vito gamberale - infrastructures in italy, the role of infrastructure funds

AIFI Annual Meeting 2014Financing the recovery

Infrastructures in ItalyThe role of infrastructure funds

Milan, March 31st 2014

Vito Gamberale

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TABLE OF CONTENTS

– Evolution of the Italian infrastructure system Page 3– Lack of public funding, privatisations Page 6

– Modern financing and infrstructure funds Page 8– The role of F2i Page 13

– Conclusions 4

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Evolution of the Italian infrastructure system

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Italy was historically recognised for being a country with a great tradition of building big infrastructures:–Italy was the first country in the world to have a highway (Autostrada dei Laghi,1924)

–In 1970 the extension of the Italian highway network (3,913 km)1 was second only to the German highway system (4,461 km)1

–During the 60s Italy ranked among the “leading countries” in nuclear power production (3rd biggest installed power – 640 mw – in the world, after the USA and Great Britain)

–Italy was among the first countries to develop hydroelectric plants on a large scale; in 1960 these plants had already achieved the current installed capacity (about 20 gw) and covered almost 100% of the national power demand

–During the 80s Italy was the first country, together with France, to launch the project of a high speed railway network (Rome-Florence)

The development of infrastructures contributed to modernise Italy as well as to emancipate the country from an economic point of view, helping to move from a rural to an industrial society.1 Data from: Eurostat.

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Infrastructures in Italy have been mainly supported by public financing, through institutions and public national bodies...

– IRI: transportation (Autostrade, Alitalia, Tirrenia), telecommunication (STET, RAI), building sector (Finmeccanica, Fincantieri)

– ENEL: power energy

– ENI: natural gas transportation and distribution (SNAM, Italgas, etc.), petrochemical sector (Snamprogetti).

…and local bodies:– Mainly former municipality bodies, operating in the integrated water cycle management,

local distribution (power and gas), waste disposal management (especially in northern Italy), local highways, airports, intermodal ports, etc.

Public funding allowed to develop world leading infrastructure networks.

This model worked usually well, while the government could support development through national debt.

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At the beginning of the 90s, Italy was involved in important processes that forced the country to radically change its economic policy choices:

–the First Republic’s economic crisis

–economic decline: Italy’s GDP constantly ranks below the European average

–the adoption of the Euro, accounting for the need to drastically reduce deficit, debt and inflation with very strict financial actions

–the European Community urged a reduction of the public commitment in the member states’ economies (Commissioner Van Miert will take advantage of Italy’s particular weakness to «push» the country a great deal).

The following governments were forced to cut public expenditure and “cash in”, and could no longer maintain their role of investors for building and managing public works.

Evolution of the Italian infrastructure systemLack of public funding, privatisations

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Evolution of the Italian infrastructure systemLack of public funding, privatisations

The government can no longer play the role of investor and is more and more choosing to leave industrial sectors, especially infrastructures:

– During the 90s, the most important Italian companies who counted on the investments of the state, became private – partially or completely and with different results (ENI, ENEL, Telecom, Autostrade, etc.);

– In the early 2000s, there were attempts to privatise local public companies (often without completion) such as multiutilities (through a listing at the Stock Exchange: ACEA, A2A, IREN, HERA, etc.) or airports (mainly through direct sale to private entities: Rome, Naples, Venice, Turin);

– The infrastructure companies that remained totally publicly-owned, or at majority share, progressively suffered from a lack of public financing (poor investments for the local needs), unclear management, and from the inefficiency caused by asset fragmentation, especially at a local level.

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Modern financing and infrastructure funds

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Today, big financing aggregates are mainly provided by investment funds, which are mostly based on private – usually institutional – shareholderships (banks, pension funds, insurance companies, etc.).

Over time, the assets and the related investment capability moved from public (with poorer and more indebted governments) to private management, both in Italy and in Europe.

– Private entities are able to aggregate and channel the resources of thousands of small and big investors, directly or through an increasing number of modern financing tools; they have therefore acquired (more or less consciously) the role of economic and development "engine".

– This contributed to a progressive "financialisation" of the economy.

– A process, therefore, in which significant investments and big projects are no longer accomplished with the sole objective of developing but also to provide for adequate returns for the resources made available by private investors (regardless of whether they are small savers or big operators).

