THE REFERENCE CONTEXT:

In this chapter we refer to the extended issue of Public Private Partnership and Project Finance with reference to Law no. 232 of 11 December 2016 (2017 Budget Law) and Legislative Decree 56 of 19 April 2017 (corrective to the Code of Public Contracts and subsequent updates).

In this chapter we will deal in particular with the issues that impact the Public Administration in the management of PPP and Project Financing.  

PERFORMANCE OF PROJECT FINANCING ON THE ITALIAN MARKET:

From 2012 and 2016, the PPP in Italy produced 48 billion euros of Still Projects, only for Litigation, equal to about 35% of the total number of activated Projects.

Furthermore, the greater the Projects, the more this percentage rises. For Projects with an investment of over 50 million euros, the total number of blocked Projects is over 53%. This means that more than half of the Great Projects in Italy are blocked [Source IFEL-Department of Territorial Economics Studies].

And the trend shows no sign of stopping, not even today, also subject to the difficulties for many PAs in interpreting the new regulatory inputs of the New Procurement Code.

Therefore, we can basically say that so far the PPP in Italy has gone badly and there are many Italian Operators who desert Tender Notices, preferring alternative Investment Opportunities.

The situation is certainly complex because it depends on several factors, respectively:

• From the Italian Contract Regulations
• From the Public Administration
• From the Private
• From the inappropriate use of a technology

In this chapter we will try to highlight those behaviours that distance the Public Administration from the possibility of using the PPP in a proactive way, so that it can return to being a responsible and essential engine for the economic recovery of the territory, perpetuating it for all administrations through the Whole Italy.

A PROJECT IN PROJECT FINANCING

Parts:

• Public Part (Contracting Authority)
• Private Party (Promoter, Dealer)

The Project which generally consists of:

• Urban-Architectural Project
• An Economic Financial Plan
• Convention
• Certification

THE ECONOMIC FINANCIAL PLAN IN THE ITALIAN PPP

In this section we want to dedicate ourselves to the analysis of the criticalities that lead to the Public Administration having a limited approach to PPP in Italy, so that it can overcome these "Limiting Practices", the legacy of an outdated cultural approach and the inadequate use of a technology, in order to arrive at a new innovative and modern PPP in the interest of the PA, the community and all Stakeholders.

The limits of Excel sheet technology, in the implementation of the Economic Financial Plans (PEF), can be classified into 3 categories:

• Lack of reliability of the economic and financial representation of reality 
• Lack of Opportunities in managing the various Economic and Financial situations 
• Lack of Sustainability

Let's go and examine them in detail.

LACK OF RELIABILITY

FIRST CRITICAL ISSUE “I WANT TO ASK THIS QUESTION TO WHICH I ASK YOU TO CAREFULLY REFLECT. WHAT IS THE APPROXIMATION% OF REALITY OF A PEF MADE ON EXCEL SHEET? " 

In other words, what is the average approximation of the Economic and Financial Plans that the Public Administration receives to get the work done? 30%, 70%? No, on average it is 15-20% and this means that if it is 20% there is an error margin equal to its complement, that is 80% and this means that if a value obtained is 1,000, then its true value fluctuates from 200 to 1,800? 

And therefore what reliability for the Public Administration?

What are the consequences for the community it represents?

Today in Italy, 70% of the PEFs presented and awarded lack the data and results necessary for the Sustainability of the Project.

90% of the PEFs are defined on the basis of essential economic and financial assumptions that do not take into account in a correct and realistic way the critical issues of working capital, VAT management, correct payment of taxes and correct payment of debt instalments.

80% of the PEFs are presented and awarded with overestimated Financial Sources (Equity and Debt).

95% of the PEFs are presented and awarded with negative cash flow years / months. This in particular means that the Project, already in the preliminary phase, does not have sufficient cash to support itself.

This is one of the problems of the PPP, for which the too low approximation of the PEF makes unreliable the projects it represents, with unfulfilled budgets, higher expenses, delays, inefficiencies and damage to the community and a stagnant economy.

What is the cause? Surely one of these is due to a technology problem: the Excel spreadsheet is a fantastic tool, but it is inadequate for the financial and economic predictive representation of such complex realities. 

