Vito Gamberale - Local public services between the public and private domain

Vito Gamberale – Local public services: between the public and private domain
Local public services: between the public and
private domain
Laboratory of ideas
Alessandria (Italy), November 26, 2012
Vito Gamberale
CARECS

Infrastructures in Italy Pg. 3
Privatisations
– Privatisations at a central level Pg. 11
– Privatisations at a local level Pg. 16
– Privatisations today Pg. 18
The financing of infrastructures Pg. 20
– Aggregation and «national champions» as public companies Pg. 22
The financing of infrastructures: the role of F2i Pg. 31
– Examples of industries Pg. 42
– Development of new industries Pg. 56
Conclusions Pg. 58
2
Table of contents

3
Infrastructures in Italy

4
Until the mid-70’s Italy was historically recognised for being a country
with 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) was second only to the German
highway system (6,061 km)
– during the 60’s 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 80’s Italy was the first country, together with France, to launch the project of a high
speed railway network (Rome-Florence).
The creation of infrastructures in Italy was an important driving force for
development after World War II and during the so-called «economical
miracle».

5
In Piedmont, the greater part of the highway network was also built
between the 50’s and 80’s:
– A4 TO – MI – TS (517 km): one of the first highways in Italy. The construction began in 1930,
the most important actions were undertaken during the 50’s
– A5 TO – the Mont Blanc Tunnel (146 km): the Turin-Ivrea-Quincinetto road opened in 1961
after only 3 years of construction. During the 60’s and 70’s the roads connecting Aosta were
finished (1970)
– A6 TO – SV (130 km): this road was built in segments, starting in 1956 until 1972. Since
1973, the construction project to double the number of lanes began
– A21 TO – PC – BS (240 km): the works of the TO-PC segment started in 1964 and lasted for
over 5 years. The connection with the PC-BS road was then completed in 1973
– A55 Turin ring roads (58 km): initiated in 1969 and completed in 1976
– A26 GE – Gravellona Toce (221 km): the biggest part of this segment was built between
1977 and 1988.
The same applied for the airport system: Turin’s Caselle airport was built in 1953, Cuneo’s
Levaldigi airport between the 60’s and the 80’s.
Thanks to the efforts made throughout those years, today the region of
Piedmont can still rely on the biggest highway network in Italy (820 km,
which represents 184 km per million inhabitants, vs. the national average
of 111/km per million inhabitants).

6
Infrastructures in Italy have been mainly supported by public financing,
through institutions and national public entities:
– 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).
Until the 80’s Italy had an adequate infrastructure system. The high
cash flow from the existing infrastructures contributed to the
development of new projects.

7
Local public services and infrastructure followed a very similar
pathway:
– the origins of the development of local services in Italy dates back to the end of the 19th
century, after the fast urbanisation process led to a significant rise in demand for public
services (these were initially limited to road lights and agricultural services)
– in the beginning, services were managed by private, often foreign (Austrian) monopolies
with no form of regulations, who developed and provided serviced communities
– this led the local administrations to take direct action in the construction and
management of the plants, both to limit costs and to invest profits in the development
of the plants (mid-’800, several municipalities started to directly handle certain local
public services: Genoa, Vercelli, Brescia, Rovigo, La Spezia and Cesena)
– at the beginning of the 20th century, municipalisation was included in Giolitti’s
administration decentralisation plan, as it reflected a need for innovation determined by
the industrialisation process and its related migration movements.
– despite the municipalities were given freedom of choice on the opportunity to make the
services public, this practice quickly spread: gas and power distributions, water services,
transportation, waste disposal, dairy manufacturers, pharmacies, etc., were
municipalised.
Until the 60’s, the municipalisation model of public services and
revenue reinvestment allowed for the rapid infrastructure growth of
Italian cities.

8
– the most evident signs of crisis were found in the uncontrolled rise of costs and the deficit
of public companies, as well as in the insufficient level of quality and efficiency
– the deficit that municipalised companies cumulated for local public services – slightly above
3.5 bil Lira in 1960 – grew to 800 bil in 1975 and reached 1,800 bil in 1980
– this was combined with a significant worsening of the overall financial status of local
bodies and central Government, with rising deficit and debt rising beyond control.
The decline of public finance was responsible for blocking the creation
of new infrastructure that, until then, had driven development, as well as
the continuous deterioration of the service quality.
This model was based on the combination of «public financing-efficient
management-development»; it had already begun to experience a
critical phase during the 70’s-80’s, both for central government and local
bodies:

9
At the beginning of the 90’s, Italy was involved in important changes 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».
The public sector could no longer continue acting as an investor for the
building and managing of public projects, and consequently began
entering a phase of «big privatisation», especially at a central level.

