UNIT TECNICA FINANZA DI PROGETTO

CIPE PRESIDENZA DEL CONSIGLIO DEI MINISTRI

CIPE Presidenza del Consiglio dei Ministri CIPE Presidenza del Consiglio dei Ministri CIPE Presidenza del Consiglio dei Ministri CIPE Presidenza
del Consiglio dei Ministri CIPE Presidenza del Consiglio dei Ministri CIPE Presidenza del Consiglio dei Ministri CIPE Presidenza del Consiglio dei
Ministri

UTFP: 100 Questions and Answers

PRESIDENZA DEL CONSIGLIO DEI MINISTRI

CIPE Presidenza del Consiglio dei Ministri CIPE Presidenza del Consiglio dei Ministri CIPE Presidenza del Consiglio dei Ministri CIPE Presidenz
 FOREWORD

Over recent years Project Financing and, more generally, Public-Private Partnership
(PPP) have been the focus of growing attention at both European and national level.
Difficulties related to public finance as well as budget constraints imposed by Monetary
Union membership have certainly encouraged the search for more efficient financing
patterns alternatively to merely resorting to State resources.

Although PPP schemes are nowadays very widely employed for public works
implementation, not always are such instruments applied adequately or upon full
knowledge of their related operational mechanisms. In such perspective, the Project
Finance Technical Unit (UTFP) at the Presidency of the Council of Ministers (Department
for Economic Policy Programming and Coordination) can contribute to re-defining
interaction between public sector and private sector and enhancing favourable context
conditions through assistance, training and promotion activities aimed at spreading PPP
culture. We thus deemed it advisable to produce a synthetic vademecum ensuring clarity
of terminology and concepts, and aiming at dissemination of a common and uniform
language, notably for public operators approaching PPP for the first time.

We wish the present volume will prove a helpful working tool for Public Administrations
as well as all sector operators.

Eventually, I personally wish to thank all those who have passionately contributed their
knowledge and devoted their expertise to this initiative.

Prof. Fabio Gobbo

Under-Secretary of State

Presidency of the Council of Ministers

UTFP: 100 Questions and Answers

INTRODUCTION

The Project Finance Technical Unit (UTFP) undertook to produce a synthetic and user-
friendly publication addressed to all those who, within Italys Public Administration and
not solely, deal with Public-Private Partnership and Project Financing. The UTFP
components who contributed to enlarging the present text thus wished to reply to most
frequently posed questions as clearly as possibly, and invite to further survey Public-
Private Partnership undoubtedly a key issue for Public Administrations nowadays.
Adoption and correct implementation of PPP schemes can certainly optimise public
spending and ensure more efficient and better quality services to citizens namely, PPP
main beneficiaries.

Hence the guiding and supporting role underlying the whole of UTFP activity.

Manfredo Paulucci de Calboli

UTFP Coordinator

Presidency of the Council of Ministers

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UTFP: 100 Questions and Answers

UTFP: 100 Questions and Answers

The present publication was contributed by the following UTFP components: Giuliana
Bo, Franco Ercini, Gabriele Ferrante, Pasquale Marasco, Laura Martiniello, Ilaria
Paradisi, Gabriele Pasquini, Maria Samoggia, and Rosalba Cori.

The present UTFP-CIPE-Presidenza del Consiglio dei Ministri publication is aimed at

information purposes. Contents may be used providing that the source is explicitly
mentioned. Publication and sale, whether total or partial, of the document are not
authorised.

Translation and Editing: Rose Epifani

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UTFP: 100 Questions and Answers

LIST OF QUESTIONS

1. What is UTFP?........................................................................................ 11

2. What are UTFP institutional tasks? ............................................................ 11

3. What are UTFP activities? ........................................................................ 12

4. What assistance activities are provided by UTFP to Public Administrations? ...... 13

5. What assistance is delivered to administrations for identification of initiatives

compliantly with PPP actual logic? ............................................................ 14

6. What is technical, juridical and economic-financial assistance? ...................... 14

7. How is the UTFP assistance procedure activated? ......................................... 15

8. What documentation shall be transmitted to UTFP?...................................... 15

9. Shall the administration communicate to UTFP decisions taken as to assistance

requested and/or intervention outcome? .................................................... 16

10. How does UTFP inform on its own activity? ................................................. 17

11. Where are UTFP documents made available? ............................................... 17

12. What is PPP? ......................................................................................... 18

13. How are PPP-eligible public works classified? .............................................. 19

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UTFP: 100 Questions and Answers

14. What are PPP interventions main characteristics? ....................................... 19

15. What forms of PPP are identified at European level? .................................... 20

16. What forms of PPP are carried out in Italy? ................................................. 21

17. When are PPP schemes advisable? ............................................................. 23

18. What are PPP advantages? ....................................................................... 23

19. What are PPP disadvantages? ................................................................... 24

20. What is Project Financing? ....................................................................... 24

21. What are the differences between PPP and PF? ........................................... 25

22. When are PF schemes advisable? ............................................................... 25

23. What are PF advantages? ......................................................................... 26

24. What are PF disadvantages? ..................................................................... 27

JURIDICAL INSTRUMENTS AND PROCEDURES .......................................................... 28

25. What is PPP reference legislation in Italy? .................................................. 28

26. What are works concessions? .................................................................... 28

27. How are works concessions awarded?......................................................... 29

28. What preliminary fulfilments are required by current legislation to set up a PPP
intervention for construction and management of public infrastructures? ......... 29

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UTFP: 100 Questions and Answers

29. How are interventions inserted into public works programming instruments? .... 30

30. What is a Feasibility Study? ...................................................................... 31

31. How does Art. 144 (Code) apply? ............................................................... 31

32. How does Art. 153 (Code) apply? ............................................................... 31

33. When may proposals be submitted as by Art. 153 (Code)? .............................. 32

34. What subjects may submit proposals as by Art. 153 (Code)? ........................... 32

35. What documents shall be included in the proposal submitted by the Promoter? . 33

36. What is a draft contract? ......................................................................... 34

37. What is a Business Plan? .......................................................................... 35

38. What is asseveration?........................................................................... 35

39. What fulfilments follow the proposal submission phase? ................................ 36

40. How is proposal evaluation performed? ...................................................... 36

41. What are the implications of acknowledging a proposal as being of public

interest? ............................................................................................... 37

42. How is a tender carried out as by Art. 155 (Code)? ....................................... 37

43. What is a Special Purpose Vehicle? ............................................................ 38

44. What causes the extinction of construction and manangement concessions ? .... 38

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UTFP: 100 Questions and Answers

45. What are the concessionaire rights following the resolution of a construction and
management concession? ......................................................................... 39

46. What in case of concession resolution due to concessionaire? ......................... 39

47. What are service concessions? .................................................................. 40

48. How are service concessions awarded? ....................................................... 40

49. What is sponsoring? ................................................................................ 41

50. How are sponsoring contracts awarded? ..................................................... 42

51. What is financial lease for public works ? ................................................... 42

52. How is a leasing contract for public works awarded?..................................... 42

53. What are urbanisation work promoters? ..................................................... 43

54. What are tourist settlement promoters? ..................................................... 44

55. What are public assets concessions for valorisation and capitalisation? ............ 44

56. What is a mixed company? .................................................................... 45

57. How are private partners selected in mixed companies?............................. 46

58. What are Urban Transformation Companies? ............................................... 46

ECONOMIC-FINANCIAL ASPECTS ........................................................................... 47

59. What are the aims of a Feasibility Study? ................................................... 47

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UTFP: 100 Questions and Answers

60. What is Cost-Benefit Analysis? .................................................................. 48

61. What is Financial Analysis? ....................................................................... 49

62. What is the PPP Test? ............................................................................. 49

63. What are the aims of a Business Plan? ........................................................ 50

64. How is a Business Plan structured? ............................................................ 51

65. What are Business Plan main inputs? .......................................................... 51

66. What is a previsional Profit and Loss Account? ............................................. 52

67. What is a previsional Balance Sheet? ......................................................... 53

68. What are previsional Cash Flows? .............................................................. 53

69. What is Investment Economic-Financial Balance? ......................................... 54

70. What is investment economic convenience? ................................................ 54

71. What does NPV stand for? ........................................................................ 55

72. What does IRR stand for? ......................................................................... 56

73. How is the SPV shareholders profitability measured? ................................... 56

74. What is financial sustainability? ............................................................. 57

75. What is Debt Service Coverage Ratio? ........................................................ 57

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UTFP: 100 Questions and Answers

