Vito gamberale - Italy's infrastructure system structure, characteristics, boundaries - possible evolution and the role of modern finance
Italy’s infrastructure system: structure,characteristics, deficiencies, boundaries −Possible evolution and the role of modernfinanceInaugural lecture for the academic year opening2012-2013Cassino (Italy), January 24, 2013Vito Gamberale
2TABLE OF CONTENTS– Evolution of the Italian infrastructure system Pg. 3– Lack of public funding, privatisations Pg. 7– An anti-infrastructure attitude Pg. 11– Characteristics, deficiencies and boundaries of theItalian infrastructure system Pg. 16– Highways Pg. 18– Airports Pg. 20– Waste disposal Pg. 23– Regasification terminals Pg. 26– Gas distribution Pg. 29– Water system Pg. 30– Possible evolution for the financing of infrastructure Pg. 32– A modern finance example: the role of F2i Pg. 38– Examples of industries Pg. 47– Conclusions Pg. 55– Back-up slides Pg. 60
3Evolution of the Italian infrastructure system
4Evolution of the Italian infrastructure systemUntil the mid-70’s Italy was historically recognised for being a countrywith a great tradition of building big productions:–Italy was the first country in the world to have a highway («Autostrada dei Laghi»,1924)–in 1970 the extension of the Italian highway network (3,913 km)1was second only to the Germanhighway system (4,461 km)1–during the 60’s Italy ranked among the «leading countries» in nuclear power production (3rdbiggestinstalled power – 640 mw – in the world, after the USA and Great Britain)–Italy was among the first countries to develop hydroelectric plants on a large scale; in 1960 theseplants had already achieved the current installed capacity (about 20 gw) and covered almost 100% ofthe national power demand–during the 80’s Italy was the first country, together with France, to launch the project of a high speedrailway network (Rome-Florence).After World War II and during the «economic miracle phase», the creationof infrastructures in Italy was an important development driver and areference worldwide.1Data from: Eurostat.
5Evolution of the Italian infrastructure systemInfrastructures in Italy have been mainly supported by public financing,through institutions and public national bodies...– IRI: transportation (Autostrade, Alitalia, Tirrenia), telecommunication (STET, RAI),building sector (Finmeccanica, Fincantieri)– ENEL: power energy– ENI: natural gas transportation and distribution (SNAM, Italgas, etc.), petrochemicalsector (Snamprogetti).…and local bodies:– Mainly former municipality bodies, operating in the integrated water cycle management,local distribution (power and gas), waste disposal management (especially in northernItaly), local highways, airports, intermodal ports, etc...Until the 80’s Italy had an adequate infrastructure system. The high cash flowfrom the existing infrastructures contributed to the development of new works.This model worked usually well, while the government could supportdevelopment through national debt.
6Evolution of the Italian infrastructure systemThe main obstacles to the creation of new infrastructures in Italy arose inthe mid-70’s and are are still ongoing today.These obstacles were generally caused by two different causes:1) first of all, the lack of public financing (worsened by the recent globalcrisis), which had always been a driving force behind the development ofthe new big productions, added to the obstacle2) secondly, in Italy, a set of new attitudes against infrastracture were bornfrom pseudo-environmentalistic beliefs, which contributed heavily toburden and, in some cases, to block the decision-making process.After 20 years, the opinion on infrastructures in Italy went from beingperceived as a development opportunity to an environmental threat.
7At the beginning of the 90’s, Italy was involved in important processesthat forced the country to radically change its economic policy choices:–the First Republic’s economic crisis–economic decline: Italy’s GDP constantly ranks below the European average–the adoption of the Euro, accounting for the need to drastically reduce deficit, debt and inflation withvery strict financial actions–the European Community urged a reduction of the public commitment in the member states’economies (Commissioner Van Miert will take advantage of Italy’s particular weakness to «push» thecountry a great deal).The following governments were forced to cut public expenditure and«cash in».Italy could no longer maintain its role of investor for building andmanaging public works, and consequently began entering a phase of«big privatisations».Evolution of the Italian infrastructure systemLack of public funding, privatisations
Privatisations are usually seen negatively. Contrary to popular belief, they oftenhad positive effects, even if they are different, based on the applied strategies:8Evolution of the Italian infrastructure systemLack of public funding, privatisations1. Initially, all suffering manufacturing companies were privatised. Such privatisationswere usually achieved by selling to private entities operating in the same businesssector, which ensured a successful result of the privatisation itself (e.g. NuovoPignone 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 resultsfor the government (ENI since 1994, ENEL since 1999), but not always for theinvestors (ENEL).Former public bodies became (and still are) real efficient «public companies» able tocompete at an international level;b) Direct sales to private entities, often on a «family-like» basis (Telecom, 1997;Highways, 1999; ADR, 2000), and with disappointing or contradicting results (inparticular for TLC companies).This model generated a «hit and run» attitude, risking the ownership of foreign entitiesof strategic Italian assets (together with their cash flows), which would locally bemanaged from a financial point of view only.
