ANNUAL REPORT
2006
3
1.
HIGHLIGHTS AND OVERVIEW ...
5Corporate bodies ... 7
Letters to Shareholders... 8
Group financial and operating highlights ... 12
Autostrade’s share price and investor information ... .…. 13
Group structure ... ..…..……14
The Group's network and planned expansion and modernisation works ... 15
2.
MANAGEMENT REPORT ON OPERATIONS ...
19Significant corporate, regulatory and legal aspects ... 21
Consolidated financial review ... 41
Group operating review... 58
Traffic... 58
Toll charges... 60
Network expansion and modernisation... 63
Network operations ... 83
Service areas and advertising... 90
Advanced mobility and communication services ... 92
International expansion ... 93
Other investments ... 95
Autostrade S.p.A.: financial review and other information ... 96
Financial review of other Group companies... 112
Subsequent events at 31 December 2006... 130
Outlook... 132
Additional information ... 133
Sustainability section ... 136
Corporate Governance ... 146
The social dimension ... 155
Staff ... 163
Government and Institutions ... 175
The community... 177
Shareholders and investors ... 182
Suppliers ... 184
The environmental dimension... 185
Socio-economic indicators ... 196
Proposal to Autostrade S.p.A. Annual General Meeting... 201
3.
CONSOLIDATED FINANCIAL STATEMENTS OF THE AUTOSTRADE
GROUP AND NOTES ...
203Consolidated financial statements ... 205
Notes to consolidated financial statements... 211
4.
FINANCIAL STATEMENTS OF AUTOSTRADE S.p.A. AND NOTES...
290Financial statements ... 292
Notes to the financial statements... 297
Annexes…………. 361
5. OTHER REPORTS ...
422Report of the Board of Statutory Auditors ... 424
Reports of Indipendent Auditors ... 433
Report of The Environmental and Social Responsibility Committee ... 438
5
7
C
ORPORATE BODIESChairman Gian Maria GROS-PIETRO
Chief Executive Officer Giovanni CASTELLUCCI 1
Directors Salvador ALEMANY MAS
Gilberto BENETTON
Alberto BOMBASSEI (independent) Amerigo BORRINI
Roberto CERA
Alberto CLO’ (independent)
Sergio DE SIMOI
Piero DI SALVO (independent) Antonio FASSONE
Guido FERRARINI (independent)
Vito Alfonso GAMBERALE 2
Giuseppe GUARINO 3
Gianni MION Giuseppe PIAGGIO
Luisa TORCHIA 4
Board of Directors
elected for the three-year period 2006-2008
Secretary Andrea GRILLO
Chairman Gian Maria GROS-PIETRO
Executive Committee
Directors Giovanni CASTELLUCCI
Alberto BOMBASSEI (independent) Gianni MION
Giuseppe PIAGGIO
Chairman Giuseppe PIAGGIO
Internal Control and Corporate Governance
Committee Members Piero DI SALVO (independent) Guido FERRARINI (independent)
Chairman Gianni MION
Remuneration Committee
Members Amerigo BORRINI
Alberto CLO’ (independent)
Chairman Renato GRANATA
Supervisory Board
Members Pietro FRATTA
Simone BONTEMPO 5
Chairman Marco SPADACINI
Auditors Tommaso DI TANNO Raffaello LUPI Angelo MIGLIETTA Alessandro TROTTER Board of Auditors elected for the three-year period 2006-2008
Alternate Auditors Giuseppe Maria CIPOLLA
Giandomenico GENTA
Independent Auditors
for the period 2006-2011 KPMG SpA
(1) The Ordinary General Meeting of 30 June 2006 and the Board of Directors’ meeting of the same date confirmed the
appointment of Giovanni Castellucci as the Company’s CEO, following his co-option on to the Board by the Board of Directors’ meeting of 12 May 2006, following the resignation of Prof. Giuseppe Guarino. Mr. Castellucci is also the Company’s General Manager.
(2) CEO in office until 2 May 2006. Resigned his position as a Director by letter dated 21 May 2006. (3) Resigned as a Director on 2 May 2006.
(4) Appointed by the General Meeting of 30 June 2006 to replace Vito Alfonso Gamberale, who had resigned. (5) New member of the Supervisory Board in place of Enzo Spoletini.
S
TATEMENTS TOS
HAREHOLDERSChairman’s statement
Seven years have gone by since Autostrade was privatised. Seven years during which the debate over our country’s inadequate infrastructure has repeatedly come to the fore both at government level and among public opinion, in part thanks to Autostrade.
Autostrade’s privatisation gave a competitive boost to the country’s development, continuing the Company’s role played since its foundation in 1956. During the economic boom Autostrade played a leading part in the Italy’s modernisation, speeding up the process of industrialisation, bringing Italians’ habits and quality of life into line with those in other major European countries, and projecting a dynamic image of Italy around the world. Following its privatisation Autostrade has shown that it is capable of driving change, setting the European benchmark for standards of maintenance and management, and developing services and technologies to support its core business, which has lead, for example, to the export of our Telepass technology.
The Mediterranean Project, launched in 2002, was designed to give the Group’s role a European dimension, involving additional investments on top of those envisaged in the original Agreement of 1997, bringing the total up to approximately €11 billion. The new plan aims to make up for Italy’s lack of infrastructure, in terms of both networks and services, compared with other European countries, giving Italy in a key role in Mediterranean and trans-European trade.
This goal was behind the proposed merger with Abertis, Spain’s number one motorway operator, in 2006. The transaction was designed to enable us to play a leading part in the rapidly changing motorway sector, and respond to a competitive challenge that today extends beyond individual national contexts, turning Europe into a single large system, in competition with the other economic systems of Asia and America.
The measures used to block our merger with Abertis and the uncertainties linked to the new regulatory framework have led us to call off the proposed combination, although the industrial logic behind the transaction remains compelling.
Our global ambitions do not mean that we can forget the mainly domestic problems we have to deal with in carrying out the major works involved in upgrading the motorway network, in order to cope with ongoing traffic growth. Whilst the lengthy delays in the start-up and execution of works, due to complex and drawn-out authorisation procedures, reduce the country’s competitiveness, they also penalise the Autostrade Group, as the cost of carrying out the various works increases. Despite this, each year has seen us increase the volume of investments carried out and we are confident that this trend will continue over the coming years.
9
New issues have arisen as a result of recent changes to the legal and regulatory environment for motorway concessions, as introduced by Law 286/2006 and the subsequent Directive 1/2007 issued by the Interministerial Economic Planning Committee (CIPE). The new developments not only pose a threat to the Group’s ability to finance investments, as guaranteed by the existing system, but also damage the credibility of Italian government institutions, which have unilaterally modified the concession agreements that formed the basis for Autostrade’s privatisation in 1999 and enabled us to earn the trust of international investors.
It is our hope that the new regulatory framework can be altered in order to ensure effective improvements to concession arrangements. In line with what has happened in other European countries, the new regulations should aim to overcome current restrictions on the implementation of infrastructure projects in Italy, offer stronger protection for public interests, preserve the entrepreneurial role that resulted from Autostrade’s privatisation, and restore confidence among institutional investors.
The Group’s restructuring, which began in 2003 with the birth of Autostrade per l’Italia, will be completed in 2007. Autostrade SpA will take on the exclusive role of holding company, with responsibility for growth strategies. At the same time Autostrade per l’Italia will strengthen its role as an operating parent company involved in the management of infrastructure under concession.