76. What is Loan Life Cover Ratio?.................................................................. 58

77. What are PPP interventions funding sources? ............................................. 58

78. What forms of own capital are envisaged? .................................................. 59

79. What is an intermediate capital? ............................................................... 60

80. What is Debt and what are its forms? ......................................................... 60

81. What are financial costs? ......................................................................... 61

82. What are banking fees? ........................................................................... 61

83. What are pre-amortisation interests? ......................................................... 61

84. How is maximum sustainable debt determined? ........................................... 62

85. How is the bank loan interest rate determined? .......................................... 62

86. What is a bank loan base rate? ................................................................. 62

87. What is the loan base rate spread? ............................................................ 63

88. When are grants issued? .......................................................................... 64

89. What forms of grants are issued?............................................................... 64

90. How can optimum grant be quantified? ...................................................... 65

91. What is the generally most convenient issuance pattern for Public
Administrations? .................................................................................... 65

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UTFP: 100 Questions and Answers

92. What are PPP interventions main risks? ..................................................... 66

93. What does risk transfer mean? ............................................................... 66

94. How are risks allocated amongst involved parties? ....................................... 67

95. What is a risk matrix?.............................................................................. 68

96. How are risks allocated in a concession contract? ........................................ 69

97. What does Value for Money stand for? ........................................................ 70

98. What is the Public Sector Comparator? ....................................................... 71

99. What are PSC model implementation main limits and difficulties? ................... 72

100. What types of PPP interventions can be deconsolidated from public budget? .... 72

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UTFP: 100 Questions and Answers

PROJECT FINANCE TECHNICAL UNIT (UTFP)

1. WHAT IS UTFP?

The UTFP (Project Finance Technical Unit) is a technical body established by Art. 7 of
Law n.144/1999 within Italys Inter-Ministerial Committee for Economic Planning (CIPE).

Pursuant to CIPE and related bodies transfer to the Presidency of the Council of
Ministers (PCM) (Law-Decree n. 181/2006 subsequently converted into Law n. 223/2006),
the UTFP is currently encompassed in the PCM Department for Economic Policy
Programming and Coordination.

2. WHAT ARE UTFP INSTITUTIONAL TASKS?

Pursuant to the above institutive Law, the UTFP is in charge of:

Promoting use of infrastructure financing techniques through private capitals

within Public Administrations, at both central and local level;

Assisting applicant administrations in all phases of Public-Private Partnership

(PPP) implementation process;

Supporting commissions constituted within CIPE relatively to Italys

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UTFP: 100 Questions and Answers

infrastructural interventions financing.

Legislative Decree n. 190/2002 (enforcing Law n. 443/2001 so-called Legge Obiettivo,

namely Framework Law for Infrastructures), extended UTFP tasks and enabled the
Ministry of Infrastructure and Transport to avail itself of UTFP so as to perform
preliminary analysis activities within strategic infrastructure projects.

Recent Legislative Decree n. 113/2007, amending the Code for Public Contracts as by
Legislative Decree n.163/2006, ascribed further functions to UTFP within measures
aimed at creating strategic infrastructures upon obligation, for contracting
administrations, to acquire UTFP feasibility study findings related to such
infrastructures. The obligation is aimed at verifying conditions for resorting to private
capitals relatively to infrastructures whose management offers potential economic
return.

3. WHAT ARE UTFP ACTIVITIES?

In order to fulfil its institutional tasks, the UTFP performs the following activities:

Organisation and provision of technical, legal and financial assistance for

applicant public administrations and, within them, promotion and dissemination
of financing techniques via private capitals;

Identification of activity sectors eligible for financing through private resources,

as well as detailing and itemising technical, juridical and financial specificities

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UTFP: 100 Questions and Answers

within each sector;

Collecting information, documentation and all and any helpful elements related
to project-design, technical-economic evaluation, calls for tenders and their
contracting phases, in order to simplify PPP use by administrations, also through
uniform operational schemes applicable to various typologies of public works and
public utilities services;

Providing support to evaluation of infrastructural interventions financed through

private capitals and subject to CIPE evaluation by virtue of their scope and
economic impact;

Monitoring PPP primary and secondary legislation;

Activating cooperation with institutions, bodies and associations operating in

sectors relevant for UTFP activity;

Developing cooperation with NARS consultative nucleus for implementation of

guidelines for regulation of public utilities services operating within CIPE.

4. WHAT ASSISTANCE ACTIVITIES ARE PROVIDED BY UTFP TO PUBLIC ADMINISTRATIONS?

Pursuant to its institutive Law, the UTFP provides support to contracting

administrations in identifying needs eligible to be fulfilled through works financed via
private capitals as eligible for economic management.

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UTFP: 100 Questions and Answers

Such support is referred to all PPP schemes and over all procedural phases, and notably
as to:

Initiative design for identification of: i) infrastructural needs eligible for

financing via private capital; and ii) most suitable procedures;

Evaluation of proposals submitted by promoters;

Over the tender, preparation of related call and documentation required to

compare, evaluate and select submitted tenders;

Over contract execution, assistance aimed at analysis of possibly arisen problems.

5. WHAT ASSISTANCE IS DELIVERED TO ADMINISTRATIONS FOR IDENTIFICATION OF

INITIATIVES COMPLIANTLY WITH PPP ACTUAL LOGIC?

UTFP assists administrations over implementation of PPP interventions by specifically

identifying most suitable partnership patterns consistently with PPP underlying
principles and assessing the economic sustainability and juridical feasibility of the given
intervention.

6. WHAT IS TECHNICAL, JURIDICAL AND ECONOMIC-FINANCIAL ASSISTANCE?

UTFP assists administrations free of charge and upon request throughout public

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UTFP: 100 Questions and Answers

infrastructure implementation by providing clarifications, elaborating advice and

drawing reports on related technical, juridical and economic-financial issues. Indications
and opinions issued by the UTFP are not binding for the applicant administration, which
is thus free to assume decisions deemed as advisable within its own discretionality
powers.

7. HOW IS THE UTFP ASSISTANCE PROCEDURE ACTIVATED?

UTFP assistance procedure is activated upon specific formal request transmitted by the
applicant administration via letter on headed notepaper bearing reference number and
specifying the issue of the required assistance.

Following to the application, the UTFP will contact the concerned administration so as
to either arrange a preliminary meeting or request the necessary documentation.

8. WHAT DOCUMENTATION SHALL BE TRANSMITTED TO UTFP?

It depends on the type of assistance required and procedural phase for which assistance
is requested. The documentation to be transmitted to UTFP shall in any case include all
the elements necessary to enable UTFP to perform its consulting and support activities.

For instance:

In case of requests for legal advice, it may be sufficient to provide a detailed

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UTFP: 100 Questions and Answers

description of the procedure adopted and main characteristics of the pursued

intervention;

In case of requests for assistance over evaluation of proposals submitted by

promoters (Art. 153 of Legislative Decree n. 163/2006), UTFP shall be provided with
the documentation prescribed by the above legislation.

9. SHALL THE ADMINISTRATION COMMUNICATE TO UTFP DECISIONS TAKEN AS TO

ASSISTANCE REQUESTED AND/OR INTERVENTION OUTCOME?

The Administration is not compelled to provide communications on the outcome of

interventions for which UTFP assistance has been requested. Such communication
would, in any case, produce the following advantages:

Inform on decisions taken by Administrations following to UTFP activity;

Enable UTFP monitoring on the status and outcome of assisted interventions;

Acknowledge and analyse successful cases, so as to identify best practices;

Acknowledge and analyse unsuccessful cases so as to identify related underlying

causes and adopt initiatives aimed at preventing, limiting and/or removing them.

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UTFP: 100 Questions and Answers

10. HOW DOES UTFP INFORM ON ITS OWN ACTIVITY?

In compliance with the aforementioned institutive Law, the UTFP will make known both
activities performed and results attained on an annual basis through elaboration and
delivery of an Annual Report and its subsequent transmission to CIPE by 31 July every
year. CIPE will then transmit the Annual Report to the two Parliamentary Chambers. The
Annual Report is also available on the UTFP institutional Website (http://www.utfp.it).

11. WHERE ARE UTFP DOCUMENTS MADE AVAILABLE?

The UTFP institutional Website (http://www.utfp.it) publishes technical documents,

studies and reports drawn up throughout implementation of UTFP institutional tasks.

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UTFP: 100 Questions and Answers

PPP FOR CIVIL WORKS IMPLEMENTATION

12. WHAT IS PPP?

PPP, namely Public-Private Partnership, is not specifically defined at national or EU

level. As a matter of fact Public-Private Partnership refers to numerous different
forms of cooperation between public sector and private sector.

Resort to PPP through various implementation methodologies can be envisaged whereby

a Public Administration intends to entrust a private operator with a project for
construction of a public infrastructure and management of related services.

All or most of the following elements coexist within a PPP intervention:

Project-design;

Financing;

Construction or Renovation;

Management;

Maintenance.

