Vito Gamberale - Private financing of infrastructures

Vito Gamberale
Private financing of infrastructures
Vito Gamberale
13th
finance meeting for public works
DEXIA CREDIOP
Rome, November 8, 2012

Vito Gamberale
Table of contents
Infrastructures in Italy Pg. 3
– History Pg. 4
– Privatisations Pg. 5
– New privatisations to overcome the difficulties of local bodies Pg. 6
Who finances infrastructures? Pg. 7
– Project financing Pg. 9
– Aggregations and «national champions» Pg. 14
The financing of infrastructures: the role of F2i Pg. 16
– Examples of industries Pg. 25
Conclusions Pg. 39

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Infrastructures in Italy

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History
Italy was historically recognised for being a country with a great tradition of
building big productions, mainly promoted by public financincing of institutions,
and national and local public 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)
– Mainly former municipality entities, operating within the integrated water cycle
management, local distribution (power and gas), waste disposal management (especially
in northern Italy), local highways, airports, intermodal ports, etc…
Until the 80’s the high cash flow from existing infrastructures contributed to the
development of new projects.
This model worked usually well, while the government could support
development through national debt.

Vito Gamberale
Privatisations
Privatisations are usually seen negatively. Contrary to popular belief, they often
have positive effects, even if they are different, based on the applied strategies:
1. Suffering manufacturing companies. Such privatisations were usually achieved by
selling to private entities operating in the same business sector, which ensured the
successful 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 service
and infrastructure sectors, which earned the greatest revenues. These
privatisations were accomplished through:
a) Quotation of part of the assets at the stock exchange, with very successful results for
the 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 to
compete 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 TLC
companies).
This model generated a «hit and run» attitude, risking the foreign ownership of strategic
Italian assets (together with their cash flows), which would locally be managed from a
financial point of view only.

Vito Gamberale
New privatisations to overcome the difficulties of local bodies
Just like it happened for the central government in the past, the local bodies today
are 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 new
projects is what attracts the local bodies’ interest in privatisations.

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Who finances infrastructures?

Vito Gamberale
– Infrastructures have to be financed through the balance of debt and
equities.
– The problem of debt has been addressed in the previous
presentations today. I will just add a few remarks.
– I will provide further details on the equity topic.

Vito Gamberale
Project financing
– As discussed, infrastructures have, in the past, played a fundamental role in the
development of the country.
– It is therefore necessary to understand how the infrastructure’s contribution to
push development can be reactivated, in Italy as well.
– Throughout the past decade, there have been attempts in Italy to finance
infrastructures 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 have
been local institutions. However, the results were not always positive. In fact, PF:
o worked well with projects promoted by private entities and with returns
that could have been predicted more easily (power and health sectors)
o faced more difficulties with projects involving public sponsors (e.g. in
the 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 EXPO
highways, is a clear example of this.

Project financing
Vito Gamberale
The main sponsor for the EXPO highway is Milano-Serravalle Tangenziali SpA, a very small
company in comparison to European operators…
… however, it is committed to the construction of new
highways 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 a
company of mainly public
assets, controlled by the
Province of Milan through
ASAM:
ASAM 52.9%
Milan municipality 18.6%
SIAS 10.7%
Other public partners 15%
Others 2.8%
EBITDAData
in mil €
Network (km) Revenues EBITDA % Profit % PFN NFP/EBITDA
MI - Serr. 185 211 10 48% 17 8% 22 2.25x
Atlantia 5,079 3,976 2,385 60% 84 21% 8,970 3.76x
Abertis 3,772 3,915 2,454 63% 77 20% 13,882 5.66x
Brisa 1,305 670 45 69% (82) -12% 3,517 7.66x
APRR 2,244 2,181 1,399 64% 39 18% 6,202 4.43x
A
S
A
M
5
2
.
9
%
M
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a
n
m
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biggest fund operating in Italy and counts among the
biggest country infrastructure funds worldwide.
– Recently, F2i has performed the first closing of a
second fund, which already raised 575 mil € (final
target: 1,200 mil €).
– F2i was created as a private, yet institutional tool by
sponsors of high standing, who contributed to the
establishment of the Fund’s solid reputation:
o the government, through CDP
Source: balance 2011

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Who finances infrastructures? Project financing
The aggregate financial plan for all 3 projects
Investments 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 l'Italia 5% 89 EBITDA '11: 2.385 mil €
Other highway concessory companies 10% 171
Intesa SanPaoloGroup 21% 346
Builders 17% 282
Other 15% 240
The efforts are seemingly exaggerated
compared to the economic «potential»
of both entities.
TOTAL 100% 1.640 Of which about 480 (29%) already committed
Although the Milano-Serravalle financial structure seems to be solid today (see previous
slides), 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 the
current 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 should
raise a debt of 160 mil € more, and collect at least 200 mil € from the partners (which are still
considered high amounts for public entities).
The main sponsor’s limited dimensions account for the obstacles
preventing the progress of the project construction.