Against this backdrop, and in accordance with its purpose of developing growth and financial strategies in the infrastructure sector, both in Italy and overseas, Autostrade SpA is to change its name to “Atlantia”. We are certain that the new name, which is based on the myth of Atlantis, clearly represents the solidity, reliability and internationalism that have always characterised and inspired the Company’s approach to doing business. And indeed, “Atlantia” brings together a group of companies devoted to the design, construction and development of infrastructure capable of supporting and encouraging social and economic development in Italy and further afield.
In this new guise, we are confident that we will be able to better respond to the challenges that lie ahead.
CEO’s statement
2006 saw Autostrade face a barrage of criticism. This was aimed primarily at the Group’s main concessionaire, Autostrade per l’Italia, and focused on the tariff increases introduced and delays in carrying out the investments originally planned. We in no way wish to sidestep the issues raised, but intend to respond with facts, figures and results.
Over recent years, our commitment of financial, technological and management resources has brought extremely satisfying results for shareholders and road users alike. We offer an increasingly efficient and safe service, whilst at the same time charging the most competitive tolls in Europe. Thanks in part to the application of new technologies, since our privatisation in 1999 we have achieved a significant reduction in accidents on our network, almost halving the fatal accident rate. Our motorways are now twice as safe as ordinary roads.
This has been accompanied by large-scale investments in the network, committing a total of over €1.1 billion in 2006, representing a third of turnover. Despite the difficulties encountered in obtaining authorisations and carrying out the works, since 1999 we have opened more than 152 km of new third and fourth lanes to traffic, accounting for over 50% of the volume envisaged in the original agreements entered into by the Group’s concessionaires. By 2012 we shall have completed investments totalling approximately €11 billion, more than any other European motorway company. At the same time we have almost fulfilled our goal of surfacing our motorways with draining pavement: 65% of the network compared with 18% in 1999. In 2006 alone we laid over 13 million square metres of asphalt, a figure five times higher than in 1999.
Between 2002 and 2004 around 80% of all food and fuel service concessions were renewed, with the definition of new quality standards and investment plans. 67 service areas have already been renovated, whilst the plan envisages the renovation of all service areas and the addition of a further nine areas by 2009. This represents total investment of around €800 million, with about half to be financed by the Autostrade Group.
5.3 million Telepass devices are in use on Italy’s motorways, compared with 1.5 million in 1999. In addition to boosting operating efficiency, this system has a positive impact on the quality of services and the environment, reducing tailbacks at toll stations. This makes us number one in Europe, with over half the continent’s Telepass devices having been developed by us. It is no accident that, at the end of an international tender involving leading technology companies from around the globe, in 2002 the Austrian government selected Autostrade to develop the world’s most advanced multilane, free-flow electronic toll collection system for heavy vehicles using the country’s motorway network.
11
But the Group has not only been successful in Austria. In 2006 it completed the acquisition (in partnership with SIAS and Mediobanca) of Chile’s Costanera Norte, the company that holds the concession to manage 47 km of urban motorway serving Santiago in Chile. The acquisition of a stake in the Polish company, Stalexport, the holder of a motorway concession for the 61 km long A4 Krakow-Katowice motorway, was also completed during the year. The holding will rise to 50% plus one share in 2007 following a capital increase reserved to Autostrade. All of this provides proof of the Group’s ability to build an international presence.
On the whole, the results for 2006 mark a continuation of the progressive improvement witnessed since privatisation. Revenue of €3,141 million is up 6.2% on 2005, whilst gross operating profit (EBITDA) has risen 7.0%, on a like-for-like basis, to €1,989 million. The ratio of net financial indebtedness, totalling €8,945 million, to EBITDA stands at 4.5 and is one of the lowest in the European motorway sector. Profit from continuing operations amounts to €672 million, marking an increase of 2.7% on 2005. Traffic using the network is up 3.1%, partly on the back of renewed economic growth. Toll charges have risen by an average 2.9%, but remain by far the lowest in Europe.
It gives us great pride and confidence to know that our uninterrupted efforts over the last seven years have kept Italy moving, especially as we view Autostrade’s privatisation not as the end of the road, but as the beginning of new challenges.
G
ROUP FINANCIAL AND OPERATING HIGHLIGHTS Revenue 3,141 2,957 0 1,500 3,000 4,500 2006 2005 €m +6.2% EBITDA 1,989 1,860 0 1,000 2,000 3,000 2006 2005 €m +7.0% Investment 1,177 852 0 500 1,000 1,500 2006 2005 €m +38.1% Traffic 41,771 40.464 12.487 12.171 0 20,000 40,000 60,000 2006 2005 Light vehicles Heavy vehicles+3.1% Mln Km Safety (accidents per 100m km travelled) 2006 2005 Global accident rate Fatal accident rate
46.8 0.49 49.9 0.48
Method of payment (% of total transactions) 30% 32% 7% 7 % 12% 12% 50% 48 % 1% 1% 2006 2005 M anual cash payments A utomated cashier Viacard and other cards Telepass Other
13
A
UTOSTRADE’
S SHARE PRICE AND INVESTOR INFORMATIONKEY MARKET DATA
2006 2005
Issued capital (€) 571,711,557 571,711,557
Number of shares (unit par value €1) 571,711,557 571,711,557
Market capitalisation (€m)* 12.5 11.6
Earnings per share (€) 1.16 1.39
Operating cash flow per share (€) 2.12 1.96
Dividend per share (€) 0.62 0.56
Interim 0.2625 0.25 Final 0.3575 0.31 Payout ratio (%) 53% 40% Dividend yield* 2.8% 2.8% Year-end price (€) 21.79 20.26 High (€) 24.38 22.99 Low (€) 20.11 18.37
Share price/ Earnings per share (P/E)* 18.7 14.6
Share price / Cash flow per share* 10.3 10.3
Market to Book Value* 3.4 3.5
Autostrade as % of stock market capitalisation* 1.57% 1.98% Autostrade as % of S&P Mib index* 1.45% 1.60%
Group's ratings
Standard&Poor's A - negative outlook A - stable outlook Moody's A3 - stable outlook A3 - stable outlook
* Based on year-end price.
