Vito Gamberale - Infrastructures in Italy, the Role of Infrastructure Funds

AIFI Annual Meeting 2014
Financing the recovery
Infrastructures in Italy
The role of infrastructure funds
Milan, March 31st
2014
Vito Gamberale

2
TABLE OF CONTENTS
– Evolution of the Italian infrastructure system Page 3
– Lack of public funding, privatisations
Page 6
– Modern financing and infrstructure funds Page 8
– The role of F2i
Page 13
– Conclusions Page 24

3
Evolution of the Italian infrastructure system

4
Italy was historically recognised for being a country with a great tradition
of building big infrastructures:
–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)1
was second only to the German
highway system (4,461 km)1
–During the 60s Italy ranked among the “leading countries” in nuclear power production (3rd
biggest
installed 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 these
plants had already achieved the current installed capacity (about 20 gw) and covered almost 100% of
the national power demand
–During the 80s Italy was the first country, together with France, to launch the project of a high speed
railway network (Rome-Florence)
The development of infrastructures contributed to modernise Italy as well
as to emancipate the country from an economic point of view, helping to
move from a rural to an industrial society.
1
Data from: Eurostat.

5
Infrastructures 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.), petrochemical
sector (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 northern
Italy), local highways, airports, intermodal ports, etc.
Public funding allowed to develop world leading infrastructure
networks.
This model worked usually well, while the government could support
development through national debt.

6
At the beginning of the 90s, Italy was involved in important processes
that 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 with
very 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» the
country a great deal).
The following governments were forced to cut public expenditure and
“cash in”, and could no longer maintain their role of investors for
building and managing public works.
Lack of public funding, privatisations

7
Lack of public funding, privatisations
The government can no longer play the role of investor and is more and
more choosing to leave industrial sectors, especially infrastructures:
– During the 90s, the most important Italian companies who counted on the investments of the
state, became private – partially or completely and with different results (ENI, ENEL, Telecom,
Autostrade, etc.);
– In the early 2000s, there were attempts to privatise local public companies (often without
completion) such as multiutilities (through a listing at the Stock Exchange: ACEA, A2A, IREN,
HERA, etc.) or airports (mainly through direct sale to private entities: Rome, Naples, Venice, Turin);
– The infrastructure companies that remained totally publicly-owned, or at majority share,
progressively suffered from a lack of public financing (poor investments for the local needs), unclear
management, and from the inefficiency caused by asset fragmentation, especially at a local level.

8
Modern financing and infrastructure funds

9
Today, big financing aggregates are mainly provided by investment
funds, which are mostly based on private – usually institutional –
shareholderships (banks, pension funds, insurance companies, etc.).
Over time, the assets and the related investment capability moved from
public (with poorer and more indebted governments) to private
management, both in Italy and in Europe.
– Private entities are able to aggregate and channel the resources of thousands of small and
big investors, directly or through an increasing number of modern financing tools; they have
therefore acquired (more or less consciously) the role of economic and development
"engine".
– This contributed to a progressive "financialisation" of the economy.
– A process, therefore, in which significant investments and big projects are no longer
accomplished with the sole objective of developing but also to provide for adequate
returns for the resources made available by private investors (regardless of whether they
are small savers or big operators).

Today, investment funds represent an innovative investment tool, an alternative to
traditional asset classes (bonds and equities). They vary based on the investors’ time
requirements and risk expectations.
The major types are:
‒ Private equity funds → short/middle-term
‒ Real estate funds → middle/long-term
‒ Debt funds → middle-term
‒ Infrastructure funds → long-term
Private equity funds usually provide opportunities against a background of high risk-
return ratios and appeal to investors looking for a quick way-out (the so-called
"revolving door" or "hit and run" investments);
Real estate funds, traditionally a beloved niche for Italian investors, have been
affected by the current financial crisis, which created significant issues for returns (high
vacancy rates, increased taxation) and value in the sector;
Debt funds represent an emerging opportunity that has yet to be fully understood,
especially as they address SMEs. These funds are expected to replace the positive
role held by special credit institutions in the past;
Infrastructure funds allow for more stable returns and protection from economic
cycles. 10

