Italy's project finance rules have an awkward legal foundation. If investors and sponsors can gain the benefit of project bond technology, radical reforms are needed
The recent placement of project bonds to finance Belgium's A11 motorway made Italian lawyers wonder when it will be possible to structure a similar transaction under our national project bond laws. The asset class was introduced in Italy two years ago, with the aim of financing infrastructures and public interest services through bond markets rather relying solely on bank lending.
Italian project bonds feature a number of benefits for issuers and investors alike. First, they are applicable to a vast variety of infrastructure projects including motorways, electricity transportation, IT networks, gas storage and transportation. Second, project bonds issued before June 26 2015 are tax efficient, having the same tax treatment as Italian government bonds in respect of interest received by the bondholders. Third, bondholders have the benefit of special liens (privilegio generale, similar to a common law floating charge) over certain assets of the special purpose vehicle issuer. And fourth, Italian banks, financial companies and insurance companies are permitted to guarantee project bonds (albeit only during the construction phase).
Nevertheless, Italian project bonds are yet to experience any real success.
This is not due to structural inefficiencies or flaws in the financing tool, but rather the difficulty in finding financeable projects. This is the result of project financing, and therefore project bond regulations, having been created under the Public Procurement Code (Codice degli appalti pubblici) which was recently renamed the Public Works, Supplies and Services Contracts Code (Codice dei contratti pubblici relativi a lavori, servizi e forniture). In short, Italian lawmakers took the rules originally designed to govern the complex process necessary to select a supplier of works or services under a public procurement and tried to adapt them to public-private partnerships (PPPs) – including project financings.
This inevitably led to a lack of compatibility between the rigid and complicated public procurement framework and project finance schemes which, by their nature, need flexibility to achieve a financeable result. In addition, the timing of such financing procedures are often unpredictable and not constrained by law. Not only did this limit the number of projects launched...