2A CRITICALITY: "THE PEF IS GUARANTEED BECAUSE IT HAS BEEN ENCLOSED"

Once upon a time there was an old saying about the quality certification legislation that says:

“Look at this chair that has complied with all the production processes required by the Quality Certification; pity that, when one sits down, it breaks "

The Assertion as it is done today unfortunately does not determine any guarantee for the Public Administration, because it does not go to the bottom of the economic and financial structure of the Project but in most cases, it merely certifies that the declared flows go to cover the declared investments, without going into the specifics of how they were created, with which algorithms and with which assumptions.

We have seen financial plans with negative cash in the early years! Unfortunately!

3A CRITICAL: "HOW DO YOU COMPARE THE DIFFERENT PEF IN THE RACE?"

The first parameter, in order for two different objects to be compared, is the normalization. In other words, the economic and financial mathematical model must be homogeneous.

However, how do you compare two PEFs presented on Excel sheets? Perhaps from the results, for one of them the IRR is 12% and for the other the IRR is 15%. Is it enough? Absolutely not, the results can be obtained, the more difficult it is to construct correct economic financial assumptions with the relative adequate algorithms that represent them.

Then the Public Administration thinks to solve the problem by asking for a readable Excel sheet. Nothing more wrong. It's like thinking of guaranteeing the PEF with sworn certification ... Requesting an Excel sheet does not solve the Public Administration's problem of insurance regarding the economic and financial sustainability of the work, due to the very nature of the Excel sheets which are subjective, incomplete, not certified in terms of the algorithms used and with an average reliability of 20%.

What responsibility does the Public Administration assume then? What Responsibility towards the Community? What Results? The results are well known: disastrous! Is it worth it to continue like this? The PA just can't do anything? We believe so. 

4A CRITICALITY: ANNUAL TIME SCALE PROBLEM:

In fact, Excel sheet technology can only be on an annual basis.

This assumption implies that you can visualize a cash on an annual basis that is always positive, when in reality it is negative for most of the months making the project unsustainable, with inadequate indices of profitability, bankability and sources necessary for debt coverage.

The need to have a cash flow on a monthly basis is imposed by the need to view the monthly payment of taxes.

5A CRITICALITY: LIMITED USE OF FINANCIAL FUNCTIONS PROBLEM:

In fact, it becomes impossible with Excel sheet technology to use all the features used and allowed in finance,

Recursive calculations, reimbursements in Taylor Made, the calculation of commitment fees, self-financing, the different methods of VAT compensation, the use of variational principles to optimize system variables.

6A CRITICALITY: PROBLEM OF LACK OF CERTIFICATION OF THE ALGORITHMS USED:

Without referring to sources, which declare the correctness of the algorithm used, also considering that the certification does not verify this aspect.

7A CRITICALITY: COMPLEXITY-RELATED ERROR PROBLEM:

In fact, in the hypothesis of being able to represent all the above functions, the Excel sheet would become so complicated and complex that it would increase proportionally the probability of error, making the simulations unreliable anyway. 

Two well-known professors at MIT drafted the three-year work plan for a major government department. Unfortunately, a university student of MIT, after a few months, disavowed the PEF for having found a calculation error, trivial, but such as to make the obtained calculations unreliable, with serious damage to the image of the Government and the two professors. 

8A CRITICAL: "WHY THE FIRST AND BIGGEST RISK FOR PEF IS THE EXCEL SHEET?"

There is a lot of talk about risk analysis, but what is the risk associated with using the Excel sheet to create a PEF for the achievable analysis of a public work?  

Would you still use a drafting machine to make a Project?

Would you still use a carriage for a trip?

9A CRITICALITY: "THE LACK OF A SYSTEMIC APPROACH"

Due to the inability of Excel sheet technology to take into consideration all the variables in a given context that force us to make approximations, making the project unreliable.

The need to specify the VAT rate associated with each variable entering the model, the exact payment / collection days, the tax rates, the risk variables, etc.).

LACK OF OPPORTUNITY

The ability to flexibly manage the various cases that a project can offer is not possible with a PEF developed with Excel sheet technology, precisely because this technology does not allow the development of models that can exhaustively simulate the various economic and financial aspects of the reality.