On a background of increasingly complex, unstable and interconnected markets,
infrastructure funds – based on regulated assets that therefore provide stable
flows and limited risks – offer professional long-term investors:
from a financial point of view:
‒a constant yield in time
‒a good future capital appreciation of the investment
‒an acceptable risk-revenue ratio
from an economic point of view:
‒protection from inflation rate variations (inflation-linked returns)
as for portfolios:
‒a decorrelation from the economic cycle and from stock exchange performances
‒absolute returns
11
Infrastructure funds have appeared on the Italian market just a few years ago, and
could indeed both satisfy infrastructure needs and the investment opportunity
requirements of institutional financing.

12
In Italy, as well as in other countries, such benefits are only found with funds
that invest in existing infrastructures (so-called "brownfield").
The difficult regulatory clearances for the development of new projects in
Italy make it impossible for greenfield investments to meet the investors'
time requirements and risk level expectations (Except fo the new urban
railway in Mestre, no important projects have been carried out in the past 10
years).

The role of F2i
13
– Among other infrastructure funds, thanks to a fundraising of 1,852 mil €,
F2i is the biggest fund operating in Italy and counts among the biggest
country infrastructure funds worldwide.
– F2i was created as a private, yet institutional tool by high standing
sponsors, who contributed to the establishment of the Fund’s solid
reputation:
 the government, through CDP
 the networks of former banking foundations
 major Italian banks (Unicredit, Intesa SanPaolo)
 private welfare funds
 Important foreing investors
 life insurance companies and pension funds

14
– F2i was conceived in 2006 when Italy finally had the necessary conditions
to foster the creation of a big infrastructure fund:
o A clear need of a new wave of local privatisations to respond to a lack of
public financing following a time of big central privatisations that, contrary to
what is usually believed, led to more than satisfying results;
o fragmentation (still ongoing) in many infrastructure areas (gas
distribution,water services, environment, etc.);
o the need to aggregate the numerous small operators in each business area
to create «national champions» specialised in the various infrastructure
sectors following the model of big Italian and foreign players.
The role of F2i
F2i was developed as an innovative tool for Italy, a private yet institutional fund
that can aggregate the existing infrastructures in industries using funds from this
asset management to allow for their development.

– In just a few years, F2i has created seven business areas now reunited in a
structured group, committing over 2,200 mil € (86% of total fundraising of Fund
I+Fund II).
Finanza moderna e fondi infrastrutturali - L'esempio di F2i
15
11
Agreements to be finalised
Ongoing closing
72% 100.0%
100% 40%
49.0%
100%
60.0%
100% 70%
67.7%
44.3%
87.7%
100.0%
53.8%
85.0%
10.2%
15.9%
100%
49.8%
26.3%
2.165.3 97.7%
31.7 1.4%
20.3 0.9%
2.217.4
85.4%
Log.networks
55.0 2.5%
10.0%222.5
TLCs
11.4%
132.5 6.0%F2i Energie
Rinnovabili
Metroweb GE
SIA
Metroweb
Italia
Metroweb
Brescia
Metrobit
252.0
Gas
SAGAT
Iren Ambiente
F2i Ambiente
TRM
F2i Aeroporti GESAC
F2i Rete Idrica
Italiana
Mediterranea
delle Acque
Fund I+II
487.6 22.0%
Committed
F2i
Reti Italia
2i Rete Gas
Highways
237.5 10.7%
31.4 1.4%
AirportsRenewables
746.9 33.7%
WaterEnvironment
Infracis
Alerion CP
HFV
SEA
Dismissions
Fund management costs
TOTAL COMMITTED
% of raised funds
1
For SAGAT all commitments until 2014 are
considered (share acquisition by other
private partners)

The role of F2i
16
− F2i offered a new business model for infrastructures in Italy,
operating as a “public company” and creating a structured group of
companies and company industries, each representing a
benchmark in their respective sector.
− The companies where F2i holds the majority of shares or plays an
important role in their administration, registered in 20131
:
o aggregated turnover: around 2.200 mil €
o EBITDA: around 850 mil € (EBITDA margin: 40%)
o employees: around 10,000
o investments: around 480 mil € (55% EBITDA)
1
Aggregated business data, including SIA (ongoing closing).
In 2013, F2i subsidiaries have invested almost 55% of their EBITDA.

