Campania USW projects: summary of events up to 31 December 2013

From the early stages of the Project, following the signing of the contracts, major problems arose, the most important of which were as follows:

• failure by the Campania Regional Authorities to commence the scheduled separated waste collection at the agreed volumes, an essential factor underpinning the project and service contracts agreed by the companies with the Government Commissioner and which constitutes one of the causes of some of the most serious ongoing disputes relating to the management of the former WDF (now "STIR") plants;
• inadequate landfill areas made available by the government commissioner;
• delayed start of work on construction of the EfW plants at Acerra and Santa Maria La Fossa. Work at the Acerra plant which, according to the contract, should have started at the beginning of 2001, was actually only started in August 2004, following special action by more than 450 policemen who cleared the work areas which had been occupied by protesters since January 2003. As regards the Santa Maria La Fossa plant, which should have completed the project framework for the provinces of Campania apart from Naples, and whose construction should have started at the same time  as the Acerra  plant,  after obtaining the  E.I.A. (environmental  impact assessment) in 2007, the works were never started.

In parallel with the rapid deterioration in the economic and operating conditions under which the company was obliged to operate as a result of these problems, the administrations - both local and central - variously involved in management of the contracts proved to be in breach with regard to FIBE concerning the fees contractually due to it.

On 12 May 2004, moreover, the Naples public prosecutor, in proceedings which included investigation of the directors of the group companies involved in the project (FIBE, FIBE Campania and Fisia Italimpianti), as well as senior management in the Commission, sequestrated the plants, at the same time allowing their return against a bond, thus starting new litigation of a criminal nature which is more fully described elsewhere in this section and which is still partly ongoing.

At the end of Contractual phase, therefore, the company was significantly exposed financially, due on the one hand to having used its own resources, including loans from banks, to make most of the investments for which it was contractually responsible and, on the other to hand, the failure of the local administrations to pay a significant proportion of the fees due to FIBE.

Construction of the Acerra plant had only been partially started and in the meantime numerous disputes had been started in both civil and administrative legal proceedings.

Legislative Decree no. 245/2005 (converted into Law no. 21 of 27 January 2006), among other things, (i) on 15 December 2005 terminated "by operation of law" the existing service contracts between FIBE, FIBE Campania and the Special Commissioner for the Waste Emergency in Campania, "without prejudice to any claims arising from the terminated contracts", ordered the company (ii) to continue its activities in strict compliance with the control and coordination of the Special Commissioner with the right to be reimbursed by the Commission for the costs and expenses incurred in connection therewith and (iii) to continue construction of landfills and the Acerra plant, while, with the utmost urgency and using public evidence procedures, the Commissioner identified a new operator to be entrusted with the service. The law also imposes an obligation on the Government Commissioner to recover the sums owed to the company by the local administrations as fees for waste disposal until the date of termination of the service contracts.

This changed regulatory framework, already spoiled by significant difficulties relating to both the nature of the new legal relationships dependent on it and the unrealistic expectations about the possibility of finding a new operator to whom to entrust the service under the same conditions as those that had already led to collapse of the management system in the Contractual phase, resulted in the start of the "Transitional" phase and further complicated the activities of FIBE which was unable to resolve any of the most important critical issues characterising the previous phase. The most significant of these issues were:

• the insufficient allocations of financial resources to the Commission in order to carry out its required control and coordination activities, in relation to both operating expenses and the significant capital expenditures still to be made;
• the illegitimate continuation of FIBE's obligation to continue its business because of the lack of new operators to take over the service (all the calls for bids were successful due to the lack of appropriate guarantees regarding the availability of sites for disposal of the WDF processing residues), although this was the same regulation that prescribed early termination of the service contracts; and
• the lack of specific and precise provisions regarding the manner in which the company could have received compensation to satisfy its claims for damages arising from the early termination of its service contracts.

With an operational profile consistently governed by compliance with the rules then in force and by more open collaboration with the Commission, FIBE has nevertheless continued construction work at the Acerra plant, without access to adequate funding from the public administration which would subsequently become the owner, thereby further burdening its budget.