In fact, reproducing the various decisions on an Excel sheet means always customizing the model  with a consequent waste of time, making operation impossible.

However, not managing them means not being able to translate the possibilities that the Public Administration could have.

What does this limit mean for the PA? It means losing opportunities to create work that otherwise could have been done.

Let's see the structural reasons for the inadequacy of the Excel Sheet due to the limited opportunities it can offer in the drafting of an Economic and Financial Plan:

1A CRITICALITY: “THE PEF? A FORMALITY "

Unfortunately, the Financial Economic Plan is considered a formality both for the Private and the Public when in reality it constitutes the essential part of the Project, the one that highlights the financial balance of the project, its sustainability and on the basis of this the ability to give the Infrastructures and services expected to the community for which the work is carried out.

2A CRITICALITY: "THE PEF AND THE PROBLEM OF COMPETENCE"

Most of the Public Administrations do not believe they have the economic and financial skills adequate to manage a PEF and therefore feel deprived of responsibility in the fundamental aspect of the Project Evaluation. It erroneously believes that the responsibility of the PEF falls on the Operator, on the Banks, on the External Consultant or on the Certification Body. This causes a false problem, because those who approve the Project always remain the Public Administration.
So what are you going to do? Abdicate? No! Technology can give valuable help to the Public Administration

3A CRITICALITY: "THE PEF IS ANYWAY A RESPONSIBILITY OF THE PROMOTER"

Unfortunately, that's not true!

In fact, the following sentence is always found in the Certification of Certification:
"... this statement does not constitute a substitute for the function of verification and evaluation of the promoter's proposal, which is solely the responsibility of the Public Administration ..."

This is why there have been judgments that have had to reaffirm the responsibility of the public administration in terms of approval in tender notice. This is why many disputes involve not only the Participants of the Tender Notice, but the Contracting Authority itself. This is why, if a Project stops or causes real damage as the recent Italian chronicles have brought to light, the Community is offended not only by the Operator’s actions, but also because the Public Administration approved it.

Therefore, the Administration must be able to control the Economic and Financial Plans that are submitted to it.

4A CRITICALITY: IMPOSSIBLE TO BREAK A PROJECT INTO ITS UNITS:

in fact, with the Excel sheet technology it is difficult to break down the Project (an investment, a Business Model) into its fundamental economic components (Business Unit with its own investment and operating periods, investments, operating costs and revenues, seasonality, etc. .)

The Restructuring Project of a Result, initially calculated with the old technology of the spreadsheet, in 60 million euros, was made possible by breaking it down into units with only 45 million euros.

5A CRITICALITY: LACK OF TRANSPARENCY PROBLEM:

Due to the extreme subjectivity of the Excel sheet, which makes the Excel sheet legible only by those who have done it.

Summary statements different from each other, not distinguished by competence (for example a cash flow superimposed on an income statement, etc.). 

6A CRITICALITY: "THE PEF AND THE CONTINUITY PROBLEM"

This problem is due to bad practice, according to which the PEF, once approved, is no longer revised with a view to temporal continuity during the progress of the project. This represents a serious limitation because a periodic review of the PEF would instead allow the Public and the Private to collaborate together to immediately correct, in the bud, the planning route of conducting the same in order to avoid problems later.

100% of PEFs are not monitored during their useful life. However, how can you do it? Today it is impossible to create two homogeneous scenarios of comparison with the technology of Excel sheets, due to their subjectivity, precariousness and because they would not be able to reflect the approximation at least monthly of the progress of the PEF.

LACK OF PROFITABILITY

1A CRITICALITY: OVERESTIMATION OF SOURCES (EQUITY, BANK LINES, SHAREHOLDER FINANCING)  

This is due to Excel technology, because it does not allow for financial optimization of cash flows, which is instead permitted by the breakdown of the project into Business Units, the management of flows on a monthly basis and the management of self-financing. This means that the Public Administration must put excess allocations in the Budget, and is able to do one project instead of two.

For this issue, an energy efficiency Project Financing, which an investment of 25 million euros initially seemed to be needed for, with a correct financial simulation, was carried out by the investor with only 15 million euros.