AUTOSTRADE S.p.A.’S SHAREHOLDER STRUCTURE
AUTOSTRADE’S SHARE PRICE PERFORMANCE
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000 Volu mes ( 0 0 0 ) 18 19 20 21 22 23 24 25
Jan.06 Feb.06 Mar.06 Apr.06 May.06 Jun.06 Jul.06 Aug.06 Sep.06 Oct.06 Nov.06 Dec.06
Pr ic e ( € ) Volumes Autostrade S&P/Mib (rebased)
G
ROUPS
TRUCTUREFINANCIAL AND OPERATING HIGHLIGHTS FOR THE GROUP’S PRINCIPAL MOTORWAY CONCESSIONAIRES
15
T
HE GROUP’S NETWORK AND PLANNED EXPANSION AND
MODERNISATION WORKS
THE GROUP’S INVESTMENT IN MAJOR WORKS
Project Km covered by project Value of project (a)
Km open to traffic at 31 Dec 2006 (c)
(km) €m €m % of completion (km) Autostrade per l'Italia: Agreement of 1997
MI-VA (A8) Fiorenza - Gallarate Works completed 28.7 65 65 100% 28.7 MI-NA (A1) and BO-TA (A14) Bologna Interchange 45.3 365 217 59% 31.6
- Modena-Bologna Works completed (1) 31.6
177 139 78% 31.6
- Bologna Ring Road Works in progress (2) 13.7
188 78 42% 0.0
MI-NA (A1) Variante di Valico 66.6 3,160 860 27% 19.0 - Casalecchio - Sasso Marconi Works in progress 4.1 54 9 16% 0.0 - Sasso Marconi - La Quercia Works in progress (3) 19.4 543 485 89% 19.0 - La Quercia - Badia Nuova Works in progress (4) 21.3 1,000 36 4% 0.0 - Base Tunnel (d) Works in progress 15.7
1,037 247 24% 0.0
- Aglio - Barberino Works in progress 6.1 227 16 7% 0.0
- Landscaping works (e) 298 67 23% 0.0
MI-NA (A1) Florence Interchange 58.5 1,358 208 15% 3.1 - Barberino - Florence North Environmental Impact Assessment in progress 17.5 484 12 3% 0.0 - Florence North - Florence South Works in progress or completed (5) 21.9 590 191 32% 3.1 - Florence South - Incisa Environmental Impact Assessment in progress 19.1 284 4 1% 0.0 MI-NA (A1) Orte Fiano Works completed (6) 37.8 178 171 96% 37.7
Remaining investments
Tender process underway/works in progress
or completed (7) 25 10 41% 0.0
Total projects under Agreement of 1997 236.9 5,150 1,531 30% 120.1
Autostrade per l'Italia: IV Addendum of 2002 (m)
MI-CO (A9) Lainate - Como Grandate Awaiting closure of Services Conference 23.2 186 8 4% 0.0 MI-Lakes (A8-A9) Access to Milan Exhibition Centre Works completed (8) 3.8 87 67 77% 3.8 MI-BS (A4) Milan - Bergamo Works in progress or completed (9) 35.1 425 218 51% 8.3 A7-A10-A12 Genoa Interchange Preliminary design in progress 34.8 1,800 6 0% 0.0 BO-TA (A14) Rimini North - Pedaso (f)
Works being approved/tender process
underway/works in progress (10) 171.0 1,763 60 3% 0.0 MI-NA (A1) Fiano Romano - Rome Orbital Motorway (g) Awaiting closure of EIA-Services Conference 18.7 149 6 4% 0.0 Other projects (h) Works being approved/ in progress/ completed (11) 225 15 7% Total projects under IV Addendum of 2002 286.6 4,636 379 8% 12.1 Total investments in major works by Autostrade per l'Italia 523.5 9,786 1,910 20% 132.2 Subsidiaries:
RAV: AO-Mont Blanc Tunnel (A5) Morgex- Entreves (Agreement of 1999) Works completed (12) 12.4 407 375 92% 7.2
Strada dei Parchi: RM-AQ-TE and Torano - Pescara (A24 and A 25) (Agreement of 2001) (n) 19.9 345 32 9% 0.0
- Villa Vomano -Teramo Work in progress 5.7 117 25 21% 0.0 - Rome East (Lunghezza) - Via P. Togliatti (i) Awaiting closure of EIA-Services Conference (13) 14.2 228 7 3% 0.0 Autostrade Meridionali: NA-Pompei-SA (A3) Napoli - Pompei (Agreement of 1999) (l)
Tender process underway/works in progress
or completed (14) 20.4 387 200 52% 3.6
Total projects by subsidiaries 52.7 1,139 607 53% 10.8 Total investments in major works by the Autostrade Group 576.2 10,925 2,517 23% 143.0
(d) The Base Tunnel includes the Badia Nuova-Aglio lots and pilot tunnels.
(e)This item includes landscaping works around the motorway network on the Sasso Marconi-Barberino section.
(l)Planned widening on SAM's network regards 24.9 km, including 4.5 km already open to traffic during Agreement of 1972-1992. (1) Excluding compensatory works.
(2)
The new Bologna Exhibition Centre junction was opened to traffic on 6 December 2006.
(12) This section was opened to traffic on 7 March 2007 on a provisional basis. (13) With the exception of upgrading work on the new Lunghezza toll station, which is in progress.
(6) Work on widening the southbound section of the Nazzano Tunnel (337 metres) is still underway; excavation is due to finish by spring 2007, to be followed by excavation of the reverse arch in the two bore holes (northbound and southbound), with completion expected by the end of 2007.
(7)
The works regard the widening of 3 viaducts on the A1 motorway, of which one has been completed, whilst the contract is in the process of being awarded for another and the third is in progress. This item also includes a number of works carried out by contractors with a contribution from ASPI.
(14)
Work on widening the 20.4 km section has been divided into 6 Lots, of which 2 have been completed and 4 are in progress. The planned expansion of the motorway also envisages the construction/upgrading of 6 named junctions. Work on 4 of these has been completed, whilst work on another is in progress and the contract is in the process of being awarded for the last.
(9) The new Trezzo junction (Lot 2) was opened to traffic on 6 October 2006. Lot 2, between Trezzo and Cavenago, representing a section of approximately 7.5 km, was opened to traffic on 29 December 2006, together with a 1.6 km section of the eastbound carriageway of Lot 3, before the Bergamo junction.
(10) Widening work has been divided into 9 lots. Work is in progress on one Lot (37.0 km), whilst the tender process is underway for another Lot (5.2 km). The Services Conference has closed for 5 Lots (88.7 km) and the final design is being added to. The closure of the EIA and the Services Conference is awaited for a further Lot (29.0 km), whilst the Services Conference for a ninth Lot (11.4 km) failed to give the go-ahead and a decision from the Cabinet Office is awaited.
(11) Work on the Tunnel Safety Plan is in progress. In terms of the 6 junctions involved, work is in progress on one, the contract is in the process of being awarded for another, and a further 3 are awaiting closure of the EIA and the Services Conference. The final design is being prepared for the sixth.
(3) The northbound section of the Gardelletta Tunnel (840 metres) is nearing completion; work is scheduled for completion by April 2007. (4)
Contract for lot 6-7 of the Variante di Valico finally awarded on 31 August 2006. The contract has so far not been signed due to appeals brought before the Administrative Court by certain companies not selected. (5) Southbound carriageway of Florence North-Florence Scandicci section opened to traffic on 21 December 2006 with provisional road markings.
(8) Link opened to traffic from March 2005 with the inauguration of the Milan Exhibition Centre junction. Work is nearing completion and is expected to be finished in February 2008 (14 months after the site was made available free from interference and impediments).
(n)In operation from 2003. (a)
Total cost of carrying out the works, as assessed at 31 December 2006, including the base bid price, available funds, recognised reserves and early completion bonuses. (b) Excludes capitalised costs (financial expenses and staff costs). Percentage of completion calculated in relation to the value of the project.
(f)
Includes the new Marina di Monte Marciano junction (estimate in IV Addendum: €7m) and the new P.to S. Elpidio junction (estimate in IV Addendum: €22m). (g)Includes the new Castelnuovo di Porto junction (estimate in IV Addendum: €10m).
(h)Includes the Tunnel Safety Plan (estimate in IV Addendum: €134m) and 6 new junctions (estimate: €91m).
Status
(i)Total costs including €64.1m to be financed by SdP and remaining €163.9m to be financed by proposing local authorities.
Stage of completion 31 Dec 2006 (b)
(m)
Final approval received in 2004.
17
19
21
S
IGNIFICANT CORPORATE,
REGULATORY AND LEGAL ASPECTSThis section provides key information about corporate, regulatory and legal developments during 2006 and early 2007, partly in relation to potential future implications.