The end of this phase, as previously described, coincided with the entry into force of Decree Law no. 90 of 23 May 2008 and Decree Law no. 107 of 17 June 2008, both converted into Law no. 123 of 14 July 2008. On the one hand, these measures oblige FIBE to complete the EfW plant at Acerra and, on the other hand, finally sanction the Impregilo Group's exit from the waste disposal business, transferring to the Provinces the ownership of the WDF plants and the operating resources present at each plant, including the personnel (other than management), who are employed under temporary contracts.

Even though an important result had been achieved, the situation of the company was evidence of an absolutely critical operational and financial picture. Among the most significant elements of this situation are:

• the increased deficit attributable to the enforced continuation of construction work at the Acerra plant in respect of which no specific procedural or contractual framework had been established concerning its intended use;
• the final removal of FIBE from management of all the plants and equipment until then used by the company to carry out their activities as the mere executor, on behalf of the Commission, of the waste disposal activities, together with the absence of any decision relating to the reimbursement of costs incurred in the construction of such plants;
• the legally required abolition of the public administrative structures that had coordinated the activities in the Transitional phase without the provision of any concrete measure for the reimbursement of the huge financial resources which, during performance of the disposal activities for and on behalf of the administration, FIBE still had to pay in advance - with the financial support of the Group as in the previous periods - and for which, again, no specifically identified debtor nor specific procedures for payment by the public administration were provided.

The start of this phase was mainly characterised by two new scenarios which involved (i) the completion of the EfW plant at Acerra and development of associated events and (ii) the initiation of a new phase of disputes between the company and the public administration relating to the management of the plants, storage sites and equipment in respect of which full and exclusive possession of the same by the administration had been registered pursuant to the aforementioned Law 123/2008.

As regards the Acerra plant, in December 2008, as part of the procedure for awarding the service management contract for the EfW plant, a new service provider was identified in the shape of a leading Italian company which owned other large plants for waste disposal and associated energy recovery. In parallel, FIBE, in accordance with the provisions of the aforementioned Law 123/2008, continued the technical activities aimed at completion of the plant and the related testing. Final acceptance testing of the Acerra plant was carried out in the first two months of 2010 and the relative certificate was issued on 16 July 2010 confirming successful completion of the procedure. In this context, Decree Law 195/2009 was converted with amendments into Law no. 26 of 26 February 2010, which, inter alia, contains some significant provisions that can be summarised as follows:

1. sale of the EfW plant at Acerra for € 355 million and transfer of ownership by the Impregilo Group to the Campania Region (or to the President of the Council of the Civil Protection Department or a private individual). The transfer was set for 31 December 2011 in accordance with a new decree of the Prime Minister and after allocation of the related financial resources. Until then, the former service provider would be paid a monthly lease payment of € 2.5 million for 15 years. The payments for the 12 months before transfer of title would be deducted from the consideration to be paid, together with the amounts advanced to the former service provider, pursuant to article 12 of Law Decree no. 90/2008, as advances for work in progress when the plant was being built;
2. still in relation to the Acerra plant (i) the deadline for performance of the acceptance test was fixed as 28 February 2010, (ii) it was agreed that, until the transfer of ownership, the plant would not be transferable, it would not be subject to seizure or other transactions or registrations or other acts detrimental to the plant, and (iii) further significant charges would be imposed on the former service provider in relation to a series of guarantees substantially different and significantly more costly than the current best practices in the field of plant engineering. Management of the plant, however, was assigned to the new operator starting from 2010, despite the required presence of issued guarantees and continuing ownership on the part of FIBE.

As regards the development of the disputes relating to the management of the plants and storage sites, the first period of the 'Post-transitional' phase was marked, among other things, by the development of two key administrative disputes, namely:

• definitive identification of the role played  by FIBE in relations with the public administration after termination of the service contracts and
• determination of the entity which, after entry into force of Law 123/2008, would take over and manage all the plants, storage sites and equipment which, during the Contractual phase, had been carried out by FIBE for the performance of its activities.