9– for infrastructures/service, it is better to favour stock exchangequotations (such as ENI or ENEL) or share ownerships of «publiccompanies» (such as F2i, see further down)– set lock-up bonds (for at least 5-7 years)– always introduce the concept of «earn-out» to favour the publicvendor in case of re-selling the company within 5-10 years– set up bindings to prevent selling the company to buyers who wouldplace an exceeding acquisition debt on the company itself.A couple of rules taught by the privatisation of the infrastructuresector:Evolution of the Italian infrastructure systemLack of public funding, privatisations
10The difficulties in creating new productions in Italy aren’t just due to alack of assets, but also by a lack of authorisation processes.Since the mid-70’s infrastructure came to a halt following somethoughtless political actions…− in 1975, Law 492 in 1975 prevented the construction of new toll highways− the referendum against nuclear power in 1987 («confirmed» by a new referendum in 2011)destroyed an important part of the energy sector in Italy, at which the country used to excel.…that affected and slowed down the authorisation and buildingprocess:− the Contracting Regulation, although aspiring for transparency and competition,contributed to increasing the building process of productions and their costs. The pitchingterms in particular tended to privilege mark-downs, often benefiting untrustworthycompanies. This had a negative affect on the quality of the productions and their final costs(e.g. the so-called work-in-progress variables)− the inclusion of infrastructures in the competition on regulation between government andlocal bodies (art. 117 of the Constitution) lengthened the authorisation process and tookresponsibility away from the subjects involved in the decision-making process.Evolution of the Italian infrastructure systemLack of public funding, privatisations
11The anti-infrastructure attitude translated in a series of obstacles for thebuilding of new productions, such as the following:− an overall lacking of strategic synergy (productions were often driven by local interest andwere not included in the national plan)− an extreme fragmentation of the authorisation process (VIA, service conference, firebrigades, ENAC, air force, superintendence of architecture and landscape, regions,municipalities, etc.)− an environmental policy with a «fundamentalist», unscientific approach− excessive burden from local authorities – often following a «NIMBY» logic – in thedecision-making process with «permanent tables» (inherited from 1968)− territorial «compensation» requirements altering the financial plans− frequent appeals to regional administrative courts and to the Council of State, whichaccounts for slowing down the process− continuous and repeated violation of concession rights and inadequate rates.Evolution of the Italian infrastructure systemAn anti-infrastructure attitudeThe exaggerated «democratisation» of the decision-making process andthe indiscriminate appeals to judicial authorities lengthen the approvalprocess indefinitely and prevent the creation of new productions.
12– Since 1975, Italy seems to be stuck in an «anti-infrastrcutureKhomeinism».– All obstacles reflect a «fundamentalist culture».– Khomeinism lasted for over a decade in Iran, from 1978 to 1989.That religion however still lives on today. It will take time to eliminate it.– The anti-infrastructure Khomeinism in Italy has been living on forover 35 years! That’s over three times longer than the case of Iran!Evolution of the Italian infrastructure systemAn anti-infrastructure attitudeBecause of this attitude, certain forms of private funding, which couldreplace the public funds, and were successful in other countries, suchas project financing, have to face many difficulties to establishthemselves in Italy.
13− M6 Toll (43 km), is a toll bypass for the overcrowded M6 (160,000 vehicles/daycompared to the estimated 72,000) in the Birmingham area.− The production was achieved thanks to the project financing through privateentities (25% Highway Group, 75% Macquarie Group), who acquired the M6 Tollconcession for the following 53 years.Characteristics− 1989: birth of project− 1992: concession assigned− 1997: project approval− 2000: start of construction work− Opening to traffic: 2003 (3 months inadvance) – average: about 14km/yearHistoryTimespan: 6 years after projectapproval− Total cost was about 880 mil € (about 20 mil €/km).− The project financing was characterised by a financial leverage of about 80% (debtratio ≈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.Costs/FinancingThe M6 Toll highway in Great Britain is an example of project financing.Evolution of the Italian infrastructure systemAn anti-infrastructure attitude
14– Italy’s main highway projects are, on the contrary, largely delayed.– The heterogeneity of partners and the cost increase – which ranges from 8 to over100% during the approval process (usually due to compensations, variables andhigher expropriation costs) – are the main causes behind the delays on the settimelines.– The cost per km is at least 3 times higher than the European benchmark (M6 Toll –UK).– The necessary condition to successfully finance a functioning project is thecertainty of the presence of all elements (especially: project, costs/resources andtimelines).– Due to cost and time increase, the project construction did not start because thefinancial sources could no longer balance such increased expenses.– It should not surprise that no project financing has been closed to date!Evolution of the Italian infrastructure systemAn anti-infrastructure attitudeM6 Toll (UK) 43 1989 1997 2000 2003 6 880 880 +0.0% 20.5 CompletedPedemontanaLombarda157 1950 2006 2010 2016 10 4,560 4,945 +8.4% 31.5Bre-Be-Mi 62 1996 2001 2009 2013 12 1,174 2,518 +114.5% 40.6TEM 33 2003 2005 2012 2015 10 1,578 2,225 +41.0% 67.4*If currently estimated timelines are met.Highway km Concept Constructionkick offConstructioncompletion*(b)Timing(b)-(a)CostincreaseCostper km(mil €)ProjectfinancingstatusPreliminaryprojectapproval (a)Initialcosts(mil €)Finalcosts(mil €)To becompletedCompletedTo becompleted
15Evolution of the Italian infrastructure systemAn anti-infrastructure attitudeExistinghighwaysHighways indevelopmentExisting Italian highways and and highways indevelopmentEXPOhighways
16Characteristics, deficiencies and boundaries of theItalian infrastructure system
17– The anti-infrastructure attitude and the lack of public financingconsequently produced a phase of extreme shortage of newbig productions and a lack of maintenance for the existinginfrastructures.– This determined:– an «infrastructure gap» between Italy and otherEuropean countries, which widened during the last 10years– an overall ownership fragmentation of the assets, oftenheld by small local bodies, with a very poor presence of bigplayers of national standing.Characteristics, deficiencies and boundaries of the Italianinfrastructure system
