CITY OF NAPLES
TABLE OF CONTENTS
PAGE
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INTRODUCTION...................................................................7
CITY OF NAPLES.................................................................9
THE ECONOMY...................................................................14
FINANCIAL CONDITION OF THE CITY...............................................16
DEBT OF THE CITY..............................................................26
THE REPUBLIC OF ITALY.........................................................28
OFFICIAL STATEMENTS...........................................................82
AUTHORIZED REPRESENTATIVE IN THE UNITED STATES................................82
SCHEDULE OF OUTSTANDING DEBT AS OF DECEMBER 31, 2005..........................83
6
INTRODUCTION
THE EURO
The Treaty on the European Union (the "MAASTRICHT TREATY"), which came into
effect on November 1, 1993, established the guidelines for a single European
currency under the monetary control of a European Central Bank. The European
Monetary Institute ("EMI") was subsequently established with responsibility for
the technical preparations for European Monetary Union (including instruments,
procedures and regulations) as well as for strengthening cooperation and
coordination among the monetary authorities of the member states. With the
approval of the Council of the European Union, Italy, Austria, Belgium, Finland,
France, Germany, Greece, Ireland, Luxembourg, the Netherlands, Portugal and
Spain (the "PARTICIPATING MEMBER STATES") agreed to adhere to the Maastricht
Treaty.
On January 1, 1999, the Euro officially became a currency, alongside each of the
national currencies of Participating Member States, which were fixed at
irrevocable conversion rates to the Euro, and the currencies of other European
Union member countries that are not Participating Member States also became
linked to the Euro. The national currency of each Participating Member State
continued to be the sole legal tender for cash transactions in each nation. The
conversion rate between the Euro and the Italian Lira was fixed at Lit.1,936.27
per Euro. The following table sets forth the fixed conversion rates between the
Euro and each of the twelve Participating Member States' national currencies:
BELGIAN/
LUXEMBOURG FRENCH DEUTSCHE IRISH DUTCH PORTUGUESE SPANISH AUSTRIAN FINNISH ITALIAN GREEK
FRANCS FRANCS MARK POUNDS GUILDER ESCUDOS PESETAS SCHILLINGS MARKS LIRA DRACHMA
--------- ------- ------- ------- ------- --------- ------- ---------- ------- ------- --------
(euro)1.00... 40.3399 6.55957 1.95583 0.787564 2.20371 200.482 166.386 13.7603 5.94573 1936.27 340.750
Also on January 1, 1999, the European Central Bank in Frankfurt began to
determine the monetary policy for the Participating Member States centrally.
Beginning on January 1, 2002, the Euro was introduced as the legal tender in
each of the Participating Member States and each of the pre-existing national
currencies continued to be accepted for temporary periods ending no later than
March 1, 2002. The Italian Lira ceased to be legal tender on March 1, 2002, and
has been removed from circulation and replaced by the Euro.
All Lira amounts have been converted into Euro at the fixed exchange rate of
Lit.1,936.27 to (euro)1.00.
EXCHANGE RATES
The following table sets forth, for the periods and dates indicated, certain
information regarding exchange rates between the U.S. Dollar and the Euro, based
on the Noon Buying Rate for Euros expressed in Euro for $1.00 (rounded to the
nearest Euro). These rates are provided solely for your convenience. We do not
represent that the named currencies could have been converted at these rates or
any other rate.
The column of averages in the tables below shows the averages of the relevant
exchange rates on the last business day of each month during the relevant
period. The high and low columns show the highest and the lowest mid-market
quotes, respectively, on any business day during the relevant period. Except as
otherwise specified, all amounts in this Annual Report are expressed in Euro
("EUR", "EURO" or "(EURO)") or in United States Dollars ("DOLLARS", "$", "US$"
or "U.S. DOLLARS"). Amounts stated in Dollars, unless otherwise indicated, have
been translated from Euro at an assumed rate solely for convenience, and should
not be construed as representations that the Euro amounts actually represent
such Dollar amounts or could be converted into Dollars at the rate indicated or
any other rate.
7
U.S. DOLLAR PER EURO(1)
YEAR ENDED DECEMBER 31, END OF PERIOD AVERAGE(2) HIGH LOW
- -------------------------------------------------- -------------- ----------- ----- ------
2005.............................................. 1.18 1.24 1.35 1.17
2004.............................................. 1.36 1.24 1.36 1.18
2003 ............................................. 1.26 1.13 1.26 1.04
2002 ............................................. 1.05 0.95 1.05 0.86
2001 ............................................. 0.89 0.89 0.95 0.84
- ---------------
(1) Based on the U.S. Federal Reserve Bank noon buying rate for Euro for 2001,
2002, 2003, 2004 and 2005.
(2) Based on the average of the exchange rates for the last business day of each
month during the relevant period.
8
CITY OF NAPLES
GENERAL
The City of Naples (the "CITY" or the "CITY OF NAPLES") is located in the
Southern portion of the Republic of Italy ("ITALY" or the "REPUBLIC") on the
Mediterranean coast in the region of Campania.
The City dates from the sixth or seventh century B.C., when Greek colonists
established an outpost under the name of "Parthenope" on what is now Naples.
"Parthenope" later changed its name to "Palepolis" (old town) before the
inhabitants of the Greek colony Cuma founded "Neapolis" (new town) in 475 A.D.
Over the centuries, Naples became a prosperous commercial center and has
remained an important trading port on the Mediterranean Sea ever since.
Today, the City occupies an area of 117.2 square kilometers (approximately 453
square miles). With a population of approximately one million as of December 31,
2004, Naples is the third largest city in Italy, after Rome and Milan. The
population of the Naples metropolitan area (known as the PROVINCIA DI NAPOLI)
amounted to approximately 3 million as of December 31, 2004.
Naples is the capital of the region of Campania (hereinafter referred to as the
"REGION OF CAMPANIA" or the "REGION"), the second most populous of Italy's 20
regions. As of December 31, 2005, Campania had a population of approximately 5.8
million representing approximately 9.9% of the population of Italy. Campania,
along with the regions of Abruzzo, Molise, Puglia, Calabria, Basilicata, Sicily
and Sardinia, form an area in Southern Italy known as the "MEZZOGIORNO".
With an international airport, an extensive road and rail network and one of the
most important ports in the Mediterranean Sea, the City of Naples is well
connected to local communities as well as strategically placed to conduct
international trade. Its strategic location historically led to the growth of
Naples into one of Italy's major cities while the City's local environment and
proximity to the islands of Capri, Ischia and Procida have established tourism
as one of its most important industries.
In June 1996, the City of Naples issued $195 million in aggregate principal
amount of senior notes (the "NOTES") in a registered offering in the United
States and listed the Notes on the New York Stock Exchange. The Notes bear
interest at a rate of 7.52% per annum and mature on July 15, 2006.
The principal office of the City is located at PALAZZO SAN GIACOMO, Piazza del
Municipio, Naples, Italy.
GOVERNMENTAL ORGANIZATION
RELATIONSHIP BETWEEN CENTRAL GOVERNMENT AND LOCAL GOVERNMENTS
The Republic of Italy has been a democratic republic since June 2, 1946. Its
government is organized territorially and administratively on national, regional
and local levels. Legislative, executive and judicial powers are exercised at
the national level by the Central Government of Italy (the "CENTRAL
GOVERNMENT"). Limited legislative and executive powers are exercised by the
governments of regions (REGIONI, of which there are 20), provinces (PROVINCE, of
which there are 103) and municipalities (COMUNI, of which there are
approximately 8,100).
The Central Government has exclusive powers to act, INTER ALIA, in the areas of
international relations, defense, armed forces and national security, foreign
trade and economic, monetary and energy policies. The Central Government also
has powers to act in other areas, such as public works, water resources,
railways and transportation. The Central Government provides a substantial
portion of the funds of regions, provinces and municipalities.
Due to amendments to the Italian Constitution (the "CONSTITUTION") introduced by
Constitutional Law No. 3 of October 18, 2001, regions were granted greater
legislative powers which can be exercised on all those matters not expressly
reserved to the competence of the Central Government as well as on such other
matters falling within the concurrent competence of regions and the Central
Government, while provinces and municipalities exercise certain regulatory and
executive powers at local level.
In particular, new Article 118 of the Constitution attributes administrative
functions to municipalities with the exception of those functions that are
attributed to provinces, metropolitan cities, regions or the Central Government
9
in order to guarantee the co-ordinated exercise of these functions. The recent
amendments to the Constitution implement the principle that the management of
public functions should be attributed to those entities which are nearest to
citizens and consequently in a position to grant them the most efficient support
(PRINCIPIO DI SUSSIDIARIETA), such as municipalities.
As a consequence of the federalist reform which started with Law No. 59 of March
15, 1997 (the "LEGGE BASSANINI") and which is still in progress today,
municipalities currently derive the majority of their revenues from their own
sources (namely taxes and income from the provision of public services).
In particular, Constitutional Law No. 3 provides that: (i) municipalities have
financial autonomy within certain limits; (ii) municipalities are entitled to
establish and collect their own taxes and other revenues in a manner consistent
with the general criteria set forth by the Constitution and in compliance with
the principles of co-ordination of public debt and the domestic tax system;
(iii) municipalities are entitled to receive a portion of Central Government
taxes collected within their territory; (iv) the redistribution of resources
from richer to poorer areas shall be effected by means of an equalization fund;
(v) the revenues listed in the preceding paragraphs (i) to (iv) be used to fund
the public functions devolved to municipalities; (vi) to promote economic
development, cohesion and economic and social balance, the Central Government
shall devote additional resources to and, where necessary, intervene in support
of, specific municipalities; and (vii) the municipalities shall have their own
assets attributed according to the general principles set forth by the Central
Government and may incur indebtedness only to finance investment which
indebtedness cannot be guaranteed by the Central Government.
The Region of Campania has powers with respect to general economic and social
issues and is responsible for providing resources to finance municipal and
provincial investment programs. Its powers are largely administrative and cover
the regulation of regional offices and administrative authorities; local, rural
and urban policing; fairs and markets; charities, health trusts and hospitals;
professional training and education; museums and libraries belonging to local
authorities; town planning; tourism and hotels; national tramways and motorways;
road maintenance, aqueducts and public works of national interest; navigation;
regulations relating to minerals and thermal water; regulations relating to
quarries; agriculture; forestry; and arts and crafts.
The City is responsible for managing City-owned properties, providing City-wide
services such as urban transportation, water, sewers and waste disposal,
constructing and managing government housing on behalf of the Central
Government, certain pre-schools, museums and cultural sites, local economic
promotion, certain social services for the elderly, foster children and
handicapped individuals (retirement homes, foster care and renovation for
handicapped access) and various local civil services. See "--Major Activities."
The City conducts a number of these services through its subsidiaries. See
"Financial Condition of the City--Subsidiaries."
LOCAL ADMINISTRATION
Naples is governed by a Mayor, a City Council (CONSIGLIO COMUNALE) and a City
Board (GIUNTA COMUNALE). Supervisory and advisory assistance is provided to the
City Council through the Board of Auditors (COLLEGIO DEI REVISORI). Since the
electoral reforms of June 1993, the Mayor is elected directly by popular vote
for an uninterrupted term of five years. The Mayor is responsible for appointing
the members of the City Board. In Naples, the City Council consists of 60
members elected by popular vote for terms of five years. The City Council has
responsibility for the City's policy and regulation. In particular, the City
Council is responsible for the City's accounts and budgets and enacting relevant
statutes and by-laws; the City's investment programs; provisions of and setting
tariffs for public services; bond issues and other debt financing; and managing
the City's fixed assets. The City Board is an administrative and executive body,
responsible for making proposals to the City Council and administration of the
City Council's policies. The City Board is in charge of drawing up the
provisional and final financial statements and the long-term budget. The City
Board consists of the Mayor and sixteen ASSESSORI, which are chosen directly by
the Mayor and cannot be members of the City Council. Each ASSESSORE is
responsible for one or more administrative departments.
The Board of Auditors, which is nominated by the City Council, consists of three
members that have three-year terms. Members of the Board of Auditors have the
right to access all municipal records and documents and to attend meetings of
the City Council. The Board of Auditors is empowered to provide comments on
draft budgets and budget amendments, monitor the City's accounting and financial
management, prepare an annual report on the City's financial statements, conduct
cash controls on the City's treasury department on three-month intervals and
refer serious mismanagement or fraud to the City Council and to law enforcement
authorities.
10
Today, the Mayor must attain an absolute majority of votes. In the event that a
candidate obtains less than a majority, a second ballot must be held between the
two candidates with the highest number of votes. Each list of candidates for the
City Council is linked to one candidate for the position of Mayor. The
candidates on the elected Mayor's list are automatically awarded the greater of
60.0% of the City Council seats or the percentage of the City Council seats
equal to the percentage vote obtained in the election. The remaining seats are
distributed among the candidates on the other lists based on the percentage vote
obtained in the election.
As of December 31, 2005, the mayor, Mrs. Rosa Russo Jervolino, a member of the
center-left coalition (L'ULIVO), was in office. Mrs. Jervolino was elected to
office in May 2001. Her term expired in May 2006 and she was re-elected for
another term.
The following table shows the political party affiliations of the City
Councilors elected in the most recent election:
REPRESENTATION OF POLITICAL PARTIES IN THE CITY COUNCIL
ADMINISTRATIVE ELECTION OF
MAY 13, 2001
-------------------------------
POLITICAL PARTY SEATS PERCENTAGE
- -------------------------------------------------------------------------------- ----------- ---------------
Democratic Party of the Left (PARTITO DEMOCRATICO DELLA SINISTRA)............... 18 30.0%
Daisy (MARGHERITA).............................................................. 5 8.3%
Popular Party (PARTITO POPOLARE)................................................ 3 5.0%
Communist Refoundation (RIFONDAZIONE COMUNISTA)................................. 3 5.0%
Greens (VERDI).................................................................. 3 5.0%
Renew Italy (RINNOVAMENTO ITALIANO)............................................. 1 1.6%
Italian Democratic Left (SINISTRA DEMOCRATICA ITALIANA)......................... 1 1.6%
Republican Party (PARTITO REPUBBLICANO)......................................... 1 1.6%
Italian Communist Party (PARTITO DEI COMUNISTI ITALIANI)........................ 1 1.6%
TOTAL MAJORITY.................................................................. 36 60.0%
----------- ---------------
Go Italy (FORZA ITALIA)......................................................... 11 18.3%
National Alliance (ALLEANZA NAZIONALE).......................................... 5 8.3%
House of Liberties - Martusciello for Major
(CASA DELLE LIBERTA PER MARTUSCIELLO PER SINDACO)............................... 5 8.3%
Christian Democratic Party (PARTITO DEMOCRATICO CRISTIANO)...................... 2 3.3%
White Flower (BIANCO FIORE)..................................................... 1 1.6%
----------- ---------------
TOTAL OPPOSITION................................................................ 24 40.0%
----------- ---------------
TOTAL CITY COUNCIL 60 100.0%
=========== ===============
EMPLOYEES OF THE CITY
The following table shows the employees of the City at the dates indicated:
EMPLOYEES OF THE CITY OF NAPLES
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------
City of Naples..... 13,471 13,457 13,432 13,537 13,303
========= ========= ========= ========= =========
As of December 31, 2004, the City employed 13,303 employees, representing a 1.7%
decrease from the December 31, 2003 total of 13,537. The decrease was the result
of the retirement of employees without replacing them with new employees in
accordance with the cost-cutting measures set forth in a law passed by the City
in 2003.
Unions represent City employees. Separate contracts are negotiated on a national
basis for non-executive and executive employees. Generally, the contracts are
for four-year terms and the economic aspects of the contract are
11
negotiated every two years. The contracts generally expire prior to the
negotiation of a new contract. Until the new contract is in effect, the terms of
the prior contract are generally respected and upon effectiveness of the new
contract retroactive payments are made. The City's national contracts expired on
December 31, 2003. New national contracts were entered into on January 1, 2004.
Naples has not experienced significant work stoppages by City employees in the
past three years. The pensions of City employees are paid by the Central
Government entity INPDAP (Institute of Social Security for Public Administration
Employees), which was created specifically for public sector employees.
MAJOR ACTIVITIES
The City is responsible for managing City-owned properties. The management of
these properties was outsourced to an external company, Romeo Immobiliare, which
provides City-wide services such as urban transportation, water, sewers and
waste disposal, constructing and managing government housing on behalf of the
Central Government, certain pre-schools, museums and cultural sites, local
economic promotion, certain social services for the elderly, foster children and
handicapped individuals (retirement homes, foster care and renovation for
handicapped access) and various local civil services. The City conducts a number
of these services through its subsidiaries (joint stock companies (SOCIETA PER
AZIONI)). See "Financial Condition of the City--Subsidiaries."
PUBLIC HOUSING. The construction and maintenance of public housing is
substantially funded by the Central Government with a lesser part sustained by
the City. The Central Government provides its funding allotment through direct
project grants to the City, which are then disbursed under the supervision of
the City's administration. After several years of low capital expenditures on
public housing due to DISSESTO, in 2004 the City spent approximately
(euro)31,011,336 million on housing improvement, renovation and construction.
EDUCATION. Primary and secondary education is principally the responsibility of
the Central Government. The City operates nursery schools and kindergartens. The
City also provides funding for certain expenses of primary and secondary
schools. Furthermore, five universities are located in Naples, however, they are
not the responsibility of the City.
WASTE COLLECTION AND DISPOSAL. The City and the Region of Campania share
responsibility for waste disposal. Garbage collection is performed by ASIA
S.p.A., which is 100.0% owned by the City. Identifying and constructing new
dumps is the responsibility of the Region of Campania.
PUBLIC SECURITY. The City maintains a municipal police force of approximately
2,470 officers. The main responsibilities of the police force are traffic
control and traffic violations, audits for evasion of City fees and taxes,
public building security and enforcement of building codes. In 2004, significant
expenses were incurred totaling (euro)78 million for public security purposes.
SEWAGE SYSTEM AND WATERWORKS. The City is responsible for the construction,
maintenance and management of the sewage system in the City. As of December 31,
2004, the sewage system consisted of over 1,000 kilometers of sewers. Due to the
age of the sewage system, for the past few years the City has budgeted and
incurred significant maintenance and capital expenditures for the system. The
City supplies drinkable water to its inhabitants through ARIN (AZIENDA RISORSE
IDRICHE DI NAPOLI), a joint stock company (SOCIETA PER AZIONI) wholly owned by
the City. See "Financial Condition of the City--Subsidiaries." ARIN utilizes a
network of approximately 2,360 kilometers of pipes to distribute drinking water
to more than 2 million people in the Naples metropolitan area with an average
water supply of approximately 104,084,151 cubic meters in 2004. As part of a
process towards a more efficient management system of water resources, including
sourcing, distribution, depuration and sewerage, the Region of Campania has
recently implemented a reorganization plan, whereby the management of water
resources has been entrusted to macro-urban areas, each named "AMBITO
TERRITORIALE OTTIMALE" ("ATO"), which must assign the activities to private
companies by calling for tenders. ARIN, as the leading company in the Region of
Campania, would in a good position to obtain such assignments. However, as of
December 31, 2004, such assignment had not yet been carried out.
