Keywords

Introduction

The economic benefits of PPP versus conventional budget financing have been addressed in several books and papers in academia (Estache et al., 2007; Yescombe, 2007; Engel et al., 2014). However, very little has been addressed in relation to governance of PPPs. The PPP model from a government point of view, notably in countries with weak governments, has been little debated. Uncertainties in project funding and the asymmetric information between the public and private sector tend to create contract price inflation, delays in decision-making, delays in financial closure, and eventually collusion or corrupt practices. These issues and the lack of a clear infrastructure policy of the Italian government have contributed to a large infrastructure gap with other European countries. Italy has tried to fill this gap by enhancing the role of PPPs. However, PPPs have been used primarily to look for private sector financing to bypass the EU debt/GDP and deficit/GDP covenants, rather than for searching for expertise and management to accelerate project delivery at reduced costs.

The paper will address some of the above issues by looking at the Milan Metro Line M4 (M4) which has been among the most innovative transportation PPP cases in Italy. It will initially show the main hurdles related to the Italian PPP market and how the Milan M4 project findings addressed and helped resolve them. It will then review the Malpensa airport rail link between terminal T1 and T2 which will show how a PPP process could fail due to inappropriate governance and lack of a reliable institutional framework and a proper policy coordination. We will then conclude with policy recommendations.

Current Issues in PPP Projects in Italy

The Italian infrastructure market over the past 20 years has experienced a huge gap compared to other European countries. The reasons are related to weak political decisions in planning and development of projects and inefficient bidding systems, combined with a lack of public funding to support required investments. Lack of public funding has encouraged PPPs. However, compared to other countries, the approach to PPPs in Italy has been dictated more by the necessity to complement public funding with private financing, rather than by a desire to exploit the private sector expertise, efficiency, and resources to accelerate project delivery. Therefore, to develop an efficient PPP policy, the Italian authorities should deal with some of the following hurdles which are hindering national infrastructure development.

Minimizing Asymmetric Information

There is a growing asymmetric information gap between the public and private sector in negotiating infrastructure contracts, due to, among others, inadequate skills within the public administration, tight budgets and inefficient selection procedures to appoint advisers, and cumbersome procedures embedded in the Italian procurement law. In addition, PPP contractual documentation is often incomplete. Often project design at a very preliminary stage and/or legal or financial documents are not sufficiently scrutinized, for their investment and bankability feasibility. The result is the emergence of a very restrictive bureaucracy, which, besides delaying project implementation and increasing projects costs, is often a feeding ground for corruption or collusion practices. Minimizing information asymmetry reduces contract uncertainties and hence contractual price. More complete bidding documentation (technical, legal, and financial) will favor more realistic bids and a better handling of claims in case of contract renegotiation after tender award. The less detailed is the bid documentation, the more likely it is that potential bidders will include in their price the extra risk deriving from the non-complete assessment of contractual risks. Thus, there is a high probability that the final bidding price could be higher than anticipated.

External Consultants

Reduction of information asymmetry is closely tied to the inadequate professional competence of public administration officials and to the use of external consultants to support them. The public sector is seriously limited in the use of external consultants as their selection procedure is cumbersome and subject to fee limitations which are below ongoing market rates. The advisory contract is therefore awarded to the lowest bid under the published ceiling, given a minimum set of expertise and qualifications for the job. The private sector, on the other hand, is not bound by regulatory procedures and can select and pay the best possible advisers at current market rates. In Italy, the number of qualified legal and financial advisers is limited, and thus the first choice for the advisers is to respond to the private sector invitation for bidding. This leaves the public sector, under budget constraints, with second best options, which imply a negotiating bias in favor of the private party, notably in the event of contract renegotiation, concession termination, or arbitration proceedings.

Public Awareness, Project Transparency, and Economic Feasibility

In Italy, there is a lengthy time span required from initial expression of interest to tender issuance, bid evaluation, and final contract award. These delays and uncertainties contribute to increased project costs since contractors and bidders tend to protect themselves by factoring this delay into their offers. These delays are often due to lack of ex ante information and transparency on the project costs and objectives, thus triggering unforeseen reactions by the population or project stakeholders leading to delays in execution if not, sometimes, cancellation of a project.Footnote 1

Negative reactions to a project are often due to a lack of an appropriate cost-benefit analysis (CBA), as demonstrated in the recent debate on the Turin- Lyon Trans Alp Tunnel. The Italian Government has issued a set of guidelines for cost-benefit analysis (CBA), based on the European Union guidance, and requested local public administration to abide by those guidelines.Footnote 2 A proper CBA, besides assessing the feasibility of a project, could convince the private sector to commit time and resources to consider the attractiveness of a proposed investment. It also allows the government to decide on the allocation of budget funding, as well as supporting measures to assure the financial viability of a project.