18− Italy’s highway sector is quite closedoff to new players because of thepresence of two big private operators(Atlantia and Gavio) and numerouspublic concessions:o the longitudinal highways are managedby the Atlantia Groupo the main highways in the North-West aremanaged by the Gavio Groupo in the Lombardy and Veneto regions, theauthorities are often managed by veryfragmented public share ownershipso the southern regions (the highways ofSalerno-Reggio Calabria, and AutostradeSiciliane) are managed directly by ANAS.Italy’s highway networksOther operatorsPublic concessionary companies, in particular, come with numerous partners (often withno reference stakeholder) and differentiating issues that affect each other.Characteristics, deficiencies and boundaries of the Italianinfrastructure system – HighwaysAbout 6,700km network
19– Therefore, it should not come as a surprise that the network extension,compared to population, lies much below the European average:European highway network – Density per inhabitant(km per million inhabitants)Average = 181 km/mil inhabitantsData from: CIA The World Factbook 2011This shows that Italy needs to develop over 4,000 km of new highways tomatch the European average, which would imply a cost ranging between80 and 180 bil €1!Characteristics, deficiencies and boundaries of the Italianinfrastructure system – Highways1Average cost: between 20 mil €/km (European benchmark) and 45 mil €/km (average costs for the EXPO highways)111212184251050100150200250300Italy Germany France Spain
20− The Italian airport sector is made of 38national/regional airports – about 100 if thesmallest ones are considered.− The airport managing companies aremainly public. Only a few are privatelycontrolled:− Gemina, which handles the Romeairports, is private and listed− SAVE, (airports of Venice and Treviso),is listed, and includes the participationof public and private shareholders− SEA, SAGAT and GESAC (Milan, Turinand Naples) are now in the airportindustry managed by F2i.− The others (small to middle-size airports −Bologna, Catania, Bari, Palermo, Cagliari)are mainly under public or public/privatecontrol.Main Italian operatorsCharacteristics, deficiencies and boundaries of the Italianinfrastructure system – AirportsPMOCTATRNCUFMXPVBSLINBGYBZOTSFTRSVCEVRNPMF FRLFLRPEGBLQ RMIAOIPSRFCO CIA FOGBRIGOANAP BDSSUFCRVTPS REGAHOOOOLBCAGPSASIEThis is a very fragmented sector: with exception of F2i, and in part of the Rome and Venicecases, the other many airports are not aggregated into systems controlled by a singleoperator.Airports >10 mil passengersAirports >5<10 mil passengersAirports >2<5 mil passengersAirports >0,25<2 mil passengersAirports <0,25 mil passengersHigh concentration area
21Characteristics, deficiencies and boundaries of the Italianinfrastructure system – Airports– Italy is the first Europeancountry for airport density onthe territory1…Regional/national airport density (n. ofairports/100,000 km2- 2011)1Airports with over 100,000 passengers/yearAverage number of passengers per airport – inmillions(airports with over 100,000 passengers/year - 2011)Source: Assaeroporti and the main airport associationsof the represented European countries.– …these airports are usually smallcompared to those of majorEuropean countries…4.509.013.546.180.001.002.003.004.005.006.007.008.009.0010.00Italy Germany France Spain11687024681012Italy Germany France Spain
22Characteristics, deficiencies and boundaries of the Italianinfrastructure system – Airports– …the gap widens if we consider the average traffic in the biggestairports (>1 mil passengers/year):Average number of passengers per airport –in millions (airports with over 100,000passengers/year - 2011)The uncoordinated fragmentation of this sector, often due to ownership by localpublic bodies, prevents the development of a strategy and leads to lack ofresources for investments.Other than the other big European airports (Madrid, Paris, Frankfurt), thatunderwent in recent years significant renovation and expansion works (see back-up slides), there have been no relevant works in this sector in Italy.Source: Assaeroporti and the mainairport associations of therepresented European countries.6.2610.899.018.300.002.004.006.008.0010.0012.00Italy Germany France Spain
23– The national waste market presents high levels of «pulverisation»: in 2011 thenine main operators (whose ownership is mainly held by local bodies) havehandled only 7% of the total volumes:Characteristics, deficiencies and boundaries of the Italianinfrastructure system – Waste disposalMain operators on the Italian market – per volumes disposed (data 2011)− The European waste management market – especially in France, Germany and theUK – experiences the presence of very big, usually private operators (Veolia,Remondis, Sita Suez, Biffa).Business modelCollection YES YES YES NO YES NO NO YES NOTreatment YES YES YES NO YES NO NO NO NOWaste to energy (WTE) plants YES YES YES YES YES YES YES YES YESLandfills YES YES NO YES YES YES NO NO NO3,3822,8001,8001,100 1,017600331208 9001,0002,0003,0004,000Hera A2A AMARomaVeolia Iren Acea APSAcegasWasteItaliaACSM
24− The market fragmentation, as well asthe fundamentalist environmentalismslowing down the sector’sdevelopment, are the reasons behindItaly’s few active plants compared toother main European countries…− …as well as the plants’ limiteddimensions.Operating WTE plantsWTE plants average capacity(thousands of tons of disposed solid urbanwaste [SUW]/year)Characteristics, deficiencies and boundaries of the Italianinfrastructure system – Waste disposal100429154050100150200250300350400450Italy Germany France5270130020406080100120140Italy Germany France
25− Given an average of 1kg/inhabitant of waste production per day, Germany andFrance could dispose of almost their entire waste production with waste-to-energyplants. Italy just one-fourth of it!!The lack of WTE plants makes Italy, of all big European countries, thecountry that most resorts to landfills for waste disposal (over 50% of itstotal solid urban waste production)!Characteristics, deficiencies and boundaries of the Italianinfrastructure system – Waste disposalWTE capacity per inhabitant(kg/inhabitant/year)86367309050100150200250300350400Italy Germany France
26Regasification terminals are important strategic reserves for countries with ahigh consumption of natural gas to supply thermoelectric plants (Italy) and/orinsufficiently connected to international gas pipelines (Spain).Characteristics, deficiencies and boundaries of the Italianinfrastructure system – Regasification terminals− In Spain there are 6 operating regasification terminals – Barcelona (1969),Huelva (1988), Cartagena (1989), Bilbao (2003), Sagunto (2006) and El Ferrol(2007) − with a total capacity of 1.9 mil m3(44m3per 1,000 inhabitants).Three of these terminals were initiated in the last decade.Operating terminalsTerminals in developmentCanary Islands− The Barcelona terminal is located just a few km away from the city centre.− Three other terminals are being developed: two on the Canary Islands (withparticipations by ENEL through Endesa) and one at El Musel.