URBAN AND SUBURBAN TRANSPORTATION. The City provides urban transportation
through ANM (AZIENDA NAPOLETANA MOBILITA), a joint stock company (SOCIETA PER
AZIONI) 100.0% owned by the City and Metronapoli S.p.A., which is 62.0% owned by
the City. ANM also provides suburban transportation through CTP (CONSORZIO
TRASPORTI PUBBLICI), a consortium 50.0% owned by the City and 50.0% owned by the
PROVINCIA DI NAPOLI. See "Financial Condition of the City--Subsidiaries."
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URBAN INFRASTRUCTURE. City planning is designed to promote the orderly
development and continual improvement of the City and to provide the
infrastructure for a healthy and cultural urban life for its citizens. For these
purposes the City prepared and recently approved a regulatory plan (PIANO
REGOLATORE) relating to the design, construction and maintenance of urban
infrastructure, including roads, subways, waterworks, sewage works, parks, and
urban development for residential area projects and redevelopment projects.
Building regulations are also imposed for land use control and for safety, fire
prevention and sanitation purposes, as well as to ensure the conformity of
buildings with zoning and occupancy regulations.
ROADS. There were approximately 1,211 kilometers of public roads in the City as
of December 31, 2004. While the City is not responsible for the construction of
new roads, it is responsible for their maintenance and lighting.
OTHER TRANSPORT. Naples International Airport (Capodichino) connects Naples with
other major Italian and international airports. The operations of Capodichino
are conducted by GE.S.A.C. (SOCIETA GESTIONE SERVIZI AEROPORTI CAMPANIA S.P.A.),
a limited liability corporation which is owned by British Airport Authorities
Plc ("BAA", which owns 65.0% through its subsidiary BAA Italia S.p.A.), the City
of Naples and PROVINCIA DI NAPOLI (which own 12.5% each), SEA S.p.A. and
Interporto Campano S.p.A. (which own 5.0% each); see "Financial Condition of the
City--Subsidiaries." In 2004, approximately 4.63 million passengers traveled on
flights arriving at or departing from Capodichino resulting in an 1.0% increase
from the approximately 4.59 million passengers registered in 2003. In addition,
approximately 25,000 tons of merchandise were transported through the airport in
2004 as compared to 29,000 tons in 2003 (Source: Bank of Italy Annual Report for
2004 - May 2000).
The port of Naples is one of the largest Italian ports with respect to the
number of passengers and ships and the fourth-largest with respect to tonnage.
In 2004, the port had a flow of approximately 1,027,235 passengers and
approximately 19,448,709 tons of cargo as compared to 859,849 passengers and
approximately 19,414,315 tons of cargo in 2003 representing a 19.5% and a 0.2%
increase, respectively. The port is managed by an autonomous entity (ENTE
AUTONOMO PORTO) (Source: Bank of Italy Annual Report for 2004 - May 2005).
CITY PROPERTIES. The City owns properties, including land and buildings (both
for public use and residential housing) which at December 31, 2004, had a value
of approximately (euro)3,733 million, according to the public registrar's
office. All such properties are subject to the DISSESTO procedure. See
"Financial Condition of the City--DISSESTO FINANZIARIO."
UTILITIES. As in other parts of Italy, the construction of the network and its
maintenance are provided by Telecom Italia S.p.A. The electrical power in Naples
is supplied primarily by ENEL, the formerly state-owned electric power
distribution company.
13
THE ECONOMY
REGION OF CAMPANIA
The following discussion of the economy of Campania and the City is based on
data of Istat (ISTITUTO NAZIONALE DI STATISTICA), the Bank of Italy (BANCA
D'ITALIA), and the Region of Campania.
In 2004, approximately 6.5% of Italy's gross domestic product ("GDP") was
generated in Campania and 3.36% of Italy's GDP (as added value) was generated in
Naples. In the year ended December 31, 2004, Campania's GDP per capita was
approximately (euro)15,496 as compared to approximately (euro)22,930 for Italy
as a whole. The unemployment rate in 2004 was 15.6% in Campania (as compared to
8.0% in Italy during the same period).
THE EUROPEAN UNION'S OPERATIONAL PROGRAM FOR CAMPANIA. On August 8, 2000, the
European Commission approved an operational program (the "PROGRAM") for Campania
to support the Region's development through measures on natural, cultural and
human resources, local development systems, urban areas, networks and service
centers. The Program is part of the Community Support Framework for the period
2000-2006 (QUADRO COMUNITARIO DI SOSTEGNO) which operates in underdeveloped
areas by assisting their development and supporting their economic and social
stability. In Italy, such areas comprise the entire MEZZOGIORNO. The total
amount of the grant is approximately (euro)9,216 million. The Community
contribution amounts to (euro)3,825 million (41.5% of the total), the balance
being borne by national and regional authorities and by the private sector.
Community funding will be provided by the European Regional Development Fund
(65.5%), the European Social Fund (16.5%), the European Guidance and Guarantee
Fund (17.0%) and the Financial Instrument for Fisheries Guidance (1.0%).
Funds provided by the Central Government and the European Union are contingent
upon their being allocated to specific projects and must be returned to the
European Union if not spent on such projects.
The Program principally focuses on six areas: (i) NATURAL RESOURCES (measures
relating to the improvement of water resources, soil and coastline protection,
upgrading of natural areas, waste processing and energy management with special
reference to renewable resources); (ii) CULTURAL RESOURCES (enhancement of the
region's cultural resources as a factor contributing to its economic and social
development); (iii) HUMAN RESOURCES (measures are closely linked to the
Commission's recommendations and the national action plan in the context of the
European strategy for employment; research and technological innovation measures
are also planned); (iv) LOCAL DEVELOPMENT SYSTEMS (promoting local development
systems, in particular industrial districts and export systems, and new
companies, supporting demand for high-quality services and upgrading
professional qualifications; special emphasis is placed on boosting the
competitiveness of tourism and developing its potential); (v) CITIES
(enhancement of the City's role in its territorial context as a means of
improving competitiveness and the social potential of urban areas); and (vi)
NETWORKS AND SERVICE CENTERS (the measures aim to develop transport
infrastructures and to accelerate the introduction of the information society in
education, public administrations and the production base; actions to
internationalize the regional economy are also planned). In addition, technical
assistance measures will be provided to assist with the management of,
information on, implementation of, control and evaluation of all aspects of the
Program.
THE CITY OF NAPLES
GENERAL. Naples is the major business, commercial and cultural center of the
Region of Campania. In 2004, the City's GDP per capita was approximately
(euro)14,000 as compared to an average of (euro)15,496 for the Region of
Campania as a whole.
Naples is a center for tourism due to its historic value and the proximity of
Pompei, Hercolaneum, the Amalfi Coast and the islands of Capri, Ischia and
Procida. In 2004, approximately 21.4 million tourists visited the Region as
compared to 21.3 million in 2003, representing a increase of 0.7%. The
administration has made the restoration of the historic areas of the City, in
particular near the port, a centerpiece of its agenda to promote tourism.
EMPLOYMENT. The unemployment rate for the City of Naples is higher than the
Italian national average, as is the case for the Region of Campania as a whole.
In 2004, the unemployment rate was 18.9% in Naples and 15.6% in the Region as
compared to a national average of 8.0%. Since 1995, the unemployment rate for
the City of Naples has decreased by approximately 30.8%.
14
INFLATION. The table below shows annual increases in the consumer price index of
Naples and Italy for the periods indicated.
CHANGE OF CONSUMER PRICE INDEX
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------
Naples.......... 1.9% 2.7% 2.4% 2.7% 2.6%
Italy........... 2.5% 2.7% 2.5% 2.5% 2.2%
========= ========= ========= ========= =========
- ---------------
Source: Istat, SERVIZI STATISTICI COMUNE DI NAPOLI.
15
FINANCIAL CONDITION OF THE CITY
SUMMARY
The City of Naples prepares its financial statements in accordance with
accounting principles and standards established by the Local Authorities Act
(REGOLAMENTO DI CONTABILITA), which requires the preparation of the annual
provisional budget (BILANCIO ANNUALE DI PREVISIONE), the pluri-annual budget
(BILANCIO PLURIENNALE) and the financial report (RENDICONTO).
The relationships between the City, the Central Government and the regional
government are governed by one principal law, Law 267/2000 (the "MUNICIPAL LAW")
and by the annual financial laws (LEGGI FINANZIARIE). The City derives the
majority of its revenues from transfers, primarily from the Central Government.
Municipalities are permitted to levy direct and indirect taxes and charges and
fees for services.
The general administration of Naples' finances is the responsibility of the City
Board and the City Council. The budget is initially developed by the respective
departments of the City and consolidated by the financial services department.
After approval by the City Board, the budget is provided to the Board of
Auditors for its review and comments. Thereafter, the budget together with an
annual report prepared by the Board of Auditors is submitted to the City Council
for approval. The City Council is required to approve year-end financial
statements no later than on June 30 of each year. The budget for each year is
required to be approved by December 31 of the previous year. In practice,
however, the budget may be delayed due to the lack of a budget at the Central
Government. The City budget is completed after the approval of the Central
Government budget, so that the budgeted revenues from Central Government
transfers are committed, not estimated. If the City's budget has not been
approved by the beginning of the year, expenditures are limited to one twelfth
of the previous year's amounts, except for payment of personnel, outstanding
obligations, debt payments, taxes and operations necessary to avoid severe
damage to the local authority, which are not subject to such limit. At least
once a year, by September 30, the administration is required to review the
budget for imbalances and to make any necessary adjustments by November 30.
Local authorities must include in the budget a reserve of not less than 0.3% and
not more than 2.0% of budgeted expenses to be used for extraordinary or greater
than expected expenses.
The current surplus is calculated on an accrual basis. The current revenues are
required to exceed current expenditures and debt repayments. The issuance of
bonds is permitted only for capital investments or to refinance older, more
expensive loans, where bonds would provide access to more favorable funding. New
borrowing is only permitted if interest expense, net of interest transfers from
the central and regional governments, is less than 12 % of the year's current
revenue.
MUNICIPAL TREASURER (TESORIERE COMUNALE). Municipalities in Italy are required
to effect all payments and collect all revenues through an account with a
specially appointed municipal treasurer (TESORIERE COMUNALE). The municipal
treasurer intermediates funds between the City and the Bank of Italy. The
municipal treasurer is required to deposit all surplus cash on a daily basis
into an account at the local branch of the Bank of Italy (TESORERIA UNICA). In
the case of Naples, the municipal treasurer is SanPaolo - Banco di Napoli.
IRREVOCABLE PAYMENT DELEGATION (DELEGAZIONE DI PAGAMENTO). The municipal
treasurer can be granted an irrevocable authorization to pay interest on, and
repay the principal of, debt when due on behalf of the City (DELEGAZIONE DI
PAGAMENTO). Upon entering into a bond issue, the City is required to implement
such a DELEGAZIONE DI PAGAMENTO by providing the municipal treasurer with the
required power as well as a timetable for payments of interest and principal.
The City may, but is not required to, provide for a DELEGAZIONE DI PAGAMENTO on
loans other than bonds. Historically, the City has made such irrevocable payment
delegations on all its financial indebtedness. See "Debt of the City." Once the
authority has been delegated, the municipal treasurer is required to make future
payments as interest and principal become due. The Municipal law requires the
municipal treasurer to allocate appropriate funds in a reserve for payment of
interest and principal on debt. Payments are made out of funds arising from tax
revenues, transfers from the Central Government, the Region and other public
entities and certain non-tax revenues.
REVENUES AND EXPENDITURES. The following table sets forth the current revenues,
expenditures, capital revenues and spending for the periods indicated:
16
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
BUDGET
2001 2002 2003 2004 2005 2006(2)
--------- --------- --------- --------- --------- --------
((EURO) MILLIONS)
---------------------------------------------------------------------------
Current revenues............... 1,301.5 1,304.5 1,266.0 1,277.0 1,323.0 1,304.0
Previous Year Balance for
Current Expenditures(1)........ 5.0 7.2 0 0 0 138
Current Expenditures........... (1,167.3) (1,149.8) (1,112.0) (1,190.0) (1,276.0) (1,373.0)
--------- -------- --------- --------- --------- --------
Current Balance................ 139.2 161.0 154.0 87.0 47.0 69.0
--------- -------- --------- --------- --------- --------
Capital Revenues............... 114.0 248.8 253.0 197.0 117.0 714.0
Previous Year Balance for
Capital Expenditures(1)........ 1.3 0 0 0 0
Capital Spending............... (235.7) (359.7) (515.0) (474.0) (361) (834)
--------- -------- --------- --------- --------- --------
Balance Before Financing....... 17.5 (51.0) (108.0) (190.0) (197) (51)
--------- -------- --------- --------- --------- --------
New Borrowing.................. 93.8 51.2 205.0 501.0 403 211
Reimbursement of Borrowing..... 74.3 73.4 78.0 (297.0) (185) (132)
--------- -------- --------- --------- --------- --------
TOTAL BALANCE.................. 38.3 28.8 19.0 14.0 21.0 28.0
========= ======== ========= ========= ========= ========
- ---------------
(1) Represent surpluses from previous years allocated to Current Expenditures
and Capital Expenditures, as indicated.
(2) Approved by the City Council on January 24, 2006
The City's current balance has shown a surplus since 1991. In the past years
until 2002, as a result of increases in current revenues and decreases in
expenditures from budgeted amounts, there has been a significant increase in the
current balance from the budgeted amount. From 1998 to 2002, capital spending
was greater than capital revenues because the City used surpluses from previous
years to finance both current expenditures and capital spending. In 2004, the
City's current balance decreased while capital revenues decreased. In 2005
current expenditures increased in correspondence to the ending of the current
administration and the start of the new administration.
DISSESTO FINANZIARIO
Naples declared DISSESTO in May 1993. DISSESTO occurs when a municipality is
either insolvent or unable to further guarantee the supply of basic services.
The City remains subject to DISSESTO, which does not affect the payments on
financial indebtedness subject to DELEGAZIONE DI PAGAMENTO and does not apply to
transactions entered into by the City subsequent to the date on which DISSESTO
was declared. The City has made all payments, both interest and principal, on
all financial indebtedness since entering DISSESTO.
The primary reason Naples went into DISSESTO was that special entities for which
the City was financially responsible made expenditures that were not
appropriated in the budget. Recent legislation now provides that unappropriated
expenses are not deemed to be expenditures of the municipality and that a
creditor only has recourse against the employee, as an individual, who agreed to
such unauthorized expenditure. In addition, the special entities (SOCIETA
SPECIALI) have been transformed into joint stock companies (SOCIETA PER AZIONI),
therefore their indebtedness is not reflected on the financial statements of the
City.
The procedure of DISSESTO is governed by Legislative Decree No. 66 of March 2,
1989, which has been amended and the procedures streamlined and simplified on
several occasions in the past years. The state of DISSESTO is commenced by a
declaration to that effect by the City Council, publication of such notice by
the Italian Ministry of the Interior and the appointment by the President of the
Republic of Italy of the ORGANO STRAORDINARIO DI LIQUIDAZIONE, a three-person
committee (the "STATUTORY RECEIVERS"). The primary purpose of the Statutory
Receivers is to perform a full audit of claims entered into prior to the date of
DISSESTO (the "PRE-DISSESTO CLAIMS") against the City and to assess the assets
available to pay these claims and to recover all unpaid amounts owed to the
City. The Statutory Receivers in Naples were appointed by Presidential decree of
the Italian Republic dated May 3, 1993.
Upon conclusion of a full accounting and verification of the PRE-DISSESTO Claims
and the recovery of credits owed to the City, the Statutory Receivers must
present to the Ministry of Interior a plan for repayment of the verified
PRE-DISSESTO Claims (the "VERIFIED CLAIMS") for its approval. The Central
Government is required to grant a loan through CASSA DEPOSITI E PRESTITI, the
amount of which varies based on the number of inhabitants of the entity in
DISSESTO. Subsequent debt service for the loan is funded by transfers from the
Central Government. In preparing its
17
plan for repayment of Verified Claims, the Statutory Receivers consider whether
the size of the loan to be received by the CASSA DEPOSITI E PRESTITI is
sufficient to cover all Verified Claims.
As of December 31, 2005, creditors have been paid a total of (euro)689.9 million
of the total amount initially owed and the City saved approximately (euro)229.4
million through the simplified procedure described above. As of December 31,
2005, approximately (euro)7.9 million remained outstanding. Funds available to
the Statutory Receiver as at that date totaled (euro)13.05 million. In addition,
the City has approximately (euro)64.78 million (yet to be received) in credits
available to cover these debts.
On February 15, 2006 the ORGANO STRAORDINARIO DI LIQUIDAZIONE approved the
official plan of closure of dissesto.
FINANCIAL FEDERALISM
Current (Ordinary) transfers of funds by the Central Government represent
approximately 44,27% of the current revenues of the City. The Municipal law
transformed the financial relationship between the Central Government and local
authorities by focusing on greater financial autonomy and financial
responsibility of local authorities.
In order to implement such changes, the collection of certain taxes and fees
that were previously the responsibility of the Central Government are or will
become the responsibility of the City. This has resulted and will result in a
proportional reduction of tax transfers to local authorities by the Central
Government. See "--Current Revenues."
Furthermore, the Municipal law established three basic types of Central
Government transfers: ordinary transfers, equalization transfers and capital
transfers. Ordinary transfers are and will continue to be increasingly based on
objective standards such as the size and population of the city and its economic
and social indicators. Equalization transfers are allocated by the Central
Government where the median income of the residents is lower than the national
average, as is the case in Naples. Capital transfers are based on the size and
population of the city and made for specific capital expenditures in connection
with public work projects and cannot be used to finance current expenditures.
Transfers of funds to local authorities are dependent on the finances of the
Central Government. While the City is not aware of any plan to change the
current transfer system, there can be no assurance that transfers from the
Central Government will continue in the manner or the amounts of the past.