• F2i developed partnerships with institutions and major national and
international operators
• F2i also has made it possible for a wide number of important
infrastructures to return under Italian ownership
The role of F2i
17
F2i’s partners “Re-nationalisations”

Modern financing and infrastructure funds – The role of F2i
18
F2i was able to combine the development of its own industrial plan with:
− modest financing (a management fee of 0.8% vs. an average 2.4% – among the
lowest on the market with no revision since 2010);
− good returns for the investors (net yield above 4% since 2010);
− value creation (certified by an independent advisor).
F2i's portfolio at current value vs F2i's participation fair market value (bil €)
(1) Transaction costs, management and other expenses are not included. The amount of 31 bil € refers to the expenditure for the acquisition of shareholdings in
Interporto Rivalta Scrivia and Enel Stoccaggi.(2)
Includes: fair value of investee companies, sale profits, depreciations, remaining funds for dividends and reimbursements. The amount of 38 mil € refers to the returns from the sale of
shareholdings in Interporto Rivalta Scrivia and Enel Stoccaggi.
31 38
1,555
1,886
550212
F2i portfolio (overall expediture ) on
(as of 31 December 2013) (1)
Fair value (2) Dividends from the fund Gross generated value
(as of 31 December 2013)
1,586
1,924
Disposed
shareholdings

19
(FIRST FUND)
– F2i was a "first time fund": its first fund raising was totally based on the credibility of its
management. Its track record (achieved thanks to its First Fund) made more
realistic and, therefore, easier the fund-raising for the Second Fund, launched
mid-2012.
– The Second Fund's closing was achieved with a group of sponsors that included both
the investors of the First Fund and new investors, who subscribed 575 mil €
equities over a target of 1.2 bil €.
– The fundraising among "limited partners" (insurance companies, welfare funds and
pension funds) has already been activated, resulting to date in a total 750 mil €
subscribed capital.
Modern financing and infrastructure funds – The role of F2i
CDP 100
Banca Intesa San Paolo 100
Unicredit 100
Banks 300
Fondazione Cariplo 10
EnteCarifirenze 40
FCR Lucca 20
Fondazione CRT
Compagnia San Paolo 60
FCR Cuneo 30
FCR Padova e Rovigo
FCR Sardegna 25
FCR Forlì
Foundations 185
Cassa Geometri 30
Inarcassa 60
Welfare funds 90
Total A Shares 575
Fund II
SubscriptionsA Shares – Sponsors
First Fund sponsors participating in the Second Fund
First Fund sponsors not participating in the Second Fund
New sponsors

20
(FIRST FUND)
Despite the fund was launched during the worst time for Italy's international
credibility, its fund-raising has been recently attracting increasing attention from
foreign investors (particularly from the middle-far east), who are overall more and more
attracted by the so-called PIIGS countries.
Based on F2i's experience, such investors look for:
– long-term investments, with stable and foreseeable yield;
– healthy and skilled management based on efficiency;
– credible authorities that regulate the different infrastructure areas, able to ensure for
development and able to offer opportunities rather than dangers (during the diligence step to
access the Fund, some investors requested to meet the representatives of 4-5 authorities);
– similar and matching objectives with other investors, that won't use this SGR as an
arena for meeting and plot for their own interest only;
– the possibility to co-invest directly in the Fund's assets (usually with an average ratio of
1:2), thanks to technical expertise and specialisation in the field they can offer.
Italy should generate and ensure the conditions demanded by foreign investors, so
that their new interest in the country could thrive in security and foster
development.
The core conditions include the requirement for infrastructures to have significant
sizes and avoid fragmentation, to be able to ensure adequate flows both for
financing development and reward investments.