10
Privatisations

Privatisations are usually seen negatively. However, despite popular
beliefs, they often had positive effects, even if they are different,
based on the applied strategies:
1. Manufacturing companies, in a critical shape.
Such privatisations were usually achieved by selling to private entities
operating in the same business sector, which ensured the
successful result of the privatisation process itself.
A few examples :
– in 1994 Nuovo Pignone: ENI sold 70% of the company to General Electric 70% for 700
bil Lira
– in 1995 ILVA: IRI sold the iron and steel company to the Riva Group for 2,332 bil Lira,
and got rid of its 1,500 bil Lira debt
11
All these companies have experienced progressive developments.
Privatisations
Privatisations at a central level

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, but not always for the
investors (see ENEL)...
– from 1995 to 2001 the Treasury introduced 60% of ENI’s assets on the market,
obtaining a total of over 21 bil €. Today, the share is worth over three timesas much
compared to its first listing (17.5 €/sh vs. 5.4 €/sh)
– from 1999 to 2005 78% of ENEL was sold for about 33 bil €. The first tranche was
collected at 4.3 €/sh – an extremely good price for the government: 13 years after,
the share is worth 2.8 €/sh.
ENI and ENEL are Italy’s biggest companies and rank among the few Italian
companies that can compare with their global peers.
Through privatisation, former public bodies become true efficient
«public companies» that are able to compete at international level.
12
Privatisations

13
1After numerous ownership changes, Gemina’s current relative majority (about 35%) is held by Sintonia (reporting to Edizione
Holding), either directly or through its subsidiary Investimenti e Infrastrutture SpA.
Privatisations
b) Direct sales to private entities, often on a «family-like» basis, and
with disappointing or contradicting results (in particular for TLC
companies):
– In 1997 35% of TELECOM ITALIA was sold for 13 bil € (one of the biggest privatisations and the least
profitable). The company’s owner then changed several times (Colaninno, Pirelli Telco, Telefonica), which
led to a heavy debt (PFN/EBITDA from 0.7 times in 1999 to 3.2 times in 2005), the backing out of a big part of
foreign participation, and the loss of the international prestige it had acquired in the years of STET management.
– Between 2000 and 2001 the Leonardo company (led by Gemina and supported by Falck, Italpetroli and
Impregilo) acquired 96% of ADR for 2,237 mil €, with a dividend of about 1,519 mil €, achieved by the
company in 2001 thanks to new debt (over 1,200 mil €). Therefore, the actual cost paid by Leonardo was
808 mil €.
In 2002, the Australian Macquarie Fund purchased about 44.7% of ADR’s asset from Leonardo for 480 mil
€ (1,704 mil € for 100%), which means the Fund had almost a 30% premium of the carrying value.
In 2007 Gemina1 became Leonardo’s only shareholder, purchasing 44.7% of ADR’s assets from Macquarie
for 1,237 mil € ─ that is 2.5 times the price paid by Macquarie just 5 years before and over 3 times
Leonardo’s net expenses during the privatisation process!
This heavy debt, began in 2001 to pay the extraordinary maxi-dividend and never significantly
decreased, which led to a very slow growth in the decade following privatisation (CAGR revenues 2001-
201: +3%, basically ceasing all investments).
Over a period of 10 years ADR went through three different ownerships and accumulated a net
debt, which today amounts to about 1,250 mil € (PFN/EBITDA >4.5 times!), after paying capital gains
to shareholders (and 190 mil € dividends between 2000 and 2007)!

14
– The privatisation of AUTOSTRADE had a more positive outcome. In 1999 70% of
the company was sold for about 13.5 bil €. Schemaventotto (led by Edizione Holding)
purchased 30% of the company through IRI at about 7.05 €/sh. The market absorbed
about 40% at 6.75 €/sh. In 2006 Schemaventotto agreed on the transfer of Autostrade
to Abertis at 25 €/sh, which was over 250% more than the price IRI paid, but this
operation was not accomplished. Autostrade is still a solid company under Italian
control today.
Infrastructure and service privatisations through direct sales to
private entities, have seemingly entered a «hit and run» game, putting
strategic assets at risk of being acquired by foreign entities – as was
the case with Telecom and was about to happen for Autostrade (which
implies their cash flow management as well), or risking their
management responsibility to be reduced to a mere financial role.
Comparison of the main privatisations
Among big privatisations, Telecom was
the less profitable for the government:
the EV/EBITDA ratio, for example, is
3.4 times (compared to 7.2 times for
ENEL and 5.4 times for ENI).
Privatisations
Company Year EV/EBITDA Price/PN
Nuovo Pignone 1994 7.39x 2.90x
ILVA 1995 4.03x 1.17x
ENI (average 5 tranche)1995 - 2001 5.40x 2.10x
ENEL(just 1st tranche) 1999 7.20x 3.00x
Telecom Italia 1997 3.40x 1.70x
Autostrade 1999 9.40x 4.50x