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UTFP: 100 Questions and Answers

13. HOW ARE PPP-ELIGIBLE PUBLIC WORKS CLASSIFIED?

Projects eligible for PPP implementation can be classified in three main categories:

Projects intrinsically capable of generating revenue through use Initiatives

whose projected commercial revenue allows the private sector to recover
investment costs. Public sector involvement is limited to identification of project
implementation assumptions;

Projects requiring public contribution Infrastructure initiatives whose

commercial use is by itself insufficient to generate adequate economic return,
but whose implementation will produce relevant positive externalities in terms of
induced social benefits;

Projects whose private partner directly provides services to Public

Administration All public works (i.e. prisons, hospitals, schools) for which the
private implementing and managing partner gains proceeds exclusively (or
primarily) through payments issued by the Public Administration.

14. WHAT ARE PPP INTERVENTIONS MAIN CHARACTERISTICS?

Public-Private Partnership main characteristics are:

Relatively long cooperation between public partner and private partner on

various aspects of the project to be carried out;

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UTFP: 100 Questions and Answers

Project funding pattern by the private sector. Public funds, often rather
substantial, may integrate private funds;

Major role played by economic operators participating in various project stages.

The public partner mainly focuses on definition of aimed objectives in terms of
public interest, quality of provided services and pricing policy, and is also
responsible for monitoring compliance with set objectives;

Distribution of risks between public partner and private partner, determined on a

case-by-case basis, consistently with concerned parties respective ability of
assessing, controlling and coping with implied risks.

15. WHAT FORMS OF PPP ARE IDENTIFIED AT EUROPEAN LEVEL?

The Green Paper on Public-Private Partnerships and Community Law on Public

Contracts and Concessions presented by the European Commission on 30 April 2004
differentiates between two major models of partnership:

Contractual Partnership based upon contractual between public and private

partners, whereby one or more tasks are assigned to the private partner. In such
context, concession is certainly one of the most widespread models,
characterised by direct links between private partner and final user i.e. the
private partner provides a public service on behalf, yet under control, of the
public partner;

Institutionalised Partnership implying an entity jointly held by public and

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UTFP: 100 Questions and Answers

private partners, and aimed at ensuring delivery of works or services for public
benefit. In EU Member States, public authorities notably resort to such structures
for management of public services at local level (i.e. water supply or waste
collection services). Direct cooperation between public partner and private
partner within a body with own legal personality enables the public partner,
through its participation in the board of shareholders and decision-making bodies
of the joint entity, to maintain relatively high control over project progress,
which can however be adjusted over time depending on circumstances. It also
allows the public partner to develop its own experience as to provision of
concerned services, while resorting to private partner support. Institutionalised
PPP can either result from establishment of a company jointly held by public
sector and private sector, or by the private sector taking control of an existing
public undertaking.

16. WHAT FORMS OF PPP ARE CARRIED OUT IN ITALY?

Italys legislation provides both for contractual and institutionalised PPP.

The main forms of contractual PPP are:

Works Concession

Service Concession

Sponsoring

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UTFP: 100 Questions and Answers

Financial Lease.

Furthermore other institutes can envisage contractual PPP forms aimed at

implementation of specific interventions, namely:

Promoters of urban planning works

Promoters of tourist settlements

Concession of public assets to enhance their economic value.

Institutionalised PPP forms are:

Joint stock companies with predominantly public capital;

Joint stock companies with predominantly private capital;

Mixed joint stock companies established pursuant to Civil Code provisions;

Urban transformation companies.

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UTFP: 100 Questions and Answers

17. WHEN ARE PPP SCHEMES ADVISABLE?

PPP schemes are to be utilised when recourse to private capitals and resources can
produce benefits both for Public Administration and provided services final users. Such
benefits can be economic and result in reduced costs for infrastructure implementation
and management, and/or enhanced efficiency and effectiveness, as well as improved
quality of provided services.

18. WHAT ARE PPP ADVANTAGES?

Besides collective benefits in terms of management efficiency, quality of interventions

and effectiveness of provided services, resorting to PPP can also enable overcoming
public spending and budget constraints induced by European Monetary Union
membership (extended at local level by the Stability and Growth Pact).

Furthermore, private partners intervention in financing and management of public

projects enables pursuing further aims, and namely: i) upgrading and fine-tuning of
project evaluation methodologies via whole life costing techniques (i.e. infrastructure
whole lifecycle) which enable optimising capital account expenses; ii) rigorous estimate
of benefits that public operators can attain via partnership solutions alternative to
traditional public financing (i.e. Value for Money); and iii) possibility to transfer part of
project risks to private sectors compliantly with transparent, proportionate and ad-hoc
patterns.

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UTFP: 100 Questions and Answers

19. WHAT ARE PPP DISADVANTAGES?

Main criticalities identified in PPP interventions so far set up in Italy can be itemised as
follows:

Excessive trust in PPP solving capacity, as the alternative to public resources

poor availability;

Absence of preliminary verifications on PPP actual convenience in terms of

optimisation of Public Administration costs;

Public Administrations inadequate capacity to report and interact with private

partner, both in identifying respective contractual obligations and monitoring
contract execution;

Time extension for set-up of initiatives operational phase, due to procedural

complexity.

20. WHAT IS PROJECT FINANCING?

Project Financing (PF) stands for the financing of a project capable of generating, over
its management phase, cash flows sufficient to repay the debt contracted for its
implementation and related risk capital. The project is an autonomous entity to its
promoters and is primarily evaluated by funders on the basis of its capacity to generate
cash flows.

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UTFP: 100 Questions and Answers

Project Financing was born as a financing pattern for financially independent public or
private projects, characterised by high financial needs and possible risk distribution
among the various participants.

In compliance with Italys legislation, works concession represents a possible instrument

to finance public works via Project Financing.

21. WHAT ARE THE DIFFERENCES BETWEEN PPP AND PF?

Public-Private Partnership (PPP) stands for all forms of public-private cooperation aimed
at project-design, construction, financing, management and maintenance of public
works or utilities services.

Project Financing (PF) indicates a specific financial technique adopted within PPP
interventions to finance infrastructure projects.

22. WHEN ARE PF SCHEMES ADVISABLE?

PF schemes are to be preferred to traditional financing whereby:

Income flows are sufficient to cover management risks and repayment of capital

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UTFP: 100 Questions and Answers

invested by partners and banks;

Management plays a major role;

Private partner takes on the financing, envisaging repayment limited to financed

activity (i.e. without public guarantee);

Private partner assumes a considerable part of risks related to project

implementation and management.

23. WHAT ARE PF ADVANTAGES?

PF main advantages can be differentiated, relatively to involved partners, as follows:

Advantages for Public Administration:

Implement remarkably interesting initiatives for general public, limiting their

impact on public budget and without assuming their related financial and market
risks, to be, instead, allocated to private partner;

Generally guarantee higher quality project-design, reduced implementation

timing, and more efficient management.

Advantages for Private Partner:

Limit the impact of possible project failure on its own budget, as the project

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UTFP: 100 Questions and Answers

stands for an autonomous entity;

Access to further off-budget financing, thus avoiding increasing its own debt
ratios;

Activate high financial leverage (possible debt percentages on own resources up

to 70-90%);

Share with other (public/private) enterprises both competences and resources on

innovative, thus riskier, projects.

24. WHAT ARE PF DISADVANTAGES?

PF main disadvantages are:

Higher costs, due to the more complex contractual structure required to properly
pattern interventions (i.e. legal, technical and financial costs for
implementation, insurance costs, commissions, etc.).

Rigid contractual structure, upon conclusion of negotiations among all actors

involved.

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UTFP: 100 Questions and Answers

JURIDICAL INSTRUMENTS AND PROCEDURES

25. WHAT IS PPP REFERENCE LEGISLATION IN ITALY?

Legislation disciplining PPP institutions is mostly laid down in Legislative Decree n. 163
of 12 April 2006 and subsequent amendments (Codice dei Contratti pubblici di Lavori,
Servizi e Forniture - Code of Public Contracts for Works, Services and Provisions
hereinafter the Code) with regard to PPP contractual subjects. Legislative Decree n. 267
of 18 August 2000 (Local Authorities Single Text), instead, provides for general discipline
on enterprises with public-private mixed capital (so-called Institutionalised PPP).

Along with Civil Code rules, single sector laws also apply (i.e. water resources, waste,
energy, transports, gas, etc.).

26. WHAT ARE WORKS CONCESSIONS?

Pursuant to Art. 3 Para 11 of the Code, works concessions are defined as remunerative
written contracts aiming at final and executive project-design and execution of public
works and structurally or directly connected works, as well as related functional and
economic management, and featuring the same characteristics as public works
contracts, except in that the compensation for works to be carried out consists either
solely in the right to exploit the concerned works or in such right together with
payment.