Project Financing of a section of a motorway was carried out with 30% less than the expected investment.

2A CRITICAL: SUSTAINABILITY IS ALWAYS CRITICAL

because it does not take into account all the financial variables involved. The reasons for these results are mainly due to the fact that a predictive financial economic analysis is a very complex analysis that it is inadequate to try to translate it on an Excel sheet for the structural limits of the same.

Sustainability on an annual basis is in most cases critical because it does not take into account the monthly cash flows, creating unrealistic Reliability and, ignoring the necessary hedges, leads to an underestimation of the debt.

3A CRITICALITY: "THE PEF, THE REGULATION IN FORCE AND ANAC GUIDELINES"

The Public Administration's outing of not knowing anything about Project Finance has given the input to the Italian Ministries in charge of starting a re-foundation of the PPP Regulation through the New Procurement Code and the ANAC guidelines and their continuous revisions.

The Principle of Financial Economic Equilibrium has become the mantra of the Procurement Code. The ANAC Guidelines, which in the meantime have become mandatory guidelines, have indicated to the Public Administrations the mathematical importance of VAN = 0 and WACC = TIR for a Project.

But is this approach correct? Unfortunately, No, because it introduces a further formal element that can be easily bypassed at the sacrifice of the ability to really verify the economic and financial sustainability of a project. Let's see why:

In fact, if on the one hand the Regulation had the merit of spreading these concepts so dear to Project Finance, on the other hand it did not tell the whole story but only the ending, and from the end it is difficult to understand what the story is about. .

In fact, VAN, TIR and WACC are the final Indices of a Project in ‘Project Finance’, as they determine its Sustainability. But how were these indices generated? What are the economic, financial, technical, macroeconomic and fiscal assumptions that generated these indices? How were they structured Statements of Cash Flow, the Income Statement, the Balance Sheet, the sources / reference Loans?    

All this is the real beginning of the Sustainability of the Project. If this data is incomplete or wrong, or with Risks not correctly assessed or not assessable, you can put the NPV = 0 to the cent but it is clear that this is not the solution to have a truly sustainable project, it is just a method to hide behind the form, unfortunately forgetting the substance.

If only the End is told, a Story can say everything and or nothing.

To conclude, it is right to give some guidelines to follow but we cannot substitute the Project and Market Evaluator.

It is necessary for the Public Administration to return to being the protagonist of its territory with competence, authority and the ability to decide on projects to be developed for the community it represents. Today, technology can help the Public Administration to regain that role for which it was created.

4A CRITICAL: "THE PEF IS ONLY A SCORE PROBLEM IN THE TENDER NOTICE?” IT'S CORRECT?"

How does the Public Administration assign a score to a PEF presented in a tender notice?

Based on what criteria? If the PEF presented is not sustainable, what score should be assigned to it?

Wouldn't it be better to be excluded from the tender notice? How do you continue to take into consideration a project that does not have sustainability, let's talk from a substantial and non-formal point of view (see the Asseveration).

THE CHANGE OF PARADIGM: "FOR A BETTER, SUSTAINABLE WORLD"

We have seen how the Public Administration must return:

• To its role of centrality
• To his Role of Expertise
• To his ability to decide and evaluate in a competent and informed way to make the correct decisions
• To use the appropriate Technological Resources and not to continue to use inadequate technologies that have produced the results we are all aware of
• To know how to surround yourself with modern consultants who are able to direct you and not the usual names that have brought what we all have under our eyes
• And above all to return to the substance and abolish the many and useless formalities that have led us to where unfortunately the PPP is.

A CHALLENGE

So what do you want the Public Administration to do with the future of your Administrations, in particular Mayors, Councillors, Executives? Do you want to continue to:

• Make the tender notices empty?
• Make Projects with a Budget of 1 have to become x2, x3, x4?
• Continue to disregard the expectations of the community for a new work or service?
• Keep doing barely 1 project when you could do 2-3 with the same Budget?

So, if you no longer want this:

• Acquire the new “Finance Atena” platform or  
• Use the innovative ATI of Atena Consulting, always based on "Finance Atena" to have a "Project Financing" office within your company regularly at your disposal, paying it only for the use you want to make, but still suitable to solve your problems today.