27− Italy largely depends on natural gas for its power production (75%): the countryrecently installed ony one regasification terminal with a capacity of 250,000 m3capacity (Rovigo), in addition to the terminal in Panigaglia (100,000 m3) – for a totalof 6 m3per 1,000 inhabitants, which is one-seventh of Spain’s capacity):Characteristics, deficiencies and boundaries of the Italianinfrastructure system – Regasification terminalsRovigoPanigagliaOperating terminalsTerminals in developmentLivornoPrioloPortoEmpedocleGioia TauroBrindisi (the project wassuspended by the sponsors)Zaule TriesteMonfalconeRavennaTarantoPorto Recanati
28− Italy is increasingly becoming «gas dependent»: Gazprom’s «cut» in February 2011– during some rigidly cold days – forced Italy to «empty» the gas stocks, and came closeto facing an emergency situation.− Even without considering the Italian «dream» of being a European gas «hub», annalistsestimate that the country needs 30 bil m3/year more2in the short term (vs. the currentconsumption of 70 bil m3/year1).− This means that there is a need for three to four2new regasification terminals.Compared to big international gas pipelines, regasification terminals are easier to buildand allow for bigger geographical supply diversification (Italy is connected today toRussia and Algeria’s supply). For quite some time now, the European Union has beenpushing for the most gas dependent countries to diversify their gas imports by buildingregasification terminals (financed by the EU in Poland and Spain).− At least 11 projects are currently being carried out in Italy (in some cases – Livornoand Trieste – there are more than one projects focused on the same geographical area),none of them however are at an advanced-stage in their construction development! (seeback-up slides)Characteristics, deficiencies and boundaries of the Italianinfrastructure system – Regasification terminalsItaly is proceeding in a very «disorganised» way in this sector too, andit’s not achieving any result!1Consider that before the economic crisis, the consumption was already reaching about 85 bil m3/year.2Source: Il Sole24Ore 8/2/2012. This need was recognised de facto in 2006 by the Prodi Government. Minister Antonio Di Pietro stated:«Italy needs 11 regasification terminals, of which at least 4 are to be initiated now». The environment minister (and committedenvironmentalist) Alfonso Pecoraro Scanio replied: «The environment policy refuses to use Italy as the entry point to European gas, andrequires to create only the 4 regasification terminals that will cover our local demand».
29Characteristics, deficiencies and boundaries of the Italianinfrastructure system – Gas distribution– Besides the presented examples above, another feature to be considered is thevery small dimension of network operators for local public services, which arecharacterised by low concentration and, therefore, by small investments toprovide a strictly standardised, innovative and quality service.– Some examples: the gas distribution sector, with over 250 operators, whoserationalisation F2i is contributing to (see further down)…22,6%17,0%6,5% 6,5% 6,1%3,1%2,3%1,7%F2iRetiItalia23,1%17,3%6,5% 6,1% 5,9%3,2%2,3%2,1%ERG10,1%2iG3,2%G64,0%GDFSuez94%Altri 6%GasNatural69%Altri31%250 operators+Market shares in gas supply (per carried volumes)NationalGrid51%Altri49%UKFranceSpainItalyOthers
30Characteristics, deficiencies and boundaries of the Italianinfrastructure system – Water system– …and the water system, also characterised by limited concentration because of alocal (municipality/province) outreach of its managing companies:30MdARIEOthers134295125122Data from:BCGData from: BCGITALY SPAIN FRANCEFirst 3operators25.8%Others74.2%Others65.0%Others38.0% Others30.0%First 3operators35.0%First 3operators62.0%First 3operators70.0%LISTED MULTI-UTILITY COMPANIES BIG MUNICIPALISED COMPANIESAbout 3,000otheroperatorsMarketshare1. Other minor subsidiaries: SAP, AM Ter, Idrotigullio, Acos and Asp (Piedmont), ASA Livorno (Monza), Astea (Marche), Aquenna (Sicily)29.5%24.3%46.2%
31Characteristics, deficiencies and boundaries of the Italianinfrastructure system– Therefore, overall, Italy is characterised by relevant deficiencies and limitsin the infrastructure sectors:– an often public and fragmented ownership that presents a growinginability to finance the building of new works and the development of theexisting ones– inefficient management of some infrastructure networks, whichdetermines a gap with Italy’s most direct competitors in Europe(Germany, France, as well as Spain)– sluggish decision-making processes, obstacled by a pseudo-environmental culture thath is basically against infrastructures.– Infrastructures in Italy need big, credible and finanacially solid entitiesin each sector, operating at a national level and capable of providingsignificant investments to develop and innovate the networks.– The government can no longer play this role nowadays because of alack of public financing that, in the past, was the engine of infrastructuredevelopment. An efficient management of infrastructure can thereforeonly be achieved through private financing, as long as this source offunding remains healthy and non-speculative.
32Possible evolution for the financing of infrastructure
33Possible evolution for the financing of infrastructureNew 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 should not befragmented.– My self-evident answer to this question is:As we just discussed, the lack of public funding and the anti-infrastructure attitude are developing a series of hurdles that slow downthe new work development.Who, then, can finance infrastructure nowadays?