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UTFP: 100 Questions and Answers

As a matter of fact, works concessions are characterised by management responsibilities

(i.e. economic risk) being transferred to the concessionaire. Such risk, strictly depending
on concessionaires management proceeds, represents a key element to distinguish
concessions from public contracts.

27. HOW ARE WORKS CONCESSIONS AWARDED?

Current legislation distinguishes between two main schemes for awarding works
concessions: 1) a public initiative procedure (i.e. traditional procedure) regulated by
Art. 142 and subsequent articles, and 2) a private initiative procedure, activated by the
so-called Promoter and disciplined by Art. 152 and subsequent articles of the above
Code.

28. WHAT PRELIMINARY FULFILMENTS ARE REQUIRED BY CURRENT LEGISLATION TO

SET UP A PPP INTERVENTION FOR CONSTRUCTION AND MANAGEMENT OF PUBLIC
INFRASTRUCTURES?

Administrations identify their own needs upon analysis of the demand for public works,
thus devising preliminary projects and feasibility studies to support the tri-annual
programme of public works and respective updating. Programming represents the
decisional phase in which Public Administrations set their own objectives and
implementation patterns, so as to comply with criteria of maximum efficiency and
economy. Programming documents also encompass public works to be implemented

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UTFP: 100 Questions and Answers

through private capitals.

29. HOW ARE INTERVENTIONS INSERTED INTO PUBLIC WORKS PROGRAMMING

INSTRUMENTS?

Art. 128 of the Code represents programming main regulatory reference and establishes
that implementation of > 100,000 public works (single amount) shall be performed in
accordance with a tri-annual programme and related annual updates, made public
through notice displayed at the premises of the contracting administration for at least
60 consecutive days and, whereby necessary, through publication on buyers profile.

The tri-annual programme shall lay down a priority sequence of civil works among which
top priority will be ascribed to maintenance, recovery of existing patrimony, completion
of already set up works, approved executive projects, as well as interventions that may
be mostly financed via private capital.

Inclusion of a given work in the annual list is subordinated to feasibility study pre-
authorisation for < 1,000,000 interventions, and to preliminary project-design pre-
approval for 1,000,000 or > 1,000,000 interventions.

The annual list issued by contracting administrations shall be approved jointly with
related budgets and contain indications of both forecast and/or allocated financial
resources.

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UTFP: 100 Questions and Answers

30. WHAT IS A FEASIBILITY STUDY?

A feasibility study is a document identifying interventions aimed at fulfilling a given

Public Administration need, indicating functional, technical, operational and economic-
financial requirements of the interventions so as to ensure proper fulfilment. Feasibility
studies also provide analysis of the state-of-the-art of each intervention in its possible
historical-artistic and architectonic characteristics, in terms of landscape and
environmental sustainability, as well as its socio-economic, administrative and technical
components.

31. HOW DOES ART. 144 (CODE) APPLY?

The procedure establishes that the awarding administration may entrust works
concessions through either open or restricted procedure in compliance with the most
economic and convenient offer criteria. On the basis of an either preliminary, final or
executive project, the Administration issues and publishes a call for tender containing
all the information indicated in Annex IX B to the Code. Furthermore, the Administration
forwards invitation letters to selected competitors, then receives, evaluates and selects
their tenders, and subsequently awards and entrusts a concession contract.

32. HOW DOES ART. 153 (CODE) APPLY?

The procedure establishes that private subjects (so-called Promoters) may present
proposals for implementation of an initiative encompassed in the tri-annual

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UTFP: 100 Questions and Answers

programming of public works of the granting administration. Each promoter is required

to elaborate a proposal encompassing a preliminary project, a draft contract, a business
plan, and the necessary documents on feasibility and environmental background of the
initiative.

Once the proposal has been acknowledged by the administration as having public
interest, it represents the basis for a public selection aimed at identifying the suitable
concessionaire.

33. WHEN MAY PROPOSALS BE SUBMITTED AS BY ART. 153 (CODE)?

Interested subjects shall present their proposals within 180 days from publication of the
indicative notice through which the contracting administration informs of the presence,
amongst programming instruments, of interventions to be implemented via private
capitals as eligible for economic management. The notice shall lay down the basic
criteria followed by the awarding administration to evaluate the proposals submitted.

34. WHAT SUBJECTS MAY SUBMIT PROPOSALS AS BY ART. 153 (CODE)?

Pursuant to Art. 153 of the Code, proposals may be submitted by subjects proving the
technical and financial requisites established by Art. 99 of Presidential Decree (D.P.R.)
554/1999, as well as by single enterprises, commercial companies, cooperatives,
consortiums, production and labour/work cooperatives, consortiums of handicraft
enterprises, permanent consortiums and temporary groupings of abovementioned

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subjects, and engineering companies as by Art. 90 Para. 2 b) of the Code, also whereby
associated or grouped into consortiums with financing organisations and service
operators.

35. WHAT DOCUMENTS MUST BE INCLUDED IN THE PROPOSAL SUBMITTED BY THE

PROMOTER?

Art. 153 of the Code prescribes that proposals shall contain and itemise:

Assessment of territorial and environmental background;

Feasibility study;

Preliminary project;

Draft contract;

Business plan and related asseveration

Detail of service and management characteristics;

Indications as by Art. 83 Para 1 - Code (i.e. elements upon which the

economically most convenient offer is evaluated) and guarantees offered by
the Promoter to the contracting administration;

Expenses borne to issue the concerned proposals (i.e. max. 2.5% of the

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investment value, upon Business Plan).

36. WHAT IS A DRAFT CONTRACT?

A draft contract is aimed at disciplining interaction between the granting administration

and the concessionaire throughout the concession period and represents the core of all
project contractual relationships. On the basis of the draft contract, all the other
contracts composing the interventions are laid down (i.e. financing contract, insurance
contract, provision contract, etc.). The elements composing the proposal must therefore
be fully compliant with the contract itself. In particular, the latter should lay down, in
terms of legal obligations amongst parties, all the economic, project-design, technical-
executive, operational and administrative components of the envisaged intervention.

A draft contract is a document included in the proposal submitted by the Promoter,

which allows drafting, yet upon proposal submission itself, contents and procedures of
mutual and respective obligations (financial, too) of the parties involved in the
concession relationship.

Upon evaluation of the contract submitted by the Promoter, the contracting

administration is entitled to amend it. Art. 86 of Presidential Decree (D.P.R.) n.
554/1999 lays down mandatory minimum elements to be provided by draft contracts.

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37. WHAT IS A BUSINESS PLAN?

The Business Plan (hereinafter BP) is the document itemising assumptions and basic
conditions for the economic and financial balance of both investments and management
throughout the concession period. Therefore, BP represents the instrument to estimate
project profitability and thus justify proposed tariffs or fees (in the case of works for
direct use by Public Administration), as well as hypothetical need for public grants upon
investment execution.

BP is moreover recalled in Art.153 of the Code as a key element in proposal evaluation.

As a matter of fact Art.153 provides that the economic-financial value profile of a
submitted plan shall be taken into account in evaluating proposals.

38. WHAT IS ASSEVERATION?

Asseveration consists in a document drawn up by a credit institution/other entrusted

subject (as by Art. 153 - Code) so as to certify BP consistency and balance, as well as
project capacity of generating adequate cash flows to ensure debt service and
settlement, and risk capital remuneration hence possible implementation of the given
public work via private capital.

Therefore asseveration represents the only verification of interventions financial

structure consistency. It nevertheless does not include BP data verification.

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39. WHAT FULFILMENTS FOLLOW THE PROPOSAL SUBMISSION PHASE?

Within 15 days upon receipt of tenders, contracting administrations entrust procedure

responsibility to a public officer, thereof inform the concerned promoters, and then
verify that submitted documents are complete and, if necessary, request for their
integration.

Within 4 months upon receipt of the concerned offer, the contracting administration
sees to evaluating and identifying public interest proposals. Whereby necessary, the
public officer in charge of the procedure can agree with the Promoter for a longer
examination and evaluation period.

40. HOW IS PROPOSAL EVALUATION PERFORMED?

The proposal evaluation procedure encompasses the following phases:

Feasibility evaluation of the proposal under the profiles listed in Art. 154 of the
Code (i.e. construction, urban-planning and environment, project quality,
functionality, public accessibility, return, management and maintenance costs,
concession duration, deadlines for completion of concession works, tariffs to be
applied and related updating methodologies, business plan value, and draft
contract contents);

Verification of absence of obstacles to proposal implementation;

Hypothetical comparative analysis whereby various proposals are submitted

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relatively to the same public work(s);

Hypothetical debate between promoters and contracting administration;

Identification of public interest proposals.