15
– for infrastructures/service, it is better to favour stock exchange
quotations (such as ENI or ENEL) or share ownerships of «public
companies» (such as F2i, see ultra)
– set lock-up bonds (for at least 5-7 years)
– always introduce the concept of «earn-out» to favour the public
vendor in case of re-selling the company within 5-10 years
– set up bindings to prevent selling the company to buyers who would
place an exceeding acquisition debt on the company itself.
A couple of rules taught by the privatisation of the infrastructure
sector:
Privatisations
Privatisations at central level

16
– the transformation of the companies into SpAs usually takes place in a generalised
manner: the SpAs in the local public service sector grow from 22 in 1995 to 56 in 1997, and
exceed 450 in 2002. AEM in Turin, for example, is turned into an SpA in 1997, AMAG in
Alessandra in 2002
– the cession of shares is a more scarce procedure: in 2000, in 75% of the cases, the
capital share sold to private entities is below 10%
– very frequently the management of the services, even those with «industrial relevance»,
remain under direct control of local bodies, especially in the waste disposal and water
sectors (that today, not by chance, are still the most troubled segments).
Even the biggest municipalised companies, that usually choose to be
listed at the stock exchange (AEM in Milan – today A2A – in 1998, ACEA
in 1998, AEM in Turin – today IREN – in 2000) usually remain
characterised by a public majority.
– At local level, privatisations underwent a much less determined process.
– Turning the «special companies» into SpAs (Italian: società per azioni, limited
company) was usually a preferred process, that should then have been
followed by a (total or partial) dismission of the shares by the public bodies.
– However, the dismission process remains often apparently uncompleted:
Privatisations
Privatisations at local level

17
– This process led to the building of companies, which were obviously «slightly bigger» than
those before the merging, but were internally divided by local contrapositions.
– Unlike what happened in other main European countries, Italy pursued a strategy of
«horizontal», rather than «vertical» aggregations.
– Such multi-utility companies manage in fact an aggregation of different services –
among which there cannot be synergy – instead of specialising in delivering only one
type of service.
Such companies cannot fully develop the necessary synergies and
scale economies to ensure an efficient management and the
investments necessary to provide quality services.
During the 2000’s a phase of managing companies aggregations
operating in different sectors started, especially in northern Italy (A2A,
IREN, HERA, Acegas-APS, etc.).
Privatisations
Privatisations at a local level

18
− high debt, more and more frequently used to cover the current expenditure, not just for
investments
− decreasing transfers from the government
− more and more binding restrictions for the internal stability pact.
Today some local bodies are facing critical financial conditions, due to
the persisting international economic crisis as well…
<…which explains the great difficulties to collect funds to:
− participate in the capital increase of the controlled companies, necessary to ensure the
development and efficiency of the services delivered to citizens
− further develop existing infrastructures and finance the construction of new ones,
which are more and more needed by the territory.
Privatisations
Privatisations today
This background explains why privatisations are now back on the
agenda for local bodies.

19
An example of this is the Turin Municipality, which needs resources to
cover its investment campaing in the last decade (subway train, district
heating, WTE, railway link, olympic facilities).
Privatisations
Privatisations today
– The Municipality is now dismissing its estate assets and shares from public assets, such as
TRM, AMIAT, GTT and SAGAT, with the objective to recover about 330-350 mil € from the
sale of subsidiaries’ stakes. In particular:
– TRM and AMIAT (SUW disposal and management) will be privatised, respectively, at
80% and 49%, through a single tender that allows, however, separate allocations
– GTT (public transport): in June 2012 the Municipality agreed to sell 49%
– SAGAT (Turin’s airport Caselle): a first tender for the sale of 28% (at about 59 mil €)
was deserted. In October 2012 the deadline for preemption for the other partners,
which was never applied, was missed. In November 2012 a new tender had been
called out, without the setting of an auction base.
It is now necessary to find the right partner. A «public company», public
and institutional at the same time, suitable for long-term partnerships,
financially strong, respectful of the public role and interests.

20
The financing of infrastructures

21
– As we just discussed, in the past, infrastructures in Italy played a very
important role in the country’s development.
– Today this contribution is no longer available, mostly because of the
current critical conditions of public financing.
– It is now necessary to find a way to reactivate the infrastructure
contribution to development and to collect the necessary
resources.
– A «replacement» for the public financing of infrastructure
development has to be identified, still guaranteeing the control and
surveillance of delivered services to public bodies.

22
Aggregations and «national champions» as public companies
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.
– My self-evident answer to this question is:
Who can finance infrastructure nowadays?

23
– 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).
– Even in the cases where the companies turned to a private – or private-like –
management (privatisation, listing at the stock exchange), the new shareholders have
often focused an exaggerated amount of attention on financial aspects and
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 of international
markets.
– Without a national strategy for infrastructure, the other countries’ «national champions»
(E.On, GdF, EdF, etc.) could acquire important Italian assets.
– To date the concepts of «aggregation» and «industry» are missing in the single
sectors.
The infrastructure sectors in Italy are sometimes very fragmented and
also characterised by a localistic management approach.