Vito Gamberale
The M6 Toll Highway in Great Britain is an example of successful project
financing in Europe.
Characteristics − M6 Toll (43 km), is a toll bypass for the overcrowded M6 (160,000 vehicles/day compared to
the estimated 72,000) in the Birmingham area.
− The production was achieved thanks to the project financing through private
entities (25% Highway Group, 75% Macquarie Fund), who acquired the M6 Toll
concession for the following 53 years.
History
Costs/
Financing
− 1989: birth of project
− 1992: concession assigned
− 1997: project approval
− 2000: start of construction work
− Opening to traffic: 2003 (3 months
in advance) – average: about 14 km/year
Timespan: 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 an
innovative toll regulation that grants the concessionary company complete freedom in
setting the tolls.

Vito Gamberale
– Italy’s main highway projects are, on the contrary, largely delayed.
– The heterogeneity of partners and the cost increase – which ranges from 8
to over 100% during the approval process (usually due to compensations,
variables and higher expropriation costs) – are the main causes behind the
delays on the set timelines.
– The cost per km is at least 3 times higher than the European benchmark (M6
Toll – 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 the
financial sources could no longer deal with such increased expenses.
It should not come as a surprise that no project financing has been
completed on the due date!

Vito Gamberale
Aggregations and «national champions»
As far as debt is concerned, as we discussed, project financing is still
facing some obstacles in its application in Italy.
Who, then, can finance infrastructure nowadays, as far as equities are
concerned?
– 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 existing
infrastructures need to have considerable dimensions and should
not be fragmented.

Vito Gamberale
Who finances infrastructures? Aggregations and «national champions»
– The infrastructure sectors in Italy are sometimes very fragmented. They are 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».
– Besides a few «national champions» (ENI, ENEL, Terna, Autostrade) and entities that could be
leaders in their respective sectors (AdR, SEA, Italgas, F2i Reti Italia, Metroweb, etc.) there
are operators of embarrassingly small dimensions (38 regional/national airports – 100 including
the smaller ones –, 3,000 water operators, 250 in gas distribution, etc.), that prevent to «create
the system».
– Even the so-called «multi-utility» companies have, at best, only an interprovincial outreach
and manage local assets. The parallel management of differentiated businesses buderns
heavily 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 been
very rare in Italy and, when it did happen, it had significant restrictions on the cash flow for the
buyer.
– To date the concepts of «aggregation» and «industry» are missing in the single sectors. In
the 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! Institutional
investors (banks, foundations, pension funds, etc.) need to finance the creation of big sector
«public companies», «national champions» capable of promoting an efficient management
and the development of infrastructure assets.
– To this extent, project bonds, guaranteed by big institutions can certainly play an important role; in
order to work, however, and have a sustainable price, these need to be issued by solid and
credible subjects (even better if by big public companies).

Vito Gamberale
The financing of infrastructures: the role of F2i

Vito Gamberale
– The lack of public financing, which prevents the creation of new
infrastructures and the efficient management of the existing ones, can
only 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 development
o the shadows of the infrastructure privatisation phase in the 90’s
o the need for a new infrastructure privatisation phase, as a solution to
the high debts of local bodies
o the possibility to create «national champions» specialised in the
various infrastructure sectors following the model of big Italian and
foreign players.
…we therefore came up with the idea of F2i, a private yet institutional fund
that can aggregate the existing infrastructures in industries using funds from
this asset management to allow for their development.

Vito Gamberale
– 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.
– Recently, F2i has performed the first closing of a second fund, which
already raised 575 mil € (final target: 1,200 mil €).
– F2i was created as a private, yet institutional tool by high standing
sponsors, who contributed to the establishment of the Fund’s solid
reputation:
o the government, through CDP
o major Italian banks (Unicredit, Intesa SanPaolo)
o an important international bank (Merrill Lynch – BoA)
o the networks of former banking foundations and private welfare
funds
o life insurance companies and pension funds.

Vito Gamberale
F2i investors (per category)
Following its mission and the institutional nature of its investors, F2i aims for
long-term participation with an industrial understanding.

Vito Gamberale
GAS
WATER
AIRPORTS
TLC
RENEWABLES
TRANSPORTATION
1,685.0 mil €
26.8 mil € (1.6%)
31.7 mil € (1.9%)
1,626.5 mil € (96.5%)
= COMMITTED TOTAL
+ Fund management costs
Investments currently in the portfolio
– F2i created 6 industries, reunited in a structured group, committing over 1,685 mil€ (91% of the first
Fund’s total fundraising).
Committed
436.4 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

Vito Gamberale

Vito Gamberale
1
Aggregated closing data 2011. Referred to: ERG, 2i Gas, G6 Rete, Alerion CleanPower, HFV, Mediterranea delle
Acque, GESAC, SEA, Metroweb.
− Within four years, F2i managed to offer a new business model for
infrastructures in Italy by creating a structured group of companies
and company industries, each representing a benchmark in their
respective sector.
− The companies where F2i holds the share majority or plays an important
role in their governance, registered in 2011
1
:
o aggregated turnover: 1,539 mil €
o EBITDA: 630 mil € (EBITDA margin: 41%)
o employees: 8,130
o 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!