CURRENT REVENUES
SOURCES OF REVENUE. Transfers of funds by the Central Government and the Region
represent approximately 47,52% of the revenues of the City. The City collects
certain taxes, fees and charges. The specific taxes and fees that municipalities
are allowed to levy are as follows: use tax for use of public spaces; waste
collection and disposal and sewage treatment and disposal fees; advertising
taxes; and real estate taxes (IMPOSTA COMUNALE SUGLI IMMOBILI (ICI)). In
addition, in 1998 the Central Government passed a law introducing a new tax
regime for the year 1999-2000, whereby each municipality could apply a local
personal income tax not to exceed 0.5% of the personal taxable income
(ADDIZIONALE IRPEF). The rate of this local personal income tax could be
introduced progressively over a period of three years, through annual increases
not to exceed 0.2% each year, up to the 0.5% maximum rate. The rate would become
fixed in the third year. The City applied an initial 0.2% tax for the year
1999-2000 and has increased the rate to 0.4% for the year 2001, and to 0.5% for
the years 2002, 2003, 2004 and 2005
The following table shows a breakdown of the sources of the City's current
revenues for the periods indicated:
18
CURRENT REVENUES
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
BUDGET
2001 2002 2003 2004 2005 2006(2)
--------- --------- --------- --------- --------- ----------
((EURO) MILLIONS)
----------------------------------------------------------------------------
Tax Revenues
IMPOSTE......................... 218.4 214.6 328.1 330.1 340.9 326.2
TASSE........................... 106.5 112.6 112.8 128.0 133.2 134.4
TRIBUTI SPECIALI................ 1.2 78.3 2.6 2.6 0 0
-------- --------- --------- -------- --------- --------
Total tax revenue............ 326.1 405.5 443.5 460.7 474,1 460.6
Current Transfers
Central Government.............. 715.2 640.9 557.9 560.3 551.6 547.8
Campania........................ 27.9 70.4 52.6 33.9 73.0 61.0
Other........................... 4.4 1.0 1.1 5.0 4.2 5.4
-------- --------- --------- -------- --------- --------
Total current transfers...... 747.6 712.3 612.0 599.2 628.8 614.2
Non-Tax Revenue
Public services................. 94.5 111.2 98.3 101.3 93.7 98.0
Rents........................... 27.4 28.0 25.9 40.1 43.3 43.0
Interest income................. 9.5 5.9 6.5 7.2 8.9 3.4
Competitions, refunds and payoffs 0.7 0.2 0 0.3 47.4 31.0
Profits 1.3 1.7
Corrections..................... -- -- 0 0 0 0
Other revenues.................. 95.5 41.3 79.4 68.2 25.4 51.6
-------- --------- --------- -------- --------- --------
Total non-tax revenues....... 227.9 186.6 210.4 217.1 220.0 84,3
-------- --------- --------- -------- --------- --------
Current Revenues................ 1,301.5 1,304.4 1,265.5 1,277.0 1,322.9 1,159.1
======== ========= ========= ======== ========= ========
Previous year balance for current
expenditures(1)............... 5.0 7.2 0 0 0 138
-------- --------- --------- -------- --------- --------
TOTAL CURRENT REVENUES.......... 1,306.5 1,311.6 1,265.5 1,277.0 1,322.9 1,297.1
======== ========= ========= ======== ========= ========
- ---------------
(1) Represent surpluses from previous years allocated to current expenditures,
as indicated.
(2) Approved by the City Council on January 24, 2006.
TAX REVENUES consist of IMPOSTE, TASSE and TRIBUTI SPECIALI (taxes, fees and
special fees). IMPOSTE, the principal source of tax revenue, are real estate
taxes (IMPOSTA COMUNALE SUGLI IMMOBILI (ICI)) based on the value of real estate
registered with the public registrar's office at a rate of 0.55% for household
residences. TASSE include fees for the exploitation of public areas for private
use, for the consumption of electric power and for the performance of
administrative duties (such as the issuance of stamps or notarizations). TRIBUTI
SPECIALI are fees for the right to make street advertisements and fees for water
purification. In 2004, tax revenues increased by (euro)17.2 million, or 3.9% as
compared to 2003, due to the increase of the TARSU.
CURRENT TRANSFERS are made by the Central Government and the Region of Campania.
The transfers take the form of both ordinary transfers and equalization
transfers. The median income of the residents of Naples is below the national
average and consequently Naples receives significant equalization transfers from
the Central Government. The decline in current transfers between 1999 and 2000
was mainly due to the assignment of the employment agreements of approximately
1,500 support staff employees for local schools to the Central Government,
thereby decreasing the City's need for Central Government funds to cover the
salaries of such employees, as well as a decrease in the number of public
projects financed by the Central Government. In 2004, current transfers
decreased by (euro)12.8 million, or 2.1% as compared to 2003. The decrease was
due mainly to a decrease of (euro)18.7 million in transfers from the Region.
This phenomenon was repeated in 2005, but smaller transfers from the Region
resulted in a total reduction of current transfers.
NON-TAX REVENUES include revenues from public services, rents, interest income,
CONCORSI (credits), RIMBORSI (reimbursements), RECUPERI (recoveries) and
corrections. PUBLIC SERVICES include fees charged for services provided
19
by the City (such as sport centers), as well as for the private use of public
property (such as parking lots) and fines for traffic law violations and other
offenses. RENTS consist of payments made to the City for the lease of City-owned
properties. INTEREST INCOME is the interest earned on overdue payments to the
City. CONCORSI, RIMBORSI and RECUPERI include value added tax credits payable to
the City, social security grants for elderly people and reimbursements by the
Central Government, Region of Campania and the PROVINCIA DI NAPOLI for the
conduct of elections. CORRECTIONS will result from matching, with equal
expenses, the notional rents for schools and other municipal buildings. In 2004,
non-tax revenues increased by (euro)6.7 million, or 3.2%, primarily as a result
of (i) revenues from public services, and (ii) rents.
CURRENT EXPENDITURES
Current expenditures include personnel, goods and services, current transfers,
interest expense and corrections.
The following table sets forth the current expenditures of the City for the
periods indicated.
CURRENT EXPENDITURES
YEAR ENDED DECEMBER 31,(1)
--------------------------------------------------------------------------
BUDGET
2001 2002 2003 2004 2005 2006(2)
--------- --------- --------- --------- --------- --------
((EURO) MILLIONS)
--------------------------------------------------------------------------
Personnel expenses........................ 402.6 421.2 419.0 428.4 437.6 441.8
Goods and services........................ 493.7 485.4 490.2 536.4 571.9 540.3
Rents, leases and related costs........... 9.8 10.5 12.2 11.2 12.9 13.1
Current transfers......................... 97.3 118.0 64.3 56.7 81.1 80.1
Interest expense.......................... 53.5 51.5 50.0 54.3 71.4 61.2
Corrections............................... 0 0 0 0 0 0
Taxes..................................... 28.6 32.0 32.8 34.2 33.7 34.5
Extraordinary expenses.................... 81.7 31.2 45.1 69.6 67.6 61.0
Others.................................... -- -- -- -- -- 141.2
------- ------- ------- ------- ------- -------
TOTAL CURRENT EXPENDITURES................ 1,167.2 1,149.8 1,112.6 1,190.8 1,276.2 1,373.2
======== ======= ======= ======= ======= =======
- ---------------
(1) Pursuant to the Legislative Decree of the Republic of Italy no. 194/96 of
January 1, 1996, the accounting criteria employed to compile financial
statements of regional and local governmental entities have changed,
requiring monies transferred from the City to the Special Entities to be
reclassified as payment for goods and services as opposed to current
transfers.
(2) Approved by the City Council on January 24, 2006
PERSONNEL EXPENSES are salaries, social security expenses and expenses in
connection with early retirement. GOODS AND SERVICES include amounts spent on
goods and services provided by independent contractors, such as street
maintenance, and by certain of the City's subsidiaries. CURRENT TRANSFERS are
transfers made by Comune di Napoli in favor of other public entities, as
redistribution of contributions purposely obtained or as new contributions.
INTEREST EXPENSE is the interest paid on the City's long-term and short-term
debt. CORRECTIONS are the accounting adjustments that reflect revenues relating
to matters such as regional funding.
The following table sets forth the current expenditures of the City attributable
to its major activities for the periods indicated.
20
CURRENT EXPENDITURES BY MAJOR ACTIVITY
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
BUDGET
ACTIVITY 2001 2002 2003 2004 2005 2006(2)
-------- --------- --------- --------- --------- --------- --------
((EURO) MILLIONS)
--------------------------------------------------------------------------
Administration................................ 375.6 435.9 394.3 419.2 491.1 613.6
Roads and Transportation...................... 183.5 138.5 147.4 159.5 145.7 160.2
Education, Culture, Sport and Recreational 99.7 114.3 116.3 116.4 120.6
Activities.................................... 101.8
Public Security............................... 77.3 71.7 80.4 78.0 78.8 93.4
Housing and Environmental Management.......... 294.4 258.3 258.1 303.2 295.9 238.2
Social Services(1)............................ 122.7 126.9 106.9 100.6 138.3 138.6
Services and Local Economic Promotion......... 12.0 14.6 8.4 11.0 6.9 5.8
Other......................................... 2.0 2.1 2.4 3.0 3.1 2.2
-------- ------- ------- ------- ------- -------
TOTAL......................................... 1,167.2 1,149.8 1,112.6 1,190.8 1,276.2 1,373.2
======== ======= ======= ======= ======= =======
- ---------------
(1) Primarily services for elderly and disabled persons as well as foster
service.
(2) Approved by the City Council on January 24, 2006
Current Expenditures in 2000 increased as compared to 1999, mainly due to a
substantial increase in housing and environmental matters, public security, and
other expenses, which was partially offset by a decrease in social services.
Current Expenditures in 2001 increased by (euro)130.1 million, or 12.5%, as
compared to 2000, mainly due to a substantial increase in administration,
education, culture, sport and social activities, partially offset by a decrease
in roads and transportation activities. Current Expenditures in 2002 decreased
by (euro)17.4 million, or 1.5%, as compared to 2001, mainly due to a decrease in
roads and transportation activities. Current Expenditures in 2003 decreased by
(euro)37.2 million, or 3.2%, as compared to 2002, due to a decrease in
administrative expenses, and a slight decrease in services and local economic
promotion. Current Expenditures in 2004 increased by (euro)78.2 million, or
7.0%, as compared to 2003, due to an increase in expenditures for goods and
services. Current Expenditures increased in 2005 by 7.1% due to the increase of
administrative costs and costs for cultural, educational and recreational
activities.
CAPITAL REVENUES AND CAPITAL EXPENDITURES
CAPITAL REVENUES consist of asset sales, capital transfers and credit
collections. Asset sales consist of the sale of City-owned assets. CAPITAL
TRANSFERS include contributions from the Central Government, the Region, the
European Union and other public entities. The City incurs CAPITAL EXPENDITURES
for the development and improvement of facilities for housing, transportation,
the renovation of public property for general use and other civic purposes.
The following table sets forth the capital revenues of the City for the period
indicated.
CAPITAL REVENUES
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
BUDGET
2001 2002 2003 2004 2005 2006(1)
--------- --------- --------- --------- --------- --------
((EURO) MILLIONS)
--------------------------------------------------------------------------
Asset sales................................... 0.1 0.6 0.11 0.2 4.3 32.1
Capital transfers............................. 114.2 248.1 253.29 197.0 112.5 621.6
-------- ------ ------- ------ ----- ------
TOTAL......................................... 114.3 248.7 253.4 197.2 116.8 653.7
======== ====== ======= ====== ===== ======
- ---------------
(1) Approved by the City Council on January 24, 2006.
The decrease in 2000 was mainly due to a substantial decrease in transfers from
the Central Government for works related to the City's subway system. The
significant decrease in 2001 was attributable to a substantial decrease in
21
capital transfers from the Central Government and the Region, due to a slowdown
in the implementation of certain public projects, including roads and
transportation projects such as the subway system, land development and
environmental projects and maintenance works for municipal buildings. The
increase in 2002 was attributable to the implementation of additional public
projects. In 2003, the increase was due to higher transfers from the Central
Government. The decrease in 2004 and 2005 was attributable mainly to a decrease
in transfers from the Central Government.
The following table sets forth the capital expenditures of the City attributable
to its major activities for the periods indicated.
CAPITAL EXPENDITURES
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
BUDGET
2001 2002 2003 2004 2005 2006(1)
--------- --------- --------- --------- --------- -------
((EURO) MILLIONS)
--------------------------------------------------------------------------
Administration............................. 13.3 22.7 73.8 150.5 106.6 66.8
Roads and Transportation................... 63.8 265.5 264.7 129.6 126.8 297.2
Education, Culture, Sport and Recreational 21.5 10.5 38.5 35.8 20.1 34.0
Activities.................................
Public Security............................ 1.2 1.5 0.1 0 2.0 1.0
Housing and Environmental Management....... 132.9 54.4 119.7 141.2 69.0 108.7
Social Services(1)......................... 0.9 1.6 8.3 4.9 27.0 7.2
Services and Local Economic Promotion...... 2.2 3.5 9.7 10.7 6.5 2.0
Other...................................... 0.0 0.0 0.0 1.3 3.0 0.0
------- ------- ------- ------- ------ -----
TOTAL...................................... 235.7 359.7 514.8 474.0 361.0 516.9
======= ======= ======= ======= ====== =====
- ---------------
(1) Includes primarily services for elderly and disabled persons as well as
foster service.
(2) Approved by the City Council on January 24, 2006.
Capital expenditures included both capital expenditures financed in part by the
City and capital expenditures financed through transfers from the Central
Government, the Region and the European Union. The amount financed by the City
includes funds accumulated from budget surpluses in previous years, borrowings
and asset sales. In 2001, the significant decrease in Capital expenditures was
due to a slowdown in implementation of certain public projects, including roads
and transportation projects such as the subway system, land development and
environmental projects and maintenance works for municipal buildings. Capital
expenditures in 2002 and 2003 included both capital expenditures financed in
part by the City and capital expenditures financed through transfers from the
Central Government, the Region and the European Union. The increases in 2002 and
2003 were attributable to the implementation of additional public projects. In
2004, the decrease was due to a decrease in roads and transportation
expenditures. In 2005, expenses for investments increased significantly due to
the transfer of funds from the European Union.
SUBSIDIARIES
The City owns interests in 22 companies, seven of which operate in the public
service sector. The value of the fixed assets of the City's subsidiaries amounts
to nearly (euro)800 million. In addition, these subsidiaries use assets of the
City such as infrastructure, warehousing, stations and vehicles. All public
service sector subsidiaries were converted into joint stock companies (SOCIETA
PER AZIONI) to permit efficient use of cash flow and to increase their asset
base.
The following table lists the most significant subsidiaries of the City:
22
SHAREHOLDING OF THE
SUBSIDIARY CITY (%) NET ASSETS 2004 NET ASSETS 2005
- ------------------------------------------ ------------------------ ---------------- ------------------
A.R.I.N. S.p.A.......................... 100.00 180.6 221.1
A.N.M. S.p.A............................ 100.00 67.0 91.1
A.S.I.A. S.p.A.......................... 100.00 38.0 33.0
C.T.P. S.p.A............................ 50.00 6.8 27.7
GE.S.A.C. S.p.A......................... 12.50 41.0 44.1
Mostra d'Oltremare S.p.A................ 66.70 168.6 168.9
Metronapoli S.p.A....................... 89.00 2.0 2.0
BALANCE SHEET 2005
AS OF DECEMBER 31, 2005
----------------------------------------------------------------------------------
METRONAPOLI
SUBSIDIARY A.R.I.N. SPA A.N.M. SPA A.S.I.A. SPA C.T.P. SPA MOSTRA SPA SPA
- ------------------------------- ------------- ------------ ------------- ----------- ----------- ------------
((EURO) MILLIONS)
----------------------------------------------------------------------------------
Liquid asset.................... 49,4 5,7 5,2 0,3 4,2 1,4
Credits......................... 226,8 164,4 193,9 96,0 6,5 56,0
Tangible assets................. 317,8 97,9 25,2 61,2 192,1 1,0
Intangible assets............... 132,0 0,7 0,2 1,4 0,2 0,5
Other........................... 60,4 14,9 0,9 4,0 0,1 0,2
------- ------- ------- ------- ------ -----
TOTAL ASSETS.................... 786,4 283,6 225,4 162,9 203,1 59,1
======= ======= ======= ======= ====== =====
Other liabilities............... 330,1 77,9 178,9 34,4 8,7 48,7
Financial liabilities
(including Retirement Allowance) 15,3 89,2 12,0 70,8 1,3 7,6
Other........................... 229,9 25,4 1,6 30,1 24,2 0,8
------- ------- ------- ------- ------ -----
Net equity...................... 211,1 91,1 32,9 27,6 168,9 2,0
------- ------- ------- ------- ------ -----
TOTAL LIABILITIES............... 186,4 283,6 225,4 162,9 203,1 59,1
======= ======= ======= ======= ====== =====
A.N.M.
A.N.M. S.p.A. (AZIENDA NAPOLETANA MOBILITA) is primarily responsible for the
operation of the bus and tramway transport in the City of Naples. In 2004, its
fleet comprised approximately 1,000 vehicles. The A.N.M. fleet makes
approximately 500,000 journeys per day on 167 routes, covering an urban network
of approximately 404 kilometers and a suburban network of approximately 119
kilometers. A.N.M. manages five bus depots, one filobus depot, one tram depot,
five car parks, two workshops and six electrical control centers.
A surveillance system was installed which constantly monitors the service and
allows for the real-time central management of the fleet.
In 2002, ANM incurred a loss of (euro)14.3 million, mainly as a result of a
decrease in payments for services transferred from the City and an increase in
costs for services. In 2003, ANM's loss amounted to (euro)6.4 million. This
improvement was due to a revised organization of the subsidiaries implemented in
2003. In 2004, ANM incurred a loss of (euro)9.6 million, which was primarily
attributable to personnel expenses. In 2005, however, ANM recorded a net gain of
(euro)347,874, which represented a substantial reversal of the historical trend
and was due primarily to efficiency improvements.
C.T.P.
C.T.P. S.p.A. (COMPAGNIA TRASPORTI PUBBLICI), was converted into a joint stock
company in March 2001 and manages the urban and suburban public transport
services within the provinces of Naples and Caserta.
The service for the year 2004 was carried out, pursuant to article 46 of
Regional Law No.3 dated March 28, 2002, by means of temporary service contracts
(CONTRATTI DI SERVIZIO PONTE) between the company and local authorities. In
recent years, C.T.P. has extended its scope of activity to services and
operations relating to transportation, creating numerous subsidiaries.
23
At December 31, 2004, the entity employed approximately 1,800 persons. In 2004,
its fleet was comprised of approximately 500 buses, which covered approximately
2,300 kilometers and transported approximately 35 million passengers per year.
During 2003, C.T.P. completed a process of transformation and reorganization. As
of December 31, 2004, a central structure co-ordinated the control and
governance of activities of the company and its subsidiaries, and the company
was divided into three operating divisions: services, workshops, and assets. The
company established NAMET S.p.A. and brought into service 50 methane operated
buses, the largest such fleet in Central and Southern Italy. C.T.P. obtained the
ISO 9001/2000 and SA 8000 certificates and publishes a report on environmental
sustainability on a yearly basis.