24
–Energy: after their privatisation, ENI (turnover: 110 bil €, EBITDA: 27 bil €, margins: 24%) and ENEL
(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 about 4 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 national level, 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) Italian system to
rationalise and develop it
–Gas distribution: Italgas (turnover: 900 mil €, EBITDA: 663 mil €; margins: 74%) and F2i Reti Italia -
ERG (turnover: 606 mil €, EBITDA: 326 mil €; margins: 54%) could provide the system with a balanced
evolution through network reconditioning and development, with innovation and measurement
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 aggregation
centres (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 an agreement to cooperate together!
Despite some big players most of the assets are still partitioned (38 national/regional airports – actually 100
considering the smaller ones, 3,000 operators in the water system, 250 in gas distribution, etc.) and cannot
therefore create «the system».
The managers of the existing infrastructures embrace a very wide spectrum, ranging from
European leaders to embarrassingly small players:

25
– The big «national champions» (ENI, ENEL, Atlantia), specialised in one single sector, have
higher 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 more
resources to investments.
– This is also explained by the fact that inefficient business segments within multi-utility
companies consume the resources produced by the profiting segments.
– Multi-utility companies are currently trying to compensate their cash flow deficiency for
investments through a debt increase that, in some of these companies, has peaked to levels
impossible to sustain on the long run (>4 times their EBITDA!).
The analysis of the main infrastructure groups quoted at the stock
exchange explains the importance of dimensions and sector specialisation.
National champions
ENI 110,522 26,753 24% 7,803 7% 13,438 28,032 63,310 91,342 3.41x 50% 1.05x
ENEL 79,514 17,717 22% 5,358 7% 7,589 44,629 27,080 71,709 4.05x 43% 2.52x
Atlantia 3,976 2,385 60% 840 21% 1,619 8,970 8,270 17,240 7.23x 68% 3.76x
Terna 1,636 1,230 75% 440 27% 1,220 5,123 5,850 10,973 8.92x 99% 4.17x
Main multi-utility companies
A2A 6,198 942 15% (916) -15% 310 4,021 1,720 5,741 6.09x 33% 4.27x
ACEA 3,288 744 23% 86 3% 413 2,326 921 3,247 4.36x 55% 3.12x
HERA 4,106 645 16% 127 3% 325 1,987 1,450 3,437 5.33x 50% 3.08x
IREN 3,520 592 17% (108) -3% 493 2,652 544 3,196 5.40x 83% 4.48x
Note: data from 2011 budget, with exclusion of Mkt Cap, updated October 25, 2012
«National champions» average 45% 15% 5.90x 65% 2.87x
Main multi-utility comp. average 18% -3% 5.30x 56% 3.74x
Data (mil €) Turnover EBITDA % Profit % Invest. PFN Mkt Cap EV EV/EBITDA Inv./EBITDA PFN/EBITDA

26
The Monti Government tried to promote the aggregation of local public
service management with LD 1/2012 («decree on liberalisations»)
introducing (art. 25):
− the obligation to reorganise the Local Public Services (LPS) through local authorities
(ATOs, Italian: Ambito Territoriale Ottimale) with at least provincial outreach, to
promote a scale economy and service efficiency
− limits to in-house assignment of LPSs (with the exception of the water service, which is
still determined by the referendum results), in particular:
o lowering of the maximal level of annual value of an LPS, beyond which a tender becomes
mandatory (from 900,000 to 200,000 €/year)
o inclusion of the budget data of the in-house companies in the calculation of the
limits for the internal stability pact (the debt of the in-house companies is not the same
as the one of the municipalities and, therefore, the local bodies will no longer be able to
create formally external companies to detract the expenses in the framework of the stability
pact)
o reinforcement of the Antitrust Authority judgment (which, however, stays non-binding)
based on the market analysis of the local bodies in order to choose between in-house or
external assignment.
The Decree therefore aims to make LPSs more efficient, by promoting the
dimensional growth of the management companies and discouraging the
assignment to public entities. However, a more determined action would
be necessary.