Public Funds

In Italy, as in most countries, when considering infrastructure financing, there is a continuous debate on the budget allocation supporting given projects. This debate is usually exacerbated during election time. In Italy there are two additional hurdles to be overcome when discussing public financing for infrastructure projects.

The first one relates to the uncertainty concerning budget appropriations and the timely delivery of those funds. This uncertainty derives from too many government announcements, from a complex bureaucracy, and from a general lack of trust by contractors and stakeholders on government decisions. Uncertainty on public funds availability implies decision-making delays by the contracting authorities that may trigger price increases by potential bidders. The second hurdle relates to the optimal use of public funds, particularly in PPP projects. The optimization of public funds is a recent phenomenon that Italian contracting authorities are starting to consider to better leverage public funds with private financing. Techniques such as land value capture or joint venture in real estate developments, long-term loans versus grants, and public-private concessionaires are currently being considered by contracting authorities. This not only facilitates the financing of a project but also allows a financial return on those public funds. In addition, as it will be shown in the Milan Metro Line M4 case below, flexibility in the use of public funds may also improve governance and control of infrastructure projects under a PPP scheme.

Role of the Italian Financial System

In Italy, there are a few large corporations (but still small if compared with their European or US competitors) and many small and medium size enterprises (SME) capable of completing infrastructure projects. For large infrastructure projects, where company size is a prerequisite to bid, only large corporations can compete, while SMEs act primarily as subcontractors. Among the big contractors, only one, Salini Impregilo, is a public companyFootnote 3 with sales in 2020 of around €6 billion. All the other companies are predominantly family owned or cooperative businesses. Given the low level of capitalization and the ownership structure, Italian construction companies depend heavily on local bank financing. Therefore, before submitting a bid for a given project, contractors must pass the scrutiny of their lenders. Financial support for large contracting companies, bidding on a large infrastructure work, is given by a selected number of Italian and international banks. Those same banks are most active in the PPP/project financing market: therefore, they have a key role in determining the bankability of a given project and in finding innovative solutions for their clients’ needs. The limited number of both lenders and eligible infrastructure players for large projects tend to reduce competition, and, often, the financial support to a bid tends to reflect more the corporate-lender relationship, rather than the actual bankability of the project.

Experiences from Italy

We selected two projects in Italy, the Milan Metro Line M4 (M4) and the Milan Malpensa International Airport T1-T2 (T1-T2) rail link, to address some of the issues raised in the preceding paragraphs. The Milan Metro Line M4 is a PPP project almost completed, while the T1-T2 could not be implemented as a PPP, due to the institutional difficulties in addressing the PPP process. Table 1 (Responses to PPP issues) shows how certain issues related to an Italian PPP process have been dealt with, in the two cases.

Table 1 Responses to PPP issues
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The Case of Milan Metro Line M4 (M4)

The Milan Metro Line M4 (or M4) project is an example on how to incorporate a better delivery system in establishing a PPP scheme.Footnote 4

The Metro Line M4 PPP was conceived following dissatisfaction by the City of Milan on how the concession for Metro Line M5 had been handled, leaving increased costs and delays as a result of its implementation. Metro Line M4, as Metro Line M5, is an underground driverless system that connects the southwestern part of town to the Linate Milan City Airport on the eastern side. The total length of the line is 14.2 km, with 21 stations (Fig. 1 Map of M4). The tender was published in 2007. However, the official tender process started in 2010 after the problems with the financial markets created by the 2008 financial crisis. At that time, Italy was experiencing a severe economic downturn. Borrowing financial conditions became expensive for Italians, as reflected by the reduction in maturities and an increase in the spreads on interest rates. This issue together with the financial crisis in Greece caused many projects to be postponed. The contract was awarded to a consortium formed by Salini Impregilo, Astaldi, Ansaldo STS (currently Hitachi STS), and Hitachi Rail. The operator was ATM the incumbent operator of the Milan transit system. The next qualified bidder was the Pizzarotti consortium which appealed the award to Salini Impregilo. The judicial appeal, which was addressed to the regional court, was rejected but delayed the contractual finalization of the project.