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− Thanks to F2i, important assets managed by foreign companies have
returned, together with their cash flows, under Italian control:
− E.On Rete Gas
− Gesac
− G6 Rete
− Metroweb

Vito Gamberale
– F2i was created as a private, yet institutional investment tool to aggregate
existing infrastructures into industries in order to guarantee subsidiaries
with:
o operational effectiveness
o balanced financial management, preventing the companies from
becoming poorer through exaggerated debts and extraordinarily high
dividends
o focus on development, reinvesting a great part of the cash flows
generated by strengthening managed networks and assets.
In a time of very poor public financing, the – both quantitative and
technological – the infrastructure gap needs to be filled with the modern
finance model proposed by F2i: using resources from an efficient
management of existing infrastructures to finance the development of
new plants and projects.

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Examples of industries
Some actual examples of how F2i operates to aggregate
infrastructure assets are visible on the gas distribution, airport and
TLC sectors.

Vito Gamberale
The 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

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GAS
− By aggregating three important
networks, F2i Reti Italia
became, after just two years,
the second biggest national
player for market share in a still
very partitioned sector (over 250
operators).
Capillarità di F2i Reti Italia sul
a
Capillary presence of F2i Reti Italia
on the territory
F2i Reti Italia

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GAS
− The group dimensions allow significant investments that favour
development, innovation, efficiency and safety of the network:GAS
Investments mil €
ERG + + +
189
93
108
54% of the
EBITDA
Other operators ~47
F21 Reti
Italia
Group
~49
Benchmark €/customer
Others
Transparency, quality
and safety
Growth

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GAS
− The absence of conflicts of interest allows for transparency
(particularly as to measurements) and efficiency towards customers:GAS
Inspected network (%) Actual average time for assistance
Source: AEEG
Year: 2010
AEEG
1
request
~30’
F21 Reti
Italia
Group
78%
77%
63%
57%
54%
41%
36%
29%
Enel Rete Gas
Hera
A2A
Iren
G6 Rete Gas
Eni (Italgas)
E.On Rete
Toscana Energia
Average
in Italy:
55%
1. Authority for Electricity and Gas.
60’

Vito Gamberale
GAS
- The investment commitment creates a quality service, recognised and
awarded by the gas authority!GAS
Incentives from AEEG for safety recovery
(1)
(k€)
% incentives
compared to total
% market
share
844
114
696
1.314
273
Others
2.311 379
(1) Includes incentives distributed during 2010 per number of odorisation measurements and dispersion in the network.
2,963
1,314
3792,311

Vito Gamberale
GAS
− F2i Reti Italia Group represented the main innovation in the gas
distribution sector in 2000: the group fostered and guided the
concentration process of the market.
− The group’s acquisitions could bring strategic networks, which
were previously controlled by foreign companies, back to Italy.
− The presence of a big independent operator, which can rely
on solid investors, brings actual significant benefits to the gas
sector, by promoting efficiency and technological development to
the network.
− F2i Reti Italia aims to consolidate its role as a big independent
operator in gas distribution, capable of representing a safety,
transparency and efficiency benchmark for the authorities and
the entire sector.

Vito Gamberale
AIRPORTS
32
− At the end of 2010 F2i accessed the airport sector by acquiring 70% of
Gesac, the company managing the Naples airport, Capodichino, thanks
to a concession expiring in 2043.
− Gesac was founded in 1980 through the input of the Naples Municipality
and Province, and by Alitalia. In 1997, following the privatisation process,
the public bodies sold a participation of 70% to the UK Group BAA (later
purchased by the Spanish Group Ferrovial).
− The airbase spreads out on a 2.8 km
2
ground with a 2,628 m long and
45 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 to
develop the airport infrastructures (over 190 mil € of cumulative Capex
between 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 €, of
which about 65 mil € have been accomplished by 2011.
− In 2011 Gesac managed a passenger traffic of 5.8 mil/passengers, and
employed about 300 people.

