Impregilo Lidco Libya General Contracting Company (Libya)
The subsidiary Impregilo Lidco Libya General Contracting Company (Impregilo Lidco), active in Libya since 2009, is a mixed company established by Impregilo with a 60% interest. A local partner owns the remaining 40%.
In the past, Impregilo Lidco won important contract for the construction of:
- Infrastructural projects in Tripoli and Misuratah;
- University campuses in Misuratah, Tarhunah and Zliten;
- Tripoli’s new “Conference Hall.”
With regard to the political upheaval in Libya from the end of February 2011 to the date of this Report, it is worth mentioning that the subsidiary was always able to operate in accordance with contractual terms and that the investments made up until the deterioration of the country’s political situation were fully covered by contractually stipulated advances.
In addition, the projects subject of the contracts executed by the Libyan subsidiary represent projects of national interest with regard to which, at the moment, it would not seem reasonable to presume that they would be abandoned. It is also clear that the subsidiary will face significant challenges in developing the projects in accordance with the schedule planned before the crisis erupted. Accordingly, Impregilo excluded the possibility of a new phase of significant development for the activities of the Impregilo Lidco subsidiary over the near term.
Beginning in 2012, the Group resumed the procedures necessary to restart industrial activities, even though the local situation continues to be challenging and there still no assurance of fully secure working conditions. Nevertheless, commercial and contractual relations with customer local administrations have been reestablished , with the aim of reopening the jobsites and restoring the financial conditions originally stipulated in the respective contracts. In this general framework, in 2012, the Group again obtained access to more accurate information about the financial and operating items that have an impact on its consolidated financial statements. Consequently, in the consolidated statement of financial position, income statement and statement of cash flows of the Impregilo Group at December 31, 2012 the asset, liability and income statement items attributable to the Libyan subsidiary were restated in accordance with Group principles, based on the evidence developed during the period and the support of assessments provided by the independent counsel that is assisting the subsidiary. Compared with the situation reported in Impregilo’s 2011 consolidated financial statements, which reflected the latest available information at March 31, 2011, the value adjustments made to reflect the gradual impairment losses suffered by the subsidiary’s net assets as a result of the events described above were estimated as constituting charges totaling 42.9 million euros. These charges were included in contract work in progress, as the Group deems them recoverable, considering that relationships with the customers have been reestablished. Net cash and cash equivalents held in Libya decreased by about 14.4 million euros, due to expenses incurred locally from March 31, 2011 to March 31, 2014.
In addition, early in 2013, a physical inventory was taken of plant, machinery and supplies at the main jobsites, with a total carrying amount of 29.9 million euros, but not all inventory sites could be accessed for security reasons. Taking also into account the fact that costs that may arise following completion of the inventory taking procedures would be covered by customers, consistent with force-majeure contract terms, as determined by the counsel that is assisting the subsidiary, no significant risks are deemed to exist in this context with regard to the recovery of the net assets attributable to the subsidiary, thanks in part to actions and claims filed with the customers contractually or otherwise.
Lastly, please note that Salini Impregilo is following the situation in Libya very closely and the possibility that, subsequent to the preparation of this Interim report on operations, events unforeseeable at this point could occur requiring changes to the assessments made thus far cannot be excluded.
Tax dispute – Iceland
In connection with the contract for the construction of a hydroelectric power plant in Karanjukar (Iceland), which the Group successfully completed in previous years, please keep in mind that, in 2004, a dispute arose with the local tax authorities with regard to the party required to act as the withholding agent for the compensation of foreign temporary workers employed at the jobsite. Impregilo was initially incorrectly held responsible for the payment of the withholdings on the abovementioned compensation, which it therefore paid. Subsequent to the final ruling in the proceedings activated in this dispute before the local lower court, the Company obtained full satisfaction of its claims. Nevertheless, the local authorities filed a new lawsuits with a similar scope and, based on a decision handed down in February 2012 by the Icelandic Supreme Court, blatantly contradicting the previous decision issued in 2006 on the same matter by the same judicial authority, rejected the claims filed by the Company, which expected to be refunded both the unduly paid withholdings of 6.9 million euros (at the original exchange rate) and the related interest accrued to date, amounting to 6.0 million euros. In previous years, the Company had conservatively written off the accrued interest component, despite a favorable final decision by the local court and the comfort of the opinion of counsel confirming the validity of its position, recognizing only the unduly paid principal amount. Following the latest ruling, the Company pursued all available judicial avenues, both at the international level (appeal filed with the EFTA Surveillance Authority on June 22, 1010) and, as far as possible, again at local level (new reimbursement claim filed with the local tax authorities on June 23, 2010), in the belief, comforted by the opinion of counsel, that the decision previously handed down by the Icelandic Supreme Court was incorrect in respect of local legislation, the international agreements that govern trade relations between EFTA countries and international conventions that prohibit the adoption of discriminatory treatments for foreign entities (both individuals and companies) working in signatory countries. On February 8, 2012, the EFTA Surveillance Authority sent the Icelandic government a communication notifying an infraction regarding the free exchange of services and requesting the government to provide its response. In April 2013, at the conclusion of this process, the EFTA Surveillance Authority issued its reasoned opinion finding the provisions of the Icelandic legislation applied to the dispute in question to be inconsistent with the regulations governing trade relations between member countries and asking that Iceland take action consistent with this position. Consequently, the Impregilo Group asked that the case be reopened. In view of the above, Impregilo does not believe that objective reasons currently exist to change the valuations made about this dispute.