In 2004, CTP incurred a net loss of (euro)38.8 million, as compared to a net
loss of (euro)43.1 million in 2003 and a net loss of (euro)36.9 million in 2002.
In 2005, net loss amounted to (euro)18.6 million. Consequently, CTP continued
his march of improvement in efficiency and in reduction of costs. Losses are
funded annually in proportion to the share ownership. Annual losses reflect the
ongoing need for subsidies to cover expenses not covered by other transfers or
reserves.
A.R.I.N.
A.R.I.N. S.p.A. (AZIENDA RISORSE IDRICHE NAPOLI) supplies water to the City of
Naples and to the provinces of Avellino, Benevento, Naples and Caserta. It is
one of the largest companies supplying water to Southern Italy. As of December
31, 2004, the company supplied more than 1 million inhabitants of the City of
Naples and approximately 650,000 inhabitants in the provinces. It had 552
employees and 280,000 user contracts across 26 municipalities of Campania. In
2003, A.R.I.N. also obtained the ISO9001 (Vision 2000) certificate of quality
and the research department acquired the SINAL accreditation.
In 2002, ARIN's recorded a net loss of (euro)4.1 million and in 2003, ARIN's net
loss amounted to (euro)1.2 million. In 2004, ARIN recorded a net gain of
(euro)41,971, which was primarily due to improved efficiency. In 2005, ARIN
recorded a net gain of (euro)714.369, confirming the trend of the previous
years.
A.S.I.A.
A.S.I.A. S.p.A. (AZIENDA SERVIZI IGIENE AMBIENTALI) manages health and
environmental services for the City of Naples. It was originally incorporated as
a special company (AZIENDA SPECIALE) but became a joint stock company in
December 2003. A.S.I.A. carries out the collection and transportation of waste
refuse of the area. The service provided is limited exclusively to refuse
collection and removal. The company is not responsible for recycling or
disposal, which are the responsibility of the Region.
The municipal program for the management of urban solid waste disposal, which
was recently approved, gives A.S.I.A. the most important role in the new
program. The program provides for the change of the TARSU (TASSA SUI RIFIUTI
SOLIDI URBANI - solid refuse tax) fee into a tariff as of January 1, 2005, and
A.S.I.A. will carry out the assessment and collection of such tariff. As a
result, the consideration for the service will no longer be accounted for in the
balance sheet of the municipality, but instead will be accounted for in the
balance sheet of the company which will have sole responsibility for the
management of the revenues.
In 2004, A.S.I.A. recorded a net loss of (euro)9.9 million as compared to a net
loss of approximately (euro)29.4 million in 2003. In 2005, the net loss amounted
to (euro)5.03 million. The continuous reduction of losses confirms the
meaningful improvement of the company's performance and the progressive
optimization of the cost and revenue structure.
METRONAPOLI S.P.A
Metronapoli S.p.A was incorporated on July 26, 2000, and became operative as of
February 1, 2001, when it was assigned the management of the subway network of
the City. The City's subway network is comprised of Line 1 and the four urban
funiculars. In addition, it was assigned the urban railway service section of
Line 2 by Trenitalia, the subsidiary of FERROVIE DELLO STATO, the national
railway operator.
The City of Naples owns Line 1 and the four urban funiculars, and owns a 89.0%
stake in Metronapoli. In 2005, the Comune di Napoli acquired 38% of the share
capital of the company from Trenitalia. The remaining 11.0% is owned by ANM.
Consequently, Metronapoli, directly or indirectly, is currently completely
controlled by the Comune di Napoli.
24
All of the transport services managed by the company are characterized by high
level of frequency and by an equally high number of stops and stations. The
transport is largely concentrated in the City of Naples and uses approximately
79 kilometers of railways serving 53 stations. The high level of frequency is
guaranteed by a fleet of 30 trains and eight funiculars. Metronapoli transports
approximately 250,000 people per day.
In 2004, Metronapoli S.p.A recorded a net profit of (euro)349,226 as compared to
a net profit of approximately (euro)0.02 million in 2003 and approximately
(euro)0.04 million in 2002. In the 2005, the company recorded a net profit of
(euro)6,333, in spite of the increase of personnel costs and expenses resulting
from the reorganization of industrial relationships with Trenitalia.
25
DEBT OF THE CITY
Debt of the City principally consists of loans borrowed in the domestic market
from the CASSA DEPOSITI E PRESTITI (approximately (euro)504.3 million at
December 31, 2005) and from Italian banking institutions ("INTERNAL FUNDED
DEBT") (approximately (euro)349.6 million) and the Notes, of which (euro)386.4
million remained outstanding as of December 31, 2005. The CASSA DEPOSITI E
PRESTITI is an entity managed and funded by the Central Government and lends
exclusively to local authorities. The City regularly includes borrowings in its
budgets provisions to permit short-term borrowings. The Central Government
contributes to the debt service of the City. For loans contracted prior to 1980,
the Central Government is responsible for 100.0% of debt service. For subsequent
years, the amount of contribution depends on the use of proceeds.
The following table sets forth the debt of the City outstanding for the periods
indicated:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2001 2002 2003 2004 2005
-------- -------- ------- ------- -------
((EURO) MILLIONS)
--------------------------------------------------------------------
Fixed Rate Debt............................ 758.1 752.5 874.6 1,060.5 1268.0
Floating Rate Debt......................... 8.1 7.7 7.2 25.4 28.0
------- ------- ------- ------- -------
Total Debt Outstanding..................... 766.2 760.2 881.8 1,085.9 1,296.0
======= ====== ======= ======= =======
Debt for which service is paid with Central
Government transfers..................... 41.6 80.5 41.0 39.0
The following table sets forth the changes in the debt of the City for the
periods indicated:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2001 2002 2003 2004 2005
-------- -------- ------- ------- -------
((EURO) MILLIONS)
--------------------------------------------------------------------
Outstanding at Beginning of Year........... 791.1 766.2 760.2 881.8 1,085.9
New Borrowings............................. 49.6 67.4 199.7 500.9 396.0
Debt Repayments............................ (74.5) (73.4) (78.1) (296.7) (185.9)
------- ------- ------- ------- -------
Outstanding at End of Year................. 766.2 760.2 881.8 1,085.9 1,296.0
======= ======= ======= ======= =======
26
The following table sets forth the maturity and debt service schedules of the
City's debt outstanding on December 31, 2005.
MATURITY OF DEBT AND DEBT SERVICE
- -------------------------------------------------------------------------------------------------------------------
MATURING DURING THE TRANSFERS FROM
YEAR PRINCIPAL DUE INTEREST DUE(1) DEBT SERVICE CENTRAL GOVERNMENT NET DEBT SERVICE
- -------------------- -------------- ---------------- ------------- ------------------- -----------------
((EURO) THOUSANDS)
-------------------------------------------------------------------------------------------
2006................ 58,862 55,769 114,631 26,949 87,682
2007................ 63,038 52,494 115,533 25,446 90,087
2008................ 56,843 49,566 106,409 18,805 87,604
2009................ 52,755 46,622 99,377 14,583 84,794
2010................ 53,918 43,940 97,858 12,879 84,979
2011................ 49,710 41,309 91,020 6,330 90,387
2012................ 44,641 39,077 83,719 6,330 83,086
2013................ 44,216 37,094 81,311 5,678 75,633
2014................ 46,362 35,191 81,553 5,678 75,875
2015................ 48,506 33,195 81,700 5,678 76,022
2016................ 47,550 31,165 78,715 - 78,715
2017................ 49,903 29,073 78,976 - 78,976
2018................ 52,375 26,906 79,282 - 79,282
2019................ 54,976 24,631 79,607 - 79,607
2020................ 57,708 22,260 79,967 - 79,967
2021................ 60,584 19,731 80,314 - 80,314
2022................ 63,605 17,093 80,698 - 80,698
2023................ 66,786 14,322 81,108 - 81,108
2024................ 65,833 11,463 77,296 - 77,296
2025................ 32,960 8,606 41,567 - 41,567
2026................ 15,279 7,378 22,657 - 22,657
2027................ 15,957 6,699 22,656 - 22,656
2028................ 16,665 5,991 22,655 - 22,655
2029................ 17,405 5,250 22,655 - 22,655
2030................ 18,178 4,476 22,654 - 22,654
2031................ 18,987 3,666 22,653 - 22,653
2032................ 19,832 2,821 22,653 - 22,653
2033................ 20,716 1,936 22,652 - 22,652
2034................ 21,639 1,012 22,652 - 22,652
2035................ 7,265 177 7,443 - 7,443
- ---------------
(1) The interest due on floating rate debt was calculated at 12.75% per annum.
SHORT-TERM DEBT
As of December 31, 2005, the City had no outstanding principal amount of
short-term debt. Short-term borrowings of the City are limited by law to 25.0%
of budgeted current revenues.
DEBT RECORD
Since 1946, the City has never failed to pay when due the full amount of
principal of, and interest and premium on, and amortization or sinking fund
requirements with respect to, its outstanding public debt. Although the City
entered into DISSESTO in 1993, payments on financial indebtedness were not
affected. See "Financial Information of the City--Summary--DISSESTO
FINANZIARIO."
27
REPUBLIC OF ITALY
AREA AND POPULATION
GEOGRAPHY. The Republic of Italy is situated in south central Europe on a
peninsula approximately 1,120 kilometers (696 miles) long and includes the
islands of Sicily and Sardinia in the Mediterranean Sea and numerous smaller
islands. To the north, Italy borders on France, Switzerland, Austria and
Slovenia along the Alps, and to the east, west and south it is surrounded by the
Mediterranean Sea. Its total area is approximately 301,300 square kilometers
(116,336 square miles), and it has 7,375 kilometers (4,582 miles) of coastline.
The independent States of San Marino and Vatican City, whose combined area is
approximately 61 square kilometers (24 square miles), are located within the
same geographic area. The Apennine Mountains running along the peninsula and the
Alps north of the peninsula give much of Italy a rugged terrain.
POPULATION. According to ISTAT data, as of January 1, 2005, Italy's
population was estimated to be approximately 58.5 million, accounting for
approximately 12.8% of the European Union, or EU, population (including the 10
member states that joined on May 1, 2004) compared to 57.9 million as at January
1, 2004. The growth in Italy's population was largely due to the increase in
foreigners holding permits to live in Italy. Italy is the fourth most populated
country in the European Union after Germany, France and the United Kingdom.
According to ISTAT data, as of January 1, 2005, the six regions in the southern
part of the peninsula together with Sicily and Sardinia, known as the
"Mezzogiorno," had a population of approximately 20.8 million. Northern and
central Italy had a population of approximately 26.5 million and 11.3 million,
respectively. The breakdown of the resident population by age group, as of
January 1, 2005, was as follows:
- ------------------------------------------------------------------
o under 20 19.1%
- ------------------------------------------------------------------
o 20 to 39 28.4%
- ------------------------------------------------------------------
o 40 to 59 27.5%
- ------------------------------------------------------------------
o 60 and over 25.1%
- ------------------------------------------------------------------
Source: ISTAT
In 2004, for the first time since 1993, the number of births in Italy exceeded
the number of deaths. However, Italy's fertility rate is still one of the lowest
in the world, while life expectancy for Italians is among the highest in the
world. Because population growth has been low in recent years, the average age
of the population is increasing. Based on 2002 ISTAT data, population density is
approximately 189.1 persons per square kilometer.
Rome, the capital and largest city, is situated near the western coast
approximately halfway down the peninsula, and had a population of 2.5 million in
2004. The next largest cities are Milan, with a population of 1.3 million,
Naples, with 1.0 million, and Turin, with 0.9 million. According to the 2001
census, approximately 44.2% of Italy's population lives in urban areas.
Like other EU countries, Italy has experienced significant immigration in
recent years, particularly from North Africa and Eastern European countries.
According to ISTAT data, at January 1, 2005 there were approximately 2.4 million
foreigners holding permits to live in Italy, a 20.7% increase from January 1,
2004. Foreigners holding permits to live in Italy represented 4.1% of Italy's
population at January 1, 2005, compared to 3.4% and 2.7% as at the same date in
2004 and 2003, respectively. Immigration legislation has been the subject of
intense political debate since the early 1990s. Italy tightened its immigration
laws in March 1998 and initiated bilateral agreements with several countries for
cooperation in identifying illegal immigrants. Additional measures to further
tighten immigration laws were introduced by the Italian government in early 2002
in an attempt to control the increase of illegal immigrants. In addition in
2002, the Italian government introduced measures aimed at regularizing the
position of illegal immigrants. While these legislative efforts have resulted in
regularization of large numbers of illegal immigrants, Italy continues to have
high numbers of foreigners living in Italy illegally.
28
GOVERNMENT AND POLITICAL PARTIES
Italy was originally a loose-knit collection of city-states, most of which
united into one Kingdom in 1861. It has been a democratic republic since 1946.
The Government operates under a Constitution, originally adopted in 1948, that
provides for a division of powers among the legislative, executive and judicial
branches.
THE LEGISLATIVE BRANCH. Parliament consists of a Chamber of Deputies, with
630 elected members, and a Senate, with 315 elected members and a small number
of life Senators, consisting of former Presidents of the Republic and prominent
individuals appointed by the President. The Chamber of Deputies and the Senate
equally share and have substantially the same legislative power. Any statute
must be approved by both assemblies before being enacted. Except for life
Senators, members of Parliament are elected for five years by direct universal
adult suffrage, although elections have been held more frequently in the past
because the instability of multi-party coalitions has led to premature
dissolutions of Parliament.
THE EXECUTIVE BRANCH. The head of State is the President, elected for a
seven-year term by an electoral college that includes the members of Parliament
and 58 regional delegates. The current President, Carlo Azeglio Ciampi, was
elected in May 1999. The President has the power to appoint the Prime Minister
and to dissolve Parliament. The Constitution also grants the President the power
to appoint one-third of the members of the Constitutional Court, to call general
elections and to command the armed forces. The President nominates and
Parliament confirms the Prime Minister, who is the effective head of Government.
The Council of Ministers is appointed by the President on the Prime Minister's
advice. The Prime Minister and Council of Ministers are responsible to both
houses of Parliament and must resign if Parliament passes a vote of no
confidence in the administration.
THE JUDICIAL BRANCH. Italy is a civil law jurisdiction. Judicial power is
vested in ordinary courts, administrative courts and courts of accounts. The
highest ordinary court is the CORTE DI CASSAZIONE in Rome, where judgments of
lower courts of local jurisdiction may be appealed. The highest of the
administrative courts, which hear claims against the State and local entities,
is the CONSIGLIO DI STATO in Rome. The CORTE DEI CONTI in Rome supervises the
preparation of, and adjudicates, the State budget of Italy. There is also a
Constitutional Court (CORTE COSTITUZIONALE) that does not exercise general
judicial powers, but adjudicates conflicts among the other branches of
government and determines the constitutionality of statutes. Criminal matters
are within the jurisdiction of the criminal law divisions of ordinary courts,
which consist of magistrates who either act as judges in criminal trials or are
responsible for investigating and prosecuting criminal cases.
POLITICAL PARTIES. The main political parties are grouped into two opposing
coalitions: the ULIVO and the CASA DELLE LIBERTA. The ULIVO coalition was
created by former Prime Minister Romano Prodi in 1995 to combine centrist and
leftist forces. The ULIVO coalition currently consists of the DEMOCRATICI DI
SINISTRA, the largest political party representing Italy's moderate leftist
forces and numerous smaller political parties including center-left and leftist
forces. The CASA DELLE LIBERTA was created in 1994 to combine center-right and
right forces and currently consists of FORZA ITALIA, the center-right political
party led by Mr. Silvio Berlusconi, ALLEANZA NAZIONALE, representing the right
led by Mr. Gianfranco Fini, the LEGA NORD, the federalist party led by Mr.
Umberto Bossi and other smaller political parties. RIFONDAZIONE COMUNISTA, the
communist party, is led by Mr. Fausto Bertinotti and is expected to support
ULIVO at the upcoming general elections in April 2006.
Following the general elections held on May 13, 2001, the CASA DELLE
LIBERTA obtained a majority in Parliament and Mr. Berlusconi was appointed to
form a new Government, which was sworn in on June 11, 2001.
ELECTIONS. Except for a brief period, no one party has been able to command
an overall majority in Parliament and, as a result, Italy has a long history of
weak coalition governments. In 1993, Parliament adopted a partial "first past
the post" voting system for the election of 75% of the members of both the
Senate and the Chamber of Deputies, which was modified in December 2005. In the
Senate, the candidate receiving the largest number of votes in a single district
wins. The remaining 25% are elected through a proportional representation
system.
In the Chamber of Deputies, votes are cast for lists of candidates
presented by each party. Seats in the Chamber of Deputies are awarded based on
the number of votes obtained by each list, provided that multiparty coalitions
and single parties are not eligible for any seat unless they attain at least 10%
and 4% of the total votes, respectively. In addition, a "first past the post"
mechanism applies if the winning coalition does not obtain at least 340 seats
(out of 630 seats) in the Chamber of Deputies. In order to ensure government
stability, if the winning coalition does not
29
obtain at least 340 seats, it is automatically awarded as many seats as it needs
to reach 340 seats. This modified voting system will be utilized for the first
time in the general elections in April 2006.
These modifications of the voting system have resulted in a significantly
smaller number of Parliamentary seats held by parties with relatively small
shares of the popular vote. Historically, however, government stability has
depended on the larger parties' coalitions with smaller parties.
POLITICAL REGIONS. Italy is divided into 20 regions containing 103
provinces. The Italian Constitution reserves certain functions, including police
services, education and other local services, to the regional and local
governments. Following a Constitutional reform passed by Parliament in 2001,
additional legislative and executive powers were transferred to the regions.
Legislative competence that historically had belonged exclusively to Parliament
was transferred in certain areas (including foreign trade, health and safety,
ports and airports, transport network and energy production and distribution) to
a regime of shared responsibility whereby the national government promulgates
legislation defining fundamental principles and the regions promulgate
implementing legislation. Furthermore, in all areas that are not subject to
exclusive competence of Parliament or in a regime of shared responsibility
between Parliament and the regions, exclusive regional competence will be
conferred upon request of the relevant region, subject to Parliamentary
approval. In addition, in accordance with this devolution program, regions have
been granted the right to levy local taxes and collect national taxes referable
to their territory. A portion of these national taxes continues to accrue to a
national fund to be divided among regions according to their needs.
The Italian Constitution grants special status to five regions (Sicily,
Sardinia, Trentino-Alto Adige, Friuli-Venezia Giulia and Valle d'Aosta)
providing them with additional legislative and executive powers.
REFERENDA. An important feature of Italy's Constitution is the right to
hold a referendum to abrogate laws passed by Parliament. Upon approval, a
referendum has the legal effect of automatically annulling legislation to which
it relates. Exceptions to this right are matters relating to taxation, as well
as the State budget, the ratification of international treaties and judicial
amnesties. A referendum can be held at the request of 500,000 signatories or
five regional councils. In order for a referendum to be approved, a majority of
the Italian voting population must vote in the referendum and a majority of such
voters must vote in favor of the referendum.