27
– Based on the government-approved Decree, provinces will be reduced from 86 to 51.
– In Piedmont, for example, provinces will be reduced from 8 to 5. The Municipalities, for the
administration of new provinces, should become: Turin, Cuneo, Alessandria, Novara and Vercelli.
– Note: Alessandria will merge with Asti.
The aggregation process in ATOs, as envisioned by the government, could
be strengthened by the territorial aggregation process, which was recently
introduced with the project of merging provinces.
Note: data refer to legal population, as per the provisional results of
the ISTAT 2011 census.
Alessandria Asti Totale % Piemonte
Inhabitants (n.) 428,417 217,870 646,287 14%
Area (km2) 3,560 1,511 5,071 20%
Density (inh/km2) 120 144 127 n.s.
Municipality (n.) 190 118 308 26%

28
The local bodies should take advantage of the province merging to
rationalise the local public service management.
– In some adjoining territory, for example Alessandra and Asti, the water system, gas distribution
and SUW disposal are managed by different operators. Assignments are even differentiated
among the municipalities of the same province!
– The province-merging operation may present the opportunity to reactivate and complete the
aggregation process started in 2000, but this time, following a different pattern, which would
include:
– the «disaggregation» of the existing multi-utility companies and aggregation
according to «industries»
– the assignment of the control shares of companies to one single reference
institutional shareholder (such as in the case of ENI and ENEL) in order to turn them
into true independent «public companies».
Overall, there should be a shift of «in-house» management, which, according
to the Decree on LPS, imposes a debt consolidation of the contracting companies
head of the controlling body, to an «in-hands» management, which will allow the
public body to get rid of its debt through minority shares, as well as to monitor the
quality of the services delivered to citizens.
Selling control shares of the assets to institutional entities (that ensure
development and transparency) would represent an opportunity for local bodies
to «heal» the public accounts, without risking the start of a «wild
privatisation» process.

29
– 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.
– In order to meet these goals, a modern financing approach is necessary, a
new «institutional capitalism»! 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.
In the infrastructure sector, Italy should promote homogeneous
aggregations able to create «national champions» in the different sectors!

The Gavio Group is an example of successful aggregation, developed
right in the surroundings of Alessandria: Gavio, the second biggest
Italian Group– and among the biggest in Europe – could start working
in the highway sector in a few years.
– In 1996 Gavio, which was already operational in the transportation and building sectors, entered the
highway sector with the acquisition of the TO-MI highway from the Ligresti Group.
– Between the late 90’s and early 2000’s, thanks to the reinvestment of the TO-MI highway profits,
the group developed a complex programme for the acquisition of – both public and private – shares
and of other highway companies in the north-west of Italy (Turin ring road, the highway to Aosta, the
Sestri Levante-Livorno highway, the Viareggio-Lucca highway, Sitaf, the Cisa highway).
– The group is still growing today: only just a few days ago, the group purchased the TOA-SA highway
from the Atlantia Group.
– Today the group manages a network of 1,350 km (23% of the entire Italian toll network). Over the
years its dimensions and its management cash flow allowed it to plan and perform important
investments in the development of the network (e.g. Sitaf, Asti-Cuneo, Broni-Mortara, ect.).
30
The «Gavio example» indicates how it is possible to create a player of
national dimensions, at the very least, through the aggregation of single
local assets.
Aggregations and «national champions» as public company
Data (mil €) Network (km) Turnover EBITDA % Profit % Invest. NFP Mkt Cap EV EV/EBITDA Inv./EBITDA NFP/EBITDA
SIAS + ASTM 1,350 939 570 61% 181 19% 281 1,756 2,203 3,959 6,95x 49% 3.08x
Atlantia 5,079 3,976 2,385 60% 840 21% 1,619 8,970 8,060 17,030 7.14x 68% 3.76x
Abertis 3,772 3,915 2,454 63% 775 20% 676 13,882 8,810 22,692 9.25x 28% 5.66x
Brisa 1,305 670 459 69% (82) -12% 89 3,517 1,060 4,577 9.97x 19% 7.66x
APRR 2,244 2,022 1,399 69% 395 20% 233 6,202 4,630 10,832 7.74x 17% 4.43x
Note: data from 2011 budget, with exclusion of Mkt Cap, updated November 11, 2012

31
The financing of infrastructures: the role of F2i

32
– 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 the development of post-war Italy
o the lights and shadows of the privatisation phase in the 90’s
o the need for a new 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.

33
– 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 sponsors of high
standing, who contributed to the establishment of the Fund’s solid
reputation:
 the government, through CDP
 major Italian banks (Unicredit, Intesa SanPaolo)
 an important international bank (Merrill Lynch – BoA)
 the networks of former banking foundations and private welfare
funds
 life insurance companies and pension funds.