41. WHAT ARE THE IMPLICATIONS OF ACKNOWLEDGING A PROPOSAL AS BEING OF

PUBLIC INTEREST?

Acknowledging a proposal as being of public interest is necessary to proceed, over the

three following months, to the contracting phase (as by Art. 155 - Code) upon
application, whereby necessary, of the discipline regulating expropriation for public
interest. Public interest acknowledgement renders the proposal binding for the Promoter
whereby no other tenders are submitted. The proposal is complemented with a
guarantee equal to 2% of investment costs indicated in the notice and an additional
guarantee equal to the expenses borne for the submitted proposal (2.5% limit of
investment value) to be provided, upon request by the contracting administration,
ahead of the tender launch.

42. HOW IS A TENDER CARRIED OUT AS BY ART. 155 (CODE)?

The procedure for concessionaire identification encompasses two phases: i) the first
aimed at selecting the two best tenders upon preliminary project presented by the
Promoter if necessary amended by the administration and setting requirements to

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identify the most economically advantageous tender consistently with measures

envisaged by the BP presented by the promoter; ii) the second, whereby possible and
consisting in a negotiated procedure between promoter and subjects selected in the
previous phase so as to improve the tendered project and award it.

43. WHAT IS A SPECIAL PURPOSE VEHICLE?

A Special Purpose Vehicle (SPV) is a joint stock company (SpA - Societ per Azioni) or
limited company that the concession awarding subject has the right/duty to establish,
whereby provided in the tender notice. The SPV takes over the concession relation
without involving contract cession or requiring authorisations or approvals.

The take-over results in the Special Purpose Vehicle becoming the official concessionaire
and replacing the contractor in all relations with granting administrations. The so-called
Special Purpose Vehicle (SPV) allows guaranteeing the project juridical and economic
separation from other activities by subjects involved in the project itself.

44. WHAT CAUSES THE EXTINCTION OF CONSTRUCTION AND MANANGEMENT

CONCESSIONS ?

Concessions may be extinguished due to either non-fulfilment by the granting authority,

reasons ascribable to concessionaire, or concession revocation by the granting subject
for public interest reasons.

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45. WHAT ARE THE CONCESSIONAIRE RIGHTS FOLLOWING THE RESOLUTION OF A

CONSTRUCTION AND MANAGEMENT CONCESSION?

In case of concession resolution due to non-fulfilment by the granting administration, or

whereby the latter revokes the concession for public interest reasons, the concessionaire
is reimbursed of:

Implemented works value plus accessory charges net of amortisation or, whereby
works have not successfully passed the test phase, the costs actually borne;

Penalties and other costs borne or to be borne as a result of the concession

resolution;

Indemnity for compensation of missed earnings (i.e. 10% of the value of works
still to be implemented or part of the service yet to be managed) assessed upon
BP.

All the abovementioned amounts are primarily aimed at refunding concessionaires

funders and are only made available to concessionaire once all such credits have been
fulfilled.

46. WHAT IN CASE OF CONCESSION RESOLUTION DUE TO CONCESSIONAIRE?

In case of concession resolution for reasons ascribable to the concessionaire, project

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funders can prevent resolution by designating a company for concession take-over within
90 days of receipt, by the granting subject, of the notified intention to resolve the
relation.

Acceptance by the granting administration is subject to the following conditions:

The designated company has technical and financial characteristics substantially

equivalent to the concessionaire characteristics at the time the related
concession was granted;

Concessionaire non-fulfilment reportedly cause of resolution ceases within a

given period of time defined and agreed upon by both granting administration and
funders.

47. WHAT ARE SERVICE CONCESSIONS?

Art. 3 Para. 12 - Code defines service concession as a contract with the same
characteristics as a public contract for services, except in that the consideration for
services provision either solely consists in the right to exploit the service, or in such
right coupled with payment.

48. HOW ARE SERVICE CONCESSIONS AWARDED?

Art. 30 (Code) lays down general discipline on service concessions, not subject to Code

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provisions for the rest. In particular, Art. 30 Para 3 establishes that concessionaire shall
be selected in compliance with the Treaty general principles (notably as to
transparency, adequate publicity, non-discrimination, equal treatment, mutual
recognition, and proportionality) upon informal selection involving at least five invited
participants upon availability of sufficient number of qualified participants relatively
to the concession object and consistently with pre-determined selection criteria.

Furthermore, the above Art. 30 establishes that, at bidding stage, payment may be
granted to concessionaire whereby the latter is obliged to apply, to users, prices lower
than the sum of the service cost plus ordinary profits, or whereby the concessionaire
shall be granted with successful business plan of investments and related management
as to the quality of the service to be provided.

49. WHAT IS SPONSORING?

Sponsoring is the contract through which the administration (Sponsee) offers to a third
party (Sponsor) the possibility to publicise its name, logo, trademark and products in ad-
hoc spaces, upon payment in assets, services, or other utilities.

As to Art. 26 specific discipline (Code), sponsoring contracts are aimed at

implementation of public works, services, and provisions.

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50. HOW ARE SPONSORING CONTRACTS AWARDED?

Art. 26 (Code) establishes that the same provisions on subjective requisites of contract
project-designers and implementers shall discipline sponsoring contracts for
implementation of public works, and/or interventions for restoration and maintenance
of movable assets and decorated surfaces of architectonic assets subject to preservation
measures as by Legislative Decree n. 42 of 22 January 2004 (Code on cultural and natural
heritage), as well as services or provisions.

Furthermore, the contracting administration is required to formulate and issue adequate

prescriptions on contract project-designing, management and implementation.

51. WHAT IS FINANCIAL LEASE FOR PUBLIC WORKS ?

Financial Lease represents the contract allowing users to have access to given fixed or
movable assets, made available by a granting administration upon payment of periodical
fees, and envisaging possible redemption of given assets upon contract conclusion.

Art. 160-bis (Code), in particular, provides that contracting administrations can recourse
to financial lease for realisation, acquisition and completion of public infrastructures.

52. HOW IS A LEASING CONTRACT FOR PUBLIC WORKS AWARDED?

The Code establishes that the call for lease award shall indicate: subjective, financial,

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economic, technical-operational and organisational requirements for participation;

technical and aesthetic characteristics of the concerned intervention; related costs,
timing and guarantees; economic-technical evaluation parameters of the economically
most advantageous tender, along with other Code provisions.

The bidder may be a so-called general contractor or a temporary association jointly

established by a funder and the implementer, responsible for specific obligations
respectively assumed. In case of either failure, non-fulfilment or unexpected hinder to
obligation fulfilment by either subject establishing the temporary association, the other
can replace it, upon approval by the awarding administration, with another subject
proving the same requisites and characteristics.

53. WHAT ARE URBANISATION WORK PROMOTERS?

With regard to public works to be implemented by private operators entrusted with

construction permit and first-hand implementing urbanisation works upon total/partial
deduction of the grant envisaged for permit issuance, Art. 32 Para 1 g) - Code enables
the administration issuing construction permits to provide that, relatively to
urbanisation works, the construction permit holder will act as Promoter, thus submitting
work preliminary project-design to the concerned administration within 90 days from
such permit.

Upon outcome of the tender called and carried out by the administration issuing the
construction permit and project-design presented by the Promoter, the latter may
exert, as long as expressly provided by the tender notice, pre-emptive right versus the
highest bidder within 15 days from the award, providing the latter with 3% of the value
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of the awarded tender within 15 days from the award date itself.

54. WHAT ARE TOURIST SETTLEMENT PROMOTERS?

Art. 1 Para 583 and subsequent of Law n. 266 of 23 December 2005 (Italys Budget Law
for 2006) provides that proposals may be submitted for creation of quality tourist
settlements also through concession of public maritime assets and through upgrading of
both new and pre-existing settlements. Proposals shall be submitted to the concerned
Region, which will see to calling for tenders to be selected upon the most economically
advantageous tender criteria, in compliance with Art. 155 (Code), and only whereby
various proposals are put forward for the same concession of public assets. No limit is
set for concession duration. Grantor fees shall however be specified.

The above provisions may be applied upon issuance of an ad-hoc regulation by Italys
Minister of Productive Activities, in concertation with the Minister of the Economy and
Finance and the Minister of Environment and Territory.

55. WHAT ARE PUBLIC ASSETS CONCESSION FOR VALORISATION AND CAPITALISATION?

Art. 1 Para 259 of Law n. 296 of 27 December 2006 (Italys Budget Law for 2007)
provides that, upon payment and for a period not longer than fifty years, State-owned
assets may be granted or leased to private operators for their upgrading and re-
conversion through recovery, renovation and restructuring interventions also via new
applications aimed at either economic activities or services provision to citizens,

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consistently with Code provisions regulating cultural and natural heritage.