Merger of Autostrade SpA with and into Abertis Infraestructuras SA
On 23 April 2006 the Board of Directors of Autostrade SpA unanimously approved the Term Sheet, signed later that day, setting out the structure and principal terms and conditions of a merger between Autostrade and Abertis Infraestructuras SA, which envisaged Autostrade’s merger into Abertis.
The transaction aimed to create the world’s number one motorway operator for the construction and management of road transport infrastructure, with a road system of over 6,700 km, revenues of approximately €6 billion and a stock market capitalisation of around €25 billion.
The merger formed an integral part of the strategy drawn up by Autostrade in 2003 under the name of the Mediterranean Project. This called for the implementation of an integrated system of infrastructure and services in the Mediterranean area.
This business combination was intended to increase the overall capacity of the transportation system in the Mediterranean area, considering not only domestic trade within the different countries, but also the wider trans-European and transcontinental context. More specifically, the merger aimed to create a common infrastructure platform and shared know-how in services and technologies, in order to make the transportation system serving the Mediterranean part of Europe more competitive, whilst modernising the systems in the respective countries.
The merger had a business, financial and operational rationale.
From the business point of view, size is the key to achieving growth, given the constant expansion of markets. So-called “critical mass” is important in the motorway sector due to the capital-intensive nature of the related investments.
In fact, in other European countries, motorway concessionaires have recently tended to seek business combinations, in a sector that has witnessed a widespread process of privatisation.
The merger also had a financial rationale. The opening up of markets has, in fact, prompted an upgrading of the industry’s financial structure, as listed privatised concessionaires compete on the capital markets in order to raise low-cost funding to finance their growth plans.
The merger was to make it possible to optimise the combined entity’s capital structure, thanks to revenue growth, an improved outlook for EBITDA and the ability to generate more substantial cash flows.
In addition, the absorbing company would have been able to rely on greater visibility for its shares on equity markets, thanks to its greater capitalisation and inclusion in the main European stock market indices.
From an operational point of view, the positive synergies between the two groups were to translate into significant benefits in terms of the fit between the businesses, with the aim of ensuring greater quality and efficiency of the services provided to customers.
On 2 May 2006 the Board of Directors of Autostrade SpA approved the plan of merger, with only the CEO, who subsequently resigned, voting against.
The transaction was based on a share exchange ratio of 1.05 new Abertis Class A ordinary shares for each Autostrade share, subject to payment to Autostrade’s shareholders (who had not exercised their right of withdrawal) of a special dividend of €3.75 per Autostrade share, via the corresponding use of distributable extraordinary reserves.
On 30 June the Extraordinary General Meeting of Autostrade SpA’s shareholders approved the plan of merger, which envisaged the merger of Autostrade SpA with and into Abertis Infraestructuras SA (Abertis) and the concomitant listing of the shares of Abertis Infraestructuras SA on the Mercato Telematico Azionario organised and managed by Borsa Italiana SpA.
The combination of the Italian and Spanish leaders in the sector would have contributed to the creation of the world’s largest motorway operator, the best in its class for the construction and management of transport infrastructure.
Relations with ANAS SpA, the Ministry of Infrastructure and the Ministry of the
Economy and Finance with regard to the authorisation process
Following a specific request from the Minister of Infrastructure, Council of State ruling no. 2719/2006 of 21 June 2006 stated that the merger required authorisation from ANAS SpA (Italy’s highways agency) and the approval of the Minister of Infrastructure and the Minister of the Economy and Finance.
Autostrade SpA and Autostrade per l’Italia SpA, in a letter dated 5 July 2006, thus formally requested ANAS SpA for authorisation to proceed with the merger, whilst reserving all rights and/or claims regarding the legitimacy and effectiveness of the procedure referred to in ruling no. 2719/2006.
Subsequently to this request, ANAS SpA, in a letter dated 5 August 2006, informed Autostrade SpA and Autostrade per l’Italia SpA that it was not in a position to grant authorisation, following the decisions of the Minister of Infrastructure and the Minister of the Economy and Finance, communicated to ANAS SpA in a joint memo sent on 4 August 2006.
Specifically, ANAS SpA explained that in the view of the two ministers the merger was not compatible or consistent with the aims of the concession agreement, or with the terms of the Group’s privatisation, or with the commitments given in the Agreement of 1997 and subsequent addenda. Given that the merger has implications for the European market, pursuant to art. 1 of EC Regulation 139/2004, on 18 August 2006 Autostrade SpA and Abertis Infraestructuras SA formally reported the transaction to the European Commission. On 22 September 2006 the European Commission approved the merger without placing any conditions.
In a letter dated 13 October 2006, ANAS SpA then informed Autostrade SpA and Autostrade per l’Italia SpA that, with reference to the joint memo of 4 August drawn up by the Minister of Infrastructure and the Minister of the Economy and Finance, the obstacle to the merger with Abertis, represented by the fact that the shareholder structure of the merged company would include a construction company, following the entry into force of article 12, section 4 of Law Decree 262/2006,
23
subsequently converted into Law 286/2006, was no longer applicable. The letter stated, however, that all the other obstacles to the merger put forward in the previous communications, and included in the letter of 5 August, remained.
On the same day, 18 October 2006, Autostrade SpA and its subsidiary, Autostrade per l'Italia SpA, announced an appeal before Lazio Regional Administrative Court (TAR), against ANAS SpA, requesting cancellation, with a prior injunction suspending application, of the ruling of 5 August by which ANAS denied its authorisation to proceed with Autostrade SpA’s merger with and into Abertis, with consequent recognition of the subjective right of the appellants to proceed with the merger without the requested authorisation. The appeal also requested the court to examine whether or not the measures contained in article 12 of Law Decree 262/2006 represent a violation of the subjective rights of the appellants, raising, under various aspects, the issue of the constitutional legitimacy of the above article 12. The appeal was lodged against ANAS SpA, the Ministry of Infrastructure, the Ministry of Economy and Finance and the Presidency of the Council of Ministers. Abertis SA and Schemaventotto SpA lodged similar appeals.
Subsequently, with a letter dated 27 October 2006, ANAS SpA informed Autostrade S.p.A and Autostrade per l’Italia SpA that on 26 October it had received a communication from the Minister of Infrastructure and the Minister of the Economy and Finance stating that the jointly signed memo of 4 August 2006 had been rendered devoid of any legal effect. This had the purpose of dispelling any doubts regarding the note sent to the Italian government by the European Commission on 18 October 2006, in which the Commission announced its preliminary conclusion that Italy might have violated article 21 of the EU Merger Regulation because of unjustified obstacles placed in the way of the merger. ANAS SpA therefore announced that its communications of 5 August and 13 October 2006 were no longer valid or effective, specifying that Autostrade SpA and Autostrade per l’Italia SpA could re-activate the authorisation process begun on 5 July 2006.
On the same day, 27 October 2006, Autostrade SpA and Autostrade per l’Italia SpA responded to ANAS SpA, clarifying the fact that, under their interpretation, the European Commission’s assertion regarding the illegitimacy of the authorisation process also extended to the requirement to submit the merger to the prior authorisation of ANAS SpA and the Minister of Infrastructure and the Minister of the Economy and Finance, requesting an explicit decision on the matter should ANAS be of a different opinion.