Umbria-Tuscany Irrigation Authority - Imprepar
On December 29, 2010, the Group was informed that part of the sill above the surface discharge of the Montedoglio Dam, in the Province of Arezzo, had been damaged. In January 2011, the Umbria-Tuscany Irrigation Authority informed Imprepar that “investigations and tests are being carried out to ascertain the reasons and responsibilities for the damage.” With regard to this issue, as the transferee of the “sundry activities” business unit, which includes the “Montedoglio dam” contract, Imprepar informed the Authority that the activities related to the damaged structure were carried out by a different company in 1979 and 1980, which Impregilo (then COGEFAR) replaced as the transferee of the concession contract in 1984. In addition, the structure in question had been tested and inspected in the past with positive results. In its response to the Umbria-Tuscany Irrigation Authority, Imprepar specifically explained why it was not liable for any damages caused by the event and, comforted by the opinion of counsel, believes that, at this point, there are no reason to amend the relevant assessments.
Please note that in 2012, the management of the Umbria-Tuscany Water Authority and the Project Manager signed a service order requesting the contractor to immediately prepare executive designs and commence the related work at its own expense and under its own responsibility. Imprepar challenged these actions in their entirety, even though the amounts involved were not material.
Imprepar, comforted by the opinion of counsel and considering the recent developments mentioned above, believes that any assessment of the risk entailed by the Montedoglio incident different from the one made in the past would be premature.
Panama Canal expansion project
With regard to this project, certain critical issues have arisen during the first stage of full-scale production which, due to their specific characteristics and the materiality of the work to which they relate, have made it necessary to significantly revise downwards the estimates on which the early phases of the project had been based. The most critical issues relate, inter alia, to the geological characteristics of the excavation areas, specifically with respect to the raw materials necessary to produce the concrete and the processing of such raw materials during normal production activities. Additional problems arose due to the adoption by the customer of operational and management procedures substantially different from those contractually stipulated, specifically with regard to the processes for the approval of technical and design solutions suggested by the contractor. These situations, which were the subject of specific disclosures in previous financial documents published by the Group, continued in 2013. Faced with the customer’s persisting unwillingness to reasonably implement the appropriate tools available pursuant to the contract to manage such disputes, the contractor, and thus the original contractor partners, was forced to acknowledge the resulting impossibility to continue at the contractor’s full and exclusive risk the construction activities needed to complete the project, with assumption of the full financial burden required for this purpose without any guarantee of the resumption of objective negotiations with the counterparty. In this context, at the end of 2013, formal notice was given of the intention to immediately suspend work activities if the customer proved once again to be unwilling to tackle this controversy consistent with a contractual approach based on good faith and the desire of all parties to find a reasonable accommodation.
Negotiations between the parties, supported by the respective consultants and legal/contract experts, were carried out through February 2014 and, on March 13, 2014, the minutes of an agreement were signed. The key elements of the agreement include, in exchange for the contractor’s commitment to resume work activities and complete them by December 31, 2015, a commitment on the part of the customer and the contractor companies to provide the funding for the portions of the project not yet completed, for a maximum amount of about USD1.4 billion. This commitment will be honored by the customer through (i) a moratorium on the refunding of already disbursed contractual advances totaling about USD800 million and (ii) the disbursement of additional advances amounting to USD100 million, while the group of contractor companies will contribute (i) a direct contribution of their own financial resources in the amount of USD100 million euros and (ii) a contribution of additional financial resources, through the conversion into cash of existing contractual guarantees totaling USD400 million. The reimbursement of the amounts stipulated to finance the work to be performed was postponed, so as to make it compatible with the expected outcome of the arbitration proceedings, launched concurrently to determine the responsibilities of the parties for the extra-costs already incurred and to be incurred due to the situation described above. In this regard, please note that, starting in previous years, the Impregilo Group had applied to the project a reasonably conservative valuation approach, specifically supported by its legal consultants, which resulted in the recognition of end-of-project losses, mitigated in part by the corresponding recognition of the additional consideration claimed from the customer and determined based on the expectation that recognition of such consideration could be deemed to be reasonably certain. Considering that, at the end of the previous year, the generally problematic situation existing at that time, far from being resolved, was continuing, as described, while the agreements mentioned above were being finalized, an overall update was performed of the contract’s full-life economic projections. Consistent and in continuity with the assumptions developed earlier, in view of a further increase in the costs projected to complete the project, an update was also performed of the valuation of all of the additional costs deemed to be contractually justified, the collection of which was considered reasonably certain but conservatively deferred, consistent with the schedule set forth in the agreement with the customer. These activities resulted in the recognition of additional net charges over the life of the projects that, in view of the amounts recognized in previous years, were not significant either in absolute terms or in relative terms and were charged to income for their full amount in 2013.