THE EUROPEAN UNION
Italy is a founding member of the European Economic Community, which now
forms part of the European Union. Italy is one of the 25 current members of the
EU together with Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Ireland, Luxembourg, The Netherlands, Portugal, Spain, Sweden and the United
Kingdom, as well as the Czech Republic, Estonia, Hungary, Latvia, Lithuania,
Poland, the Slovak Republic, Slovenia, Cyprus and Malta, which joined the
European Union on May 1, 2004. Together, these countries had a population of
approximately 457 million at the end of 2004.
The European Union is currently negotiating the terms and conditions of
accession to the EU of four candidate countries: Bulgaria, Croatia, Romania and
Turkey. Bulgaria and Romania currently are scheduled to join the EU in 2007.
The EU member states have agreed to delegate sovereignty for certain
matters to independent institutions that represent the interests of the union as
a whole, its member states and its citizens. Set forth below is a summary
description of the main EU institutions and their role in the European Union.
THE COUNCIL OF THE EU. The Council of the EU, or the Council, is the EU's
main decision-making body. It meets in different compositions by bringing
together on a regular basis ministers of the member states to decide on matters
such as foreign affairs, finance, education and telecommunications. When the
Council meets to address economic and financial affairs it is referred to as
ECOFIN. The Council mainly exercises, together with the European Parliament, the
European Union's legislative function and promulgates:
o regulations, which are EU laws directly applicable in member states;
o directives, which set forth guidelines that member states are required
to enact by promulgating national laws; and
o decisions, through which the Council implements EU policies.
30
The Council also coordinates the broad economic policies of the member states
and concludes, on behalf of the EU, international agreements with one or more
States or international organizations. In addition, the Council:
o shares budgetary authority with Parliament;
o takes decisions necessary for framing and implementing a common
foreign and security policy; and
o coordinates the activities of member states and adopts measures in the
field of police and judicial cooperation in criminal matters.
Decisions of the Council are taken by vote. Each Member State's voting power is
largely based on the size of its population. The following are the number of
votes each Member State can cast:
o Germany, France, Italy and the United Kingdom each have 29 votes; O
Spain and Poland each have 27 votes;
o the Netherlands have 13 votes;
o Belgium, the Czech Republic, Greece, Hungary and Portugal each have 12
votes;
o Austria and Sweden each have 10 votes;
o Denmark, Ireland, Lithuania, Slovakia and Finland each have 7 votes;
o Cyprus, Estonia, Latvia, Luxembourg and Slovenia each have 4 votes;
and
o Malta has 3 votes.
Generally decisions of the Council are taken by qualified majority, which is
achieved if:
o a majority of member states (in certain cases, a two-thirds majority
of member states) approves the decision; and
o votes representing at least 72.3% of all votes are cast in favor of
the decision.
THE EUROPEAN PARLIAMENT. The European Parliament is elected every five years by
direct universal suffrage. The European Parliament has three essential
functions:
o it shares with the Council the power to adopt directives, regulations
and decisions;
o it shares budgetary authority with the Council, and can therefore
influence EU spending; and
o it approves the nomination of EU Commissioners, has the right to
censure the EU Commission and exercises political supervision over all
the EU institutions.
Each member state is allocated the following number of seats in Parliament:
31
1999-2004 2004-2007
-------------------------------------
Austria 21 18
Belgium 25 24
Cyprus -- 6
Czech Republic -- 24
Denmark 16 14
Estonia -- 6
Finland 16 14
France 87 78
Germany 99 99
Greece 25 24
Hungary -- 24
Ireland 15 13
Italy 87 78
Latvia -- 9
Lithuania -- 13
Luxembourg 6 6
Malta -- 5
Netherlands 31 27
Poland -- 54
Portugal 25 24
Slovakia -- 14
Slovenia -- 7
Spain 64 54
Sweden 22 19
United Kingdom 87 78
-------------------------------------
TOTAL 626 732
THE EUROPEAN COMMISSION. The European Commission traditionally upholds the
interests of the EU as a whole and has the right to initiate draft legislation
by presenting legislative proposals to the European Parliament and Council.
Currently, the European Commission consists of 25 members, one appointed by each
member state for a five-year term.
COURT OF JUSTICE. The Court of Justice ensures that Community law is
uniformly interpreted and effectively applied. It has jurisdiction in disputes
involving member states, EU institutions, businesses and individuals. A Court of
First Instance has been attached to it since 1989.
OTHER INSTITUTIONS. Other institutions that play a significant role in the
European Union are:
o the European Central Bank, which is responsible for defining and
implementing a single monetary policy in the euro area;
o the Court of Auditors, which checks that all the Union's revenue has
been received and that all its expenditures have been incurred in a
lawful and regular manner and oversees the financial management of the
EU budget; and
o the European Investment Bank, which is the European Union's financial
institution, supporting EU objectives by providing long-term finance
for specific capital projects.
32
MEMBERSHIP OF INTERNATIONAL ORGANIZATIONS
Italy is also a member of the North Atlantic Treaty Organization (NATO), as
well as many other regional and international organizations, including the
United Nations and many of its affiliated agencies. Italy is one of the Group of
Eight (G-8) industrialized nations, together with the United States, Japan,
Germany, France, the United Kingdom, Canada and Russia and a member of the
Organization for Economic Co-operation and Development (OECD), the World Trade
Organization (WTO), the International Monetary Fund (IMF), the International
Bank for Reconstruction and Development (World Bank), the European Bank for
Reconstruction and Development (EBRD) and other regional development banks.
33
THE ITALIAN ECONOMY
GENERAL
According to OECD data published in November 2005, the economy of Italy, as
measured by 2004 GDP, is the sixth largest in the world, after the United
States, Japan, Germany, the United Kingdom and France.
The Italian economy developed rapidly in the period following World War II
as large-scale, technologically advanced industries flourished along with more
traditional agricultural and industrial enterprises. Between 1960 and 1974,
Italian GDP, adjusted for changes in prices, or "real GDP," grew by an average
of 5.2% per year. As a result of the 1973-74 oil price shocks and the
accompanying worldwide recession, output declined by 2.1% in 1975, but between
1976 and 1980 real GDP again grew by an average rate of approximately 4% per
year. During this period, however, the economy experienced higher inflation,
driven in part by wage inflation and high levels of borrowing by the Government.
For the 1980s as a whole, real GDP growth in Italy averaged 2.4% per year,
compared with 2.2% per year for the European Union.
The 1990s marked Italy's period of slowest economic growth since World War
II. Tighter fiscal policy, which followed the lira's suspension from the
Exchange Rate Mechanism in September 1992, led Italy's economy into recession
and, in 1993, real GDP decreased by 0.9%. The economy recovered in 1994
primarily as a result of an increase in exports resulting largely from the
depreciation of the lira. The recovery continued in 1995, fueled by additional
investment in the manufacturing sector. Expansion after 1995 continued at a more
modest pace, with Italy's GDP growth rate lagging behind those of other major
European countries. Italy's GDP grew by an average of 1.6% per year during the
period 1996 through 1999, compared to 2.3% in the 12 country euro zone during
the same period.
The table below shows the annual percentage change in real GDP growth for
Italy and the countries participating in the EMU, including Italy, for the
period 1995 through 2004.
ANNUAL PER CENT CHANGE IN REAL GDP
- --------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
-------- ------- ------- ------- -------- -------- ------- ------- ------- --------
Italy 2.9 1.1 2.0 1.8 1.7 3.0 1.8 0.4 0.3 1.2
euro area(1) 2.3 1.4 2.4 2.8 2.8 3.6 1.6 0.9 0.5 2.1
(1) The euro area represents the countries participating in the EMU.
Source: Annual Report of the Bank of Italy (May 2005) for the year ended
December 31, 2004.
The growth gap between other European countries and Italy since the mid
1990s reflects the persistence of several medium and long-term factors,
including the difficulties in fully integrating southern Italian regions into
the more dynamic economy of northern and central Italy, unfavorable export
specialization in traditional goods, inadequate infrastructure, the incomplete
liberalization process and insufficient flexibility of national markets. The
effects of these factors were aggravated by the crisis in the emerging markets
of South-East Asia, the increasing mobility of capital, the reduction of
barriers to international competition and the reduction of subsidies for
national industries.
Italy's real GDP growth rate increased in the second half of 1999 and in
2000 due to improving exports, industrial production and growing domestic
demand. The decrease in growth experienced in 2001, 2002 and 2003 was due
primarily to the decrease in world trade resulting from the slowdown in the
global and U.S. economies, the volatility of financial markets, a rise in petrol
prices in 2000, a slowdown in domestic private sector consumption and
investments and a decrease in net exports. The increase in growth in 2004 was
lower than the average recorded in the euro area, mainly due to a slowdown in
internal consumption and fixed investment and the decrease in exports recorded
during the second half of the year.
The Italian Government historically has experienced substantial budget
deficits. Among other factors, this is largely attributable to high levels of
social spending and the fact that social services and other non-market
activities of the central and local governments account for a relatively
significant percentage of total employment. Countries participating in the
European Economic and Monetary Union are required to reduce "excessive deficits"
and adopt
34
budgetary balance as a medium-term objective. General government net borrowing
was reduced to 2.8% of GDP in 1998, mainly due to an increase in general
government revenues resulting from the improving economy. Since 1998, Italy has
failed during four years (2001, 2003, 2004 and 2005) to maintain general
government net borrowing as a percentage of GDP under the 3% reference value set
by the Maastricht Treaty. In the remaining years it satisfied the Maastricht
Treaty criteria, largely as a result of extraordinary one-off measures, such as
the sale of UMTS licenses in 2000 and the disposal of state-owned real estate in
2001 and 2002 and receipts from the tax amnesty introduced in 2003. See "Public
Finance -- Measures of Fiscal Balance."
A longstanding objective of the Government has been to control Italy's
debt-to-GDP ratio. Government debt fell relative to GDP between 1994 and 2004;
however, it remains above the 60% debt ceiling required under the Maastricht
Treaty. The ratio of Government debt-to-GDP was 108.3% in 2002, 106.8% in 2003,
106.6% in 2004 and, based on the Quarterly Cash-Flow Report published on April
5, 2006, 106.4% in 2005. Under the 2006-2009 Program Document, the debt-to-GDP
ratio is projected to fall to 100.9% in 2009.
Historically, Italy has had a high but declining savings rate. As a
percentage of gross national disposable income, which measures aggregate income
of a country's nationals after providing for capital consumption (the
replacement value of capital used up in the process of production), private
sector saving averaged 28.8% in the period from 1981 to 1990 and 24.1% in the
period from 1991 to 2000. Private sector saving as a percentage of gross
national disposable income averaged 19.4% in the period from 2001 to 2004.
Because of the high savings rate, the Government has been able to raise large
amounts of funds through issuances of Treasury securities in the domestic
market, with limited recourse to external financing.
The Italian economy is characterized by significant regional disparities,
with the level of economic development of southern Italy well below that of
northern Italy. According to the Bank of Italy, the per capita GDP of the
Mezzogiorno was 57.8% of the per capita GDP of northern Italy in 1989 and
declined progressively to 57.0% in 2000. The marked regional divide in Italy is
also evidenced by a difference in unemployment rates. While unemployment in the
north of Italy declined from 6.6% in 1998 to 4.3% in 2004, well below the
average unemployment rate of countries in the euro area of 10.0% in 1998 and
8.8% in 2004, the unemployment rate in the Mezzogiorno was 19.6% in 1998 and
15.0% in 2004.
After increasing modestly from 1995 to 1998, employment grew faster from
1999 through 2004. Employment for the year ended December 31, 2004 grew by
approximately 76,000 labor units, or 0.3%. See "-- Employment and Labor."
Inflation, as measured by the harmonized consumer price index, has declined
from rates exceeding 20% in the early 1980s to 2.3% for the year ended December
31, 2004. See "-- Prices and Wages."
2005 DEVELOPMENTS
Italy's real GDP remained unchanged, compared to the previous year, based
on the Quarterly Cash-Flow Report (RELAZIONE TRIMESTRALE DI CASSA) submitted to
the Government and Parliament by the Ministry of Economy and Finance on April 5,
2006. Italy's seasonally adjusted average unemployment rate was stable at 7.7%
during the last three quarters of 2005, from 7.8% during the first quarter of
2005. Consumer prices, as measured by the harmonized EU consumer price index,
increased at an annual rate of 2.0% during the twelve months ended December 30,
2005.
GROSS DOMESTIC PRODUCT
From 1996 to 1999, average annual real GDP growth in Italy was 1.6%,
compared to 2.3% in the euro area, reflecting a range of factors including weak
demand in key European export markets, the effects of the Asian crisis in 1998,
declining private consumption resulting from the elimination of incentives for
car purchases introduced in 1997 and weak disposable income growth. During this
period Italy also suffered the lagged effects of fiscal tightening and reform of
its social security and welfare systems. In 2000, Italy's GDP growth rose to
3.0%, compared to 3.5% in the 12 country euro area, as the declining exchange
rate of the euro and improved economies outside the EU contributed to a
significant increase in incoming orders for manufacturing goods and also due to
sustained internal demand and investment. Italy's GDP growth rate in 2001
declined to 1.8% but exceeded the growth rate of the euro area (1.6%) for the
first time since 1995. Italy's GDP growth rate declined further to 0.4% in 2002
and 0.3% in 2003, the slowest growth since 1993, and rose to 1.2% in 2004. The
decrease in real GDP growth in 2001, 2002 and 2003 was due primarily to the
decrease in world trade resulting from the slowdown in the global and U.S.
economies, the volatility of financial markets, a slowdown in domestic private
sector consumption and
35
investments and a decrease in net exports. During 2004 and the first half of
2005, Italy continued to record weak growth, mainly due to a slowdown in
internal consumption and fixed investment and a decrease in exports, while the
euro area experienced substantially higher real GDP growth.
The following tables set forth information relating to nominal (unadjusted
for changing prices) and real GDP and expenditures for the periods indicated.
GDP SUMMARY
- --------------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
----------------------------------------------------------------------
Nominal GDP (millions of (euro)) 1,166,548 1,218,535 1,260,598 1,300,929 1,351,328
Real GDP(1) (millions of (euro)) 1,015,077 1,032,985 1,036,945 1,039,581 1,052,308
Real GDP % Change 3.0% 1.8% 0.4% 0.3% 1.2%
Population (in thousands, as of December
31) 56,960 56,993 57,321 57,888 58,462
Nominal per capita GDP 20,480 21,380 21,992 22,473 23,115
Real per capita GDP(1) 17,821 18,125 18,090 17,958 18,000
(1) Constant euro with purchasing power equal to the average for 1995.
Source: Annual Report of the Bank of Italy (May 2005) for the year ended
December 31, 2004 and ISTAT data
REAL GDP AND EXPENDITURES
- --------------------------------------------------------------------------------------------------------------------
Real GDP 1,212,442 1,216,589 1,217,041 1,230,006 1,229,568
Add: Imports of goods and services 310,617 309,145 311,589 319,426 323,776
OF WHICH
Goods 256,668 255,040 255,385 276,801 300,648
Services 64,458 65,737 65,128 65,455 73,095
Total supply of goods and services 1,523,060 1,525,726 1,528,574 1,549,148 1,552,877
Less: Exports of goods and services 323,816 310,783 303,219 312,373 313,178
----------- ---------- ---------- ----------- ---------
OF WHICH
Goods 261,662 251,172 244,935 252,580 252,598
Services 64,927 63,914 63,031 67,354 72,157
Total goods and services available
for domestic expenditure 1,199,244 1,214,943 1,225,355 1,236,775 1,239,699
============ ========== ========== ========== =========
Selected Domestic Expenditure
Indicators
Private sector consumption 714,701 715,871 722,865 726,805 727,228
Public sector consumption 231,710 236,795 241,662 243,100 245,988
2001 2002 2003 2004 2005
------------- ----------- ----------- --------- -------
(EURO IN MILLIONS)
Total domestic consumption 946,411 952,666 964,527 969,905 973,216
Gross fixed investment 248,082 257,969 253,576 259,129 257,425
(1) In connection with ISTAT's revisions to the national accounting system
implemented in December 2005, ISTAT replaced its methodology for
calculating real growth, which was based on a fixed base index, with a
methodology linking real growth between consecutive time periods, or a
chain-linked index. One of the effects of using chain indices is that other
than for the first year in the chain (2001 in the above table) component
measures will no longer aggregate to totals. Also, as a result of this
change in methodology, all "real" revenue and expenditure figures included
in this document from and including 2001 differ from and are not comparable
to data published in earlier documents filed by Italy with the United
States Securities
36
and Exchange Commission.
Source: Annual Report of the Bank of Italy (May 2006) for the year ended
December 31, 2005.
PRIVATE SECTOR CONSUMPTION. The growth of private sector consumption,
comprising the expenditure by households on goods and services other than new
housing, dropped in 2001 and 2002 to 0.8 and 0.4%, respectively, followed by an
increase to 1.4% in 2003. In 2004, private sector consumption grew by 1.0%. In
the euro area, private sector consumption growth dropped from 1.7% in 2001 to
0.6% in 2002, followed by an increase to 1.1% and 1.2% in 2003 and 2004,
respectively. The growth of private sector consumption in Italy in 2004
reflected an increase in demand for durable goods (mainly transport equipment
and high-technology products) and services (principally communications,
entertainment and cultural services), partially offset by a decrease in demand
for non-durable goods (principally food products). Notwithstanding the
improvement in private sector consumption, consumer confidence in Italy remained
low in 2004 due to uncertainties regarding Italy's economic slowdown. Private
sector consumption represented 60.2% of GDP in 2004 and its contribution to real
GDP growth during the same period was 0.6%, compared to 0.8% in 2003.
PUBLIC SECTOR CONSUMPTION. Public sector consumption, or the expenditure on
goods and services by the general government, increased by 0.7% in 2004,
compared to 2.3% in 2003. Public sector consumption represented 18.3% of GDP in
2004 and its contribution to real GDP growth during the same period was 0.1%,
compared to 0.4% in 2003.
GROSS FIXED INVESTMENT. Gross fixed investment in Italy, comprising
spending on capital equipment and structures, including purchases of new
housing, rose by 2.1% in 2004, compared to a 1.8% decrease in 2003. In the euro
area gross fixed investment also increased by 2.1% in 2004, compared to a 0.4%
decrease in 2003. Italy's increase in gross fixed investment was principally due
to low interest rates on capital borrowing and operational revenue growth in the
industry sector. As a result, in 2004 Italy recorded 3.1% growth in the
construction sector, compared to 1.7% growth in 2003, together with an increase
in capital spending on machinery and equipment of 2.7%, compared to a 4.2%
decrease in 2003. The growth in gross fixed investment was curbed by a 2.9%
decrease in spending on transport machinery in 2004, compared to the 6.1%
decrease recorded in 2003, and by a 0.8% decrease of investment in non-tangible
goods in 2004, compared to 0.8% growth in 2003. Gross fixed investment
contributed positively to real GDP growth by 0.4% during 2004, compared to a
negative contribution of 0.4% in 2003.
