May 21, 2010 / 12:29 PM / 8 years ago

New Italy water law dries up bank financing-Dexia

* Ronchi law has increased uncertainty for lenders

* Ongoing project finance deals being closely monitored

MILAN, May 21 (Reuters) - Project financing of Italy’s water development projects has ground to a halt since the introduction of new liberalisation legislation that created uncertainty over concessions and regulation, Dexia Crediop said.

The Ronchi decree approved in November calls on local authorities to tender water service concessions starting 2011 with a view to breaking ties with in-house local utilities. [ID:nLDE6410EQ]

“We have some 3-4 water-related operations in the pipeline on which we started working before the Ronchi law. These operations are now on standby because of lack of visibility on the applicable regulation,” Dexia Crediop (DEXI.BR) head of project finance Fabrizio Pagani told Reuters.

Concessions to manage water businesses in Italy typically last over 20 years and for a bank to provide project financing it is crucial there be a clear regulatory framework.

Pagani said that from a financing point of view, the Ronchi law has thrown up two major problems. On the one hand the new regulation affects existing in-house concessions while on the other the law still needs an enabling act.

The enabling act, which the sector expects around September, will include important measures such as a possible sector regulator and the conditions under which an existing in-house concession can be maintained.

“As a result, the arranging of new project financing for in-house concessions has been frozen, while projects already financed are being very closely monitored since there’s the risk of having a 20-year funding project for a concession that ends in 2011,” Pagani said.

Roberto Bazzano, the president of Italy’s utility association Federutility, said on Tuesday this problem was transitory and could be resolved by agreeing that if a concession lost the project financing could be passed on to the incoming management company.

Italy’s water sector drew interest after the cornerstone Galli law of 1994 which sought to overcome sector fragmentation, increase industrial investments and integrate the water cycle.

Galli established the principle of cost recovery through tariffs and a return on investment set at 7 percent.

But if water players from France, including Suez Environnement (SEVI.PA) and Veolia (VIE.PA), invested in Italy and stayed, other foreign operators from Spain and Britain slowly left as regulation became intricate.

“When you continuously introduce new measures that affect existing concessions, it’s hard for investors to organise themselves. It’s seen badly by funders and is interpreted at an international level as country risk,” Pagani said.

Reporting by Stephen Jewkes

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