Public-private-partnerships in Italy – Federico Antellini Russo – June 2014 meeting of the Working Party 2 of the Competition Committee

Cassa depositi e prestiti

Public private partnerships in Italy:

A snapshot of the main issues

Federico Antellini Russo

Cassa Depositi e Prestiti S.p.A.

CASMEF, Luiss Guido Carli

Paris | June 16, 2014

Cassa depositi e prestiti 2

Overview

Two sizes, two tales

• The threshold matters

• The “Machiavellian PPPs”

Big projects, big problems

Main issues

Conclusion

Backup: Case Studies

Case study A: Rome Metro – Line D

Case study B: TEEM

Agenda


PPPs in Italy in 2013: an overview

Closing and operating share: 30% ca.

Evolution of PPPs (2002 – 2013)

Source: CRESME, 2014

5,154

2,901

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

0

500

1,000

1,500

2,000

2,500

3,000

3,500

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Nu

mb

er

€/

mil

lio

n

Contract starting prices Numeber of tenders

19,5% of the total number of tenders

44,2% of the total contract starting amounts

• insufficient preliminary analysis • late involvement of banks • credit crunch • lack of technical capacity of contracting authorities • excessive post-award changes

Why?

In 2013, the building contracts accounted for…


Two sizes, two tales


The threshold matters

Considering the tenders with a known reserve price (52,8% of the total)…

Value of PPPs, 2013

Below 15 € mln

97%

Above 15 € mln

3%

Source: CRESME, 2014

Municipalities were the contracting authorities for more than 80% of the tenders below € 15 millions

Subject to the Internal Stability Pact

Mainly non-complex projects (i.e. cemeteries, parking areas)


The “Machiavellian” PPPs

• higher frequency of PPPs published by Municipalities with higher population and lower infrastructural endowment;

• preference for a PPP scheme seems to be associated with a lower level of income (of the inhabitants; • “PPP decision” is:

rarely taken after an accurate “feasibility study” (= no estimation of the value for money of the project), and

often not accompanied by any monitoring mechanism; • majority of the contracts:

needs a limited know how and innovation capacities to be performed at a satisfactory level, faced a limited demand risk;

• “evergreen” clauses (i.e. requiring the private contractor to keep the technical standard of a project at the state of the art) and automatic renewal clauses are absent;

• choice to use PPPs seems to be mainly determined by critical balance sheet conditions (i. e. the number of PPP tenders increases as public deficit worsen) and the opportunity to write the assets off-balance;

• PPPs in which the project revenue stream is totally guaranteed by the users (and not by the public involvement) are “rare birds”.

Main results of empirical analysis on the tenders:

• contract is often awarded to the promoter; • market is dominated by small operators, often unable to assure a real added value to the project; • full transparency on on-going activities and “customer satisfaction” supervision mechanisms are

totally absent; • strong correlation with political cycles.

Main results of empirical analysis on the awards:


Big projects, big problems


Main issues

The award is often made on the preliminary blueprint…

The contract is often awarded on the basis of a preliminary blueprint, which requires additional (and not obvious) bureaucratic steps before becoming definitive (i.e. “conference of service”) If: • all permissions have been obtained before the

procurement process, and • concession perimeter, features and timing have

been set as clearly as possible before the tender’s beginning

(= award on the definitive blueprint), then, there could be: - a reduction of uncertainty ( more defined

evaluation of the timing and the costs of the project);

- A reduced post-award re-contracting; - a speeding up of process, - a clearer incentive scheme.

the engineering of all planned work in earlier stages of design in every detail

the most technically defined phase of the entire design

prepared on the basis of the preliminary blueprint, includes the indications of the “conference of services”

sets out the profiles and the most significant characteristics of the projects

… the risk-sharing is not efficient, or…

Preliminary blueprint

Definitive blueprint

Executive blueprint

The grantor bears an improper share of the construction risk and of the demand risk, in order to address the participation constraint.

… the cost for the awarding authority/users is higher than it could be

• The reserve price for the availability fee and/or for the public contribution are too high; • The tariff cap takes into consideration the probability for blueprint changes.


Conclusion

• new provision to regulate PPPs, separated from public contract legislation, comprising concise, clear and stable rules;

• legal-economic models compliant with Eurostat rules to avoid financial operations with a complex structure; • ad hoc resources to finance feasibility studies to be undertaken by Public Administrations, which

otherwise would not have the necessary human and financial resources; • single management unit with specific skills to be set up by the central Government; • moving from short-medium term public financing to project financing (i.e. until 2003 CDP played an

indirect role in financing of investments – by lending money to contracting authority -, currently CDP is directly involved in infrastructures funding through debt and equity).

• moving from short-term debt financing to long term financing, through the involvement of institutional investors.