NET EXPORTS. In 2004, Italy's exports of goods and services increased by
3.2%, compared to a 1.9% decline in 2003, while imports of goods and services
rose by 2.5%, compared to a 1.3% increase in 2003. This growth in Italian
exports was lower than the 6.8% average growth recorded in the rest of the euro
area. Net exports accounted for 0.4% of GDP in 2004, compared to 0.1% in 2003.
In 2004, net exports contributed positively, by 0.2%, to real GDP growth.
REGIONAL GDP. In the period between 1996 and 2004, average annual GDP
growth in southern Italy was 1.7%, faster than the 1.4% growth experienced by
northern and central Italy. In 2001 GDP grew by 1.8% in northern and central
Italy compared to 1.9% growth in southern Italy. Northern and central Italy GDP
growth was 0.2, 0.3 and 1.4% in 2002, 2003 and 2004, respectively, while
southern Italy GDP growth was 0.7, 0.4 and 0.8%, respectively, in those years.
In 2000, the per capita GDP of the Mezzogiorno was 57% of that of the rest
of Italy. Irregular workers (unregistered workers and registered workers with
unregistered second jobs) in the Mezzogiorno were estimated to constitute a
significant proportion of the overall workforce in industry and services
available in that region. The Annual Financial Law for 2001 extended until 2005
lower social security charges for employers, aimed at reducing the number of
irregular workers.
GDP GROWTH. Structural shortcomings have hindered Italy's productivity.
Italy's share of goods with low value added and high price elasticity is higher
than that of any other large industrialized country. As a result, it is more
exposed to competition from emerging economies. This was particularly evident in
1997 and 1998 when world prices for goods produced in Asia fell sharply. In
addition, most output is produced by small firms that cannot achieve economies
of scale in production. During late 1999 and 2000, however, the declining
exchange rate of the euro and improved economies outside the EU contributed to a
significant increase in incoming orders for manufactured goods. Exports growth
slowed down in 2001 and exports declined in 2002 and 2003 due to the fall in
37
worldwide demand and the continuing loss in competitiveness of Italian products.
In 2004, exports grew at a rate of 3.2% due to an increase in worldwide demand.
Based on the Quarterly Cash-Flow Report (RELAZIONE TRIMESTRALE DI CASSA)
submitted to the Government and Parliament by the Ministry of Economy and
Finance on April 5, 2006, GDP growth rate for 2005 was 0.0%, while the estimate
for 2006 is 1.3%. An improvement in the outlook for recovery in GDP growth
depends on the successful adoption of Government designed policies to:
o promote investments in infrastructure and strategic areas;
o foster market liberalization and reduce administrative bureaucratic
charges and procedures;
o reduce the tax burden;
o preserve private sector purchasing power; and
o undertake structural measures to contain the growth of government
expenditure.
STRATEGIC INFRASTRUCTURE PROJECTS. ITALY'S ECONOMIC INFRASTRUCTURE IS STILL
SIGNIFICANTLY UNDERDEVELOPED COMPARED TO OTHER MAJOR EUROPEAN COUNTRIES.
In December 2001, Parliament enacted Law No. 443/2001 (the "Strategic
Infrastructure Law") which provides the government with special powers for the
planning and realization of those infrastructure projects considered to be of
strategic importance for the growth and modernization of the country,
particularly the Mezzogiorno. The Strategic Infrastructure Law aims at
simplifying the administrative process necessary to award contracts in
connection with strategic infrastructure projects and increase the proportion of
privately financed projects. In order to implement this strategy the government
incorporated INFRASTRUTTURE S.P.A., a wholly owned joint stock company, which is
in charge of providing long-term project financing to private sector entities
responsible for the realization and management of these projects.
Also in December 2001, the government approved its first infrastructure
program under the Strategic Infrastructure Law. Under this program, investments
between 2002 and 2012 were projected to total approximately (euro)125 billion,
45% of which was to be in the Mezzogiorno, including in roadways, railways, mass
transport and water supply systems.
In each of the last four years, the Government announced plans in its
Program Document to increase public infrastructure investment in order to
decrease the logistical constraints on the expansion of trade, improve the
provision of services essential to the growth of Italian firms and reduce the
geographical disparities between the north and the south of Italy, which
discourage private investment.
PRINCIPAL SECTORS OF THE ECONOMY
The following tables set forth real GDP by sector and the proportion of
such sector of real GDP for the periods indicated.
REAL GDP AT MARKET PRICES BY SECTOR
- --------------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
------------------------------------------------------------------------------------------------
(euro) IN % OF (euro) IN % OF (euro) IN % OF (euro) IN % OF (euro) IN % OF
MILLIONS TOTAL MILLIONS TOTAL MILLIONS TOTAL MILLIONS TOTAL MILLIONS TOTAL
------------------------------------------------------------------------------------------------
AGRICULTURE, 28,219 2.8 28,093 2.7 26,969 2.6 25,572 2.5 28,338 2.7
FISHING AND
FORESTRY
INDUSTRY
Manufacturing 233,464 23.0 232,810 22.5 229,868 22.2 227,771 21.9 227,462 21.6
Construction 48,811 4.8 50,315 4.9 51,615 5.0 52,801 5.1 54,234 5.2
Extractive
industries and
production and
distribution of
energy, gas,
steam and water 31,907 3.1 32,179 3.1 32,531 3.1 34,230 3.3 34,923 3.3
Total industry 314,182 31.0 315,304 30.5 314,014 30.3 314,802 30.3 316,619 30.1
38
REAL GDP AT MARKET PRICES BY SECTOR
- --------------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
------------------------------------------------------------------------------------------------
(euro) IN % OF (euro) IN % OF (euro) IN % OF (euro) IN % OF (euro) IN % OF
MILLIONS TOTAL MILLIONS TOTAL MILLIONS TOTAL MILLIONS TOTAL MILLIONS TOTAL
------------------------------------------------------------------------------------------------
MARKET SERVICES
Commerce and
repairs 131,860 13.0 134,403 13.0 133,326 12.9 133,734 12.9 136,517 13.0
Hotels and
restaurants 33,653 3.3 34,535 3.3 34,181 3.3 34,044 3.3 33,587 3.2
Transport and
communications 67,506 6.7 72,294 7.0 73,481 7.1 73,752 7.1 75,156 7.1
Financial services 65,655 6.5 65,314 6.3 63,531 6.1 64,098 6.2 62,900 6.0
IT, research and
professional
activity 98,121 9.7 104,349 10.1 111,017 10.7 113,650 10.9 113,213 10.8
Real estate leases 83,716 8.2 84,965 8.2 85,445 8.2 86,186 8.3 87,187 8.3
Total market
services 480,511 47.3 495,860 48.0 500,981 48.3 505,464 48.6 508,560 48.3
NON-MARKET
SERVICES
Public
administration 48,516 4.8 48,972 4.7 48,862 4.7 49,436 4.8 49,947 4.7
Education 41,769 4.1 41,880 4.1 42,238 4.1 42,558 4.1 42,999 4.1
Public health and
social services 42,144 4.2 44,796 4.3 46,502 4.5 47,160 4.5 49,047 4.7
Household services 7,191 0.7 7,380 0.7 7,504 0.7 7,666 0.7 7,711 0.7
Other services 38,833 3.8 39,095 3.8 39,135 3.8 39,123 3.8 41,465 3.9
Total non-market
services 178,453 17.6 182,123 17.6 184,241 17.8 185,943 17.9 191,169 18.2
VALUE ADDED AT
MARKET PRICES 1,001,366 98.6 1,021,380 98.9 1,026,207 99.0 1,031,781 99.2 1,044,686 99.3
GDP AT MARKET
PRICES 1,015,077 100 1,032,985 100 1,036,945 100 1,039,581 100 1,052,308 100
Source: Annual Report of the Bank of Italy (May 2005) for the year ended
December 31, 2004.
REAL GDP GROWTH BY SECTOR
- --------------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
---------- ---------- ---------- ---------- -----------
% % % % %
AGRICULTURE, FISHING AND FORESTRY (2.9) (0.4) (4.0) (5.2) 10.8
INDUSTRY
Manufacturing 2.0 (0.3) (1.3) (0.9) (0.1)
Construction 3.5 3.1 2.6 2.3 2.7
Extractive industries and production and 0.1
distribution of energy, gas, steam
and water ( ) 0.9 1.1 5.2 2.0
Total industry 2.0 0.4 (0.4) 0.3 0.6
MARKET SERVICES
Commerce and repairs 5.0 1.9 (0.8) 0.3 2.1
Hotels and restaurants 8.1 2.6 (1.0) (0.4) (1.3)
Transport and communications 6.1 7.1 1.6 0.4 1.9
Financial services 9.5 (0.5) (2.7) 0.9 (1.9)
IT, research and professional activity 9.3 6.3 6.4 2.4 (0.4)
Real estate leases (1.7) 1.5 0.6 0.9 1.2
Total market services 5.6 3.2 1.0 0.9 0.6
NON-MARKET SERVICES
Public administration (0.2) 0.9 (0.2) 1.2 1.0
Education (0.3) 0.3 0.9 0.8 1.0
Public health and social services 4.8 6.3 3.8 1.4 4.0
Household services 2.8 2.6 1.7 2.2 0.6
Other services (0.3) 0.7 0.1 0.0 6.0
Total non-market services 1.0 2.1 1.2 0.9 2.8
VALUE ADDED AT MARKET PRICES 3.4 2.0 0.5 0.5 1.3
GDP AT MARKET PRICES 3.0 1.8 0.4 0.3 1.2
Source: Annual Report of the Bank of Italy (May 2005) for the year ended
December 31, 2004. ROLE OF THE GOVERNMENT IN THE ECONOMY
39
State-owned enterprises historically have played a significant role in the
Italian economy. The State participates in the energy, banking, shipping,
transportation and communications industries, among others, through its
shareholdings in ALITALIA S.P.A. ("Alitalia"), ENTE NAZIONALE IDROCARBURI S.P.A.
("ENI") and ENEL S.P.A. ("ENEL"). See "Monetary System -- Banking Regulation --
Structure of the Banking Industry" and "Public Finance -- Government
Enterprises." The contribution of government-owned enterprises (either wholly
owned or in which participations are held) to GDP has fallen significantly since
the commencement in the early 1990's of privatizations of these enterprises. See
"Public Finance -- Privatization Program."
SERVICES
In 2004, services represented 66.5% of GDP and 66.1% of total employment.
Among the most important service sectors are:
o commerce, hotels and restaurants, which accounted for 16.2% of GDP in
2004;
o information technology, research and professional services, which
accounted for 10.8% of GDP in 2004;
o transport and communications, which accounted for 7.1% of GDP in 2004;
and
o real estate leases, which accounted for 8.3% of GDP in 2004.
TRANSPORT. Italy's transport sector has been relatively fast-growing and,
during the period from 1980 to 1996, grew at more than twice the rate of
industrial production growth. The expansion of the transport sector was largely
the result of trade integration with European markets. Historically, motorways
and railways have been controlled, directly and indirectly, by the Government
and have posted large financial losses. In recent years many of these
enterprises have been restructured in order to place them on a sounder financial
footing and/or privatized.
Roadways are the dominant mode of transportation in Italy. The road network
includes, among others, municipal roads that are managed and maintained by local
authorities, roads outside municipal areas that are managed and maintained by
the State Road Board (ANAS) and a system of toll highways that in part are
managed and maintained by COSTRUZIONI E CONCESSIONI AUTOSTRADE S.P.A.
("Autostrade"), Italy's largest motorway company, which was fully privatized in
March 2000. Autostrade manages approximately 3,400 kilometers, of the
approximately 6,500 kilometer system of motorways, under a twenty-year
concession granted by ANAS. Toll motorways represent approximately 84.6% of the
total motorway network.
Italy's railway network is small in relation to its population and land
area. Approximately 30% of the network carries 80% of the traffic, resulting in
congestion and under-utilization of large parts of the network. There are
approximately 22,200 kilometers of railroad track, of which a large majority are
controlled by State-owned railways, with the remainder controlled by private
firms operating under concession from the Government. In 2004, Italian railways
carried approximately 23.3 billion tons-km of freight and recorded 47.5 billion
passengers-km. The Government historically has provided substantial operating
subsidies to the State-owned railroads, making passenger tickets less expensive
than for most European railroads. In addition, the railway system historically
has suffered from overstaffing, high pay and inadequate infrastructure. However,
the Government has been restructuring the Italian railway system to improve its
efficiency, expand the network and upgrade existing infrastructure.
In 1992, the Italian State railway company was converted from a public law
entity into a commercial State-owned corporation, Ferrovie dello Stato S.p.A. or
FS, with greater autonomy over investment, decision-making and management. In
2004 the total annual capital expenditure in fixed assets by Ferrovie dello
Stato totaled (euro)8,500
40
million, compared to (euro)2,720 million in 1997. In 2004 Ferrovie dello Stato
recorded a consolidated loss of (euro)125 million, compared to profits of
(euro)31 million in 2003 and (euro)77 million in 2002. In response to EU
directives and intervention by the Italian Antitrust Authority (AUTORITA GARANTE
DELLA CONCORRENZA E DEL MERCATO), since March 1999 Italy has been implementing a
plan aimed at preparing Italy's railways for competition. Italy liberalized
railway transportation by creating two separate legal entities wholly owned by
Ferrovie dello Stato: Trenitalia S.p.A., managing the transportation services
business and Rete Ferroviaria Italiana S.p.A. ("RFI") managing railway
infrastructure components and the efficiency, safety and technological
development of the network.
The Government plans to privatize the freight and intercity businesses,
while the local transport and infrastructure divisions will continue to be
Government-operated. The Government's objective is to devolve to the regions a
significant part of the State responsibilities for local railways. Under the
planned decentralization process, regions will become responsible for the whole
range of local transportation services through contracts entered into with the
State. The international segment of railway transport was liberalized in 2000
and as of October 30, 2005, 40 licenses had been granted to international
operators.
Projects for new high-speed train systems (TRENO AD ALTA VELOCITA, or TAV)
linking the principal urban centers of Italy with one another and with
neighboring European countries, as well as other infrastructure projects
designed to upgrade the railway network, are under way.
La Spezia and Genoa are the two largest Mediterranean ports for container
shipping. During the late 1990s, ISTITUTO PER LA RICOSTRUZIONE INDUSTRIALE or
IRI, a State holding company, completed the privatization of its international
maritime companies. Tirrenia, a state-owned company, operates ferry operations
and regional maritime activities.
Alitalia, Italy's national airline, was partially privatized in 1998 and
re-capitalized in early 2002. Currently, 37.7% is owned by the public with the
remainder held by the Ministry of Economy and Finance. In 2004, Alitalia
recorded losses of approximately (euro)812 million, compared to losses of
approximately (euro)520 million in 2003 and a net profit of approximately
(euro)93 million in 2002. Due to its financial difficulties, in early 2004
Alitalia entered into negotiations with the State and with trade union
representatives in order to agree on a corporate and financial restructuring
plan, which was finally approved by its Board of Directors on September 20, 2004
for the period 2005-2008.
Passenger air traffic in Italy is concentrated, with 53.8% of all air
traffic in 2003 attributable to Ciampino and Fiumicino airports in Rome and
Linate and Malpensa airports in Milan.
COMMUNICATIONS. In 1997, Parliament enacted legislation to reform the
telecommunications market with the aim of promoting competition in accordance
with EU directives. This legislation permits companies to operate in all sectors
of the telecommunications market, including radio, television and telephone,
subject to certain antitrust limitations and provided for the appointment of a
supervisory authority. The Italian Telecommunication Authority (AUTORITA PER LE
GARANZIE NELLE COMUNICAZIONI, or AGCOM), consists of eight members appointed by
Parliament and a president appointed by the Government. It is responsible for
issuing licenses and has the power to regulate tariffs and impose fines and
other sanctions. Each fixed and mobile telephony operator must obtain an
individual license, which is valid for 15 years and renewable.
Italy's telecommunications market is one of the largest in Europe,
utilizing an aggregate of approximately 27.9 million fixed lines and 62.7
million mobile telephone lines as of December 31, 2004. The market was
deregulated in January 1998 and Telecom Italia, which was privatized in 1997 and
later acquired by Olivetti in 1999, remains the largest operator, but is facing
increasing competition from new operators that have been granted licenses for
national and local telephone services. Competition among telecommunications
operators has resulted in lower charges and a wider range of services offered.
In January 2000, access to local loop telephony was liberalized.
In 1995, following the adoption of legislation aimed at developing
competition in the mobile telephone business, Telecom Italia Mobile (TIM) was
spun-off from Telecom Italia and publicly listed; however, in 2004, in
furtherance of a restructuring plan aimed, inter alia, at strengthening its
position in the market, TIM merged into Telecom Italia. The Government also
granted mobile licenses to other mobile operators. TIM remains the largest
mobile operator, followed by Vodafone Italia (controlled by the Vodafone Group)
and Wind.
In 1998, the European Parliament authorized EU member countries to grant a
limited number of Universal Mobile Telecommunication System, or UMTS, licenses
for third-generation, or 3G, mobile telephony services,
41
through which companies intend to provide additional and enhanced services
including high-speed wireless internet access. The allocation process of UMTS
licenses in Italy was effected by an auction among pre-qualified applicants. In
2000, five UMTS licenses were granted for terms of fifteen years. Italy raised
(euro)13,815 million through the UMTS license auction.
Internet and personal computer penetration rates in Italy have grown
substantially in recent years. The ratio of personal computers per household
increased from 16.7% in 1997 to 43.9% in 2005 while the proportion of PCs
connected to the Internet increased to 34.5% in 2005 from 2.3% in 1997.
TOURISM. Tourism is an important sector of the Italian economy. In 2004,
tourism revenues, net of amounts spent by Italians traveling abroad, were
approximately (euro)12.2 billion, representing a 22.7% increase from net tourism
revenues in 2003. This reflected a decrease in spending by Italian tourists
abroad of 9.4% while spending by foreign visitors in Italy increased by 3.8%. In
2004 the numbers of Italians traveling abroad decreased by 15.4%, while the
number of foreigners traveling in Italy decreased by 8.3%. See "The External
Sector of the Economy -- Current Account."