Today, investment funds represent an innovative investment tool, an alternative to traditional asset classes (bonds and equities). They vary based on the investors’ time requirements and risk expectations.

The major types are:

‒ Private equity funds → short/middle-term

‒ Real estate funds → middle/long-term

‒ Debt funds → middle-term

‒ Infrastructure funds → long-term

Private equity funds usually provide opportunities against a background of high risk-return ratios and appeal to investors looking for a quick way-out (the so-called "revolving door" or "hit and run" investments);

Real estate funds, traditionally a beloved niche for Italian investors, have been affected by the current financial crisis, which created significant issues for returns (high vacancy rates, increased taxation) and value in the sector;

Debt funds represent an emerging opportunity that has yet to be fully understood, especially as they address SMEs. These funds are expected to replace the positive role held by special credit institutions in the past;

Infrastructure funds allow for more stable returns and protection from economic cycles. 10



On a background of increasingly complex, unstable and interconnected markets, infrastructure funds – based on regulated assets that therefore provide stable flows and limited risks – offer professional long-term investors:

from a financial point of view:‒a constant yield in time‒a good future capital appreciation of the investment‒an acceptable risk-revenue ratio

from an economic point of view:‒protection from inflation rate variations (inflation-linked returns)

as for portfolios:‒a decorrelation from the economic cycle and from stock exchange performances‒absolute returns

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Infrastructure funds have appeared on the Italian market just a few years ago, and could indeed both satisfy infrastructure needs and the investment opportunity requirements of institutional financing.


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In Italy, as well as in other countries, such benefits are only found with funds that invest in existing infrastructures (so-called "brownfield").

The difficult regulatory clearances for the development of new projects in Italy make it impossible for greenfield investments to meet the investors' time requirements and risk level expectations (Except fo the new urban railway in Mestre, no important projects have been carried out in the past 10 years).

Modern financing and infrastructure fundsThe role of F2i

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– Among other infrastructure funds, thanks to a fundraising of 1,852 mil €, F2i is the biggest fund operating in Italy and counts among the biggest country infrastructure funds worldwide.

– F2i was created as a private, yet institutional tool by high standing sponsors, who contributed to the establishment of the Fund’s solid reputation:

the government, through CDP the networks of former banking foundations major Italian banks (Unicredit, Intesa SanPaolo)

private welfare funds Important foreing investors life insurance companies and pension funds

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– F2i was conceived in 2006 when Italy finally had the necessary conditions to foster the creation of a big infrastructure fund:o A clear need of a new wave of local privatisations to respond to a lack of

public financing following a time of big central privatisations that, contrary to what is usually believed, led to more than satisfying results;

o fragmentation (still ongoing) in many infrastructure areas (gas distribution,water services, environment, etc.);

o the need to aggregate the numerous small operators in each business area to create «national champions» specialised in the various infrastructure sectors following the model of big Italian and foreign players.


F2i was developed as an innovative tool for Italy, a private yet institutional fund that can aggregate the existing infrastructures in industries using funds from this asset management to allow for their development.

– In just a few years, F2i has created seven business areas now reunited in a structured group, committing over 2,200 mil € (86% of total fundraising of Fund I+Fund II).

Finanza moderna e fondi infrastrutturali - L'esempio di F2i

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11

Agreements to be finalised

Ongoing closing

72% 100.0%

100% 40%

49.0%

100%

60.0%

100% 70%

67.7%

44.3%

87.7%

100.0%

53.8%

85.0%

10.2%

15.9%

100%

49.8%

26.3%

2.165.3 97.7%31.7 1.4%20.3 0.9%

2.217.485.4%

Log.networks 55.0 2.5%

10.0%222.5TLCs

11.4%

132.5 6.0%F2i Energie Rinnovabili

Metroweb GE

SIA

Metroweb Italia

Metroweb

Brescia

Metrobit

252.0

Gas

SAGAT

Iren Ambiente

F2i Ambiente

TRM

F2i Aeroporti GESAC

F2i Rete Idrica Italiana

Mediterranea delle Acque

Fund I+II487.6 22.0%

Committed

F2i Reti Italia

2i Rete Gas

Highways

237.5 10.7%

31.4 1.4%

Airp

orts

Rene

wab

les

746.9 33.7%

Wat

erEn

viro

nmen

t

Infracis

Alerion CP

HFV

SEA

DismissionsFund management costs

TOTAL COMMITTED% of raised funds

1 For SAGAT all commitments until 2014 are considered (share acquisition by other private partners)


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− F2i offered a new business model for infrastructures in Italy, operating as a “public company” and creating a structured group of companies and company industries, each representing a benchmark in their respective sector.