3434
 Following its mission and the institutional nature of its investors, F2i
aims for long-term participation with an industrial understanding.
(FONDO I)
Categories (Fund II) - First closing N. Invest. Subscribed
amount
% on the
Fund
Banks 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%
F2i investors (per category)
Categories (Fund I) N. Invest. Subscribed
amount
% on the
Fund
Banks 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%

– F2i created 6 industries, reunited in a structured group, committing over
1,685 mil€ (91% of total fundraising).
31.7 mil € (1.9%)
26.8 mil € (1.6%)
35
1,668.1 mil €
GAS
RENEWABLES
TRANSPORTATION
WATER
AIRPORTS
TLC
Committed
436.4 mil € (26.2%)
272.9 mil € (16.4%)
129.5 mil € (7.8%)
489.2 mil € (29.3%)
228.1 mil € (13.7%)
53.5 mil € (3.2%)
Investments currently in the portfolio
+ Dismissions
+ Fund management costs
= COMMITTED TOTAL
75% 85.1%
100%
100%
100% 40%
40%
100% 70%
29.8%
87.5% 61.4%
15.7%
100%
49.8%
26.3%
Water branch
Parma
Sasternet
F2i TLC Metroweb
Milan and Brescia
projects
Infracis
Alerion
CleanPower
F2i Renewable
Resources
HFV
F2i Airports GESAC
SEA
F2i
Reti Italia
ENEL
Rete Gas
2iGas
G6 Rete Gas
Mediterranea
delle Acque
F2i Rete
Idrica Italianak
1,609.6 mil € (96.5%)

36
F2i is present in Piedmont with:
− F2i Reti Italia, the first regional gas operator for the number of licences (with
about 33% of shares) in the sector. It is the third operator for the number of
customers (about 16%).1 It manages 356 licenses and employs 150 people (the
number doubles if satellite companies are considered).
− Metroweb, which holds a «long distance ring network» and connects Turin,
Milan and Genoa (420 km in total, about half of which is in Piedmont).
− In addition, F2i is considering to add other important assets in the
regional area, such as Turin’s airport and WTE plant.
1The first operator in terms of number of customers is Italgas, with about 30% of market share, followed by AES (51% IREN,
49% Italgas), holding a share of about 24% even if it manages distribution in the Turin municipality only.
Provinces N. of licenses Market %
Alessandria 95 48%
Asti 24 21%
Biella 45 63%
Cuneo 32 16%
Novara 54 58%
Turin 18 7%
Verbano-Cusio-Ossola 52 69%
Vercelli 36 56%
PIEDMONT TOTAL 356 33%

37
2i Gas (formerly
E.On Rete)
ENEL Rete Gas
Alerion
HFV
Infracis
Mediterranea delle
Acque
Parma Water System
GESAC
SEA
G6 Rete Gas
Metroweb
Moon and Link Projects
SasterNet
GAS
RENEWABLES
HIGHWAYS
WATER
AIRPORTS
TLC
F2i acts as a true «public company»: each project develops with the
objective to create an industry within a specific sector, fostering
cooperation among subsidiaries and the integration of the managed
infrastructure networks:
Objective: to represent an important independent manager of gas distribution
networks and to act as an aggregating entity in a currently strengthening sector.
Foresees independence between sales and distribution.
Objective: to develop two independent entities with authoritative
shareholders, managers and management. Today the renewable energy
sector is afflicted by contradicting regulations that prevent its future
development in Italy.
Objective: to access the closed sector of highways as reference
stakeholders for companies with extremely fragmented public
shareholders.
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 fragmented
sector, characterised by a distorting and worrisome «low-cost»
predominance, mainly publicly-owned, with no specific strategy.
Objective: to facilitate the development of optic fiber in the most
populated and developed areas of Italy.

38
− 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 20111:
o aggregated turnover: 1,530 mil €
o EBITDA: 630 mil € (EBITDA margin: 41%)
o employees: 8,130
o investments: 583 mil € (91% EBITDA).
1Aggregated closing data 2011. Referred to: ERG, 2i Gas, G6 Rete, Alerion CleanPower, HFV, Mediterranea delle
Acque, GESAC, SEA, Metroweb.
In 2011, F2i subsidiaries have invested over 90% of their EBITDA.
No infrastructure system invests such a high portion of their EBITDA!

39
− 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

40
o participate in the acquisition of brownfield assets sold by public bodies too, to
support its own development. As an important innovation, selling institutional
parties are often granted an earn-out, a protection against future valorisations
above specific limits
o involve both national and local financial systems in management companies,
the same as real international public companies
o ensure an industrial management, aiming for effectiveness and the
companies’ managing development. To be able to take action on
management, F2i aims to obtain the majority of stakes in the subsidiaries
o foster aggregation processes in sectors characterised by great fragmentation
and high national and European development potential
o ensure management enhancement of the subsidiaries by involving the
management in corporate development and personal improvement projects.
– The institutional characteristics of F2i guarantees a stable and long
lasting partnership with no financial speculations, thus making the
Fund the ideal partner for public entities. Indeed, F2i can:

41
F2i was created as a private, yet institutional investment tool to aggregate
existing infrastructures into industries in order to guarantee subsidiaries
with:
– operational effectiveness
– balanced financial management, preventing the companies from
becoming poorer through exaggerated debts and extraordinarily high
dividends
– 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.

Examples of industries
42
Some actual examples of how F2i operates to aggregate
infrastructure assets – with a particular focus on local public
services – are visible on the gas distribution, airport and water
system industries.