Fig. 1
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Map of M4

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The total cost of Metro Line M4, as shown in Table 2 (M4 Source of funds), was €2.030 billion, of which €958.1 million were from central government grants (including VAT), €239.8 million were grants from the City of Milan (including VAT), €160 million was equity contribution from the City of Milan, €466 million was bank debt (base line), and €206 million was private sector contribution of which €80 million was participation in the SPV equity and the balance (€126 million) was subordinated debt. The institutional structure envisaged the creation of a public-private special purpose vehicle (SPV), acting as concessionaire of the Metro Line M4, for a period of 31 years including 7.5 years of construction, under an availability payment structure granted by the City of Milan. Financing was arranged by a consortium of foreign and Italian banks led by BNP Paribas and including Intesa Sanpaolo Bank and Cassa Depositi e Prestiti. Indirect funding support was provided by the European Investment Bank (EIB) to other Italian commercial banks. The senior loan had a maturity of 20 years and a margin over Euribor (Euro Interbank Offered Rate) of about 320 bp (Fig. 1 Map of M4 and Table 2 M4 source of funds).

Table 2 M4 source of funds. In million, exchange rate: €1 = US$1.13
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SPV equity was underwritten by the City of Milan and by the private consortium in a proportion of 2/3 and 1/3, respectively. The SPV capital shares were divided into class A shares (City of Milan), class B shares (private parties), and class C shares (ATM, the incumbent transit operator). In accordance with the financial plan and the shareholders’ agreement, return on class B and C shares was privileged in the dividend distribution, while in case of losses, class B and C shares would bear the first losses, relative to class A shares. The bylaws of the SPV gave a special right to the vice-chairman appointed by the private party to override the SPV board in the case of contractual claims with the City of Milan which was acting as contracting authority. The novelty of the Milan structure was to convey and use part of the government and city grants to pay for the city’s equity participation. The city to comply with the national budget restrictions could not borrow to fund its participation. In this way the grant element satisfied two conditions: contributing to the equity of the SPV to finance the project and strengthening the control of the city on the project implementation. This was the first case of flexibility in the use of public grants in financing an infrastructure project in Italy.

By creating two layers of control, at the city level and at the SPV level, the city was able to monitor the construction of the project, avoid renegotiations, and develop an additional tool against potential corruption practices. To reach this result, the city, together with technical, legal, and financial advisers, developed and delivered a detailed set of documentation including final design, a concession contract, other project documents, and a sophisticated financial model.

The financial model, and the assumption book, indicated the variables which could be changed by the bidders and those to be left unchanged (such as the payout ratio or hedging costs, for instance) to have a common comparative basis for the financial valuation of the project. The awarding criteria of the contract was based on the lowest tariff presented by bidders. Once the contract was awarded, the winning consortium could submit, within 3 months of the awarding date, a “modified” financial model. In the model certain variables could be modified but not the capex and the winning tariff, in order to determine a “modified” IRR. The “modified” IRR would then become the contractual IRR governing the concession. The contractual IRR could be modified only to reflect changes in financial market conditions. The modification involved a greater or smaller availability payment if, at financial closing, the financial markets conditions were higher or lower compared to the time of contract award. The return to the private investor was based on an availability payment paid by the City of Milan. Demand risk was unacceptable to the lending banks.

The initial IRR developed by the city was not satisfactory and was below market expectations. Therefore, the city decided to increase the IRR by granting the private investor preference in dividend distribution. Accordingly, 98.5% of the cash flow available for distribution was allocated to the private investor and 1.5% to the city. In this way the equity IRR of the private investor was in line with current returns on similar projects.

The initial projected passenger flow was 84 million per year and expected to grow at a rate of 0.43% per year. SPV revenues from the availability payments were indexed to inflation, with a mechanism for recouping 70% of the inflation rate in the previous 3 years.

The double layer of control made sure that the city was always aware of the possible actions to be taken, to maintain the availability payment at the level agreed contractually and to reduce its impact on the city budget. Therefore, the city had an incentive to make sure that ridership was growing and, in this sense, designed a mobility plan in favor of public transportation. For example, they introduced bus feeder routes to the metro stations at the periphery of the city or increasing public parking spaces near the metro stations.