− The companies where F2i holds the majority of shares or plays an important role in their administration, registered in 20131:o aggregated turnover: around 2.200 mil €o EBITDA: around 850 mil € (EBITDA margin: 40%)o employees: around 10,000o investments: around 480 mil € (55% EBITDA)

1Aggregated business data, including SIA (ongoing closing).

In 2013, F2i subsidiaries have invested almost 55% of their EBITDA.

• F2i developed partnerships with institutions and major national and international operators

• F2i also has made it possible for a wide number of important infrastructures to return under Italian ownership


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F2i’s partners “Re-nationalisations”

Modern financing and infrastructure funds – The role of F2i

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F2i was able to combine the development of its own industrial plan with:− modest financing (a management fee of 0.8% vs. an average 2.4% – among the lowest on the market with no revision since 2010);− good returns for the investors (net yield above 4% since 2010); − value creation (certified by an independent advisor).

F2i's portfolio at current value vs F2i's participation fair market value (bil €)

(1) Transaction costs, management and other expenses are not included. The amount of 31 bil € refers to the expenditure for the acquisition of shareholdings inInterporto Rivalta Scrivia and Enel Stoccaggi.

(2) Includes: fair value of investee companies, sale profits, depreciations, remaining funds for dividends and reimbursements. The amount of 38 mil € refers to the returns from the sale ofshareholdings in Interporto Rivalta Scrivia and Enel Stoccaggi.

31 38

1,555 1,886

550212

F2i portfolio (overall expediture ) on(as of 31 December 2013) (1)

Fair value (2) Dividends from the fund Gross generated value(as of 31 December 2013)

1,586

1,924

Disposedshareholdings

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(FIRST FUND)

– F2i was a "first time fund": its first fund raising was totally based on the credibility of its management. Its track record (achieved thanks to its First Fund) made more realistic and, therefore, easier the fund-raising for the Second Fund, launched mid-2012.

– The Second Fund's closing was achieved with a group of sponsors that included both the investors of the First Fund and new investors, who subscribed 575 mil € equities over a target of 1.2 bil €.

– The fundraising among "limited partners" (insurance companies, welfare funds and pension funds) has already been activated, resulting to date in a total 750 mil € subscribed capital.

Modern financing and infrastructure funds – The role of F2i

CDP 100

Banca Intesa San Paolo 100

Unicredit 100

Banks 300

Fondazione Cariplo 10

EnteCarifirenze 40

FCR Lucca 20

Fondazione CRTCompagnia San Paolo 60

FCR Cuneo 30

FCR Padova e RovigoFCR Sardegna 25

FCR Forlì

Foundations 185

Cassa Geometri 30

Inarcassa 60

Welfare funds 90

Total A Shares 575

Fund II SubscriptionsA Shares – Sponsors

First Fund sponsors participating in the Second FundFirst Fund sponsors not participating in the Second FundNew sponsors

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(FIRST FUND)

Despite the fund was launched during the worst time for Italy's international credibility, its fund-raising has been recently attracting increasing attention from foreign investors (particularly from the middle-far east), who are overall more and more attracted by the so-called PIIGS countries.

Based on F2i's experience, such investors look for:

– long-term investments, with stable and foreseeable yield;

– healthy and skilled management based on efficiency;

– credible authorities that regulate the different infrastructure areas, able to ensure for development and able to offer opportunities rather than dangers (during the diligence step to access the Fund, some investors requested to meet the representatives of 4-5 authorities);

– similar and matching objectives with other investors, that won't use this SGR as an arena for meeting and plot for their own interest only;

– the possibility to co-invest directly in the Fund's assets (usually with an average ratio of 1:2), thanks to technical expertise and specialisation in the field they can offer.