• develop a standard benchmark for calls for bids, tendering procedures and contract adjudication. • increase the value of single procurement contracts, by grouping together similar projects from

Municipalities.

… and in particular, for small-medium projects

What could be done in general…

Some implications: • bids should ideally be done on the definitive project; • higher skills and competitive dialogue (with an increasing remuneration through stages) could increase the

incentive to reveal private information; • scale matters: small projects should be carried out by local authorities through a more traditional approach (=

traditional procurement procedures must be considered); • if a project is sustainable (= profitability is coherent with risk and market’s expectations), the funding is not a

real issue.


Backup: Case studies


11

Case study A: Rome Metro – line D (1/2)

Main features of the tender notice (August 2009)…

Roma Metropolitane S.r.l. (public vehicle)

Negotiated procedure (promoter and the two top ranking competitors) for awarding a Design, Build, Finance and Operate contract for a new subway line

Awarding authority

Procedure & contract

2,13 €/mln for the “Priority Track” + 1,05 €/mln for the “Optional Track” (mainly construction costs). Public partner financial contribution: 14% of the total estimated amount.

Estimated amount

Awarding criteria

Quality Maximum

points

Technical solutions for reducing the upfront investment

32

Variations of the blueprint 20

Integrated transport system optimization 12

Aesthetic and functional improvements 13

Outflow capacity from stations 3

Architectural features of the interior of the stations

10

Asset service and asset management features

5

Price Maximum

points

Rebates on the construction cost of the “Priority Track”

15

Total amount of the contribution payable by the grantor for the construction of the “Priority Track”

20

Total amount of the availability fees for the “Priority Track”

15


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Case study A: Rome Metro – line D (2/2)

… just two issues!

Construction risk • any delay in the time schedule or any increase in costs due to

changes required in the transition from preliminary design to final design and during the construction period (variants, increase in the labor cost, updates on programming, increased costs resulting from interference with other services, etc.) are mainly borne by the contracting authority.

Availability risk & Demand risk • the quarterly availability fee is:

mainly fixed, proposed by the bidders and paid by the contracting authority (which collects its revenue from the users of the integrated transport system);

partially variable, subject to criteria such as the number of kilometers traveled by coaches (regardless of the number of passengers).

Risk-sharing

Competition • the bidders have to submit a sustainable business plan with respect to the “Priority Track” (⅔ of the contract value) and the “Optional Track” (⅓ of the contract value), but…

• … the contracting authority had the right to assign the “Optional Track” in its sole discretion …

• … there is no assessments about the bid on the “Optional Track”: the award is made in favor of an offer only limited to the “Priority Track”

Blocked by the Authority for the Supervision of Public Contracts


13

Case study B: TEEM (1/2)

TEEM (public vehicle)

Negotiated procedure for awarding a Design, Build, Finance and Operate contract for a toll road project linking the A4 Turin-Trieste motorway with the A1 Milan-Bologna motorway.

Awarding authority

Procedure & contract

1,9 €/bn (including interest during construction). The project company accounts for 220 €/ml paid up share capital.

Estimated amount

Main features of the concession agreement (March 2009)…

50 years of concession term post completion.

Timing

TEEM and the EPC Contractor signed on 6 November 2012 a lump sum construction contract. Construction timetable provides for the opening of the “Arco TEEM” by the first half of 2014. The entire infrastructure is scheduled to be operational by May 2015.


14

Case study B: TEEM (2/2)

… just three main features

Construction risk • The contracting authority awarded the definitive blueprint: the main

share of the construction risk is borne by the bidders .

Availability risk & Demand risk • Traffic analysis from independent consultant provides a central case of

51,100 AADT (Annual Average Daily Traffic) in 2015. • Toll adjustment mechanism is fully regulated and provides, especially

in the case of greenfield projects, traffic risk is mainly transferred to the concessionaire.

Risk-sharing

Financial plan

On August 2013 the working progress was about 40% on the “Arco TEEM” and about 20% on the entire project.

Source & Uses (construction period December 2013 – June 2016):

Uses €/mln % Sources €/mln %

Capex 1.654,7 86,7% Share Capital 464,9 24,4%

Interests during Construction 192,1 10,1% Shareholder Loan 114,8 6,0%

Other costs 8,2 0,4% Contributo 330,0 17,3%

DSRA 35,0 1,8% Senior Term Loans 936,2 49,1%

Other Reserves 18,3 1,0% Operating Cash Flow 62,4 3,3%

Cash - -

Total Uses (excl. VAT) 1.908,4 100,0% Total Sources (excl. VAT) 1.908,4 100,0%

Relevant role of development banks

Presentations & Public Speaking

Public-private-partnerships in Italy – Federico Antellini Russo – June 2014 meeting of the Working Party 2 of the Competition Committee