The financial model was structured to allow the lowest tariff which multiplied by the given passengers’ flow would give the lowest availability payment by the city. Bidders were requested to formulate their offer to place the lowest burden on the city. However, it is noted that the availability payment paid by the city was a gross figure, as all revenues from the fares were flowing directly to the city, not to the SPV. Therefore, the actual impact on the city budget was about half the actual availability payment disbursement, since fare revenues covered almost 50% of the metro operating costs.

The Milan Metro Line M4 project introduced some novel features as follows:

  1. 1.

    A common valuation platform, given by the financial model, which included the variables which could be changed by the bidders. Inclusion of a feasibility study and a detailed financial plan became a requirement in the new Italian procurement and PPP legislation.

  2. 2.

    A new flexibility in the use of grants, which were partly channeled through the equity of the SPV, thus allowing the public administration to have firmer control of project development. This was true both at the city (contracting authority) and SPV levels, where the city appointed 3 out of 5 directors. The chairman is appointed by the city, and the managing director is appointed by the private parties. Of interest, for future use in infrastructure delivery, is the ability to combine the need for a grant to ensure the bankability and return on the project, with a way to control and accelerate project implementation through an equity stake in the SPV. This structure maintains and highlights the role of the private sector in terms of efficiency in the development, management, and operation of the project.

  3. 3.

    The presence of the two layers of control (city and SPV levels) was also designed to prevent renegotiations and to minimize corrupt practices, which had been common in the Italian infrastructure market. Since then, a National Anticorruption Authority has been set up to supervise the tender path and implementation of given projects. The Milan Metro Line M4 structure contributed to that approach.

  4. 4.

    The Milan Metro Line M4 project reduced the information asymmetry between the private and public sectors. The city hired competent legal and financial advisers which were useful not only in supporting the city during bidding and concession negotiations but also in contributing to create a PPP/project finance team within the city financial department which is still being used to monitor all the infrastructure projects promoted by the city. Thus, the city’s team contributed to create, through greater access to information, a competitive climate and a governance framework to control project costs and implementation.

  5. 5.

    Attention was given to alignment with market returns, of private sector equity IRR, by distributing a preferred dividend to the private party. A clear recognition by the city that, for a proper development of a PPP, the needs of the private sector should be carefully considered, for a successful cooperation with the public sector.

  6. 6.

    The majority participation of the City of Milan and the availability payment paid by the city provided for a stronger dialogue with the lending banks to achieve better financing conditions. This mitigated the risk for lenders. In addition, the banks were obliged to give a full commitment to financing within 6 months from contract award. This latter aspect (deadline on the financing) was subsequently introduced into the Italian procurement law (18 months from contract award).

Following the financial close of 2015, the construction companies raised a series of claims against the city, which were negotiated between 2016 and 2018. A final settlement was reached in February 2019 where claims and variation orders amounting to an overall amount of about €280 million were agreed between the SPV and the city. The variation orders related to a new design to connect line M4 with line M3 which was not foreseen in the bidding documentation. The financing of these extra sums was made primarily through additional government grants and use of contingency funds. They depended very little on increased equity or sub-debt by the private parties. Moreover, banks did not increase the loan amounts. The negotiation of claims and variation orders were further complicated by the financial difficulties (receivership) of Astaldi, one of the civil sponsors of the SPV (see Footnote 3). The Milan experience has been positive so far, and work is progressing according to schedule. Initial opening of the M4 line is foreseen in early 2021, and the full opening is expected in July 2023. The appointed project finance team for the city is working quite well, and the relationship between Metro Line M4 and the city is positive. It is worth also noting the transparent relationship with the population. All major decisions as well as all relevant project documentations are posted on the website of Milan Metro Line M4. In addition, the SPV opened up construction sites at certain dates during the year to show the work progress to the population.

The Case of Milan Malpensa International Airport Terminal 1 and 2 Rail Link

While the Milan Metro Line M4 has been a major success in the Italian PPP market, the rail link between Terminals 1 and 2 of Milan Malpensa International Airport (T1-T2) is considered a failure in a correct PPP process implementation. The failure could be attributed primarily to the public authorities’ behavior.

