What can the world of finance do to relaunch infrastructure in Italy, FUIRSTonline asked Massimo Pecorari, Unicredi head of infrastructure and Project Finance on the occasion of the recent QPLab promoted in Rome by Bocconi professor Gilardoni. Here are his answers.
FIRSTonline- Doctor Pecorari, how do you define the quality of projects for infrastructures in the financial field?
PECORARI – The first thing to do is the feasibility analysis of a project.
In Italy there must be improvements in the planning and programming phase. Like what happens abroad, a standardization of the process is needed starting from the feasibility study of the work, based on a careful cost-benefit analysis that takes into account all the possible alternatives.
As part of the feasibility study, the public administration will have the possibility of evaluating the financial sustainability of a work, thus promoting only projects that can actually be financed.
Even the decision relating to which tool/procedure (contract vs. concession) to use for the construction of a new work is subject to a prior feasibility analysis, like what happens in other countries and as suggested by the ANAC (in the Draft of Determination of guidelines for the award of public works and service concessions).
In the UK there is a consolidated practice in terms of feasibility analysis which allows you to explore all the main aspects of a new project and to identify its real priority and the most appropriate method for its implementation.
By way of example, the evaluation of the benefits for the high-speed railway section (London – West Midlands) takes into account:
– transport demand;
– passenger demand and their travel preferences;
– connection with the rest of the territory;
– reduction of travel times;
– strengthening the reliability of timetables etc.
The costs are those associated with the construction of the section:
– construction costs;
– costs for the purchase of rolling stock (passenger demand and their travel preferences);
– operating costs etc.
The benefit/cost analysis (CBA) is carried out on the basis of the benefit per pound spent by the UK government without taking into account potential private investment.
This is followed by a benchmarking analysis, based on the costs and profitability of the investment (Public Sector Comparator) to evaluate whether it is more convenient to carry out the project with public resources or with the involvement of private capital (PPP.)
An ex post evaluation (POPE “Post Opening Project Evaluation”) is also envisaged. This evaluation is carried out every year and an ad hoc report is published.
The evaluation criteria are set at the government level (environment, safety, economy, accessibility and integration).
FIRSTonline – Is there anything else finance needs to take into account to support quality infrastructure projects?
PECORARI – Yes, there are at least two other aspects to consider. The Debat Public and the authorization process. An element that penalizes our country is the lack of concertation/participation with the territories concerned (Debat Public on the French model). Sharing with future users reduces conflicts and facilitates the realization of the work on schedule.
France, United Kingdom, Holland, Germany and Sweden have written and publicly available guidelines for the preventive evaluation of public works. The results of the analyzes are also published.
In the United Kingdom the analysis is even more detailed and the public decision-maker, before proceeding with his evaluations and defining the priorities of the works, publishes the ongoing analyzes allowing individual citizens to provide comments and/or ideas.
Then there is the authorization process: in order to limit conflict and reduce construction times for a work, it is necessary that this is entrusted only after having obtained the necessary authorizations from the competent administrations (eg calling tenders for definitive projects or anticipating the conference of services to the preliminary project).
FIRSTonline, what are the five most relevant aspects that make an infrastructural work eligible for financing?
SHEEP - Here they are:
1. First of all, a certain and stable regulatory context over time: any investor (both banking and bond investors) wants to have visibility on their returns, in a medium and long-term time horizon characterized by a high degree of predictability .
2. Adopt standard contractual schemes shared with the lenders.
3. Provide for a balanced allocation of risks between public and private, adopting forms of traffic/market risk mitigation otherwise unacceptable by private investors.
4. Public support, where needed, with:
– guarantees from the Grantor/Public Administration to cover certain risks (in particular traffic/market risk);
– public grants (eg MET) aimed at allowing them to be financed; to this end it is essential to identify a limited number of priority projects for the country on which to concentrate efforts in terms of contributions/guarantees/approval process;
5. accessibility to the capital market (in the legal form of the Project Bond), through instruments complementary to bank financing, which can be encouraged through greater involvement of public institutions such as EIB, SACE and CDP aimed at making first loss guarantee instruments available for expand the portfolio of bankable projects;
FIRSTonline – What investment strategies do you intend to pursue as Unicredit in the Italian infrastructure sector?
PECORARI – UniCredit confirms a strong commitment to support the country's infrastructure plan, proposing various forms of medium-long term financing (loan / project bond) to support infrastructure projects (brownfield and greenfield) of a certain size with particular attention to transit projects in the strategic axes (TEN-T).
An ad hoc team has been set up whose task is to define tailor-made structures for individual projects, evaluate the possibility of combining the traditional loan with market structures (such as project bonds) to attract a wider class of investors.
Infrastructures are increasingly a reference asset class for medium-long term investors.
According to the data collected by Preqin, the current trends are the growth of the asset price and the average deal ($549mm in 2014, up 67%). In the face of declining yields, appetite remains high, around 67% of investors need to increase the share allocated to infrastructure assets.
FIRSTonline – Can there be virtuous examples of quality infrastructure projects at a national and international level?I
PECORARI – Yes. For example, the French transport system. For these reasons: Clear definition of transport policy objectives with significant central level planning (LOTI “Loi d'orientation des transports intérieurs”) including ex ante and ex post evaluation for infrastructure projects.
There is a national infrastructure plan with a medium-long term horizon, the result of an agreement between Parliament and local authorities.
Presence of participation tools (“Debat Public”) already from the preliminary stages of the individual projects.
Presence of standardized and shared convention models (above all for the more relevant aspects) with the lending banks.
There is an acceptable allocation of risk between the public and private sectors thanks to the positioning of only the construction and availability risk on the private sector. The traffic risk remains with the Granting Authority. This allocation has allowed the financing of large strategic works in the high-speed railway sector such as HSL Bretagne Pays de Loire (€ 3.4bn project cost of which € 990mn contributed by the French State) and Nimes-Montpelleir (€ 2.2bn project cost of which € 824 million of contribution from the French State).