In relation to the definition of the role played by FIBE in the Transitional phase, decision no. 7280 of the Regional Administrative Court of Lazio of July 2008, which became final by failure to appeal, provided - in the grounds for the decision – a precise reconstruction of the role and responsibilities attributable to the former service providers after 15 December 2005 –  now “mere executors” of the Commissioner’s orders – and to the Commissioner – sole responsibility for the waste disposal service and coordination activities, required to identify the best solutions for waste disposal.

At the same time the decision pointed out that all the obligations imposed on the former service providers by law had ceased on 31 December 2007, also stating that the various measures of the Commissioner ordering FIBE to extend its operations up to entry into force of Law 123/2008, measures which were all immediately challenged by the company, were considered unlawful as contrary to the previous regulations governing the conditions and limitations of the specific emergency action.

However, in relation to the dispute concerning the ownership and management of the plants and storage sites, the litigation phase, which began in the period immediately following the entry into force of Law 123/2008, ended with the decision of the Council of State which, by judgment 290/2010, finally confirmed the quashing of the claims made by the Administration for the return of the sites to FIBE in December 2008, thus freeing the latter from any obligation in relation to the management of the sites which, in the opinion of the Administration, were not suitable for its activities.

Approaching the end of 2010, therefore, the overall situation of the Campania USW Projects still appeared somewhat complex, mainly due to the following situations:

• an economic and financial position which, at consolidated Group level, showed a huge amount in respect of net receivables and claims for compensation, relating mainly to the following sectors of activity:
• construction of the Acerra plant which, besides being one of the largest and most modern EfW plants in the world, was by then already in full operation and production, but the company that had built it had not received any compensation;
• reimbursement of the non-amortised costs of the former WDF plants which, according to the provisions of the service contracts cancelled by law in late 2005, were charged to the public administration but which to date had not been paid by it;
• net receivables resulting from progressively accumulated financial loss during both the Contractual and Transitional phases as a result, on the one hand, of the defaults of debtor administrations and, on the other, the impossibility of challenging such defaults in respect of third party suppliers and sub-suppliers of FIBE, which was therefore compelled to further commit itself to oppose actions taken by these suppliers in bankruptcy proceedings.
• the protracted criminal litigation which, although proceedings on the merits were already in progress, saw the Group subject to significant in rem precautionary measures on the part of the investigating magistrates, with all the operational and reputational risks that entailed;
• the protracted civil and administrative civil and administrative litigation which, in spite of the fundamental decisions described above, still did not allow the definition of a precise period of time in which the various legitimate claims made by the company could be satisfied.

As from the end of 2010, however, there were some significant developments relating to the foregoing, namely:

• the dispute concerning the legitimate compensation due to FIBE for the construction of the EfW plant at Acerra was largely resolved by the end of 2011 and final recovery of compensation for the plant amounting to approximately € 355 million was completed during 2012;
• the criminal proceedings initiated in 2004, and the parallel precautionary procedures which saw the Group subject to seizure of substantial financial resources from 2007, were finally ended in early 2012 with the final rejection of the applicability of the measures, and in November 2013, the Court of Naples issued an absolute acquittal of all the defendants involved. On 1 February 2014, the full acquittal decision was filed (consisting of 265 pages), and at the date of this Report the deadline for appeal by the public prosecutor, which is due to expire on 21 March 2014, is still pending;
• the dispute relating to the legitimate claims made by FIBE for reimbursement of the costs incurred in the construction of the former WDF plants and not yet amortised at the date of cancellation of the service contracts (15 December 2005) was also concluded with the decision of the Supreme Court in March 2013, which dismissed the appeal by the public administration which had been deemed unsuccessful by the Council of State in 2012. Although in this regard enforcement proceedings started by FIBE designed to achieve full compliance by the unsuccessful administration are still ongoing, during 2013 a total of approximately € 240 million was recovered, of which some € 204 million related to costs not amortised as at December 2005 and about € 35 million to the associated legal interest.