In 2012, the City of Milan and the Lombardy Region initiated the project to connect Milan with Terminal 2 of Malpensa airport, by extending the 3-km rail link from Terminal 1 to Terminal 2. The project was needed since Terminal 2 was growing in passenger traffic flows after EasyJet created a hub at Milan Malpensa International Airport Terminal 2. The project was supported by the EU TEN-T EA (European Union Trans-European Transport Network Executive Agency). The rail link would not only ease the connection between Milan and Malpensa airport, but it would be part of a larger rail system connecting Milan to Switzerland, via the Malpensa airport. This would also increase the catchment area of the airport. TEN-T EA was very interested in exploring a PPP project and eventually funding it through an EIB project bond.Footnote 5The project bond was a financial instrument developed by the European Investment Bank (EIB) to raise project financing outside the credit market. Preliminary discussions with the TEN-T EA were conducted around a possible PPP (Cohen & Croce, 2013). The co-sponsors of the project were the Lombardy Region-owned Ferrovie Nord Milano (FNM), current operator of the rail link from Milan to Terminal 1 and of the Lombardy rail network, and SEA, the Milan airports operator, majority owned by the City of Milan. Total cost of the project was €115 million of which the EU was supposed to contribute 20% of the cost. FNM and SEA obtained financing from the European Union to commission a feasibility study of the rail link between T1 and T2 under a PPP arrangement. FNM and SEA appointed Bocconi University to execute the study. Besides FNM and SEA, the Lombardy Region was involved in its capacity of FNM’s shareholder, regulator of the regional rail network, and provider of regional financial resources.

The preliminary financial model envisaged a SPV jointly owned by FNM and SEA, acting as concessionaire for the rail link. In that capacity, the SPV would undertake to construct and operate the project. The actual operation of the line was to be outsourced to FNM, current operator of the Lombardy rail infrastructure, and of the Milan to Malpensa Terminal 1 rail link, while the station at Terminal T2 was to be managed by SEA. The capital of the SPV could then be opened also to private sector investors. Two financing options were considered: one based on market revenues and the other one based on an availability payment scheme as can be seen in Figs. 2 and 3.

Fig. 2
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T1-T2 market revenue model

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Fig. 3
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T1-T2 availability payment model

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In the market revenue option, revenues depended on the track access fees paid by the train operators. However, a Lombardy Region guarantee was required to meet eventual payment shortfalls. Under the availability payment scheme, the Lombardy Region was supposed to step in by covering the revenues of the SPV. They would cash in all the actual track access payments by the train operators, which in the first option were going to the SPV. The role of the region therefore was to guarantee the adequate return to private investors by granting an implicit subsidy. This subsidy was the difference between the availability payment amount and the amount of the track access fee paid by the train operators eventually charged back on the passenger’s fares. For the model to become viable, several hurdles had to be overcome as discussed below:

  1. 1.

    Concession length: SEA and FNM had two different concession periods (2041 and 2016, respectively). The different lengths of the concession periods were preventing a possible bankable solution due to the risk associated with one concession expiring (FNM) and not being renewed. Both FNM and SEA suggested adding in the Lombardy Region as guarantor for the interim period between the end of the FNM (2016) concession and its renewal. In this way the two concession lengths could be aligned.

  2. 2.

    Regional undertaking : In terms of demand guarantee or availability payment, there was no clear indication from the sponsors of the preferred option. This created delays in the application for the TEN-T EA funds and uncertainties on the bankability of the project. Moreover, the Lombardy Region never clarified its support for the PPP process versus the traditional procurement option.

  3. 3.

    Service contract: In addition to the problem of concession terms, the service contract between FNM and the train operators was expiring. Therefore, there was a necessity to include in the new renewal tender, also the operation of the rail link between Terminal 1 and Terminal 2. Alternatively, the Lombardy Region was required to guarantee the revenues between the expiring of the incumbent service contract and the establishment of the new service contract with the train operator.

  4. 4.

    Bus competition : The Lombardy Region was reluctant to deal with the competition between buses and train for the Milan and Malpensa airport destination. Bus fares were lower than train fares, but buses carried a risk of traffic congestions, causing possible delays in reaching the airport terminals and an overall increase in air pollution. The solution required a review by the Region of its overall transportation policy, notably within the catchment area of Milan Malpensa Airport.

  5. 5.

