«national champions» in the different segments!– In order to meet these goals, a new «institutional capitalism» is necessary! Institutionalinvestors (banks, foundations, pension funds, etc.) need to finance the creation of big sector«public companies», «national champions» capable of promoting an efficient managementand the development of infrastructure assets.– To this extent, project bonds, guaranteed by big institutions can certainly play an important role; inorder to work, however, and have a sustainable price, these need to be issued by solid andcredible subjects (even better if by big public companies).
Vito GamberaleThe financing of infrastructures: the role of F2i
Vito GamberaleThe financing of infrastructures: the role of F2i– The lack of public financing, which prevents the creation of newinfrastructures and the efficient management of the existing ones, canonly be balanced today with private financing.– The key topics brought out through this analysis include:o the role of infrastructures in Italy’s post-WWII developmento the shadows of the infrastructure privatisation phase in the 90’so the need for a new infrastructure privatisation phase, as a solution tothe high debts of local bodieso the possibility to create «national champions» specialised in thevarious infrastructure sectors following the model of big Italian andforeign players.…we therefore came up with the idea of F2i, a private yet institutional fundthat can aggregate the existing infrastructures in industries using funds fromthis asset management to allow for their development.
Vito GamberaleThe financing of infrastructures: the role of F2i– Thanks to a fundraising of 1,852 mil €, F2i is the biggest fund operatingin Italy and counts among the biggest country infrastructure fundsworldwide.– Recently, F2i has performed the first closing of a second fund, whichalready raised 575 mil € (final target: 1,200 mil €).– F2i was created as a private, yet institutional tool by high standingsponsors, who contributed to the establishment of the Fund’s solidreputation:o the government, through CDPo major Italian banks (Unicredit, Intesa SanPaolo)o an important international bank (Merrill Lynch – BoA)o the networks of former banking foundations and private welfarefundso life insurance companies and pension funds.
Vito GamberaleThe financing of infrastructures: the role of F2iF2i investors (per category)Following its mission and the institutional nature of its investors, F2i aims forlong-term participation with an industrial understanding.
The financing of infrastructures: the role of F2iVito GamberaleGASWATERAIRPORTSTLCRENEWABLESTRANSPORTATION1,685.0 mil €26.8 mil € (1.6%)31.7 mil € (1.9%)1,626.5 mil € (96.5%)= COMMITTED TOTAL+ Fund management costsInvestments currently in the portfolio– F2i created 6 industries, reunited in a structured group, committing over 1,685 mil€ (91% of the firstFund’s total fundraising).Committed436.4 mil € (25.9%)272.9 mil € (16.2%)129.5 mil € (7.7%)489.1 mil € (29.0%)245.0 mil € (14.5%)53.5 mil € (3.2%)+ Dismissions
The financing of infrastructures: the role of F2iVito Gamberale
The financing of infrastructures: the role of F2iVito Gamberale1Aggregated closing data 2011. Referred to: ERG, 2i Gas, G6 Rete, Alerion CleanPower, HFV, Mediterranea delleAcque, GESAC, SEA, Metroweb.− Within four years, F2i managed to offer a new business model forinfrastructures in Italy by creating a structured group of companiesand company industries, each representing a benchmark in theirrespective sector.− The companies where F2i holds the share majority or plays an importantrole in their governance, registered in 20111:o aggregated turnover: 1,539 mil €o EBITDA: 630 mil € (EBITDA margin: 41%)o employees: 8,130o investments: 583 mil € (91% EBITDA).In 2011, F2i subsidiaries have invested over 90% of their EBITDA.No infrastructure system invests such a high portion of their EBITDA!
The financing of infrastructures: the role of F2iVito Gamberale− Thanks to F2i, important assets managed by foreign companies havereturned, together with their cash flows, under Italian control:− E.On Rete Gas− Gesac− G6 Rete− Metroweb
Vito GamberaleThe financing of infrastructures: the role of F2i– F2i was created as a private, yet institutional investment tool to aggregateexisting infrastructures into industries in order to guarantee subsidiarieswith:o operational effectivenesso balanced financial management, preventing the companies frombecoming poorer through exaggerated debts and extraordinarily highdividendso focus on development, reinvesting a great part of the cash flowsgenerated by strengthening managed networks and assets.In a time of very poor public financing, the – both quantitative andtechnological – the infrastructure gap needs to be filled with the modernfinance model proposed by F2i: using resources from an efficientmanagement of existing infrastructures to finance the development ofnew plants and projects.
The financing of infrastructures: the role of F2iVito GamberaleExamples of industriesSome actual examples of how F2i operates to aggregateinfrastructure assets are visible on the gas distribution, airport andTLC sectors.