Concessions and leases are assigned through public procedures for the period required to
pursue the set intervention business plan, and however not longer than fifty years.
Awarding criteria as well as concession and leasing conditions are laid down in tender
notices by the Agenzia del Demanio (Italys Public Property Agency), which shall also
envisage, in case of concession revocation or lease withdrawal, an indemnity to be
granted to the leasee and assessed on the basis of the Business Plan (BP). As to assets
valorisation and capitalisation regulated by the above Article, such assets may be
entrusted to third parties pursuant to Art. 143 (Code), as compatible.

56. WHAT IS A MIXED COMPANY?

It is a company with public-private mixed capital, established for creation and/or

management of public works or services and notably:

Joint Stock Companies (SpAs) with mixed public-private capital for provision of
economically relevant local public services. As to conditions and procedures for
entrustment and management of local public services, Art. 113 of Legislative
Decree 267/2000 integrates the sector discipline;

Joint Stock Companies (SpAs) with local authorities minority participation ( Art.
116 of Legislative Decree n. 267/2006) for exercise of local public services
without economic relevance and realisation of works for correct service
implementation, as well as for realisation of infrastructures and other public

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interest interventions;

Mixed SpAs established pursuant to Italys Civil Code i.e. so-called Special
Purpose Vehicles (SPV), for creation of public infrastructures and management of
related services, established pursuant to Civil Code provisions on corporations.

57. HOW ARE PRIVATE PARTNERS SELECTED IN MIXED COMPANIES?

Art. 1 Para 2 - Code establishes that private partners shall be selected through public
procedure tendering.

58. WHAT ARE URBAN TRANSFORMATION COMPANIES?

Urban Transformation Companies, regulated by Art. 120 of Legislative Decree n.

267/2000, are mixed joint stock companies, instituted by metropolitan cities and
municipalities and also participated by their respective Province and Region to project-
design and implement urban transformation interventions, via application of current
urban planning instruments and upon acquisition, transformation and commercialisation
of concerned areas.

Area identification stands for acknowledgment of their public utility, also whereby not
related to public interventions. Areas belonging to local entities may be attributed to an
urban transformation company via concession. Private shareholders are selected through
public procedure, and relations between local entities and urban transformation joint

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stock companies are regulated by a covenant laying down rights and duties of parties
involved.

ECONOMIC-FINANCIAL ASPECTS

59. WHAT ARE THE AIMS OF A FEASIBILITY STUDY?

The Feasibility Study (FS) pertaining to an investment project is aimed at transforming a

project idea into concrete investment proposals upon evaluation of instruments,
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techniques, and resources required to attain a given specific purpose.

FS is therefore aimed at analysing information needs related to development of a new

project drafted over the planning phase and thus attaining:

Identification of one or more alternatives aimed at identifying different patterns

to implement the original idea;

Provide the decision-making body with adequate evaluation to take decisions

relatively to project operational implementation;

Proposing a technical organisational and financial solution through evaluation of:

i) solutions costs; ii) benefits attainable over time; iii) implementation-related
risks; and iv) consequences of project objectives failed achievement.

60. WHAT IS COST-BENEFIT ANALYSIS?

The Cost-Benefit Analysis (CBA) is a technique aimed at evaluating whether it is

convenient to carry out an investment on the territory consistently with aimed
objectives.

CBA therefore consists of a set of operational rules aimed at guiding Public

Administration in choosing among various intervention options. Starting from financial
analysis results, CBA aims to financially evaluate all the cons (costs) and pros (benefits)
that the investment generates for a specific reference group.

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The CBA objective is to attain a comparative analysis of benefits and costs related to
project implementation, so as to assess whether the project will actually produce an
increase (or decrease) in the wellbeing standard of the concerned community so as to
suggest or discourage its implementation.

61. WHAT IS FINANCIAL ANALYSIS?

Financial Analysis (FA) is a method aimed at analysing future monetary flows generated
by an investment. FA allows evaluating feasibility and financial return of an investment
project through aggregation of corporate budget items within an integrated accounting
plan (Business Plan).

Financial Analysis is therefore aimed at assessing whether the project will manage to
generate sufficient cash flows to cover expenses whereby deemed as necessary or
whether, instead, insolvency risks occur.

The Discounted Cash Flow Method is the most widespread method to aggregate FA
values, based on recording of all expenses actually borne or monetary proceeds
generated by the project throughout its lifecycle, discounting future values by an
appropriate discount factor.

62. WHAT IS THE PPP TEST?

The Public-Private Partnership Test (PPP Test) is aimed at verifying whether necessary

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conditions for use of PPP schemes actually exist, and notably:

Compatible legislative and regulatory framework;

Risks transferable to private subjects;

Actual organisational skills and know-how by the granting Administration

adequate to undertake PPP interventions;

Payment mechanisms related to precise quantitative and qualitative performance

levels of the given service;

Possible application of tariffs on services to be issued, and verification of

collective consensus to pay such services. In the case of projects whose private
partner is to provide services to the Public Administration, verify whether the
concerned PA can actually bear payment of related fees.

63. WHAT ARE THE AIMS OF A BUSINESS PLAN?

A Business Plan (BP) can be defined as a strategic planning and income evaluation
instrument utilised for investment decisions and capable of pre-emptively evaluating
risks and opportunities set by a new project. A Business Plan is also aimed at identifying:

Revenue capacity of the activity to be managed through project implementation

(i.e. issuance of services and production of assets);

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Financial needs related to implementation of single interventions and overall

investment.

64. HOW IS A BUSINESS PLAN STRUCTURED?

The Business Plan (BP) is developed through a system of inter-dependent accounts which
allow determining the economic convenience of a new investment project and its
capacity in terms of debt service and risk capital remuneration.

The first step consists in identifying a detailed and plausible set of hypotheses to be
employed as an information base for subsequent creation of Profit and Loss Account and
Balance Sheet provisional schemes, as well as for calculation of investment-generated
cash flows.

65. WHAT ARE BUSINESS PLAN MAIN INPUTS?

Business Plan correct elaboration requires performing a detailed analysis of the following
input data:

Timing hypotheses (i.e. year of construction start, construction conclusion and

concession ending, etc.);

Technical hypotheses (i.e. investment costs);

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Operational management hypotheses (i.e. operational proceeds and costs, tariffs,

etc.);

Financial management hypotheses (i.e. interest rates, credit lines, interest rate
margins, banking commissions, discount factors, financial structure, grants, etc.);

Fiscal hypotheses (i.e. fiscal imposition, amortisation methods and rate);

Reserve hypotheses (i.e. legal reserve, cash reserve, cash reserve for debt);

Circulating capital hypotheses (i.e. payment and proceeds average timing).

66. WHAT IS A PREVISIONAL PROFIT AND LOSS ACCOUNT?

Previsional Profit and Loss Account (PL) synthesises the profitability of a new
entrepreneurial initiative in its envisaged scope and through management over a
reference period.

The Profit and Loss Account therefore represents the synthesis of a companys economic
cycle without taking into account its related financial cycle, considered in developing
previsional cash flows.

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67. WHAT IS A PREVISIONAL BALANCE SHEET?

A previsional Balance Sheet (BS) represents the enterprise patrimony in a given

timeframe.

BS enables identifying capital sources and investments performed over a new investment
project.

A previsional Balance Sheet (BS) encompasses two sections:

Activities (uses/applications);

Liabilities (funding sources).

The total of activities is always equal to total liabilities, namely total uses shall always
be equal to total funding sources.

68. WHAT ARE PREVISIONAL CASH FLOWS?

Previsional Cash Flow (CF) plan records and itemises all foreseen monetary revenues and
expenses resulting from management of a new investment project.

The CF reveals the capacity of a given initiative to bear, through available resources,
foreseen expenses and thus, presence/absence of a monetary balance for construction

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and management phases. Cash Flow plans can be drawn upon projection of monetary
revenues and expenses for each reference timeframe.

CF plans thus allow identifying cash availability/needs at the end of each reference
timeframe, so as to set necessary actions to manage lower liquidity periods.

69. WHAT IS INVESTMENT ECONOMIC-FINANCIAL BALANCE?

The term Economic-Financial Investment Balance stands for simultaneous compliance

with economic convenience conditions and investment financial sustainability.

70. WHAT IS INVESTMENT ECONOMIC CONVENIENCE?

Investment economic convenience refers to its capacity to create value over

construction and management concessions and generate profitability for the invested
capital adequately to private investors expectations.

The analysis of investment economic convenience can be patterned on the basis of

various evaluation methodologies, and most frequently on specific indicators apt to
provide synthetic evaluation of the investment capacity to create value and generate
adequate profitability.

To such end, reference shall be made to the following indices:

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NPV (Net Present Value);

IRR (Internal Rate of Return).