In a letter dated 9 November 2006, ANAS SpA stated that it had not received any answer to its letter of 27 October 2006 and was thus awaiting a request for re-activation of the authorisation process. ANAS SpA went on to state that, without such a request, the authorisation process could not begin. Autostrade SpA responded in a letter dated 17 November 2006, in which, among other things, the Company:
- noted the contradictory nature of the communications issued by ANAS SpA on 13 October 2006, 27 October 2006 and 9 November 2006 regarding authorisation of the merger, and
- reminded ANAS SpA that on 27 October 2006 it had requested clarification regarding the subsequent ineffectiveness of the above communications of 5 August 2006 and 13 October 2006 and the related removal of the need to re-activate the above authorisation process.
Autostrade SpA stressed that ANAS SpA had failed to provide the requested clarification on this matter. In the same letter Autostrade SpA, holding that ANAS SpA’s claim to have the power to authorise the merger effectively constituted a means of blocking the transaction – a transaction that, on the contrary, is subject to the sole authority of the European Commission, pursuant to art. 21 of EU Regulation 139/2004 -, concluded by asking ANAS SpA to consider that any obligations regarding the merger had been fulfilled in accordance with the related regulations, including those of the EU.
ANAS SpA never responded to this letter.
The special dividend
In a letter dated 10 November 2006, ANAS SpA, in response to press reports stating that Autostrade SpA had called a general meeting of its shareholders for 12/13 December to approve payment of a special dividend of €3.75 per share, requested Autostrade SpA and Autostrade per l’Italia SpA to provide urgent clarification and reassurances in this regard. Such a request was based on the assumption that any extraordinary transaction, with an impact on the net worth of the two companies, should only be undertaken following prior verification of their continuing ability to finance planned capital expenditure.
Autostrade SpA responded to the above letter on 16 November 2006, specifying that the plan of merger, published on 26 May 2006, originally envisaged payment of a special dividend as a condition for implementation of the merger and that all the necessary information regarding the entity’s post-merger financial position had been supplied to ANAS SpA as far back as 15 May 2006. In the same letter Autostrade noted that, on the basis of an in-depth examination of this information, involving a specially appointed committee of experts, ANAS SpA had concluded that the merger would have no impact on the entity’s post-merger financial position, even after payment of the special dividend. Autostrade SpA also took the opportunity to stress that the absence of any impact of the merger on its financial position had also been confirmed by the rating agency, Standards & Poor’s (in a note published on 1 June 2006). According to the agency, after payment of the special dividend, the post-merger entity would have maintained its current “A” Corporate Credit Rating. The agency also confirmed that Autostrade per l’Italia SpA would not have granted any form of guarantee to secure the financing necessary to pay the special dividend. The rating agency, Moody’s, also came to the same conclusion in a note published on 24 July 2006, in which it confirmed Autostrade’s A3 rating.
On 16 November 2006 Autostrade per l’Italia SpA, which was in any event not directly involved in the plan of merger, also informed ANAS SpA that it was not planning any extraordinary transaction that would have had an impact on its net worth, confirming that it was not planning to grant any form of guarantee to secure the financing necessary to pay the special dividend, and at the same time stating that it was capable of funding its planned capital expenditure.
On the same date, 16 November 2006, ANAS SpA sent a letter contesting its alleged failure to respond to the letter of 10 November, and requesting that Autostrade SpA and Autostrade per l’Italia SpA provide information regarding the nature of the special dividend payment. The information required was to include details of how the payment was to be financed and the effects of the
25
transaction with regard to the companies’ continuing ability to finance planned capital expenditure. In the same letter, ANAS SpA intimated that Autostrade SpA and Autostrade per l’Italia SpA should provide the above clarification at the earliest opportunity. It also, among other things, requested Autostrade SpA not to take any further steps relating to payment of the special dividend, warning both companies against the provision of guarantees for the transaction.
In a letter dated 17 November 2006, Autostrade SpA repeated the assertions contained in the letter of 16 November 2006, stating that ANAS SpA was applying the provisions of the concession agreement entered into with Autostrade per l’Italia SpA in 2003 to Autostrade SpA, which did not sign up to the agreement. Autostrade SpA expressly reserved the right to take legal action.
In a letter dated 20 November 2006, Autostrade per l’Italia SpA reiterated the fact that neither the Company itself, nor any of the Group’s other motorway concessionaires, had decided or intended to approve payment of a special dividend, whilst reserving the right to take legal action to protect their position.
On 21 November 2006, Autostrade per l’Italia SpA brought an appeal against ANAS SpA before Lazio Regional Administrative Court, requesting cancellation and an interlocutory injunction suspending application of the above letters (index no. 274/06 of 10 November 2006 and index no. 276/06 of 16 November) and further measures as indicated. A similar appeal was subsequently filed by Autostrade SpA.
On 28 November 2006, Autostrade SpA, having again reiterated the fact that it had already, in its letter of 16 November 2006, provided details of payment of the special dividend, supplied further information, including the contents of the Directors’ report on the proposal to be put to the general meeting of shareholders held on 30 June 2006. Furthermore, with reference to the effects of the above payment, Autostrade SpA called attention to the report, previously published on 15 May 2006 and prepared with the support of Goldman Sachs and Rothschild, which demonstrated that not only would the post-merger entity’s financial position continue to be strong but that it would be improved.
Judgments handed down by Lazio Regional Administrative Court
On 6 December 2006 hearings were held before Lazio Regional Administrative Court to discuss the appeals lodged by Autostrade SpA and Autostrade per l’Italia SpA regarding:
1. cancellation of ANAS SpA’s decision of 5 August 2006, which had refused authorisation of the merger;
2. cancellation of ANAS SpA’s letters (index no. 274 of 10 November 2006 and index no. 276 of 16 November 2006) regarding payment of the dividend.
Regarding the first judgment, the Lazio Regional Administrative Court rejected the interlocutory injunction requested by the plaintiffs, Autostrade SpA and Autostrade per l’Italia SpA
Regarding the second judgment, with ruling no. 6686/2006 and ruling no. 6687/2006, the Lazio Regional Administrative Court rejected the interlocutory injunction suspending application of ANAS SpA’s letters (index no. 274/06 and index no. 276/06), deeming that one of the conjectures behind the interlocutory injunction was groundless, as it constituted “serious and irreparable damage”.
On 25 January 2007 the Lazio Regional Administrative Court handed down a judgment regarding this matter. In brief, the judgment recognised ANAS SpA’s power to authorise the merger. In particular, the Lazio Regional Administrative Court, whilst acknowledging “that a degree of interpretative uncertainty might indeed exist in establishing the authorising power” based on the legislation referred to by the Council of State in its judgment of 21 June 2006, nevertheless considers that such right derives from the nature of the relationship.
Autostrade SpA and Autostrade per l’Italia SpA intend to appeal the above sentence issued by the Lazio Regional Administrative Court before the Council of State within the required term (one year from publication of the sentence).
Impossibility of consummating the merger
On 13 December 2006 the boards of directors of Abertis and Autostrade, bearing in mind the failure to obtain one of the necessary authorisations for completion of the merger, and changes to the legal framework in force on the date when the merger was approved by general meetings of the two companies’ shareholders, jointly acknowledged the impossibility of carrying out the merger. Having noted the opinion of the boards, the General Meeting of Autostrade’s shareholders held on the same date resolved “not to pass a resolution regarding payment of the special dividend of €3.75 per ordinary share of Autostrade SpA, due to the fact that, as things stand, there are insurmountable material obstacles to the implementation of the merger”.