FINANCIAL SERVICES. Historically, a significant portion of Italy's domestic
investment has been in public debt. However, the percentage of domestic
investment allocated to holdings of foreign assets, investment fund units and
shares, increased from 18.5% in 1995 to 38.0% in 2003, while the percentage
allocated to bonds decreased from 30.6% in 1995 to 18.7% in 2003. This shift
generated a substantial increase in fee income for financial institutions. In
2004, investment in holdings of foreign assets, investment fund units and shares
decreased to 37.8% of domestic investment, while the proportion of domestic
investment allocated to bonds rose to 19.3%.
Share prices rose in Italy in 2004. The Italian stock exchange recorded a
17% average increase in share prices, compared to increases of 9% in the United
Kingdom, 7% in France and 8% in Germany.
Italian household indebtedness as a percentage of GDP grew from 23% in 1995
to 34% in 2003. However, it remains lower than in other comparable countries in
the EU such as Germany, France and the United Kingdom, which registered
household indebtedness as a percentage of GDP of 73%, 49% and 97%, respectively,
in 2003. Bank lending to Italian residents generally has increased since 1997,
accommodating economic expansion. The rate of growth in bank lending was 6.7% in
2003 and 2004. For a description of the Italian banking system, see "Monetary
System -- Banking Regulation."
MANUFACTURING
In 2004, the manufacturing sector represented 21.6% of GDP and 20.7% of
total employment. In 2004, manufacturing output decreased by 0.1%, compared to a
0.9% decrease registered in 2003.
Italy has compensated for its lack of natural resources by specializing in
transformational and processing industries. Italy's principal manufacturing
industries include metal products, precision instruments and machinery,
textiles, leather products and clothing, wood and wood products, paper and paper
products, food and tobacco, chemical and pharmaceutical products and transport
equipment, including motor vehicles.
The number of large manufacturing companies in Italy is relatively small in
comparison to other European Union countries. The most significant include Fiat
(automobiles and other transportation equipment), Pirelli (tires, cables and
industrial rubber products), Finmeccanica (aeronautics, helicopters, space and
defense), Ferrero (food) and Benetton (clothing). These companies export a
significant share of their output and have significant market shares in their
respective product markets in Europe.
Much of Italy's industrial output is produced by small and medium-sized
firms, which also account for much of the economic growth over the past 20
years. These firms are active especially in light industry (including the
manufacture of textiles, clothing, food, shoes and paper), where they have been
innovators, and export a significant share of their production. The profit
margins of large manufacturing firms, however, generally have been higher than
those of their smaller counterparts. Various Government programs to support
small firms provide, among other things, for loans, grants, tax allowances and
support to venture capital entities.
Traditionally, investments in research and development (R&D) activities
have been very limited in Italy.
Total and corporate R&D spending has continued to be proportionally lower
in Italy than in other industrial countries, reflecting Italian industry's
persistent difficulty in closing the technology gap with other advanced
42
economies. Total R&D spending in Italy decreased from 1.13% of GDP in 1993 to
1.00% in 1995 and rose back to 1.16% in 2002. This compares to total R&D
spending as a percentage of GDP in 2002 of 2.52% in Germany, 2.20% in France,
1.83% in the EU (including the ten EU member states which joined in May, 2004),
2.67% in the United States and 3.12% in Japan.
The following table shows industrial production by sector for the years
indicated:
INDUSTRIAL PRODUCTION BY SECTOR
(INDEX: 2000 = 100)
- --------------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
--------- ----------- ----------- ----------- -----------
Energy products 100 99.6 103.8 108.2 110.2
Minerals, ferrous and non-ferrous metals 100 99.6 98.1 98.5 99.4
Chemicals and pharmaceutical products 100 97 100.7 98.2 100.6
Metal products 100 101.3 98 99.5 101
Agricultural and industrial machinery 100 101.5 101.7 96.9 97.8
Precision instruments and machines 100 97.6 91.7 83.8 83.8
Transport equipment 100 96.2 91.8 86.6 86
Food and tobacco 100 103.7 104.9 107 106.6
Textiles and clothing 100 99.5 91.8 88.5 84.8
Wood and wood products 100 100.7 100.1 98.3 100.8
Paper and paper products 100 98.4 99.1 100.9 107.3
Rubber and plastic materials 100 98.4 94.9 94.9 94.7
Other industrial products 100 101 98.4 88.4 88.3
---- ------ ------- ------ ------
Aggregate Index 100 99.4 97.8 96.8 97.3
Source: Annual Report of the Bank of Italy (May 2005) for the year ended
December 31, 2004.
ENERGY PRODUCTION
The demand for energy, measured in terms of million tons of oil equivalent,
or MTOE, increased by 1.1% in 2004, compared to a 4.0% increase in 2003. The
increase of energy demand was due to an increased demand for industry (1.5%),
transportation (1.6%) and "other uses" (5.6%), partially offset by a decrease in
demand for heating and agriculture (0.5 and 2.9%, respectively).
In 2004, oil represented 45.4% of Italy's primary energy consumption, with
natural gas accounting for 33.9%, renewable energy resources (which includes
solar and wind energy, recyclable material, waste material and biogas)
accounting for 7.2%, solid combustibles accounting for 8.7% and net purchased
electricity accounting for 5.1%.
In 2004, Italy imported 94.2% of its oil requirements and 83.7% of its
natural gas requirements. The only other significant imported energy source is
coal. A referendum held in 1987 rejected the use of nuclear power in Italy.
The domestic energy industry consists primarily of ENI and ENEL. ENI,
20.32% owned by the Government, is engaged in the exploration, development and
production of oil and natural gas in Italy and abroad, the refining and
distribution of petroleum products, petrochemical products, the supply,
transmission and distribution of natural gas and oil field services contracting
and engineering.
ENEL is the largest electricity company in Italy and is engaged principally
in the generation, importation and distribution of electricity. The Government
owns 21.87% of the share capital of ENEL directly and 10.35% through Cassa
Depositi e Prestiti S.p.A., which is 70% owned by the Government. Domestic
capacity is insufficient to meet current demand and Italy imports a portion of
its electricity requirements.
The Electricity and Gas Authority (AUTORITA PER L'ENERGIA ELETTRICA E IL
GAS) regulates electricity activities and natural gas distribution in Italy with
the aim of promoting competition while ensuring adequate levels of service
quality. The Authority is led by a board of three members appointed by
Parliament and has a large degree of independence and significant powers,
including the power to establish base tariffs and the criteria for tariff
adjustments and to issue fines and other sanctions. While several companies
operate in the gas distribution market, during 2004 natural gas sales by ENI
accounted for about 67.6% of domestic consumption. A Government Decree issued in
May 2000 in line with European Directives, provided for a partial liberalization
of the natural gas market.
43
Pursuant to that decree after January 1, 2003, no single operator could have a
50% or higher market share of the Italian natural gas market and no single
operator would be allowed to control more than 75% of gas imports, with this
ceiling subject to a further yearly reduction of 2 percentage points until 2010.
Following the determination of gas distribution tariffs by the Authority, ENI
sold a 40.2% stake in the share capital of its distribution subsidiary, SNAM
Rete Gas, through an initial public offering in December 2001 and a further 9.1%
interest in March 2004.
In recent years, the Italian electricity sector has undergone significant
changes. A Government decree issued in 1999, known as the BERSANI DECREE,
established a general regulatory framework for the Italian electricity industry
that has gradually introduced free competition in power generation and sales to
consumers meeting certain consumption thresholds, while maintaining a regulated
monopoly structure for power transmission, distribution and sales to other
consumers. In particular, the BERSANI DECREE and the subsequent implementing
regulations:
o liberalized, as of April 1, 1999, the generation, import and export of
electricity;
o liberalized the sale of electricity to consumers meeting certain
consumption thresholds, or "Eligible Customers," who may negotiate
supply agreements directly with any domestic or foreign producer,
wholesaler or distributor of electricity, and provided that other
consumers, or "Non-Eligible Customers," would have to purchase
electricity from the distributor serving the area in which they are
located and pay tariffs determined by the Electricity and Gas
Authority;
o provided that after January 1, 2003, no electricity company is allowed
to produce or import more than 50% of the total of imported and
domestically produced electricity in Italy;
o provided for the establishment of the Single Buyer, a central
purchaser of electricity from producers on behalf of all Non-Eligible
Customers;
o provided for the creation of the BORSA DELL'ENERGIA ELETTRICA, or pool
market for electricity, in which producers, importers, wholesalers,
distributors, the GESTORE DELLA RETE, other Eligible Customers and the
Single Buyer participate, with prices being determined through a
competitive bidding process;
o provided for the creation of the GESTORE DEL MERCATO, or Market
Operator, charged with managing the pool market;
o provided that the transmission and distribution of electricity are
reserved to the Italian government and performed by licensed
operators, and in this respect:
o provided that management and operation of the national
transmission grid is licensed to an independent system operator,
the GESTORE DELLA RETE or System Operator, with owners of the
transmission grid such as Terna S.p.A. (formerly owned by ENEL)
retaining ownership of the grid assets; and
o established a new licensing regime for electricity distribution
and provided incentives for the consolidation of electricity
distribution networks within each municipality.
In accordance with the BERSANI DECREE, during 2000 ENEL established three
new generating companies (Eurogen, Elettrogen and Interpower or, collectively,
Gencos); representing approximately 25% of ENEL's generation capacity. In
September 2001 a consortium led by Endesa, a Spanish utility, acquired
Elettrogen, the second largest Genco, with a total generation capacity of 5,400
MW. In May 2002 Edipower S.p.A., a consortium led by Edison S.p.A. acquired
Eurogen, the largest Genco with a total generation capacity of 7,000 MW. In
November 2002, a consortium comprising Acea S.p.A., Electrobel S.p.A. and
Energia Italiana acquired Interpower, the third Genco, with a total generation
capacity of 2,611 MW.
Effective January 1, 2000, a new tariff regime, subsequently amended,
significantly lowered fixed tariff rates for the generation, transmission and
distribution of electricity.
Terna S.p.A., formerly controlled by ENEL, owns and operates approximately
94% of the transmission assets of Italy's national electricity grid, which was
operated by the System Operator until October 31, 2005. In accordance with a
governmental decree, enacted in May 2004, and pursuant to an agreement entered
into in February 2005, the System Operator transferred to Terna the
responsibility to manage the national transmission grid and the related assets
with effect from November 1, 2005. In addition, following the effectiveness of
this transfer, ENEL is no longer entitled to control more than 5% of the voting
rights for the appointment of Terna's directors. ENEL has complied with its
obligation to reduce its holding in Terna to no more than 20% by July 1, 2007.
In June 2004, ENEL sold a 50% interest in Terna through an initial public
offering. A further 13.86% interest was sold in March
44
2005 through an accelerated bookbuilding process. In May 2005, ENEL entered into
an agreement with Cassa Depositi e Prestiti S.p.A. for the sale of most of its
remaining shares in Terna to the Cassa (approximately 30%).
In 2003, the EU adopted a new Directive and a Regulation to further
liberalize the electricity market. The new Electricity Directive retains the
main principles of the EU directive issued in December 1996, commonly referred
to as the Electricity Directive, which it replaces. It enables all consumers to
freely choose their electricity supplier by 2007, irrespective of consumption
levels, with all non-household consumers enjoying this right of choice from
2004. Further, the new Electricity Directive introduced new definitions of
public service obligations and security of supply, established a regulator in
all EU member states with well defined functions and requires legal unbundling
of network activities from generation and supply. The Regulation establishes
common rules for cross-border trade in electricity and lays down principles on
charges to be paid as a result of transit flows and access to networks as well
as on congestion management. More detailed rules can be issued by the EU
Commission acting together with a special committee.
CONSTRUCTION
In 2004, construction represented 5.2% of GDP and 7.3% of total employment.
In 2003 and 2004, construction activity grew by 2.3 and 2.7%, respectively.
Gross fixed investment in construction, which includes investment for building
renovations and by the public administration, increased by 3.1% in 2004,
compared to 1.7% in 2003 and 3.2% in 2002.
AGRICULTURE, FISHING AND FORESTRY
In 2004, agriculture, fishing and forestry accounted for 2.7% of GDP and
5.2% of total employment. Agriculture's share of Italian GDP has generally
declined with the growth of industrial output since the 1960s. Italy's average
farm size remains less than half the European Union average. Italy is a net
importer of all categories of food except fruits and vegetables. The principal
crops are wheat (including the durum wheat used to make pasta), maize, olives,
grapes and tomatoes. Cereals are grown principally in the Po valley in the north
and in the southeast plains, olives are grown principally in central and
southern Italy and grapes are grown throughout the country.
EMPLOYMENT AND LABOR
GENERAL. Job creation has been and continues to be a key objective of the
Government. Employment as measured by the average number of standard labor units
employed during the year increased cumulatively by approximately 6.0% from 1999
to 2004. A standard labor unit is the amount of work undertaken by a full-time
employee over the year and is used to measure the amount of work employed to
produce goods and services. This increase was largely attributable to increases
in part-time and temporary employment. Following a 1.3% growth in average
employment in 2002 and a 0.4% growth in 2003, average employment grew by 0.8% in
2004. The unemployment rate has decreased every year since 1999 reaching 8.0%
for the year ended December 31, 2004.
The following table shows the change in total employment, the official
participation rate and the official unemployment rate for each of the last five
years.
EMPLOYMENT
- --------------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
---------- ---------- ---------- ---------- -----------
(AVERAGE OVER THE YEAR)
Employment in standard labor units
(% change on prior year) 1.75 1.64 1.25 0.43 0.79
Participation rate (%)(1) 61.0 61.6 62.1 62.9 62.5
Unemployment rate (%)(2) 10.1 9.1 8.6 8.4 8.0
(1) Participation rate of population aged 15-64.
(2) Does not include workers paid by Cassa Integrazione Guadagni or Wage
Supplementation Fund, which compensates workers who are temporarily laid
off or who have had their hours cut.
Source: Annual Report of the Bank of Italy (May 2005) for the year ended
December 31, 2004.
45
EMPLOYMENT BY SECTOR. Of the total employed workforce in 2004,
approximately 66.1% were employed in the service sector, 21.3% were employed in
industry (other than construction), 7.3% worked in the construction sector, and
5.2% worked in agriculture.
In 2004, average employment in industry, excluding construction, decreased
slightly, by 0.4%. Historically, a declining trend of employment levels in the
industry sector began in the 1980s with employment in industry decreasing from
23.0% of the total workforce in 1994 to 21.3% in 2004, principally reflecting a
decline in employment in the manufacturing sector.
In 2004, average employment in agriculture, forestry and fishing increased
slightly, by 0.4%. Average employment in agriculture, forestry and fishing has
declined constantly since World War II except in 2001 and 2004. Employment in
the agriculture sector declined from 7.5% in 1994 to 5.2% in 2004.
The largest contribution to employment growth in Italy in recent years has
come from the services sector, which increased from 62.7% of the total workforce
in 1994 to 66.1% in 2004. The growth was mainly attributable to business and
household services, with all service sectors other than public administration,
transportation, communications, financial services and education experiencing
employment growth.
EMPLOYMENT BY GEOGRAPHIC AREA AND GENDER. Unemployment in southern Italy
has been persistently higher than in northern and central Italy, and in 2004,
was 15.0% compared to 6.5% in central Italy and 4.3% in northern Italy. The
unemployment rate in central and northern Italy declined steadily between 1995
and 2002, remaining substantially stable thereafter, while unemployment in
southern Italy has fluctuated, increasing from 1994 to 1999 and decreasing by
4.6% from 1999 to 2004.
While unemployment for women in Italy historically has been substantially
higher than for men, it has decreased at a faster rate (from 14.8% in 1999 to
10.5% in 2004) than for men (from 8.4% in 1999 to 6.3% in 2004). This is in part
attributable to the substantial growth in female participation in the labor
force, particularly among women aged 25-54. The proportion of economically
active women increased from 44.3% in 1995 to 50.6% in 2004, while the
participation rate of men increased from 72.5% in 1995 to 74.5% in 2004.
Participation rates for women over age 40 and for women in southern Italy are
significantly below European averages.
The Government believes that a substantial "hidden economy" exists in
Italy, consisting of persons who claim, for tax and other purposes, to be
unemployed but actually hold a job, or who claim to hold a job but also perform
other income-earning activities. The hidden economy is believed to be
particularly persistent in areas of high official unemployment and among
immigrant workers. The increase in employment in 2001 and 2002 may partly be
attributable to the "emergence" of workers that were not previously accounted
for in national statistics. According to ISTAT data in 2003 the hidden economy
was estimated to equal between 14.8% (equal to (euro)193 billion) and 16.7%
(equal to (euro)217 billion) of GDP. The hidden economy includes illegal
activities and unreported income from the production of legal products and
services.
GOVERNMENT PROGRAMS AND REGULATORY FRAMEWORK. The Government has adopted a
number of programs aimed at correcting the imbalances in employment, including
programs that provide money for job training, particularly in southern Italy,
and certain incentives to companies that hire young workers. The Government's
target set forth in the 2006-2009 Program Document is to reduce unemployment to
7.7% by 2009. During the period 2001-2005, the Government introduced tax
incentives for employers in order to promote full-time permanent employment.
Collective bargaining of industry-wide labor contracts is the principal means of
determining working hour limitations.
Through the CASSA INTEGRAZIONE GUADAGNI ("CIG"), or Wage Supplementation
Fund, the Government guarantees a portion of the wages of workers in the
industrial sector who are temporarily laid off or who have had their working
hours reduced. Workers laid off permanently as a consequence of restructuring or
other collective redundancies are entitled to receive unemployment compensation
for a period of 12 months, which is extendable for up to three years for workers
nearing retirement age. The number of hours of work paid through CIG declined
steadily from 299.9 million hours in 1995 to 147.2 million hours in 2000 before
increasing to 227.6 million hours in 2004.
Italy's labor market historically has been slow to respond to cyclical
trends, contributing to a high unemployment rate. This has been attributed to
the bargaining power of labor unions and a regulatory framework that makes
dismissal of workers difficult. The persistence of high unemployment has
contributed to a less confrontational
46
stance on the part of the unions, leading to significant declines in the average
number of person-hours lost per year in strikes and industrial actions, from
116.6 million in the period 1978-82 to 43.6 million in the period 1983-90 and
50.2 million in the period from 1991-1997. In the period from 1998-2001, an
average of approximately 5.9 million person-hours per year were lost to strikes.
In 2002, 2003 and 2004, however, 34 million, 13.1 million and 4.8 million
person-hours, respectively, were lost to strikes, principally due to protests
against Government reforms and international policy.
PRICES AND WAGES
WAGES. Unit labor costs historically have been lower in Italy, on average,
than in most other European countries. This is due to lower average earnings per
employee, combined with higher productivity levels.