34Possible evolution for the financing of infrastructure– Many infrastructure assets have been created and managed according to the (oftenpolitical) needs of the local entities in which they are set, far from a global vision ofstrategic network for a «country economic system».– Even the so-called «multi-utility» companies have, at best, only aninterprovincial outreach and manage local assets in very differentiatedsegments (which does not favour a sector specialisation).– Even in the cases where the companies turned to a private – or private-like –management (privatisation, listing at the stock exchange), the new shareholdershave often focused an exaggerated amount of attention on financial aspectsand political/local balance vs. development.– This is why many sectors are still very fragmented today, they lack a reference«national champion» (following for example Veolia or GdF’s example in France)and can hardly provide an adequate service and operate on a larger number ofinternational markets.– Without a national strategy for infrastructure, the other countries’ «nationalchampions» (E.On, GdF, EdF, etc.) could acquire important Italian assets.– To date the concepts of «aggregation» and «industry» are missing in thesingle sectors.The infrastructure sectors in Italy are very fragmented and alsocharacterised by a localistic management approach.
35– energy: after their privatisation, ENI (turnover: 110 bil €, EBITDA: 27 bil €, margins: 24%) andENEL (turnover: 80 bil €, EBITDA: 18 bil € - 22%) became public companies at a European level.The same happened with Terna (turnover: 1.64 bil €, EBITDA: 1.22 bil €, margins: 75%)– highways: the Atlantia Group is the sector’s European leader and generates a turnover of about4 bil €, with an EBITDA of 2.4 bil € (margins: 60%). The Gavio Group (turnover: 939 mil €,EBITDA: 570 mil €, margins: 61%) is an example of how creating a player, at least at a nationallevel, is possible by aggregating single local assets– airports: SEA (turnover: 583 mil €, EBITDA: 133 mil €, margins: 23%) and AdR (turnover: 620 mil€, EBITDA: 296 mil €, margins: 48%) could take the leadership in the (still too fragmented) Italiansystem to rationalise and develop it– gas distribution: Italgas (turnover: 900 mil €, EBITDA: 663 mil €; margins: 74%) and F2i RetiItalia - ERG (turnover: 606 mil €, EBITDA: 326 mil €; margins: 54%) could provide the system witha balanced evolution through network reconditioning and development, with innovation andmeasurement transparency (electronic remote meter reading)– water system: there are a few potential future «national champions» in this sector (ACEA, Hera,Mediterranea delle Acque) that may be small if considered separately but could act as aggregationcentres (separating however the water system from the other managed businesses)– TLS networks: this sector’s uncontested leader is Telecom Italia (turnover: 30 bil €, EBITDA:12.2 bil €; margins: 41%). On the other hand, Metroweb (turnover: 56 mil €, EBITDA: 43.5 mil €;margins: 78%) represents a specific leader with an ongoing important project in optic fiber.Unfortunately, Metroweb has a big project, Telecom has a big debt, but they cannot find anagreement to cooperate together!Despite some big players most of the assets are still partitioned and cannottherefore create «the system».The managers of the existing infrastructures embrace a very widespectrum, ranging from European leaders to embarrassingly small players:Possible evolution for the financing of infrastructure
36– The big «national champions» (ENI, ENEL, Atlantia), specialised in one single sector, havehigher profits and more solid capital structures compared to multi-utility companies (in addition,the listed companies are more efficient than many others in Italy) and can provide moreresources to investments.– This is also explained by the fact that inefficient business segments within multi-utilitycompanies consume the resources produced by the profiting segments.– Multi-utility companies are currently trying to compensate their cash flow deficiency forinvestments through a debt increase that, in some of these companies, has peaked tolevels impossible to sustain on the long run (>4 times their EBITDA!).The analysis of the main infrastructure groups quoted at the stockexchange explains the importance of dimensions and sectorspecialisation.Possible evolution for the financing of infrastructureData (mil €) Turnover EBITDA % Profit % Invest. PFN Mkt Cap EV EV/EBITDA Inv./EBITDA PFN/EBITDANational championsENI 110,522 26,753 24% 7,803 7% 13,438 28,032 69,860 97,892 3.66x 50% 1.05xENEL 79,514 17,717 22% 5,358 7% 7,589 44,629 30,640 75,269 4.25x 43% 2.52xAtlantia 3,976 2,385 60% 840 21% 1,619 8,970 8,900 17,870 7.49x 68% 3.76xTerna 1,636 1,230 75% 440 27% 1,220 5,123 6,110 11,233 9.13x 99% 4.17xMain multi-utility companiesA2A 6,198 942 15% (916) -15% 310 4,021 1,480 5,501 5.84x 33% 4.27xACEA 3,288 744 23% 86 3% 413 2,326 1,030 3,356 4.51x 55% 3.12xHERA 4,106 645 16% 127 3% 325 1,987 1,660 3,647 5.65x 50% 3.08xIREN 3,520 592 17% (108) -3% 493 2,652 615 3,267 5.52x 83% 4.48xNote: data from 2011 budget, with exclusion of Mkt Cap, updated January 11, 2013«National campions» average 45% 15% 6.13x 65% 2.87xMain multi-utility comp. average 18% -3% 5.38x 56% 3.74x
37Possible evolution for the financing of infrastructure– Only big and specialised players (such as ENI, ENEL, Atlantia, etc.) cangenerate enough cash flow to create new investments.– It is necessary for each player to specialise in one single sector (or«industry») to allow an efficient and high quality management. The multi-utility companies’ efforts to aggregate into «macro-utility companies» show howthe parallel management of different businesses affects the service efficiencyand the company expenses in a very negative way.The infrastructure sector in Italy should promote homogeneousaggregations able to create «national champions» throughout differentsectors!In order to achieve such objectives, it is necessary to apply modern financingtools, to create a new «institutional capitalism»! It is indeed necessary forinstitutional investors (banks, foundations, insurance companies, pension funds,etc.) to finance big sector «public companies», to generate «nationalchampions» able to promote an efficient management and infrastructure assetdevelopment.