Vito GamberaleThe financing of infrastructures: the role of F2i Examples of industries− The F2i Reti Italia Group was born through the acquisition of Enel Rete Gas (2009), E.On Rete(today 2i Gas, 2010) and G6 (former GdF Group, 2011).GA
The financing of infrastructures: the role of F2iExamples of industriesVito GamberaleGAS− By aggregating three importantnetworks, F2i Reti Italiabecame, after just two years,the second biggest nationalplayer for market share in a stillvery partitioned sector (over 250operators).Capillarità di F2i Reti Italia sulaCapillary presence of F2i Reti Italiaon the territoryF2i Reti Italia
The financing of infrastructures: the role of F2iExamples of industriesVito GamberaleGAS− The group dimensions allow significant investments that favourdevelopment, innovation, efficiency and safety of the network:GASInvestments mil €ERG + + +1899310854% of theEBITDAOther operators ~47F21 RetiItaliaGroup~49Benchmark €/customerOthersTransparency, qualityand safetyGrowth
The financing of infrastructures: the role of F2iExamples of industriesVito GamberaleGAS− The absence of conflicts of interest allows for transparency(particularly as to measurements) and efficiency towards customers:GASInspected network (%) Actual average time for assistanceSource: AEEGYear: 2010AEEG1request~30’F21 RetiItaliaGroup78%77%63%57%54%41%36%29%Enel Rete GasHeraA2AIrenG6 Rete GasEni (Italgas)E.On ReteToscana EnergiaAveragein Italy:55%1. Authority for Electricity and Gas.60’
The financing of infrastructures: the role of F2iExamples of industriesVito GamberaleGAS- The investment commitment creates a quality service, recognised andawarded by the gas authority!GASIncentives from AEEG for safety recovery(1)(k€)% incentivescompared to total% marketshare8441146961.314273Others2.311 379(1) Includes incentives distributed during 2010 per number of odorisation measurements and dispersion in the network.2,9631,3143792,311
The financing of infrastructures: the role of F2iExamples of industriesVito GamberaleGAS− F2i Reti Italia Group represented the main innovation in the gasdistribution sector in 2000: the group fostered and guided theconcentration process of the market.− The group’s acquisitions could bring strategic networks, whichwere previously controlled by foreign companies, back to Italy.− The presence of a big independent operator, which can relyon solid investors, brings actual significant benefits to the gassector, by promoting efficiency and technological development tothe network.− F2i Reti Italia aims to consolidate its role as a big independentoperator in gas distribution, capable of representing a safety,transparency and efficiency benchmark for the authorities andthe entire sector.
The financing of infrastructures: the role of F2iExamples of industriesVito GamberaleAIRPORTS32− At the end of 2010 F2i accessed the airport sector by acquiring 70% ofGesac, the company managing the Naples airport, Capodichino, thanksto a concession expiring in 2043.− Gesac was founded in 1980 through the input of the Naples Municipalityand Province, and by Alitalia. In 1997, following the privatisation process,the public bodies sold a participation of 70% to the UK Group BAA (laterpurchased by the Spanish Group Ferrovial).− The airbase spreads out on a 2.8 km2ground with a 2,628 m long and45 m large runway, including 27 airplane parking lots. It includes 56 check-in desks and 15 gates.− In recent years, the company promoted a significant investment plan todevelop the airport infrastructures (over 190 mil € of cumulative Capexbetween 1998 and 2009, compared to net cumulative gains of 47.6 mil €),partly financed with public funds (63 mil €) and partly self-financed.− The investment plan for 2009-2012 amounts to a total of 90 mil €, ofwhich about 65 mil € have been accomplished by 2011.− In 2011 Gesac managed a passenger traffic of 5.8 mil/passengers, andemployed about 300 people.
Vito GamberaleThe financing of infrastructures: the role of F2iExamples of industriesAIRPORTS− At the end of 2011, F2i purchased 29.75% SEA shares from the MilanMunicipality; SEA manages the airport network of Milan (Linate andMalpensa airports) since 1948. The current 40-year agreement has beenundersigned alongside ENAC in 2001.− SEA and the group companies provide all the related activities andservices, such as airplane landings and take-offs, airport security, theactivities related to passengers and the handling of merchandise, as wellas commercial services− Milan’s airport network is located in one of the most important areasof economic development in Europe (Lombardy’s GDP exceeds thenational GDP by 20%) and represents a bridge between the Mediterraneanregion and continental Europe.− In 2011 Milan’s airport network registered 28.4 million passengers,310,00 air flights and over 470,000 t of merchandise.− Turnover is about 580 mil € (net profit 54 mil €); over 5,000 peopleemployed.− Development plans include investments of about 600 mil € by 2015(capacity increase, and a third runway at the Malpensa Airport,enlargement of the Cargo area, etc.).