    Willingness to pay: An analysis of willingness to pay by the train operators was undertaken to assess the actual possibility of using the increase in track access fee as a possible source of revenue. However, as most operators were subsidized by the region, this created a problem in the determination of the possible increase in track access fees, which, at the end, the train operators were going to charge back to the region. On the other hand, a survey on willingness to pay by passengers travelling to and from Malpensa airport gave a positive indication. This justified some increase in fares if accompanied by better service quality and more frequent schedules. The increase in fares could have entailed the train operators to contribute totally or partially to the track access payments, minimizing or nullifying the recourse to additional regional subsidies.

  6. 6.

    Equity commitment : During the negotiations, there were different approaches to equity participation by FNM and by SEA, with the latter being financially in better shape compared to FNM. This confused the discussion on the determination of the optimal debt-to-equity ratio under the PPP arrangement.

  7. 7.

    FNM strong technical opposition: The technical staff of FNM disagreed with the suggested PPP solution and claimed that rail projects should be funded only from the government budget. The staff did not understand the implications of a PPP approach and was strongly opposed to innovative financing solutions.

Given the uncertainty associated with the election, the region decided to withdraw from the project and obliged FNM to do the same. SEA submitted its application to TEN-T EA with the understanding that, after the elections, FNM and the region would finalize their decision. After the election, however, the region and the new elected central government (both governed by the same political party) decided to increase public funds and to return to traditional procurement and financing. The project has been completed under a traditional procurement and works very satisfactorily. Table 3 shows the breakdown of the final funding.

Table 3 T1-T2 final source of funds. In million, exchange rate: €1 = US$1.13
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The T1-T2 lessons for a successful PPP process were the following:

  1. (a)

    Institutional framework matters : It is difficult to implement a PPP scheme when the interest and vision of the different stakeholders are misaligned.

  2. (b)

    PPP education : Public sponsors and technical staff need a deeper educational process to enable them to understand advantages and procedures of a PPP structure. This takes some time to be implemented.

  3. (c)

    Public support: Public sector support might be needed to overcome hurdles in bankability issues such as guarantees or administrative undertakings (not necessarily financial commitments). This support should be clear at the onset of the PPP decision-making concerning the project.

  4. (d)

    Management of political climate : The T1-T2 experience shows that political uncertainty stemming from election outcomes and the lack of accountability by public officials are a basic stumbling block when undertaking a PPP.

  5. (e)

    Static attitude: The Malpensa T1-T2 lesson confirms that when grants are available, and with a static attitude of the public authorities, a straightforward design and build contract is certainly preferable.

Policy Recommendations and Concluding Remarks

The conclusions of Milan Metro Line M4 and of Malpensa Airport Terminal T1-T2 rail link project led us to consider possible policy recommendations that might accelerate and govern infrastructure project delivery.

  • Dynamic attitude. The Milan municipality has undertaken, for the first time in Italy, a dynamic approach to PPP, avoiding the staticFootnote 6 approach adopted in most project financing. The dynamic attitude of the local policymakers created a cultural and technical environment to enhance the role of the public sector in support of a project.Footnote 7 The enhancement derived from a better understanding of the City of Milan mobility needs and of the project complexity, thus applying more flexibility in the use of public funds, keeping in mind also the financial constraints of the city. In this way, the role of the private sector was reconsidered, searching for efficacy and know-how rather than for financing. This new dynamic attitude, as a second step, helped to narrow the information asymmetry gap between the public and the private sectors. This resulted in the possibility of increasing the available information to bidders, through a detailed technical, financial, and contractual documentation, thus laying a negotiating path suitable for the city and the bidders.

    Another policy consideration embedded in the City of Milan approach is the flexible use of grants, needed for the financial sustainability of the PPP project. In the M4 project, grants, before being used to contribute to capital expenditures of the project, were partly channeled to underwrite the City of Milan equity contribution to the joint public-private SPV. This bypassed the government borrowing restrictions of the city. In addition, the city granted an availability payment to the SPV to enable the banks to finance the project without considering demand risks. The availability payment adopted by the city was designed as a gross liability figure (ridership revenues belong to the city not to the SPV), and therefore the city initiated a transportation policy to reduce the impact of the availability payment on the city budget. The city imposed a series of measures such as (a) a cordon pricing mechanism (C Area) to limit access to the city center and used revenues from the cordon pricing to invest in new ecofriendly transit vehicles, (b) reducing on-street parking space within the C Area and increasing parking fees, and (c) encouraging soft mobility (bike and car sharing, etc.). The overall result of such policy since 2012 has been an average increase in ridership on the metro lines by 17% and an average increase in transit speed of up to 6%.