39– The lack of public financing, which prevents the creation of newinfrastructures and the efficient management of existing ones, canonly be balanced today through private financing.– The key topics brought out through this analysis include:o the role that infrastructure played in Italy’s development afterWorld War IIo the fragmentation of infrastructures, the often public ownership andthe need for privatisation of some key sectorso a lack of public financingo 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 institutionalfund that can aggregate the existing infrastructures in industriesusing funds from this asset management to allow for theirdevelopment.A modern finance example: the role of F2i
A modern finance example: the role of F2i40– 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 sponsors of highstanding, 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.
A modern finance example: the role of F2i41F2i investors (per category) Following its mission and the institutional nature of its investors, F2iaims for long-term participation with an industrial understanding.Categories (Fund I) N. Invest. Subscribedamount% on theFundBanks 7 593 M€ 32.02%Welfare funds 13 487 M€ 26.30%Foundations 26 439 M€ 23.70%Insurances 4 175 M€ 9.45%Public financial institutions (CDP) 1 150 M€ 8.10%Management SGR / Sponsors 1 8 M€ 0.43%Total 52 1,852 M€ 100.00%Categories (Fund II) - First closing N. Invest. Subscribedamount% on theFundBanks 2 200 M€ 34.78%Welfare funds 2 90 M€ 15,65%Foundations 6 185 M€ 32.17%Public financial institutions (CDP) 1 100 M€ 17.39%Total 11 575 M€ 100,00%
A modern finance example: the role of F2i4211For SAGAT all commitments until 2014 areconsidered (share acquisition by otherprivate partners)F2i has created seven industries now reunited in a structured group,committing over 2,182 mil € (90% of total fundraising).175% 85.1%100%100%100% 40%40%49.0%100%60.0%100% 70%69.3%44.3%87.2%100.0%53,8%85.0%15.9%100%49.8%26,3%2,124.7 97.4%31.7 1.5%25.3 1.2%2,181.789.9%Transportation272.9 12.5%242.9 11.1%53.5 2.5%AirportsTLCRenewables749.4 34.3%WaterEnvironmentInfracisAlerion CPRIE ParmaF2iReti ItaliaERG2iGasG6F2i Rete IdricaItalianaMediterraneadelle Acque436.5 20.0%GasSAGATIren AmbienteF2iAmbienteTRMHFVF2iAeroportiGESACSEASaster NetMetrowebItaliaMetrowebBresciaMetrobit240.0 11.0%129.5 5.9%F2i EnergieRinnovabiliDismissionsFund management costsTOTAL COMMITTED% of raised fundsCommittedFund 1+2
2i Gas (ex E.On Rete)43ENEL Rete GasAlerionHFVInfracisMediterranea delleAcqueRete Idrica ParmaGESACSEASAGATG6 Gas NetworkMetrowebSasterNetMetroBit, BresciaGASRENEWABLESHIGHWAYSWATERAIRPORTSTLCF2i acts as a true «public company»: each project is developed with theobjective to create an industry within a specific sector, fosteringcooperation among subsidiaries and the integration of the managedinfrastructure networks:A modern finance example: the role of F2iObjective: to represent the first independent manager of gas distributionnetworks and to act as an aggregating entity in a currently strengtheningsector. Envisions independence between sales and distribution.Objective: to develop two independent entities with authoritativeshareholders, managers and management. Today the renewable energysector is afflicted by contradicting regulations that prevent its futuredevelopment in Italy.Objective: to access the closed sector of highways as referencestakeholder for companies with extremely fragmented publicshareholders.Objective: to create a «national champion» in a sector crucial to Italy,which requires great investments to modernise the existing plants,despite the demagogy created by the referendum in 2011.Objective: to create an aggregation focus in a strongly fragmentedsector, characterised by a distorting and worrisome «low-cost»predominance, mainly publicly-owned, with no specific strategy.Objective: to facilitate the development of optic fibre in the mostpopulated and developed areas of Italy.TRMIren AmbienteENVIRONMENTObjective: to promote, alongside Iren, a national leader (followingVeolia’s model) that can operate according to the best Europeanpractices in a still very fragmented sector that needs development.
A modern finance example: the role of F2i44− In the timelapse of a few years, F2i offered a new business model forinfrastructures in Italy, creating a structured group of companies andcompany industries, each representing a benchmark in theirrespective sector.− The companies where F2i holds the majority of shares or plays animportant role in their governance, registered in 20111:o aggregated turnover: 1,608 mil €o EBITDA: 650 mil € (EBITDA margin: 40%)o employees: 8,550o investments: 593 mil € (91% EBITDA)1Aggregated closing data 2011. Referred to: ERG, 2i Gas, G6 Rete, Alerion CleanPower, HFV, Mediterranea delleAcque, GESAC, SEA, Metroweb, SasterNet and SAGAT.In 2011 F2i subsidiaries have invested over 90% of their EBITDA.No infrastructure system invests such a high portion of their EBITDA!
A modern finance example: the role of F2i45Thanks 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
46F2i was created as a private, yet institutional investment tool to aggregateexisting infrastructures in production chains in order to guaranteesubsidiaries with:– operational effectiveness– a balanced financial management, avoiding that companies becomepoorer through exaggerated debts and extraordinary high dividends– a focus on development, reinvesting a great part of the cashflows generated by strengthening managed networks and assets.A modern finance example: the role of F2iIn a time of very poor public financing, the infrastructure gap – bothquantitative and technological – 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 works.