71. WHAT DOES NPV STAND FOR?

NPV stands for Net Present Value namely, the present value of investment's future net
cash flows minus initial investment. Only whereby NPV is positive should the investment
be made (unless an even better investment exists).

Positive NPV substantially indicates project capacity to free monetary cash flows to
repay initial spending, remunerate capitals employed and possibly keep resources
available for further applications. Therefore any investment producing a NPV >= 0
creates value.

NPV calculation for specific initiatives usually envisages a two-phase procedure:

Phase 1: evaluation is carried out considering the investment project exclusively

in the hypothesis of financing through own capital (i.e. all equity). In such case,
the selected discount rate will only reveal risk capital, equal to the yield
required by shareholders in absence of debt (unlevered NPV).

Phase 2: possible resort to external coverage sources in addition to own resources

made available by shareholders (levered NPV).

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72. WHAT DOES IRR STAND FOR?

IRR stands for Internal Rate of Return, namely a capital budgeting metric used by firms
to decide whether they should make investments. IRR is an investment efficiency
indicator, opposed to Net Present Value (NPV), which indicates value or magnitude.

In another sense, IRR can be interpreted as gross profitability measure revealing

investment yield net of employed resources (unlevered IRR). As for NPV, also IRR can be
calculated taking into account coverage sources other than own resources (levered IRR).

The analysed evaluation criteria are based on comparison between the calculated
project IRR and a threshold rate that, consistently with aforementioned NPV features,
will correspond to the invested capital estimated cost.

Whenever an investment reveals a measured IRR higher than the cost of required funding
sources, it should certainly be assessed as economically convenient and thus be carried
out.

73. HOW IS THE SPV SHAREHOLDERS PROFITABILITY MEASURED?

Investment operation economic convenience is to be evaluated also analysing the SPV

shareholders point of view, so as to appreciate the pursued profitability level. In such a
case, IRR and NPV shall be calculated upon cash flows due to shareholders, and the

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selected discount rate will solely indicate the risk capital opportunity cost.

74. WHAT IS FINANCIAL SUSTAINABILITY?

The term financial sustainability refers to project capacity to generate monetary flows
sufficient to guarantee loan reimbursement and adequate shareholders profitability.

Project financial sustainability expressed in terms of cover ratio refers to particular

indicators capable of evaluating the related security margin for funding subjects as to
guaranteed punctual debt service payment.

Main coverage factors considered are: i) Debt Service Cover Ratio (DSCR); ii) Loan Life
Cover Ratio (LLCR).

75. WHAT IS DEBT SERVICE COVERAGE RATIO?

The Debt Service Coverage Ratio (DSCR) measures the ability of a business to fulfil its
regular debt obligations. DSCR expresses the ratio between the annual business cash
flow available for debt repayment and its total debt service. DSCR indicates a safety
margin available should the business profits, and its cash flows, temporarily decline.
Sophisticated investors and small business lenders insist on DSCRs greater than 1.

A standard level against which debt coverage ratios can be compared is not actually
available. Therefore the admissible limit will be negotiated on a case-by-case basis,

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relatively to project riskiness, provided guarantees, and parties contractual strength.

76. WHAT IS LOAN LIFE COVER RATIO?

Loan Life Coverage Ratio (LLCR) is a ratio commonly used in Project Finance. The ratio is
defined as: Net Present Value of Cash Flow Available for Debt Service ("CFADS") /
Outstanding Debt in the period NPV (CFADS) measured only up to debt tranche maturity.
The ratio provides an estimate of the project credit quality from a lender perspective.

Such indicator has a less immediate interpretation than DSCR. We can nevertheless
affirm that if numerator is higher than denominator, a coefficient higher than 1 results,
thus guaranteeing funders.

Nevertheless the same considerations made for DSCR apply to LLCR quotient: funders
generally require a security margin value higher than 1 (variable depending on project
riskiness, provided guarantees, and parties contractual strength).

77. WHAT ARE PPP INTERVENTIONS FUNDING SOURCES?

The funding sources of Public-Private Partnership initiatives are:

Own Capital/Risk Capital (i.e. own means, equity)

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Intermediate Capital

Debt Capital

Grant

The first three items above represent private funding sources.

78. WHAT FORMS OF OWN CAPITAL ARE ENVISAGED?

Own capital can be differentiated in three categories:

Ordinary Shares: namely the real capital of a joint stock company (SpA). Each
share stands for the capital contribution by a given subject and is related to a
host of rights (i.e. vote, new issue option, etc.);

Special Shares: privileged(with limited vote) and savings;

Partners Loans: whereby a firm has temporary financial needs, it can resort to
partners loans rather than capital increase upon payment.

Within PPP interventions, the first and third categories are most recurrent. Equity
remuneration results from dividend distribution.

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79. WHAT IS AN INTERMEDIATE CAPITAL?

Intermediate capital sources are hybrid forms of own capital and debt capital in terms of
risks and costs.

Own capital can be differentiated in the following categories:

Mezzanine Debt

Convertible Bonds

Privileged Shares and savings

High-yield bonds.

80. WHAT IS DEBT AND WHAT ARE ITS FORMS?

Debt is an available source to finance investments and implement infrastructures. Debt

can be differentiated as follows:

Mortgage: monetary loan with long-term deadline through which the beneficiary
engages itself to periodically repay quotas of borrowed capital plus interests;

Bonds: collection of capitals from either savers and/or institutional funders.

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81. WHAT ARE FINANCIAL COSTS?

Within PF interventions, financial costs are represented by the sum of structuration

costs (commissions) and pre-amortisation interests.

82. WHAT ARE BANKING FEES?

Banking fees are the main form of bank remuneration over debt structuration and
issuance phases, necessary to implement Project Financing interventions.

Main banking fees are:

Management Fee: paid by debtor to bank(s) for expenses borne for organising the
given intervention (variable equal to 0.35% - 2% of loan value);

Commitment Fee: owed by borrower to bank(s) relatively to credit quota granted

but not utilised;

Agency Fee: owed to bank(s) for loan administration, and usually paid as a fixed
annual quota.

83. WHAT ARE PRE-AMORTISATION INTERESTS?

Pre-amortisation interests are paid upon capital quota used by the subject receiving

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funds (i.e. borrower) over utilisation phase (construction period plus a grace period)
without engagements in terms of capital quota return.

84. HOW IS MAXIMUM SUSTAINABLE DEBT DETERMINED?

The maximum sustainable debt within a PF operation varies depending on project

riskiness and capacity to generate cash flows adequate to guarantee debt
reimbursement and profitability for shareholders. PF operations are generally
characterised by a 75/25 debt-equity ratio financial structure.

To this end, it is necessary to create cash flows capable of revealing cash availability or
needs upon conclusion of each reference timeframe.

85. HOW IS THE BANK LOAN INTEREST RATE DETERMINED?

Bank loan interest rates vary according to project riskiness and capacity to generate
cash flows, and are usually determined through a rating process encompassing a base
rate to which a spread is to be added.

86. WHAT IS A BANK LOAN BASE RATE?

So as to carry out a Financial Analysis, it is necessary to identify the interest rate

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structure suitable to define the base cost (base rate) of loans to which a spread (margin)
required by funders is added consistently with project riskiness.

For base rate identification, reference can be made to:

EURIBOR Rates (short-term rate 1 year max. duration) if a variable rate is

applied to the granted credit;

Interest Rate Swap (for deadlines equal to or longer than 1 year) if a fixed rate is
applied.

Both rates express an average of rates recorded by the financial market depending on
negotiations occurred over the given single day. In such case, the reference information
base can be retrieved from the Il Sole24ore newspaper (reporting both rates) as well
as from the site www.euroribor.org, which reports Euribor values relatively to concerned
deadlines and BP elaboration period.

The main difference between fixed and variable rates lies in the uncertainty of debt
flow to be reimbursed.

A fixed rate is usually applied to PF structured interventions.

87. WHAT IS THE LOAN BASE RATE SPREAD?

Spread is the margin to be added to base rate, indicating project riskiness and affecting

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the interest quota to be reimbursed.

88. WHEN ARE GRANTS ISSUED?

The granting administration can provide the concessionaire with a contribution

(payment), whereby the concessionaire itself is obliged to apply to users, prices lower
than remuneration of investments and the sum of the service cost and ordinary profits,
or whereby it is necessary to ensure to the concessionaire attainment of economic-
financial balance of investments and related management as to the quality of the
service to be provided.

In determining the price, the administration shall take into account possible provision
of assets and services by the concessionaire to the very awarding administration,
relatively to concession works and in compliance with tender notice provisions. (Art.
143 - Code).

89. WHAT FORMS OF GRANTS ARE ISSUED?

The price (or grant) can be issued over either construction or management phase of
concession works. In the first case, contributions have to be paid to the administration
by the concessionaire upon Interim Payment Certificate (IPC) or once the test has been
performed.