    Further signs of dynamism in the M4 project could be found in the attention given by the city to align the private sector equity IRR, through a preferred dividend distribution, to market returns for that type of risk. Moreover, the M4 structure allowed the City of Milan to acquire an asset ex ante on its balance sheet. This would enable the city to recover the equity invested, not only at the end of the concession but also during operation, by selling part of its stake to qualified investors or infrastructure funds.Footnote 8 As an ex post consideration, while the city majority stake in the concessionaire contributed to a greater dynamism, from a corporate governance standpoint, “the City could have achieved the same results with a qualified minority stake, thus easing somewhat the potential conflict of interest embedded in the City dual role of contracting authority and majority shareholder in the SPV concessionaire” (Cohen & Boast, 2016).

  • Contractual clarity . There is currently a debate among PPP experts on the use of standard contractual documentation. Standard documentation could certainly help reducing legal costs but may lack the flexibility necessary in dealing with highly complex projects. However, the Milan experience shows that there are certain clauses (such as penalties, incentives, compensation for contract termination or re-equilibrium of the financial model, change in law, etc.), which could be accommodated within a standard contract and subject to little changes. However, these clauses should not create a bias towards one or the other contractual party nor jeopardize the project bankability. The accuracy and transparency of the contractual documentation should be set ex ante for the protection of both parties (and/ or also of their potential successors) in case of breaches of the terms of the concession contracts or, in case of renegotiation, adaptation or arbitration clauses being triggered.Footnote 9

    The Milan experience shows that documentation clarity, proper risk allocation, and posting a realistic price help avoiding underpricing by bidders. It eliminates the expectation of a price recovery during contract negotiation. The City of Milan, in programming the project delivery, aimed, as much as possible, at reducing the infrastructure costs while preserving work quality and showed how this could be accomplished by better information to the private sector.

  • Bureaucracy, corruption prevention, and role of the contracting authority. The reduction in information asymmetry obtained by optimizing the management of contractual/tender information is a powerful objective. The public sector should try to achieve this in PPP projects. The Milan experience shows that a competent team is required to implement a successful project. To this end, as a policy recommendation, investment in the contracting, technical, and financial education of the public authorities’ management team becomes a priority. Increased competence of the contracting authorities and clarity of the tender documentation is of paramount importance to improve negotiation efficacy with the private sector, to reduce infrastructure costs, and to better control renegotiation requests.Footnote 10

    Contracting authorities often look for external consultants to support their decision-making. To get the best advice, the selection of consultants should be made at market rates, as in the private sector, and not at below market rates under a price cap, as currently used in Italy. “To search for legal advisers through a public tender at rates much below market rates, exposes the public administration to suboptimal bids and doubtful advisory outcome. Thus, rather than reduce the information asymmetry with the private party, this inefficient search would increase such a gap and would have negative effects on the public administration in the event of concession renegotiation” (Cohen & Boast, 2016). The Milan Metro Line M4 experience tendered the advisory selection under a market rate cap but attached a specific time frame to the pre-bid advisory work. Bidders were requested to include in their bids the costs of external advisers, to refund the city pre-bid expenses, similar to what happens in many countries. This is a new practice in Italy.

    Lack of clarity, incompetence of the public authorities, and cumbersome administrative procedures constitute a feeding ground for corruption or collusion in public work projects. The fight against corruption is a top priority in Italy and other countries, but there is no simple solution to overcome it. Greater documentation accuracy and increased competition among contractors and financiers, combined with a firmer control by the contracting authorities, should reduce or mitigate this behavior. The double layer of control created in the Milan Metro Line M4 (at City and SPV levels) is certainly a positive step forward in avoiding or minimizing corruption practices. However, the success of these actions depends heavily on the rule of law in the country and the efficiency of the judicial system in addressing and solving contractual disputes.