Proceedings launched by the EU’s Competition Directorate General
On 18 October 2006 the EU’s Competition Directorate General reached the preliminary conclusion that Italy had violated article 21 of the EU Merger Regulation by unjustifiably hindering the merger between Abertis and Autostrade SpA (doc. IP/06/1418). In particular, the Commission expressed serious doubts regarding the compatibility of article 21 with the binding statement made by the Minister of Infrastructure and the Minister of the Economy on 4 August 2006 and the decision taken by ANAS SpA on 5 August, which rejected Autostrade SpA and Autostrade per l’Italia SpA’s request regarding the merger with Abertis. The Commission reached the preliminary conclusion that such measures are unsuitable for safeguarding legitimate interests compatible with the general principles and other provisions of EU legislation.
On 5 January, in a press release (Memo 07/01), following a meeting with Minister Di Pietro,
Commissioner Kroes said that national authorisation “should not be used to obtain concessions
regarding prior regulatory deficiencies or to resolve potential future problems”.
Also on 5 January, in a document that was posted on the Ministry of Infrastructure’s website, the Italian government replied to certain queries raised by the EU’s Competition Directorate General regarding relations between ANAS and Autostrade per l’Italia SpA, and between Autostrade SpA and Abertis. Briefly, the Italian government maintained that:
• Autostrade SpA and Autostrade per l’Italia SpA had not carried out planned investment amounting to €3.2 billion (at 31 December 2006);
27
• fulfilment of the public interest entails acceptance of certain conditions by the concessionaire, including signature of the Sole Agreement, a willingness to allocate €3.2 billion to planned investment that was not carried out, the issue of guarantees on investments and submission of a new financial plan;
• if a new request to authorise a merger is submitted, the administrative procedure should be
restarted. However, the preliminary activities carried out so far should enable an appropriate and satisfactory reduction in the time needed to complete the process.
On 19 January Autostrade SpA and Abertis submitted a document to the EU’s Competition Directorate General in response to the Italian government’ above-mentioned reply of 5 January. In their reply, Autostrade SpA and Abertis pointed out that:
1. the Italian government had exercised an alleged authorising power with a view to preventing completion of the merger transaction, even if the transaction did not involve the motorway concessionaires, but only Autostrade SpA;
2. the Italian government unilaterally and arbitrarily modified motorway sector regulations, thereby impairing the relevant regulatory framework, interfering with the merger transaction and seeking to forestall any action by the European Commission regarding the matter.
Both the actions by the Italian government as described in points 1 and 2 are measures designed to block the merger. Consequently, Autostrade SpA and Abertis have requested intervention by the Commission in order to eliminate the blocking measures implemented by the Italian government. On 31 January European Commission’s Competition Directorate General sent Italy a new preliminary assessment of the measures blocking the Abertis-Autostrade merger (doc. IP/07/117).
The European Commission “reached the preliminary conclusion that Italy had violated article 21 of the EU Merger Regulation due to failure to grant authorisation”. In particular, the Commission expressed
“serious doubts regarding the compatibility of the Italian government’s actions with article 21, as it had not established beforehand, and in a sufficiently clear manner, the alleged public interest criteria for applying the authorisation procedure and did not adopt the decision regarding authorisation of transfer of the concession”.
The Commission “does not dispute the fact that national governments may verify that a
concessionaire continues to make profits and is able to meet its investment commitments after a merger”.
“The national authorisation process,” according to the EU Commission, “should nevertheless refer to specific changes regarding the merger itself and not be used to obtain concessions concerning prior regulatory problems, or to solve any future problems stemming from the provisions of an existing concession. For example, the Commission considered on a preliminary basis that a special Autostrade dividend of €2 billion, included as a condition of the merger, would not jeopardise the profitability of the concession and related investments, since Abertis would contribute other assets and cash flow to the post-merger entity, and therefore the financial outlook for the entity would be at least as favourable as Autostrade’s medium-term prospects if the merger had not taken place.”
On 12 March 2007 the Italian government sent a document in reply to the preliminary conclusions reached by the European Commission regarding violation of article 21.
Autostrade SpA intends to take all possible actions, in respect of the Ministry of Infrastructure, the Ministry of the Economy and Finance and ANAS, in order to claim compensation for the damages incurred as a result of the unjustified blocking of the merger with Abertis.
ANAS SpA brings declaratory action against Autostrade SpA and Autostrade
per L’Italia SpA
A declaratory action has been brought by ANAS SpA before the Civil Court of Rome, which subsequently issued a subpoena to Autostrade SpA and Autostrade per l’Italia SpA on 9 December 2006. ANAS SpA has petitioned the court to rule on a breach of undertakings given by Autostrade SpA and Autostrade per l’Italia SpA and to order the companies to promptly carry out works in accordance with the projections in the financial plan.
In particular, the subpoena - of which the Ministry of Infrastructure, the Ministry of the Economy and Finance and the Interministerial Economic Planning Committee were also notified – claims the following:
• the delay in executing the works amounts to €1,959.9 million at 31 December 2005;
• Autostrade per l’Italia SpA has refused to post the benefits deriving from the delayed execution of investments to its accounts, as previously requested by ANAS SpA;
• Autostrade SpA and Autostrade per l’Italia SpA are jointly responsible for the breach of
obligations to ANAS SpA, given that: (i) both companies constitute “a concessionaire with an objectively unified structure”; (ii) the transfer of the business unit from Autostrade SpA to Autostrade per l’Italia SpA does not diminish the responsibility of the transferor, Autostrade, for all the commitments given prior to the transfer; (iii) Autostrade SpA must comply with the obligations assumed by Autostrade per l’Italia SpA, in its capacity as sole shareholder pursuant to article 2362 of the Italian Civil Code until the entry into force of the company law reform and, subsequently, as the entity that manages and coordinates Autostrade per l’Italia SpA
As a result of these breaches, ANAS SpA has petitioned the Court to:
— rule on whether or not Autostrade per l’Italia SpA and Autostrade SpA are in breach of their obligation to promptly carry out investments in accordance with the provisions of the agreement and the financial plan;
— consequently order the companies to jointly and severally meet the obligations of which they are in breach;
— rule on whether or not the defendant companies have breached the “obligation to commit
financial resources corresponding to the amount of projected and incomplete investments shown by evidence, subject, however, to a minimum of €1,959.9 million and the obligation to provision and/or commit amount equal to the concessionaires’ financial benefits as a consequence of the fact that the investments were not made […] which shall in no case be less than €49 million”;
— order the defendant companies to jointly and severally pay compensation for the damages
29
— ascertain – expressly without prejudice to expanding and amending the petition including a motion to order the direct refund of toll increases made in prior years and to object to citing art. 1460 of the Italian Civil Code to excuse performance due to the suspension of the annual revision of tolls for 2007” - that Autostrade per l’Italia and Autostrade as a result of their breach “...do not have full rights to the contractually determined consideration and, moreover, have no right to increase tolls for 2007”;
— ascertain, with regard to the failure to promptly carry out the investments, that “proposals have been made for a review and update of the financial plan and for the related review of the terms and conditions of the concession agreement”.
On 27 March 2007 Autostrade SpA and Autostrade per l’Italia SpA filed their statement of defence in response to the above subpoena. Procedurally, their defence is based on the nullity of the subpoena on the grounds of the imprecise nature of the claim. Also with regard to procedure, Autostrade SpA disputes the passive involvement of the Company, as all the obligations agreed with ANAS SpA were exclusively undertaken by Autostrade per l’Italia SpA, without any guarantee given by Autostrade SpA.