Strait of Messina bridge and roadway and railway connectors on the Calabria and Sicily sides
In March 2006, Impregilo, in its capacity as Lead Contractor and general partner (with a 45% interest) of the Temporary Business Association established for this specific purpose, executed with Stretto di Messina S.p.A. a contract to entrust to the general contractor the final and executive design for the construction of a bridge on the Strait of Messina, with the related roadway and railway connectors.
In addition, a pool of banks signed the financial documents required by the General Specifications, after the Association won the tender, for the supply of credit lines totaling 250 million euros earmarked for the services subject of the awarded project. In addition, as contractually stipulated, the customer was also given performance bonds of 239 million euros. A reduction of the credit line to 20 million euros was approved in 2010.
In September 2009, Stretto di Messina S.p.A. and Eurolink S.c.p.A. executed a rider that took into account the suspension of project activities from the time when the contract was signed until that date. As provided for by the rider, the project’s final design was also delivered to the customer. On July 29, 2011, the Board of Directors of Stretto di Messina S.p.A. approved the final design.
Decree Law No.187 of November 2, 2012, concerning “Urgent measures for the redefinition the contractual relationships with Stretto di Messina S.p.A. (the customer) and local public transportation issues,” was enacted on November 2, 2012. Further to the enactment of this decree and in light of the potential implications for the contractual position of the Eurolink General Contractor, of which Impregilo is the leader, Eurolink decided to send to the customer, pursuant to the contractual provisions in effect, a notice of its intention to withdraw from the contract also to protect the positions of all Italian and foreign partners in the Association. Nevertheless, given the preeminent interest in constructing the project, the General Contractor also communicated its willingness to review its position, should the customer demonstrate a real commitment to pursuing the project. Despite the efforts made, the negotiations carried out by the parties were unsuccessful. Eurolink commenced various legal proceedings in Italy and at the EU level, on the one hand, arguing that the provisions of the abovementioned decree are unconstitutional and contrary to EU laws and thus injurious to Eurolink’s legally acquired rights under the contract and, on the other hand, asking that Stretto di Messina be ordered to pay the amounts claimed, under various titles by the General Contractor due to the termination of the contract for reasons for which it was not responsible. With regard to the actions filed at the EU level, it is worth mentioning that , in November 2013, the European Commission communicated its decision to suspend the lawsuit, as no treaties were violated, and confirmed it on January 7, 2014, with a communication dismissing the lawsuit. Consistent with the developments described above, the order backlog of the Impregilo Group at the end of 2012 was restated to reflect the elimination of the abovementioned project. Lastly, considering the complex nature of the various legal proceedings in progress, even though the counsel assisting Impregilo with regard to this matter and the general contractor are reasonably confident about the outcome of the proceedings and the recoverability of the remaining assets recognized for this project, the possibility that events not currently foreseeable may arise in the future requiring an update of the existing measurements cannot be excluded.
Impregilo has been active in Venezuela through a stable organization that, directly or in association with international partners, carried out several railway and hydroelectric projects, with a presence in the local territory consolidated over a span of 10 years both at the economic and industrial level.
In recent years, relationships with customers, all government entities, were generally characterized by delays in payments. This problem became more pronounced this past year due to a change in the country’s government leadership, at the beginning of 2013, and the resulting heightened social tensions that accompanied this political transition.
In response to the virtual suspension of activity by customers in this context, the Group temporarily suspended production activities.
Insofar as railway projects are concerned, an agreement (called “Punto de Cuenta”) was drafted at the beginning of February 2014, which was signed by the Chairman of IFE (the customer) and the Ministry of the Treasury, but is currently awaiting official confirmation by the President of the Republic. This agreement calls for the gradual payment of 82% of all receivables outstanding at the end of 2014.
As for hydroelectric projects, built through the OIV Tocoma consortium, in view of the expiration of the contractual deadline for completing the project, scheduled for mid-November 2013, at the customer’s request, a new schedule was developed for the work remaining to complete the project, with work scheduled to resume at the beginning of May 2014 and be completed by the end of 2016. This proposal is still being reviewed by the customer, also in light of legitimate requests for payment of the certified debt and the identification of the future financial resources needed for a normal performance of the remaining work.
The projects that are being developed by the Impregilo Group are infrastructures of the utmost importance, both on economic-industrial and social terms and, already in the past, due to the events that characterized the country’s recent political history, temporary situations of uncertainty developed that were not substantially different from the one that exists today. However, they were resolved positively and no significant liabilities were incurred as a result. With this in mind and based on a constant and careful monitoring of the situation in the country, carried out together with the Group’s partners and through discussions with customers and local government authorities with the aim of defending and protecting the positions of the Impregilo Group, no particular problems are apparent at this stage with regard to the realizable value of the Group’s net assets, except for the lengthening of collection time, which was duly taken into account in the measurements performed for financial statement purposes. In view of the delicate and complex situation that developed at the political level, the possibility that events not currently foreseeable may arise in the future requiring an update of the existing measurements cannot be excluded.