  • Bankability and credibility . An additional point that can be learned from the two Italian PPP cases concerns the issue of project bankability and public authority credibility. Transportation projects may often require public support to become profitable to private investors and bankable for lenders. The role of banks in project financing is quite significant but often involves conflicting roles. They often act as both advisers and lenders to the private sector. As independent advisers (not lenders), they work for the benefit of the project and their respective clients. If on the other hand, banks are also lenders, then a possible conflict may arise. Their advice may be influenced by the lending policy of the bank towards the project, the project country, or the corporate relationship with the sponsors. This attitude often may lead to different terms and conditions from the one anticipated in the bidding offer of their clients. It may create a delay in the financial closing, irrespective of the soundness of the project cash flow.Footnote 11 A better definition of the banks’ role together with a greater project finance competition should be considered to minimize conflicts of interest for the benefit of the project and their clients. The bankability of a PPP project however, besides the credit policy of the lenders, requires a strong credibility on the part of the public sponsors should they give any guarantee, availability payment, or any undertaking in the concession contract. The credibility of the government bodies and the enforceability of their decisions is a major building block in arranging the financing through a private sector participation. The Milan Metro Line M4 has been a positive case since the City of Milan through its participation in the concessionaire SPV demonstrated its strong commitment to the PPP structure.

    PPP Post COVID-19. The COVID-19 pandemic of 2020–2021, besides the heavy death toll, has caused tremendous damages to the world economies. The European Union has launched the Next Generation EU, a recovery program (NGEU) to be implemented over a 6 years’ time horizon. The program deploys an unprecedent number of financial resources (€750 billions) to boost economic recovery in member states. The program stresses the growth objectives based on digital transformation in the public administration, green sustainable investment in transportation and infrastructure, improvement in healthcare, gender equality, and social inclusion. We are witnessing a stronger and deeper involvement of the state to accelerate infrastructure project delivery: is there a future for PPP? PPPs are an interesting policy tools but require a long time for their implementation and often are most costly than traditional procurement. Europe cannot wait and need shovel-ready projects. In addition, construction companies, in Italy and in most European countries, have been strongly negatively affected by the pandemic closures. Most projects in 2020 have been cancelled or delayed. Construction companies need capital to offset the losses incurred and to resume a growth pattern. So, there is less capital available to support equity participation in PPP projects. The likely outcome in infrastructure projects, given the amount of financing available from the EU, is a strong commitment by public authorities to implement projects under traditional procurement tools. We are going to see more design-build-maintain types of projects rather than PPP, as financing will no longer be an issue. The private sector will resume its role as catalyst of efficiency and innovation to accelerate project delivery. Since debt-to-GDP ratios will undoubtedly increase, governments will have to think on how to reduce and maintain sustainable the debt in the future 10/15 years. Therefore, it is very likely that after the heavy boost of public infrastructure investments, there is going to be a new wave of infrastructure asset privatization as a mean to reduce public debt alongside a growth path of the economy. However, for those privatizations to be successful, public authorities should ascertain at the onset of the project its economic and financial viability to allow interested investors to step in at the appropriate time. In addition, for certain countries, the privatization rules and concession regulation should be revised.

  • Concluding remarks. We have shown that PPP could be a useful tool for accelerating project delivery with or without public budget constraints. However, the standard PPP selection criteria based on public sector comparator, risk transfer, and value for money are no longer suitable (EPEC, 2015). They are all necessary but not sufficient conditions to implement PPP policies. Public authorities should adopt a dynamic approach, rather than a static one, to project selection, implementation, and operation.

    Under a dynamic approach, the private sector should be chosen for its ability to manage and accelerate project delivery, rather than for its capacity to raise financing to circumvent government borrowing restrictions or complement public grants. Moreover, a dynamic approach can help in minimizing or delaying the triggering of guarantees given by the public authorities to facilitate the bankability and the implementation of the project, (management of contingent liabilities). In this sense, ex post analyses and reviews of the completed projects should be undertaken to understand the eventual errors made and to prevent their reoccurrence in future projects.

    The Italian experiences confirm that PPP policies could work if there is a general institutional and regulatory framework, including an efficient and competent public sector supporting them. Financing issues and bypassing of budgetary constraints should not be the driving force in selecting a PPP project. Selection criteria should consider appropriate mechanisms of governance and control of public interests and end users.

    Finally, it is important that the public and the private sector understands each other and shares each other’s expectations. In a PPP, the third “P” means partnerships: and a partnership can be successful only if both parties are satisfied and cooperate in a constructive manner for the success of their common goals.