With respect to the facts, Autostrade per l’Italia SpA and Autostrade SpA have based their defence on the following arguments:
— Autostrade per l’Italia gave an undertaking, on the basis of the Agreement executed with
ANAS, to carry out the planned works, but gave no undertaking with regard to the timing and cost of the works. The time frame indicated in the financial plan appended to the agreement is not, therefore, binding, but merely constitutes a forecast. The Company’s position is backed up by the earlier opinions of two well-known legal experts (Prof. Guarino and Prof. Cassese). It is, on the other hand, sufficient to consider that the time it takes to carry out works is closely linked to completion of the related approval procedures, which are lengthy and complicated, involving a large number of entities and bodies over whom the concessionaire has no influence;
— in any case, Autostrade per l’Italia SpA may not be held responsible for the reported delays. Indeed, the company has made every effort to remove the obstacles – occurring primarily during the authorisation phase for each project – which have hindered completion of the works;
— the fact that Autostrade per l’Italia SpA is not responsible for the delays has already been recognised by ANAS SpA itself on several occasions;
— linking the right to increase tolls in 2007 to delays in carrying out investments is without substance, aside from the fact that Autostrade per l’Italia SpA is not responsible for such delays, as there is no correlation whatsoever between the stage of completion of such works and ordinary increases in tolls. Moreover, the delays, rather than benefiting Autostrade per l’Italia SpA, have resulted in significant cost increases;
— the delays in carrying out the works do not constitute a case of force majeure, which under the terms of the agreement would justify a request by ANAS SpA for a revision of the financial plan.
The parties are to attend an initial hearing on 18 April 2007.
Notwithstanding the obligation of the concessionaires to complete the works, the petition to commit and/or provision financial resources for the projected and incomplete works, and the consequent financial benefits, have no bearing on any contractual obligation in that respect. Due to the delays, which, as conceded by ANAS, moreover, were not caused by the concessionaire, performance of the works, in accordance with the Agreement of 1997, will result in an increase in costs to be fully borne by the concessionaire.
Based on the above considerations, which are also echoed in the legal opinions of authoritative experts in the field, which will be used to support the arguments put forward by Autostrade SpA and Autostrade per l’Italia SPA in their defence, it was deemed unnecessary to allocate any related provisions in the companies’ financial statements. This also reflects the requirements of IAS 37 – “Provisions, Contingent Liabilities and Contingent Assets” and, with reference to the recognition and measurement of assets, IAS 16 “Property, Plant and Equipment”.
New regulations governing motorway concessions
New legislation
On 29 September 2006 the Italian government passed Law Decree 262/2006 (published in the Official Gazette of 3 October 2006). Article 12 – subsequently art. 2, paragraphs 82 through 90 – has radically and unilaterally introduced changes to motorway concession arrangements in Italy, which, in their current form, were used as the basis for the Company’s privatisation in 1999. The Law Decree was converted, with amendments, into Law 286/2006 and subsequently further amended by Law 296/2006.
The new legislation introduces the Sole Agreement, which both current and future concessionaires
are substantially bound to accept (see, in particular, article 2, paragraph 82). The Sole Agreement must be signed within a year of the first updating of the financial plan, namely when the concession is first revised subsequent to the entry into force of the new legislation (paragraph 82).
Pursuant to article 2, paragraphs 84, 87 and 88, the concessionaire may submit a counter-proposal to the draft Sole Agreement. However, if the counter-proposal is not accepted, the concession will be
“redeemed”, subject to “any right to compensation” in favour of the concessionaire, to be determined on the basis of a decree issued by the Ministry of Infrastructure and the Ministry of the Economy and Finance.
The terms of the Sole Agreement will, amongst other things, cover:
• “determination of the rate to be used in calculating annual tariff adjustments and its re-alignment during periodic reviews based on traffic growth, cost trends and the concessionaire’s efficiency and service quality”;
31
• “the recognition of tariff adjustments in return for investments included in the financial plan only once the related investments have been effectively carried out, as verified by the concession provider”;
• a system of penalties should any breach of the agreement occur (paragraph 83h). The new legislations also provides for the following:
• ANAS may unilaterally define the general level of quality standards, as well as more specific
quality standards regarding each service provided by concessionaires (paragraph 86b).
• motorway concessionaires are to be obliged to act as contracting authorities with regard to the award of work contracts, as well as services and supplies with a value of more than €211,000 (paragraph 85c). Essentially, all concessionaires must comply with public procedures for the awarding of contracts regarding any kind of activity, including ordinary operations, which is different from the regulations pursuant to Legislative Decree 163/2006. Moreover, Law Decree 300/2006, converted with amendments into Law 17/2007, postpones application of such provisions, “limited to infrastructure maintenance works and supplies”, until 1 January 2008.
• The mandatory use of ministerial committees for the award of contracts as per the above point
(paragraph 85f).
• Concessionaires must meet adequate capital requirements, as established by a decree from the
Minister of the Economy and Finance and the Minister of Infrastructure (paragraph 85b).
Finally, the new legislation provides for substantial changes to the tariff adjustment procedure. Indeed, paragraph 89a eliminates the automatic annual increases granted under current agreements, and subjects the application of increases to approval by the relevant ministries, with proposals put forward by ANAS SpA.
Paragraph 89b creates uncertainty regarding the date for tariff increases to come into force.
Believing the provisions of the above legislation to be illegal, Autostrade per l’Italia and its subsidiaries intend to appeal the individual implementation measures introduced by Law 286/2006 and subsequent amendments.
In this context, Autostrada dei Fiori SpA and Aiscat lodged an appeal against the Italian government, the Ministry of Infrastructure, the Ministry of the Economy and Finance and ANAS SpA before the Court of Genoa which, in a ruling of 9 January 2007, requested ANAS SpA, the Italian government and the relevant ministries to refrain from applying the new legislation until the EU’s Court of Justice – at which the Court of Genoa conducted a reference for interpretation pursuant to article 234 of the EC Treaty – hands down judgment.
The Court of Justice should hand down judgment regarding the compatibility of the new legislation with EU legislation.
On 21 March 2007 Autostrade per l’Italia filed an intervention notice regarding the above proceedings before the Court of Genoa.
Finally, article 1, paragraph 1020, of Law 296/2006 provides for an increase in the concession fee, which concessionaires must pay to the public concession provider, from the current 1% to 2.4% of net toll revenues as of 2007.
The nature and legal implications of this additional increase, which was unilaterally imposed by a national law, are still being assessed and evaluated by concessionaires, taking into account that payment of the amount regarding 2007 toll revenues is due in March 2008.
Interministerial Economic Planning Committee (CIPE) Resolution 1/2007
The regulations pursuant to the above Law 286/2006 and subsequent amendments were subsequently supplemented by the Interministerial Economic Planning Committee (CIPE) Resolution of 26 January 2007, regarding “Provisions for the economic regulation of the motorway sector” (published in the Official Gazette of 19 February 2007). This ruling – which was adopted without any consultation with motorway concessionaires – lays down worse conditions and also introduces additional criteria and parameters for establishing motorway tariffs compared with those established under paragraph 83 of Law 286/2006.