Vito Gamberale
AIRPORTS
− At the end of 2011, F2i purchased 29.75% SEA shares from the Milan
Municipality; SEA manages the airport network of Milan (Linate and
Malpensa airports) since 1948. The current 40-year agreement has been
undersigned alongside ENAC in 2001.
− SEA and the group companies provide all the related activities and
services, such as airplane landings and take-offs, airport security, the
activities related to passengers and the handling of merchandise, as well
as commercial services
− Milan’s airport network is located in one of the most important areas
of economic development in Europe (Lombardy’s GDP exceeds the
national GDP by 20%) and represents a bridge between the Mediterranean
region 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 people
employed.
− 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 Gamberale
AIRPORTS
− 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 the
south)
− mainly public ownership
− uncertainty of rate regulations
− lack of investments (no significant interventions in the main airports
in recent years).
− SEA and Gesac represent two
exceptions in the national situation:
− SEA manages Milan’s airport system,
the only one, besides Rome, which
has a true international dimension
and is located in Italy’s most developed
area
− Capodichino is located in a «low-
density» airport area, even though it
has a large pool of potential users with
a significant development potential.
− Together, these two companies
managed 34.2 mil/passengers in
2011, which is about 23% of the total
Italian traffic.
PMO
CTA
TRN
CUF
MXP
VBS
LIN
BGY
BZO
TSF
TRS
VCE
VRN
PMF FRL
FLR
PEG
BLQ RMI
AOI
PSR
FCO CIA FOG
BRI
GOA
NAP BDS
SUF
CRV
TPS REG
AHO
OO
OLB
CAG
PSA
SIE

Vito Gamberale
AIRPORTS
− F2i started in the airport industry with a particular know-how and a
track record with a bright growth perspective:
− thanks to Gesac, F2i «brought back» important company-
generated cash flows to Italy, which they used to foster
development and growth
− thanks to SEA F2i recognised the Milan municipality’s needs to
sell 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 business
development, as well as the rationalisation and achievement of high
profitability levels, with benefits for satellite activities and for the
socio-economic system.
− F2i pursues an investment strategy that aims to create a new
airport network: a concept, therefore, of «national network»
instead of a «runway-focused» network, which would favour
aggregation, the closing of unemployed airports, and a
recognisable, modern airport format of quality.

Vito Gamberale
TLC
− Metroweb, founded in 1997, is the F2i controlled company with the largest
urban 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 infrastructure
to TLC operators that subsequently implement their value-added
connection services in an autonomous way.
− In 2011 Metroweb generated about 56 mil € revenues, with operational margins
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 domestic connections
to work from home, the company’s offer extended to end consumers.

Vito Gamberale
− Metroweb was the engine that led to Milan’s leadership in the urban optic fibre
sector (the best cabled city in Europe). Ten years ago, Milan was the sole
pioneer worldwide in the new generation of networks.
− Metroweb was the engine that led to Milan’s leadership in the urban optic
fibre sector (the best cabled city in Europe). Ten years ago, Milan was
the sole pioneer worldwide in the new generation of networks.
TLC
− However, the other Italian regions are well behind the other European countries as
to ultra broad band availability (in addition, these regions do not have alternative
technologies to optic fibre, such as cable TV, which is largely available in other
countries):
%
buildings
with optic
fibre
Italy’s current technological disadvantage is mainly due to the
incumbent operator, which should be the driver of the network
development but is, on the contrary, stuck with debts caused by
unsuccessful privatisation!
Germany France UK Italy Spain Netherlands Sweden

TLC
Vito Gamberale
F2i and Metroweb are trying to aggregate new fibre providers
operating in Italy, to develop new network extensions and
supply Italy with a modern and strategic infrastructure,
starting with the most economically-developed cities.

Vito Gamberale
Conclusions
− Infrastructure networks represent the backbone of the economic
system of any advanced country and provide for its development.
− In order for these network to correctly function, they have to be
developed and 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.
− In order to achieve this, it is necessary to establish an «institutional
capitalism model» that can access the necessary resources to
develop the networks (applying, if necessary, innovative tools such as
«project financing» and «project bonds») to finance the growth of big
sector public companies and guarantee their management
independence.

Vito Gamberale
Conclusions
F2i is a clear example of this model in Italy. A true «public company»
that could start an infrastructure network system (able to interact with
each other to push Italy forward) by optimising their management and
controlling their development.
– The Fund has basically exhausted its dotation before the first
deadline of the investment period.
– This happened even though F2i operated with extreme caution in order
to avoid hasty operations in a time of great uncertainty and a
progressively worsening global crisis.
This achievement led F2i to launch a new Fund that will allow its work to
progress further.

Vito Gamberale
Conclusions
− The new Fund will particularly allow F2i to:
o reinforce its presence wherever it had already participated (capital
injections to support development, acquisitions of shares from other partners,
etc.)
o inject new investments in industries already established
o launch new industries also starting from the investment opportunities
determined by Italy’s current economic-financial situation.
To allow the progress of group creations leaders in
their own sector and to finance the development of
national infrastructures.

Vito Gamberale - Private financing of infrastructures

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