43
GAS
− 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).
Enel Gas Network
F2i Reti Italia
2i Gas*
14.9%
85.1%
100%
75% 25%
Managed by F2i since April 2011
In the future,
these three
companies will
merge in a
single
operational
centre
G6
100%
Managed by F2i since
September 2011
* Formerly E.On Rete
1Pro-forma consolidated data (2i
Gas and G6 are included on a 12
month basis), net of IFRIC 12
principle effects and extraordinary
gains and losses.
• Rab (mil €): 2,684
• Proceeds (mil €): 6051
• EBITDA (mil €): 3261 (54%)
• Investments (mil €): 189
• Employees (#): 2,112
• Customers (#): 3,820,000
• Managed network (km):
56,833
• Concessions (#): 1,970
F2i Reti Italia
54%
of the EBITDA

44
GAS
Capillary presence of F2i Reti Italia
on the territory
F2i Reti Italia
− 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).
Municipalities with Enel Gas Network
Municipalities with E.on
Municipalities with G6

45
GAS
− The group dimensions allow significant investments that favour
development, innovation, efficiency and safety of the network:
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

46
− 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
AEEG1 request
~30’
F21 Reti Italia
Group
60’
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.

47
Incentives 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%
% incentives
compared to total
% market
share
844
114
696
1.314
273
Others
2.9632.311 379 17%
23%
2%
6%
52%
− The investment commitment creates a quality service, recognised and
awarded by the gas authority!GAS

48
− 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.
GAS

49
− 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 km2 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.
AIRPORTS

50
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.).

51
AIRPORTS
− Italy’s airport system is characterised by:
o an excessively large number of airports with low-specific traffic,
particularly in northern and southern Italy (lower concentration in the
south)
o mainly public ownership
o uncertainty of rate regulations
o lack of investments (no significant interventions in the main airports in
recent years).
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
− SEA and Gesac represent two exceptions in
the national situation:
o 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
o Capodichino is located in a «low-density»
airport area, even though it has a large pool
of potential users with a significant
development potential.
o Together, these two companies managed
34.2 mil/passengers in 2011, which is
about 23% of the total Italian traffic.
Airports >10 mil passengers
Airports >5<10 mil passengers
Airports >2<5 mil passengers
Airports >0.25<2 mil passengers
Airports <0.25 mil passengers
High concentration area

52
− F2i started in the airport industry with a particular know-how and a track
record with a bright growth perspective:
o thanks to Gesac, F2i «brought back» important company-generated cash
flows to Italy, which they used to foster development and growth
o thanks to SEA F2i recognised the local bodies’ needs to sell stretegic
assets to Italy to reduce their 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.
AEROPORTI

53
WATERS
− F2i approached the water system with the acquisition of 40% of
Mediterranea delle Acque (“MdA”) in 2010.
− The company manages the integrated water system of both the
municipality and province of Genoa; and provides water to about 875,000
inhabitants.
− It reports to the Iren Group, a multi-utility group in Genoa, Turin, Parma
and Piacenza, born from the merging of Iride and Enìa.
− Thanks to its long water
network of over 2,500 km and
its long sewage and
depuration network of 1,600
km, MdA delivers about 95 mil
m3 of drinkable water to the
network.
− Its current area plan includes
about 700 mil € of
investments, of which 600 mil
€ have yet to be placed.
− MdA employs about 415
people.
100% 100%
60% 40%
49% 66.50%
IREN SpA
IREN Acqua e Gas SpA
MdA
F2i
F2i Rete Idrica Italiana
AM.TER. IDRO-TIGULLIO

54
WATERS
− Following MdA’s successful case, F2i and Iren are currently and
progressively assigning the water activities of the Group to MdA in the
Emilia Romagna region (provinces of Piacenza, Reggio Emilia and
Parma).
− This operation rationale is to dimensionally increase MdA following, for
instance, a geographical proximity pattern.
− MdA’s dimensions (turnover and
EBITDA in 2011 were, respectively,
about 130 mil € and 48.5 mil €)
may actually double at the
completion of the assignment.
− This operation will develop in three
different steps: each will focus on
assigning activities in each of the
three provinces. Based on the
political opportunities available,
both partners decided to start in
the province of Parma (this first
step – currently facing opposition
by the Water System Agency of
the Emilia Romagna Region –
should be completed by December
2012).
Water network Emilia
Romagna region

55
The objectives of F2i’s operations are:
− to access a strategically crucial sector in Italy that requires
important investments, and bring fresh financial resources to
develop the managed assets
− to create a partnership with IREN, the major operator in the utility
sector in Italy. This partnership scored a positive result with the
MdA operation and is currently developing further through the
aggregation of the IREN Group’s water system assets in the Emilia
Romagna region
− use the growth and consolidation opportunities of a
fragmented sector to create a «national champion».
To achieve this, F2i will operate on new initiatives with the objective
to aggregate some of the major national entities of this sector.
ACQUA