21
– Many infrastructure assets have been created and managed according to the (often
political) needs of the local entities in which they are set, far from a global vision of
strategic network for a «country economic system
– Even the so-called «multi-utility» companies have, at best, only an
interprovincial outreach and manage local assets in very differentiated
segments (which does not favour a sector specialisation).
– The big central public companies – often underestimated – proved to have great
management skills and high transparency. On the contrary, today local companies
represent the industrial model with the biggest issues in Italy.
– Such companies frequently focused an exaggerated amount of attention on
local/political balance more than on development. Moreover, some of their
managers aim to accomplish their own individual objectives rather than
focusing on a transparent and targeted strategy.
– These obstacles prevent a united and efficient management of infrastructure assets
in Italy.
– To date the concepts of «network» and «industry» are still missing in the
various sectors.
Despite some big players (eg. ENI, ENEL, Atlantia), many infrastructure sectors in
Italy are very fragmented and also characterised by a localistic management
approach.

22
– In some sectors (water, waste, etc.) the necessary action is to create what was
achieved in 1963 by the first centre-left government in the energy industry – with
the creation of the “giant” ENEL starting from many small local operators.
– Only big and specialised players (such as ENI, ENEL, Atlantia, etc.) can generate
enough cash flow to create new investments.
– It is necessary for each player to specialise in one single sector (or «industry»)
in order to allow for an efficient and high quality management. The multi-utility
companies’ efforts to aggregate into «macro-utility companies» shows how the parallel
management of different businesses affects the service efficiency and the companies’
expenses in a very negative way.
– It is no longer the government alone that can play the role of aggregator today,
as now public financing – which could drive Italy’s infrastructure development in the
past – is now lacking. Therefore, an efficient management of infrastructures can
be achieved only through private financing – as long as this maintains a positive
non-speculative approach.
In the infrastructure sector, Italy should promote homogeneous aggregations
able to create «national champions» in the different sectors.

23
To be able to respond to this new attention of foreign investors, Italy
should focus on the privatisation of local assets to facilitate their
aggregation and, at a second stage, their development.
The inflow of new assets would provide fresh air for public resources and
a new drive for investments, which would in turn foster Italy's economic
recovery.

Conclusions
25
− Infrastructures – financed in the past with public funds – have driven Italy’s
development for decades.
− The ownership evolution (from public to private), which started in the 90s with the first
privatisation changes, has not been completed, and is causing market fragmentation
as well as, in some cases, management inefficiency.
− These deficiencies have limited and brutally blocked the development of infrastructure
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 the gap within
the infrastructures, which represent the connective tissue of any modern economy.
− A lack of public financing can be replaced by modern private financing tools
(such as infrastructure funds), able to aggregate huge private financial assets and
to make these available to develop infrastructures.
− Such tools can attract renewed attention, as in the past months, from foreign
investors now looking at Italy.

Conclusions
26
− To function properly, these infrastructures have to be created and managed as
networks. They have to develop and be coordinated rationally: their management
should succeed on a “country system” basis, to replace the «parochial types of
management» and financial speculation.
− In Italy, as in other big countries, it is necessary to concentrate and centralise such
sectors, to create a few «national champions» able to ensure adequate
investments, efficiency and transparency in managing the assets, according to
the model applied so far by F2i.
− This process can also be activated with a new wave of privatisations, this time
focusing on local assets able to benefit from the renewed interest of foreign
investors in Italy.
− A special consideration on this topic should include the new highways in Lombardy (also
known as the Autostrade per l’Expo), now assigned to public companies that are
preventing their creation from completion within the required schedule.
− Infrastructure funds can represent an “aggregating” tool, combining industrial
needs of infrastructures and the investors’ return expectations, hence fostering
the inflow of foreign assets into Italy and, possibly, its recovery.

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