Vito GamberaleThe financing of infrastructures: the role of F2iExamples of industriesAIRPORTS− Italy’s airport system is characterised by:− an excessively large number of airports with low-specific traffic,particularly in northern and southern Italy (lower concentration in thesouth)− mainly public ownership− uncertainty of rate regulations− lack of investments (no significant interventions in the main airportsin recent years).− SEA and Gesac represent twoexceptions in the national situation:− SEA manages Milan’s airport system,the only one, besides Rome, whichhas a true international dimensionand is located in Italy’s most developedarea− Capodichino is located in a «low-density» airport area, even though ithas a large pool of potential users witha significant development potential.− Together, these two companiesmanaged 34.2 mil/passengers in2011, which is about 23% of the totalItalian traffic.PMOCTATRNCUFMXPVBSLINBGYBZOTSFTRSVCEVRNPMF FRLFLRPEGBLQ RMIAOIPSRFCO CIA FOGBRIGOANAP BDSSUFCRVTPS REGAHOOOOLBCAGPSASIE
Vito GamberaleThe financing of infrastructures: the role of F2iExamples of industriesAIRPORTS− F2i started in the airport industry with a particular know-how and atrack record with a bright growth perspective:− thanks to Gesac, F2i «brought back» important company-generated cash flows to Italy, which they used to fosterdevelopment and growth− thanks to SEA F2i recognised the Milan municipality’s needs tosell assets stretegic to Italy to reduce its debt and, again,prevent them from going under foreign control.− The long-term objective is to promote infrastructure and businessdevelopment, as well as the rationalisation and achievement of highprofitability levels, with benefits for satellite activities and for thesocio-economic system.− F2i pursues an investment strategy that aims to create a newairport network: a concept, therefore, of «national network»instead of a «runway-focused» network, which would favouraggregation, the closing of unemployed airports, and arecognisable, modern airport format of quality.
Vito GamberaleThe financing of infrastructures: the role of F2iExamples of industriesTLC− Metroweb, founded in 1997, is the F2i controlled company with the largesturban optic fibre network in Europe, with about 3,270 km of infrastructure(lines) – corresponding to about 324,000 km fibre.− The company operates as a dark fibre provider: it rents its infrastructureto TLC operators that subsequently implement their value-addedconnection services in an autonomous way.− In 2011 Metroweb generated about 56 mil € revenues, with operational marginsof about 80%. This company employs 34 people.− Metroweb services, through Fastweb, initially addressed businesses. At asecond stage, also thanks to professionals who needed fast domestic connectionsto work from home, the company’s offer extended to end consumers.
Vito GamberaleThe financing of infrastructures: the role of F2iExamples of industries− Metroweb was the engine that led to Milan’s leadership in the urban optic fibresector (the best cabled city in Europe). Ten years ago, Milan was the solepioneer worldwide in the new generation of networks.− Metroweb was the engine that led to Milan’s leadership in the urban opticfibre sector (the best cabled city in Europe). Ten years ago, Milan wasthe sole pioneer worldwide in the new generation of networks.TLC− However, the other Italian regions are well behind the other European countries asto ultra broad band availability (in addition, these regions do not have alternativetechnologies to optic fibre, such as cable TV, which is largely available in othercountries):%buildingswith opticfibreItaly’s current technological disadvantage is mainly due to theincumbent operator, which should be the driver of the networkdevelopment but is, on the contrary, stuck with debts caused byunsuccessful privatisation!Germany France UK Italy Spain Netherlands Sweden
The financing of infrastructures: the role of F2iExamples of industriesTLCVito GamberaleF2i and Metroweb are trying to aggregate new fibre providersoperating in Italy, to develop new network extensions andsupply Italy with a modern and strategic infrastructure,starting with the most economically-developed cities.
Vito GamberaleConclusions− Infrastructure networks represent the backbone of the economicsystem of any advanced country and provide for its development.− In order for these network to correctly function, they have to bedeveloped and coordinated rationally: their management shouldsucceed on a «country system» basis, to replace the «parochial typesof management» and financial speculation.− In Italy, as in other big countries, it is necessary to concentrate andcentralise such sectors, to create a few «national champions» able toensure adequate investments, efficiency and transparency in managingthe assets.− In order to achieve this, it is necessary to establish an «institutionalcapitalism model» that can access the necessary resources todevelop the networks (applying, if necessary, innovative tools such as«project financing» and «project bonds») to finance the growth of bigsector public companies and guarantee their managementindependence.
Vito GamberaleConclusionsF2i is a clear example of this model in Italy. A true «public company»that could start an infrastructure network system (able to interact witheach other to push Italy forward) by optimising their management andcontrolling their development.– The Fund has basically exhausted its dotation before the firstdeadline of the investment period.– This happened even though F2i operated with extreme caution in orderto avoid hasty operations in a time of great uncertainty and aprogressively worsening global crisis.This achievement led F2i to launch a new Fund that will allow its work toprogress further.
Vito GamberaleConclusions− The new Fund will particularly allow F2i to:o reinforce its presence wherever it had already participated (capitalinjections to support development, acquisitions of shares from other partners,etc.)o inject new investments in industries already establishedo launch new industries also starting from the investment opportunitiesdetermined by Italy’s current economic-financial situation.To allow the progress of group creations leaders intheir own sector and to finance the development ofnational infrastructures.