The ruling drawn up by the CIPE introduces a tariff mechanism based on the Regulatory Asset Base (RAB). This method, which is commonly applied to establish tariffs for other public service users, places a ceiling on revenues by reviewing tariffs every five years based on a formula in which the revenues allowed during each five-year period largely correspond to the sum of:
• the operating costs incurred by a company in carrying out its normal business (subject to
regulation), net of an increase in efficiency determined by the regulator;
• the amortisation and depreciation of tangible and intangible assets that are used in carrying out such normal business;
• the return on invested capital, equal to the rate of return on capital deemed “appropriate” by the regulator, multiplied by the Regulatory Asset Base (RAB) at the beginning of the period.
Subsequently, within each five-year regulatory period, revenues, and consequently tariffs, are annually adjusted on the basis of:
• the target inflation rate;
• an additional factor which allows for return on new investments made during the previous year, calculated on the basis of the rate of return deemed appropriate by the regulator.
According to this system, companies must update their business and financial plans at the end of each regulatory period, on the basis of which the regulator updates the related parameters of the formula used for calculating the cap on revenues.
It should be pointed out that the explicit reference to an appropriate return on invested capital, originally mentioned in Legislative Decree 262/2006, was definitively eliminated by Law 286/2006. Indeed, the current paragraph 83 does not envisage it at all. However, the CIPE has reintroduced the principle by proposing a RAB mechanism, which the new law does not in fact take into account. In this regard, and contrary to what occurs in other sectors, it should be noted that the RAB mechanism for calculating motorway sector tariff adjustments is fixed.
33
Application of the economic regulation methods envisaged by the CIPE resolution gives rise to a series of problems:
• The investment profile and the impact on tariffs. Unlike the power and gas distribution and transmission sectors, investment is highly concentrated in the initial period of a project’s lifetime (the construction phase), after which only moderate investment in maintenance is required. This means that during the initial operating phase tariffs which are sufficiently weighted to cover costs, and achieve the rate of return on capital established by the regulator, are significantly higher than those applied during subsequent years as, due to the effect of depreciation, the value of invested capital gradually decreases. The effects on traffic of initial tariffs that are too highly weighted should also be taken into account. Such overweighting might trigger off a vicious circle in which decreased traffic would make it necessary to raise tariffs further in order to achieve a guaranteed return.
• Value of assets on expiry of the concession and depreciation. In addition to the above
factors, it should be taken into account that assets held under concession by Autostrade and other motorway operators, unlike power distribution and transmission utilities and integrated water cycle management companies, are to be relinquished at the end of the concession period. Moreover, the value of such assets is mainly depreciated not in terms of their residual useful life, but over the remaining concession term, meaning that the value of the assets is written off by the end of the term. The use of this method generates obvious distortions and oscillations in tariff trends, as depreciation of investments carried out in the latter years of a concession period reach high levels that are reflected in equally high tariff increases.
• Determination of RAB. Another problem of application stems from the need to determine the historic cost (if the revalued historic cost were to be used as the basis for calculating RAB) of assets, which in some cases were built more than 80 years ago. Moreover, even when revalued, this cost would not reflect the real current value of such assets, for which replacement or reconstruction costs are substantially higher and consequently do not ensure recognition of the real level of invested capital on which a return is expected;
• Lack of investment incentives. Currently, the CIPE resolution does not include any form of incentive for investment in new works, which occurs in the gas and electricity transmission sectors via recognition of an increase in the rate of return on invested capital;
• Deduction of other sources of revenue. The resolution stipulates that income deriving from ancillary activities, connected with the use of motorway areas and surrounding land, should contribute to maintaining financial equilibrium. Such revenues, net of the related costs, are deducted from permitted costs, thereby depriving the company of such revenues.
Application of the new tariff fixing method gives the regulator sweeping discretionary powers in setting key parameters for the determination of tariffs (rate of return, the regulatory asset base, criteria for the depreciation of assets, traffic volume estimates, productivity and efficiency targets, the use of imputed
items to ensure that tariffs rise gradually, etc.) in accordance with rules and procedures that have never been previously applied in the motorway sector.
This regulatory uncertainty actually deters investment in what is a highly capital-intensive industry, requiring certainty and stability.
Application of the RAB mechanism for determining tariffs would not punish the inefficiencies of concessionaires, who would rather be rewarded via higher tariffs for road users, who would see the increased costs incurred by concessionaires reflected in higher toll charges. On the other hand, the tariff adjustments calculated on the basis of the current price cap formula are far more transparent and produce better results, because under the current system tariff adjustments are based solely on objective criteria (above all the inflation rate) and are not connected to the costs of building motorway infrastructure. Such costs are borne by the concessionaire, who is thereby motivated to operate efficiently.
Furthermore, the CIPE resolution stipulates that all revenues deriving from ancillary activities and subject to use of the land held under concession should be deducted from “recognised costs” in such a way that the concessionaire be deprived of this revenue stream via subsequent tariff reductions. This provision removes any future incentive to invest in these sectors and to improve the quality of services and infrastructures. In this case too, the CIPE resolution would have an even worse impact than Law 286/2006, as the latter provides for even-handed sharing of these profits between ANAS and the concessionaire and not total expropriation of revenues deriving from ancillary activities. The rating agencies have also expressed grave concerns regarding the new system. Indeed, the stability and transparency of the methods used for determining tariffs are a key element in assessing the credit ratings of toll motorway operators. In this regard, on 15 December 2006 Standard & Poor’s went so far as to downgrade Autostrade’s rating from “A” with a stable outlook to “A” with a negative outlook.
The CIPE resolution establishes general guidelines. Autostrade per l’Italia and its subsidiaries will lodge an appeal to seek cancellation of this measure, as well as its application measures as they come into force.
Proceedings initiated by the EU Commissioner for the Internal Market regarding the new regulations governing motorway concessions
On 14 November, Charlie McCreevy, the EU Commissioner for the Internal Market, took out infringement proceedings against Italy for violating Treaty provisions regarding free movement of capital and right of establishment (doc. IP/06/1561).
This measure censures various aspects of the provisions introduced by article 12 of Legislative Decree 262/2006, which represents the first step in the infringement procedure pursuant to article 226 of the EU Treaty. Under this procedure, if a national government gives an unsatisfactory reply, the Commission may undertake a further initiative, by drawing up and sending a “justified opinion” which specifies any objections and asks the national government to withdraw the disputed measures. In
35
case of failure to comply with the justified opinion – and if any further clarifications provided by a national government are deemed unsatisfactory – the Commission may resort to the EU Court of Justice so that it may hand down judgment on the disputed non-compliance.
On 10 January 2007 the Italian government replied to the summons from the EU Commissioner for the Internal Market of 14 November 2006 with a note from the Minister of Infrastructure, a summary of which was published on the Ministry of Infrastructure’s website.
In brief, the Italian government maintains that:
• the limitations on investment by construction companies in the share capital of concessionaires – which are implicitly recognised as going against EU legislation – have been removed;
• the new regime would have no significant effects on current concession agreements: the Sole
Agreement envisaged by this regime would merely be for the purposes of recognition;
• the regime would not grant undue discretionary powers to national governments;
• furthermore, the Sole Agreement, of which the sole purpose of recognition was reiterated, is
moreover the outcome of a process agreed upon with the concessionaire, subject to jurisdictional verification and compensation provided for in the case of failure to reach agreement.
On 5 March 2007 Autostrade SpA and Abertis submitted a wide-ranging document to the EU’s Competition Directorate General in response to the Italian authorities’ above-mentioned reply of 10 January 20