47GAS− The F2i Reti Italia Group was born through the acquisition of ENEL Rete Gas (2009),E.On Rete (today 2i Gas ─ 2010) and, more recently, G6 (formerly GdF Group – 2011).− By aggregating three important networks, F2i Reti Italia became, after just twoyears, the second biggest national player for market share in a still very partitionedsector (over 250 operators).The group dimensions allow significant investments that favour development, innovation,efficiency and safety of the network. The absence of conflicts of interest allows fortransparency (particularly as to measurements) and efficiency towards customers. Thisinvestment commitment creates a quality service, recognised and awarded by the gasauthority!11In 2010 F2i Reti Italia was awarded by the AEEG with 50% of the incentives for safety recovery works, compared to 17% marketshare (see back-up slides)A modern finance example: the role of F2i Examples of industriesThe industries of gas distribution, airports and optic fibre networks areexamples of how F2i operates to aggregate infrastructure assets.• Rab (mil€): 2,684• Revenue (mil€): 605• EBITDA (mil€): 326 (54%)• Investments (M€): 189• Employees (#): 2,112• Customers (#): 3,820,000• Managed network (km):56,833• Concessions (#): 1,970F2i Reti Italia54%of the EBITDA
A modern finance example: the role of F2iExamples of industries48− 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 back to Italy strategicnetworks previously controlled by foreign companies.− The presence of a big independent operator, which can rely onsolid 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.GAS
A modern finance example: the role of F2iExamples of industries49− 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 parlty 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.AIRPORTS
A modern finance example: the role of F2iExamples of industries50AIRPORTS− 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.).
A modern finance example: the role of F2iExamples of industries51AIRPORTS− At the end of 2012, F2i acquired, together with the Turin Municipality, 28%of SAGAT, the company that manages Turin’s Sandro Pertini airport since1956. F2i has also acquired another share of this company (22.8%) fromSintonia (Benetton Group) becoming thus the leading shareholder ofSAGAT. Further acquisitions are planned by private partners within 2014,for a total share of 67.7%.− SAGAT will manage Turin’s airport until 2035.− Turin’s airport is located in one of the richest Italian regions (Piedmont) –ranking fifth for GDP (about 124 bil €, 8% of the total national GDP), fourthfor exports (10% of the total national exports), sixth for number ofinhabitants and second for area.− Piedmont’s strong business and tourist vocation and its lowpassengers/province inhabitants ratio (1.6 times vs. 2.4 times on nationalaverage) provide the airport with a solid development potential.− In 2012 the airport registered a total traffic of 3.5 mil passengers (averageannual growth 2000-2012: +1.9%).− Its turnover reaches 64 mil € (net revenue 3.6 mil €) with margin levels thatrepresent a benchmark for the country (EBITDA/passenger 4.2 € vs. 2.4national average). The airport employs almost 410 people.− SAGAT is also involved in the airports of Florence and Bologna.
A modern finance example: the role of F2iExamples of industries52− F2i started in the airport industry with a particular know-how and a trackrecord with a bright growth perspective:o thanks to Gesac, F2i «brought back» important company-generated cashflows to Italy, which they used to foster development and growtho thanks to SEA and SAGAT F2i recognised the local bodies’ needs to sellstretegic assets to Italy to reduce their debt and, again, prevent them fromgoing under foreign control.− Together, these three companies managed 37.9 mil/passengers in 2011,over 25% of the total national traffic.− 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 the socio-economic system.− F2i pursues an investment strategy that aims to create a new airportnetwork: a concept, therefore, of «national network» instead of a «runway-focused» network, which would favour aggregation, the closing ofunemployed airports, and a recognisable, modern airport format of quality.AIRPORTS
TLCA modern finance example: the role of F2iExamples of industries53− Metroweb, founded in 1997, is the F2i controlled company with the largesturban optic fibre network in Europe, with about 3,640 km of infrastructure(lines) – corresponding to about 426,000 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.Infrastructure Dark Fibre Connectivity WEB IP-TVWireline -WirelessBusinessResidentialTelecom Operators and Service Providers End UsersInfrastructure Dark Fibre Connectivity WEB IP-TVWireline -WirelessBusinessResidentialTelecom Operators and Service Providers End UsersValue chain in the optic fibre sector− In 2011 Metroweb generated about 56 mil € revenues, with operationalmargins of about 80%. This company employs 34 people.− Metroweb services, through Fastweb, initially addressed businesses.At a second stage, also thanks to professionals who needed fast domesticconnections to work from home, the company’s offer extended to endconsumers.
TLCA modern finance example: the role of F2iExamples of industries54F2i and Metroweb are trying to aggregate new fibre providersoperating in Italy, to develop new network extensions and supplyItaly with a modern and strategic infrastructure, starting with themost economically-developed cities.In 2012, order to achieve this, F2i:–acquired 85% of SasterNet – owner of Genoa’s optic fibre network –from the IREN Group–founded a new company, Metrobit, for the «vertical» cabling ofMilan’s buildings–got involved in the Cassa Depositi e Prestiti (Deposits and LoansFund, «CDP») through the Italian Strategic Fund, whic will bring newresources and certify a more «institutional importance»–operated to acquire more already existing fiber networks in Italy (e.g.in Brescia).
Conclusions56− Infrastructures have driven Italy’s development for decades.− The anti-infrastructure attitude and the following decision-makingparalysis that hit Italy in the last decades, worsened by the publicfinance crisis, led to Italy’s decline, especially when compared withmajor European countries.− The ownership evolution (from public to private), which started in the90’s with the first privatisation changes, has not been completed, and iscausing market fragmentation as well as, in some cases, managementinefficiency.− These deficiencies have limited and brutally blocked the development ofinfrastructure at times, blocking the whole national economy as a result.− Today, Italy has much work to do to catch up: it is necessary to close thegap within the infrastructures, which represent the connective tissue ofany modern economy.
Conclusions57− To function properly, these infrastructures have to be created andmanaged as networks. They have to develop and be coordinatedrationally: their management should succeed on a «country system»basis, to replace the «parochial types of management» and financialspeculation.− 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 inmanaging the 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 bigpublic sector companies and guarantee their managementindependence.