56
− An example of a new industry, in which F2i could invest, is the waste
disposal management (collection, treatment, disposal and energy
recovery).
– The national waste market presents high levels of «pulverisation»: in
2011 the nine main operators have managed only 7% of the total volumes:
Waste
management
− On the contrary, the European waste management market – particularly in
France, Germany and UK – is made of large operators (Veolia, Remondis,
Sita Suez, Biffa).
Main operators on the Italian market – per volumes disposed
Business model
Collection YES YES YES NO YES NO NO YES NO
Treatment YES YES YES NO YES NO NO NO NO
Waste to energy (WTE) plants YES YES YES YES YES YES YES YES YES
Landfills YES YES NO YES YES YES NO NO NO
3,382
2,800
1,800
1,100 1,017
600
331 208 90
0
1,000
2,000
3,000
4,000
Hera A2A AMA
Roma
Veolia Iren Acea APS
Acegas
Waste
Italia
ACSM

57
− We have reasons to believe that the Italian waste management market will have a
concentration similar to the ones of our neighbouring countries, to overcome its
current inefficiency and the constant environmental emergencies that it causes (Naples,
Palermo, Lazio, etc.).
− Over the past two years, F2i has looked many times for an entry point in this sector,
analysing different previous opportunities that were not finalised (HeraAmbiente,
Acegas, Marcegaglia Group’s plants).
− Currently, the Fund is considering to acquire a significant share of Iren Ambiente
(the fifth biggest national operator), which operates in this sector with two WTE plants,
one landfill and 16 waste treatment plants.
− F2i and Iren would like to promote the company growth to a national level,
turning it into a «national champion» that could operate on the market as a
leader, together with Hera and A2A (currently the leaders in this sector).
− Among the growth opportunities abroad, the most solid projects already focus on
established entities, still characterised by significant revamping plans and projects for
the development of new sites.
− Particularly in Piedmont, IREN and F2i are considering the opportunity to
compete jointly for the management of the TRM, the new WTE plant with a
capacity of over 420,000 t/y, which is currently being built in Turin.
Waste
management

58
Conclusions

Conclusions
59
− The transformation of the local public service management that
began during the 90’s is still incomplete.
o The local bodies are still the majority shareholders in many
companies and:
 have no «fresh resources» to invest in the managed assets
 are very often forced to use the profits from their subsidiaries to finance their
own expenditures
 cannot therefore finance the development of new projects.
o It explained, in many cases, the local dimension persistency –
often even at a municipality level – of the managing companies.
It implies:
 a higher risk of political interference in the management
 difficulties to guarantee an adequate quality level of the services, because of
operational inefficiencies and a lack of scale economies
 inadequate competition on the market, which is becoming more and more
international.
− In addition, the aggregations accomplished during the 2000’s have
created multi-service, non-specialised companies which are often
gridlocked by internal contrasts due to local motivations.

Conclusions
60
It is therefore necessary today to actively pursue the aggregation
process of small local entities and to aim at creating «national
champions» specialised in a specific sector, capable of ensuring:
o synergies, efficiency and adequate rates
o high-quality services and technological development
o management transparency
o the development of existing assets and the creation of new
projects
o the development of services also in areas of economic
shortcomings (southern Italy).
In order to achieve these objectives, it is necessary to apply an
«institutional capitalism» pattern that can rely on the necessary
resources to develop infrastructures, finance the creation of big public
sector companies and ensure their management independence.

Conclusions
61
This requires a clear trade-off of roles on behalf of the government,
private entities and local bodies:
o the government needs to ensure strict timelines and profitable rates, and
oversee and regulate a correct market functioning through authorities
o the private sector needs to adopt a long-term overview on infrastructures,
bring «new resources» to prevent the burdening of target entities with
excessive debts, and improve the efficiency of management to reduce
expenses, while committing to a significant reinvestment of profits
o local bodies need to keep their minority shares in the managing companies
to oversee the quality of the services provided to the citizens.
F2i is a clear example of this trade-off 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 its
management and controlling its development.

62
– The Fund virtually exhausted its resources well before the earliest
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.
Conclusions
This achievement led F2i to launch a new Fund that will allow its work
to progress further.
F2i wants to take an active role in the evolution of the local public
service sector, continuing with the same model applied to the gas
distribution, airport and the integrated water cycle sectors.

63
− The new Fund will allow F2i to:
o reinforce its presence wherever it was already participating
(capital injections to support development, acquisitions of new
partners, etc.)
o inject new investments in industries already established
o launch new industries starting from the investment opportunities
determined by Italy’s current economic-financial situation.
Conclusions
To allow the progress of group
creations, leaders in their own
sector, and to finance the
development of national
infrastructures.

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