The contribution provided by the administration may also consist in granting the

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ownership or right of use of fixed assets available or ad-hoc expropriated, whose usage
may be instrumental or related to the concession works, as well as fixed assets that no
longer fulfil public interest functions, already indicated in the programme as by Art. 128
Code. (See Art. 143 Para. 5 - Code).

90. HOW CAN OPTIMUM GRANT BE QUANTIFIED?

From a strictly financial point of view, it is possible to estimate consistency of grants

through techniques aimed at forecasting capital budgeting needs.

Grants are aimed at ensuring economic financial balance of investments and their
related management. Through application of such techniques, grants shall guarantee
debt service coverage, as well as project and shareholders profitability. All this results
in i) compliance with debt coverage indices, and ii) project and shareholders IRR
consistency with the performance level granted by the market for the concerned project
typology.

91. WHAT IS THE GENERALLY MOST CONVENIENT ISSUANCE PATTERN FOR PUBLIC
ADMINISTRATIONS?

There is no single most convenient pattern, as each project presents peculiar features
and different initial conditions that can orientate Public Administration choices.

Over the construction phase, the grant reduces the need for private capital funding.

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Issuing a grant over the management phase increases annual cash flows, raising both
debt and cash flow capacity available to shareholders, thus allowing for higher coverage
of overall project financial need in terms of debt and risk capital.

92. WHAT ARE PPP INTERVENTIONS MAIN RISKS?

Risk can be defined as uncertainty of future results analysed over a given timeframe.

With reference to a project for implementation and management of public works, risks
can be associated to various phases of project lifecycle, and notably:

Project risks related to project implementation period (i.e. pre-completion

risks), in their turn differentiated in sub-categories;

General project risks (i.e. risk factors persisting throughout

implementation, such as bureaucratic risks, political risks, etc.);

Project risks related to work economic management (i.e. post-completion

risks).

93. WHAT DOES RISK TRANSFER MEAN?

RIsk probability is, within a certain measure, linked to the ability of the subject to which
a given risk has been allocated to set prevention and mitigation measures aimed at

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minimising it. In this sense, the Administration should transfer risks to the private
subject that, in light of its specific technical competences or previously acquired
knowledge and experience, can minimise risk probability or related negative economic
impact.

Correct PPP implementation shall be aimed at optimum risk transfer, rather than at its
maximisation. In such a perspective, the Administration shall evaluate the involved
subjects actual capacity to properly take responsibility of their own allocated risks as
well as the impact such allocation will exert on intervention actual costs, debt cover
ratio and fruibility.

94. HOW ARE RISKS ALLOCATED AMONGST INVOLVED PARTIES?

Project risk allocation is one of the risk management process phases. Project risk
management is carried out throughout the project lifecycle and encompasses a four-step
sequence:

Step 1: Risk Identification Identify relevant events that could pose a risk over
project implementation.

Step 2: Risk Assessment Assess the probability that identified risks will actually
occur, their possible impact on the project, and identify during which phase such
risks could arise (i.e. project-design, construction and management).

Step 3: Risk Management Responsibilities are allocated in terms of risk

management amongst subjects intervening by virtue of contracts, agreements or

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mechanisms for distribution of risk typologies and instruments aimed at reducing

risk probability. In particular, it will be necessary to verify actual risk transfer
within the covenant that disciplines construction and management concessions.

Step 4: Risk Management Monitoring and Revision Through adequate reporting

instruments and revision of identified risks. Furthermore, new possible risks are
also identified, namely new risks generated by the project and submitted to the
same management process. The process ends upon intervention implementation
conclusion and expiry of contracts amongst involved parties.

Once project risks have been identified and assessed, it will then be necessary to
respectively evaluate which ones shall be advisably transferred, or retained and/or
distributed among parties, as well as their related distribution percentages.

It is worth recalling a typical concession feature, namely entrusting private partners

with estimate of management economic-financial risks (Art. 143 Para. 9 - Code).

95. WHAT IS A RISK MATRIX?

Risk matrix is an instrument aimed at enhancing risk analysis and identification, and
aimed at:

Listing and describing all project-related risks;

Identifying the subject to which the given risk is ascribed (i.e. public partner,

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private partner, mixed partner).

96. HOW ARE RISKS ALLOCATED IN A CONCESSION CONTRACT?

A concession contract is a juridical instrument defining the allocation of project risks

between the granting administration and the concessionaire.

The contract clauses shall punctually define partners mutual obligations.

With regard to the construction phase, risk allocation entrusted to the concessionaire is
performed through Code application. In particular:

Grant issuance upon either works completion or IPC;

Envisaging additional costs for variants only within the measure established in
Art. 132.

With regard to forecast risk allocation over management phase, the contract and its
annexes shall specify:

Listing of services that concessionaire is due to provide with indication of their

quantitative and qualitative levels;

Application patterns and scope of penalties to be applied in case of failed

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fulfilment of set standards;

Vigilance exercice patterns on Public Administration management;

Hypothetical mechanisms for adjusting obligations consistently with consolidated

and pre-established rules.

97. WHAT DOES VALUE FOR MONEY STAND FOR?

The term Value for Money (VfM) stands for optimum combination of overall project costs
and quality of issued services consistently with users needs i.e. achieving set
objectives through optimum use of available resources.

PPP VfM stands for the Administration financial benefit resulting from such operation.

VfM verification by Public Administration should be the assumption for start-up of PPP
operations. In such a context, before soliciting private investors market, Public
Administration should verify:

Whether PPP usage is more convenient than traditional procedures;

Whether possible PPP proposals would actually optimise costs borne by public sectors
and, in the presence of various proposals, identify and select the most advantageous
one.

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98. WHAT IS THE PUBLIC SECTOR COMPARATOR?

The Public Sector Comparator (PSC) a methodology available to Public Administrations to

evaluate Public-Private Partnership convenience (VfM quantification) through monetary
comparison between hypothesis of project first-hand implementation and management
and resort to PPP initiatives.

PSC encompasses three main elements:

Infrastructure base cost throughout project lifecycle (whole-of-life cost) or base

PSC;

Monetary quantification of non-transferable risks;

Monetary quantification of transferable risks.

It is of major importance for Public Administrations to primarily perform exhaustive

analysis of all risks related to infrastructure construction and management. Only correct
assessment, which can also substantially modify the base cost initially hypothesised,
allows estimating the PSC precisely.

PSC is expressed in terms of NPV i.e. via discounted cash flow analysis methodology
and taking into account all costs and risks encountered over a public contract award
procedure.

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99. WHAT ARE PSC MODEL IMPLEMENTATION MAIN LIMITS AND DIFFICULTIES?

As to evaluating whether recourse to PPP proves advisable, PSC main limit stems from
such methodology being based on often subjective forecasts and estimates that,
whereby not adequately supported by data and historical information, may be not fully
reliable.

Furthermore, however attentive and rigorous, risk quantification and transfer to private
partners will necessarily be arbitrary and subjective, notably in the long run.

Operators expertise and competence as well as use of statistical techniques may

certainly result in refining such technique and curbing its imprecision, although this will
hardly enable cleansing the PSC instrument of its inner arbitrary component.

100. WHAT TYPES OF PPP INTERVENTIONS CAN BE DECONSOLIDATED FROM PUBLIC

BUDGET?

PPP operations can provide an opportunity to deconsolidate part of infrastructural

investment costs from public budget. So as to identify and evaluate suitable costs, it is
necessary to make reference to project classification consistently with their self-
financing capacity via cash flows. In particular:

PPP projects in which revenue from use of implemented interventions enables

the private partner to integrally recover investment costs (i.e. projects without
grant). Being such projects carried out through totally private capitals,

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investment costs are obviously not consolidated in public budget;

PPP projects envisaging grant. Case-by-case evaluation, depending on the

specific grant and risk transfer level, is then required.

Eurostat Decision Treatment of Public-Private Partnerships of 11 February 2004 took

into consideration a particular PPP typology and punctually defined its treatment in
national public accounts. The decision concerns long-term contracts stipulated between
Public Administration and a private partner whereby the public subject is the main
purchaser of assets and services provided, whether the demand results both from public
partner and third parties.

This is the case, for instance, of public services (i.e. healthcare and education) whose
provision to citizens is paid by the Public Administration by virtue of a substitution
mechanism, as well as other infrastructure typologies (i.e. road-related infrastructures)
whose tolls are paid by the public partner through the so-called shadow tolls. Pursuant
to the above Eurostat Decision, it is possible to consider the implementation cost of such
infrastructure typologies as out-public budget, whereby a consistent part of project risks
is transferred to private partner, and notably:

Construction risk

Either availability risk and/or demand risk.

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