Italy should generate and ensure the conditions demanded by foreign investors, so that their new interest in the country could thrive in security and foster development.The core conditions include the requirement for infrastructures to have significant sizes and avoid fragmentation, to be able to ensure adequate flows both for financing development and reward investments.


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– Many infrastructure assets have been created and managed according to the (often political) needs of the local entities in which they are set, far from a global vision of strategic network for a «country economic system

– Even the so-called «multi-utility» companies have, at best, only an interprovincial outreach and manage local assets in very differentiated segments (which does not favour a sector specialisation).

– The big central public companies – often underestimated – proved to have great management skills and high transparency. On the contrary, today local companies represent the industrial model with the biggest issues in Italy.

– Such companies frequently focused an exaggerated amount of attention on local/political balance more than on development. Moreover, some of their managers aim to accomplish their own individual objectives rather than focusing on a transparent and targeted strategy.

– These obstacles prevent a united and efficient management of infrastructure assets in Italy.

– To date the concepts of «network» and «industry» are still missing in the various sectors.

Despite some big players (eg. ENI, ENEL, Atlantia), many infrastructure sectors in Italy are very fragmented and also characterised by a localistic management approach.

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– In some sectors (water, waste, etc.) the necessary action is to create what was achieved in 1963 by the first centre-left government in the energy industry – with the creation of the “giant” ENEL starting from many small local operators.

– Only big and specialised players (such as ENI, ENEL, Atlantia, etc.) can generate enough cash flow to create new investments.

– It is necessary for each player to specialise in one single sector (or «industry») in order to allow for an efficient and high quality management. The multi-utility companies’ efforts to aggregate into «macro-utility companies» shows how the parallel management of different businesses affects the service efficiency and the companies’ expenses in a very negative way.

– It is no longer the government alone that can play the role of aggregator today, as now public financing – which could drive Italy’s infrastructure development in the past – is now lacking. Therefore, an efficient management of infrastructures can be achieved only through private financing – as long as this maintains a positive non-speculative approach.

In the infrastructure sector, Italy should promote homogeneous aggregations able to create «national champions» in the different sectors.

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To be able to respond to this new attention of foreign investors, Italy should focus on the privatisation of local assets to facilitate their aggregation and, at a second stage, their development.

The inflow of new assets would provide fresh air for public resources and a new drive for investments, which would in turn foster Italy's economic recovery.

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Conclusions

Conclusions

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− Infrastructures – financed in the past with public funds – have driven Italy’s development for decades.

− The ownership evolution (from public to private), which started in the 90s with the first privatisation changes, has not been completed, and is causing market fragmentation as well as, in some cases, management inefficiency.

− These deficiencies have limited and brutally blocked the development of infrastructure at times, blocking the whole national economy as a result.

− Today, Italy has much work to do to catch up: it is necessary to close the gap within the infrastructures, which represent the connective tissue of any modern economy.

− A lack of public financing can be replaced by modern private financing tools (such as infrastructure funds), able to aggregate huge private financial assets and to make these available to develop infrastructures.

− Such tools can attract renewed attention, as in the past months, from foreign investors now looking at Italy.

Conclusions

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− To function properly, these infrastructures have to be created and managed as networks. They have to develop and be coordinated rationally: their management should succeed on a “country system” basis, to replace the «parochial types of management» and financial speculation.

− In Italy, as in other big countries, it is necessary to concentrate and centralise such sectors, to create a few «national champions» able to ensure adequate investments, efficiency and transparency in managing the assets, according to the model applied so far by F2i.

− This process can also be activated with a new wave of privatisations, this time focusing on local assets able to benefit from the renewed interest of foreign investors in Italy.

− A special consideration on this topic should include the new highways in Lombardy (also known as the Autostrade per l’Expo), now assigned to public companies that are preventing their creation from completion within the required schedule.

− Infrastructure funds can represent an “aggregating” tool, combining industrial needs of infrastructures and the investors’ return expectations, hence fostering the inflow of foreign assets into Italy and, possibly, its recovery.

vito gamberale - infrastructures in italy, the role of infrastructure funds

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