58– The Fund has basically exhausted its dotation before the first deadlineof the investment period.– This happend even though F2i operated with extreme caution in orderto avoid hasty operations in a time of great uncertainty and a progressivelyworsening global crisis.ConclusionsThis achievement led F2i to launch a new Fund that will allow its workto progress further.F2i 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.
59− The new Fund (already operating and committing about 60% of the fundsraised at the first closing), will particularly allow F2i to:o reinforce its presence wherever it had already participated(capital injections to support development, acquisitions of newpartners, etc.)o inject new investments in industries already establishedo launch new industries also starting from the investmentopportunities determined by Italy’s current economic-financialsituation.ConclusionsTo allow the progress of group creations leaders intheir own sector and to finance the development ofnational infrastructures.
61Back-up slidesAirports– In recent years, a number of big European airports have undertakenimportant extension and renovation projects:o Spanish airports:• Madrid Barajas: Terminal 4 opened in 2006, increasing the airport’s yearly capacityfrom 45 to 70 mil/passengers. The construction was completed in a timespan of 4years.• Barcelona El Prat: the construction of Terminal 1 was completed in 2009, increasingthe airport’s yearly capacity to 55 mil/passengers. A new satellite for Terminal 1 (T1S)is under development, and will increase the airport capacity to 70 mil/passengers.o Paris Charles de Gaulle is constantly evolving:• the renovation works of Terminal 2 were completed in 2008, including the constructionof a new sub-terminal dedicated to the Schengen area (2G) and the transformation ofthe sub-terminal 2E into a high-security area• in 2008 (with estimated completion in 2015) the renovation of sub-terminals 2A, 2B,2C, and 2D began; in 2012 the construction of the S4 satellite started, for a capacityof 7.8 mil/passengers and will host Air France’s long-distance flights• plans for a new terminal (T4) with a 30 mil/passenger capacity have been devised: itshould be operational (initially for 9 mil/passengers) by 2024.
62Back-up slidesAirportso Frankfurt Fraport: Terminal 2 opened in the mid-90’s. The airport hasa current capacity of about 60 mil/passengers and is preparing to anexpected traffic growth (80 mil/passengers by 2020 vs. 56mil/passengers in 2011):• the airport’s fourth runway opened in October 2011• the expansion works for Terminal 1 concluded in October 2012, increasing theairport’s yearly capacity to 6 mil/passengers• the construction of Terminal 3 is scheduled to start in 2013 (+25 mil/passengers peryear).
63− Italy keeps on missing important opportunities because of a lack of planning,which translates into difficult authorisation processes:o After 11 years of never-ending authorisation processes and about 250 mil €already spent, British Gas left the project for the creation of a regasificationterminal in Brindisi in March 2012. Although the project had alreadyreceived the Environmental Impact Assessment (in 2010), after 2 years theauthorisation process was far from being completed, because of opposinglocal bodies that would not provide the necessary authorisations. The terminal,with a planned capacity of 160,000 m3, was an estimated investment of 800mil €, 1,000 jobs during the 4-year construction project and 250 after thestart of activity.o Another similar case in which Italy is risking to miss an important foreigninvestment is the regasification terminal in Zaule-Trieste. The SpanishNatural Gas Fenosa has been stuck in the authorisation process for sevenyears and is still far from completion. The municipality is currently against theproject, without considering the benefits for the area (500 mil € ofinvestments, 4,500 jobs during the construction phase, 390 after the startof activity – including direct coworking and satellite activities).Back-up slidesRegasification terminals
64− Two terminals are planned in Livorno:o The onshore terminal, promoted by Edison, Bp, and Solvay, had faced theopposition of the Tuscany Region for a long time because it had already givenaurhorisation to another one (see below). Recently, the Region opened todiscussion to review the project, but Edison is apparently currently no longerinterested because as the company structure is focusing on its internalreorganisation.o The offshore terminal, created by IREN and E.On, should finally start operatingin 2013, but the planned investments doubled compared to the initial plan (600mil € vs. the estimated 300 mil € in 2002), also because of a long 8-yearauthorisation process that involved 25 institutional bodies!− After a never-ending series of appeals by environmental associations, in 2011 theCouncil of State approved the construction of a regasification terminal at PortoEmpedocle, promoted by ENEL. This terminal estimates an investment of 800 mil€ and the employment of 1,000 operators during the construction (4-5 years)and 120 after the start of activity. The construction project should have started inSeptember, but in the meantime ENEL had to cut on the investment plan (becauseof rating and debt issues) – at Group level – and the start of construction waspostponed until the following year. The construction site opened in October 2012.Back-up slidesRegasification terminalsIndecisiveness accounts for (both Italian and foreign) asset drains, even intimes of economic crisis, when assets are desperately needed!
Back-up slidesExamples of industries65GAS− The group dimensions allow significant investments that favourdevelopment, innovation, efficiency and safety of the network:Investments mil €ERG + + +1899310854% of theEBITDAOther operators ~47F21 Reti ItaliaGroup~49Benchmark €/customerOthersTransparency, qualityand safetyGrowth
Back-up slidesExamples of industries66− The absence of conflicts of interest allows for transparency (particularlyas to measurements) and efficiency towards customers:GASInspected network (%) Actual average time for assistanceSource: AEEGYear: 2010AEEG1request~30’F21 Reti ItaliaGroup60’78%77%63%57%54%41%36%29%Enel Rete GasHeraA2AIrenG6 Rete GasEni (Italgas)E.On ReteToscana EnergiaAveragein Italy:55%
Back-up slidesEsempi di filiere67Incentives from AEEG for safety recovery(1)(k €)(1) Includes incentives distributed during 2010 per number of odorisation measurements and dispersion in the network.50%22%12%2%14%% incentivescompared to total% marketshare8441146961.314273Others2.9632.311 379 17%23%2%6%52%− The investment commitment creates a quality service, which has beenrecognised and awarded by the gas authorities!GAS