Wages, as measured by gross earnings per standard labor unit increased by
an average of 3.0% for the entire economy in 2004 compared with an increase of
3.3% in 2003 and 2.6% in 2002. As in previous years, during 2004 the growth was
larger in the public service sector than in private sectors (4.0 and 2.6%,
respectively). Labor costs per standard labor unit, measured in terms of unit
remuneration (i.e. the total of gross wages and social security charges)
increased by 2.9% in 2004, compared to 3.8% in 2003. Labor costs per product
unit, or LCPU, increased by 2.3% in 2004, compared to 3.9% in 2003, due to a
0.5% increase in labor productivity in 2004, compared to a decrease of 0.1% in
2003. LCPU growth remains higher than in other major European countries.
PRICES. The European Union harmonized consumer price index reflects the
change in price of a basket of goods and services taking into account all
families resident in a given territory. In 2003 and 2004, the inflation rate in
the euro area as measured by the European Union harmonized consumer price index
remained stable at 2.1%. Since Italy's entry into the EMU in 1999, monetary
policy decisions are made for all euro zone countries by the European Central
Bank. See "Monetary System -- Monetary Policy."
Inflation in Italy, as measured by the harmonized consumer price index was
2.3% in 2004, compared to 2.8% in 2003. The 2004 figure was principally
attributable to a slowdown in the growth of prices of unprocessed foods and
energy and in the growth of the core inflation index (which is the harmonized
consumer price index net of energy, unprocessed food, alcohol and tobacco
products), driven by a slowdown in the growth of prices of services.
The following table illustrates trends in prices and wages for the periods
indicated:
PRICES AND WAGES
- --------------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
--------- ---------- ---------- ---------- ----------
(PER CENT)
Cost of Living Index(1) 2.6 2.7 2.4 2.5 2.0
Harmonized Consumer Price Index(1)(2) 2.6 2.7 2.6 2.8 2.3
Core Inflation Index(3) 1.9 2.4 2.8 2.6 2.3
Change in per capita wages 3.1 3.2 2.5 3.8 2.9
Change in unit labor costs(4) 0.7 2.8 3.2 3.9 2.3
(1) The cost of living index reflects the change in price of a basket of goods
and services (net of tobacco) typically purchased by non-farming families
headed by an employee. It differs from the harmonized consumer price index
in that the cost of living index is smaller in scope.
(2) In accordance with European Commission regulations, since January 2002 the
harmonized consumer price index reflects reductions in prices (e.g.
seasonal sales and promotional offers) taking place for a minimum period of
15 days (formerly 30 days). As a consequence, figures for 2002 are not
directly comparable to previous data.
(3) The basket of goods and services used to measure the core inflation index
is equivalent to the harmonized consumer price index basket less energy,
unprocessed food, alcohol and tobacco products.
(4) Unit labor costs are per capita wages reduced by productivity gains.
Source: Annual Report of the Bank of Italy (May 2005) for the year ended
December 31, 2004.
47
MONETARY SYSTEM
The Italian financial system consists of banking institutions such as
commercial banks, leasing companies, factoring companies and household finance
companies, as well as non-bank financial intermediaries such as investment
funds, portfolio management companies, securities investment firms, insurance
companies and pension funds.
MONETARY POLICY
THE EUROPEAN SYSTEM OF CENTRAL BANKS. As of January 1, 1999, which
marked the beginning of Stage III of European Economic and Monetary Union, the
11 countries joining the EMU officially adopted the euro, and the Eurosystem
became responsible for conducting a single monetary policy. Greece joined the
EMU on January 1, 2001.
The European System of Central Banks (ESCB) consists of the European
Central Bank (ECB), established on June 1, 1998 and the national central banks
of the EU member states. The Eurosystem is formed by the 12 national central
banks in the euro area and the ECB. So long as there are EU member states that
have not yet adopted the euro (currently Cyprus, the Czech Republic, Denmark,
Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia, Sweden
and the United Kingdom), there will be a distinction between the 12-country
Eurosystem and the 25-country ESCB. The thirteen national central banks of
non-participating countries do not take part in the decision-making of the
single monetary policy, they maintain their own national currencies and conduct
their own monetary policies. The Bank of Italy, as a member of the Eurosystem,
participates in Eurosystem decision-making.
The Eurosystem is principally responsible for:
o defining and implementing the monetary policy of the euro area,
including fixing rates on the main refinancing lending facility
(regular liquidity-providing reverse transactions with a weekly
frequency and a maturity of two weeks, executed by the national
central banks on the basis of standard tenders), the marginal lending
facility (overnight liquidity facility provided to members of the
Eurosystem by the national central banks against eligible assets,
usually with no credit limits or other restrictions on access to
credit) and the deposit facility (overnight deposit facility with the
national central banks available to members of the Eurosystem, usually
with no deposit limits or other restrictions);
o conducting foreign exchange operations and holding and managing the
official foreign reserves of the euro area countries;
o issuing banknotes in the euro area;
o promoting the smooth operation of payment systems; and
o cooperating in the supervision of credit institutions and the
stability of the financial system.
The ESCB is governed by the decision-making bodies of the ECB which are:
o the Executive Board, composed of the President, Vice-President and
four other members, responsible for implementing the monetary policy
formulated by the Governing Council;
o the Governing Council, composed of the six members of the Executive
Board and the governors of the 12 national central banks, in charge of
implementing the tasks assigned to the Eurosystem and formulating the
euro area's monetary policy; and
o the General Council, composed of the President and the Vice-President
of the ECB and the governors of the 25 national central banks of the
EU member states. The General Council contributes to the advisory
functions of the ECB and will remain in existence as long as there are
EU member states that have not adopted the euro.
The ECB is independent of the national central banks and the Governments of
the member states and has its own budget, independent of that of the European
Community; its capital is not funded by the European Community but has been
subscribed and paid up by the national central banks of the member states that
have adopted the euro, pro-rated to the GDP and population of each such member
state. The ECB has exclusive authority for the issuance of currency within the
euro area. The ECB had paid up capital of approximately (euro)4 billion at
December 31, 2004, of which approximately (euro)726.3 million, or 17.8%, was
subscribed by the Bank of Italy.
48
THE BANK OF ITALY. The Bank of Italy, founded in 1893, is the lender of
last resort for Italian banks and banker to the Treasury. It supervises and
regulates the Italian banking industry and operates services for the banking
industry as a whole. It also supervises and regulates non-bank financial
intermediaries. The Bank of Italy had assets at December 31, 2004 of (euro)163.0
billion.
THE ECB'S MONETARY POLICY. The primary objective of the ESCB is to maintain
price stability. In October 1998 the Governing Council announced the ECB
monetary strategy and provided a quantitative definition of price stability,
which has been defined as an annual increase in the Harmonized Index of Consumer
Prices for the euro area of below 2%. Despite short-term volatility, price
stability is to be maintained over the medium term. Moreover, in order to assess
the outlook for price developments and the risks for future price stability, a
two-pillar approach was adopted by the ECB.
The first pillar assigns a prominent role to money supply, the growth rate
of which is measured through a broad monetary aggregate called M3. This monetary
reference aggregate consists of currency in circulation, overnight deposits,
deposits with an agreed maturity up to two years, deposits redeemable at a
period of notice up to three months, repurchase agreements, debt securities of
up to two years, money market fund shares and money market paper. In December
1998, the Governing Council set the first quantitative reference value for M3
growth, at an annual growth rate of 4.5%. This reference value was confirmed by
the Governing Council in 1999, 2000, 2001 and 2002. On May 8, 2003 the Governing
Council decided to stop its practice of reviewing the reference value annually,
given its long-term nature.
The second pillar consists of a broad assessment of the outlook for price
developments and the risks to price stability in the euro area and is made in
parallel with the analysis of M3 growth in relation to its reference value. This
assessment encompasses a wide range of financial market and other economic
indicators, including macroeconomic projections. Based on a thorough analysis of
the information provided by the two pillars of its strategy, the Governing
Council determines monetary policy aiming at price stability over the medium
term.
The ECB's monetary and exchange rate policy is aimed at supporting general
and economic policies in order to achieve the economic objectives of the EU,
including sustainable growth and a high level of employment without prejudice to
the objective of price stability.
ECB INTEREST RATES. The minimum bid rate on the main refinancing operations
was subsequently raised on several occasions in 2000 to 4.75% on August 31
reflecting concern over the risks to price stability (since June 2000, main
refinancing operations have been conducted on the basis of variable rate
tenders). As a result of the global economic slowdown in 2001 and the weakness
of the economy in the euro area in 2002 and the first half of 2003, the
Governing Council progressively lowered interest rates by a total of 275 basis
points, with interest rates on the minimum bid rate on the main refinancing
operations, the marginal lending and deposit facilities reaching 2.00%, 3.00%
and 1.00%, respectively in June 2003. These rates remained unchanged until
December 2005. The Governing Council raised interest rates by 25 basis points in
December 2005 and in March 2006, with interest rates on the minimum bid rate on
the main refinancing operations, the marginal lending and deposit facilities
reaching 2.50%, 3.50% and 1.25%, respectively.
The following table shows the movement in the interest rate on main
refinancing operations and on marginal lending and deposit facilities from
February 4, 2000 to March 10, 2006.
ECB MONEY SUPPLY AND CREDIT. The three-month moving average of
twelve-month euro money supply growth, a measure that is used to evaluate the
divergence from the ECB's 4.5% reference growth rate, remained under the
reference rate prior to May 2001 and since then has remained above the reference
rate. It grew to 7.6% through December 2001, declined slightly to 6.9% through
December 2002, grew sharply in the first half of 2003 to over 8.0% and
subsequently declined to 7.5% through December 2003 and 6.6% through December
2004 and remained substantially unchanged through the first quarter of 2005. The
growth of M3 through the first half of 2003 was mainly due to shifts in
portfolios to more liquid assets resulting from continued uncertainty in
financial markets, international political tensions and low long-term and
short-term interest rates. In addition, the high growth rate of M3 was
attributable to the introduction of the euro in physical form in the countries
participating in the EMU on January 1, 2002 and to the decline in the growth of
total lending to the private sector, which decreased to a twelve month growth of
4.7% in 2002, compared to 6.7% in 2001. The slowdown in M3 growth recorded from
the second half of 2003 to the first quarter of 2005 was mainly attributable to
the increased stability of the financial markets, with a resulting decrease in
the proportion of liquid assets in investor portfolios and increasing investment
in the
49
equity markets and long-term debt investments. The effects of this trend were
partially offset by higher investment in money market fund shares. The slowdown
in M3 growth during this period was partially offset by a reduction in the
spread between long and short term interest rates, which resulted in a growth in
the proportion of short term deposits and repurchase agreements.
EXCHANGE RATE POLICY
Under the Maastricht Treaty, the ECB and ECOFIN are responsible for foreign
exchange rate policy. The European Council formulates the general orientation of
exchange rate policy, either on the recommendation of the Commission, following
consultation with the ECB, or on the recommendation of the ECB. However, the
Council's general orientation cannot conflict with the ECB's primary objective
of maintaining price stability. The ECB has exclusive authority for effecting
transactions in foreign exchange markets.
BANKING REGULATION
REGULATORY FRAMEWORK. Italian banks are generally organized as joint
stock companies and fall into one of the following categories:
o joint stock companies owned directly or indirectly by the private or
public sector or by public foundations;
o co-operative banks; or
o institutions that provide centralized management services to other,
usually small-sized banks.
Subject to the principle of "home country control," non-Italian EU banks may
carry out banking business and business activities in Italy that are integral to
banking as described in Directive No. 2000/12/EC, as amended, or the EU Banking
Directive. Under the principle of "home country control," a non-Italian EU bank
remains subject to the regulation of its home-country supervisory authorities.
It may carry out in Italy those banking activities described in the EU Banking
Directive that it is permitted to carry out in its home country, provided the
Bank of Italy is informed by the entity supervising the non-Italian EU bank.
DEREGULATION AND RATIONALIZATION OF THE ITALIAN BANKING INDUSTRY.
Historically, the Italian banking industry has been highly fragmented and
characterized by high levels of State ownership and influence. During the 1980s,
Italian banking and European Community authorities began a process of
substantial deregulation. The principal components of this deregulation in Italy
were the Amato Law, the Dini Directive, the Ciampi Law, certain fiscal changes
and the implementation of EU Directives. The principal components of
deregulation at the European level are set forth in EU Directives and provide
for:
o the free movement of capital among member countries;
o the easing of restrictions on new branch openings;
o the range of domestic and international services that banks are able
to offer throughout the European Union; and
o the elimination of limitations on annual lending volumes and loan
maturities.
The effect of the Amato Law, the Dini Directive, the Ciampi Law and the
implementation of the EU Directives has been a significant increase in
competition in the Italian banking industry in virtually all bank and
bank-related services.
THE AMATO LAW. The Amato Law was enacted in July 1990 to strengthen the
capital base of the Italian banking system by creating incentives for
consolidation, and permitting greater private investment. The restructuring
process under the Amato Law was intended to create larger and more efficient
institutions capable of providing better services and competing more effectively
in Italy and abroad. The Amato Law contains two principal provisions:
o Banks organized as public law entities were allowed to convert into,
or to transfer their assets to, one or more joint-stock companies.
Banks were also permitted to be members of a holding company
structure; and
o Consolidations were encouraged through tax incentives.
THE CONSOLIDATED BANKING LAW. In 1993, the Consolidated Banking Law consolidated
most Italian banking legislation into one statute. Provisions in the
Consolidated Banking Law relate to the role of supervisory authorities,
investment in banks, the definition of banking and related activities, the
authorization of banking activities, the scope of banking supervision (in
particular on a consolidated basis), special bankruptcy procedures for banks,
the
50
supervision of financial companies and the approval of securities offerings to
be made in Italy. Banking activities may be performed by a single category of
banks, which may collect demand and savings deposits from the public, issue
bonds and extend medium- and long-term credit, subject to regulations issued by
the Bank of Italy. Furthermore, subject to their respective by-laws and
applicable regulations, banks may engage in all the business activities that are
integral to banking as described in the EU Banking Directive.
The Consolidated Banking Law was amended by Legislative Decree No. 37 of
February 6, 2004 and Legislative Decree No. 310 of December 28, 2004 in order to
coordinate its provisions regarding bank institutions with the provisions of
Legislative Decree No. 6 of January 17, 2003, which introduced the corporation
law reform. The amendments to the Consolidated Banking Law included, among
others, amendments relating to the duties and responsibilities of the
administrative and supervisory bodies of the companies set by the new models of
corporate governance.
THE DINI DIRECTIVE. Historically, a large number of Italian banks were
owned by public law banking foundations, which in turn were controlled
principally by local government authorities. The Dini Directive, enacted in
November 1994, provided tax incentives for Italian banking foundations to either
reduce to below 50% their equity participation in certain public banks
originally organized as foundations through either public offerings or sales to
certain specified entities including, for example, banking groups, certain
financial institutions and insurance companies, or cover more than 50% of the
foundations' expenses from income derived from sources other than such banks.
THE CIAMPI LAW. The Ciampi Law, enacted on December 23, 1998, and
Legislative Decree No. 153 of May 17, 1999, collectively referred to herein as
the Ciampi Law, provide for, INTER ALIA, the:
o transformation of public law banking foundations into non-profit
private institutions with the exclusive purpose of pursuing projects
of social importance in the area of scientific research, education or
healthcare;
o disposition of any remaining controlling participation in banks or
financial institutions by 2006; and
o application of the tax regime for non-profit private institutions (50%
reduction in income tax and regional tax on production activities
(IMPOSTA REGIONALE SULLE ATTIVITA PRODUTTIVE, or IRAP) to those
foundations that disposed of their controlling stakes in banks by May
2003.
THE DRAGHI LAW. The Draghi Law (Legislative Decree No. 58 of February 24, 1998)
became effective in July 1998 and aimed at reorganizing laws governing the
securities market and publicly traded companies. While the Draghi Law did not
amend Italian legislation governing the banking industry, it is generally
applicable to Italian public companies. In particular, the Draghi Law introduced
new provisions regulating tender offers of securities, savings shares, the
solicitation of proxies and the duration of shareholder agreements, with the
objective of protecting minority shareholders in general.
SUPERVISION. The regulation of Italian banks is conducted by the
Inter-Ministerial Committee for Credit and Savings (COMITATO INTERMINISTERIALE
PER IL CREDITO E IL RISPARMIO, or CICR), the Ministry of Economy and Finance and
the Bank of Italy. The principal objectives of regulation are to ensure the
sound and prudent management of the institutions subject to supervision and the
overall stability, efficiency and competitiveness of the financial system.
THE CICR. The CICR is composed of the Economy and Finance Minister, who
acts as chairman, and certain other economic ministers of the Italian
government. The Governor of the Bank of Italy, although not a member of the
CICR, attends all meetings of the CICR but does not have the right to vote at
such meetings. The CICR establishes the general guidelines that the Bank of
Italy must follow when adopting regulations applicable to banks. The CICR has
wide-ranging powers to make policies and issue guidance in banking regulation,
acting upon proposals of the Bank of Italy.
THE MINISTRY OF ECONOMY AND FINANCE. The Ministry has broad powers in
relation to banking and financial activities. It authorizes the establishment in
Italy of the first branch of non-EU banks, sets eligibility standards to be met
by holders of equity interests in the share-capital of a bank and the level of
professional experience required of directors and executives of banks and other
financial intermediaries. The Ministry may, in cases of urgency, adopt measures
that are generally within the sphere of CICR's powers and may also issue decrees
that impose administrative sanctions against banks and their managers and place
banks in involuntary liquidation (LIQUIDAZIONE COATTA AMMINISTRATIVA) or
extraordinary management (AMMINISTRAZIONE STRAORDINARIA).
51
THE BANK OF ITALY. The Bank of Italy implements the policies set forth by
the CICR by adopting regulations and compliance instructions. The Consolidated
Banking Law identifies four main areas of intervention subject to the regulatory
power of the Bank of Italy: capital requirements, risk exposure, the taking of
participations, including mergers and acquisitions, and administrative and
accounting organization and internal controls. The Bank of Italy also issues
regulations in other fields (such as transparency in banking and financial
operations of credit institutions). The Bank of Italy supervises banks through
its own auditing body, which authorizes, among other things, significant
investments by banks and examines reports that banks are required to file with
the Bank of Italy on a regular basis or with respect to specific transactions.
The main supervisory powers of the Bank of Italy include review of bank
financial statements and other statistical data, prior review of by-law
amendments, bank inspections and the verification of capital ratios, reserve
requirements and exposure limits for individual banks.
The Bank of Italy carries out audits of all banks through its supervisory
staff of bank examiners. Audits may be ordinary or special (which are directed
toward specific aspects of banking activity). Matters covered by an audit
include the accuracy of reported data, compliance with banking laws and
regulations, conformity with a bank's own by-laws and compliance with exposure
limits.
The Bank of Italy requires all banks to report monthly statistical
information related to all components of their non-consolidated balance sheet.
Consolidated accounts must be submitted every three or six months, depending on
the type of information requested. Other data reviewed by the Bank of Italy
include minutes of meetings of each bank's board of directors. Banks are also
required to submit any other data or documentation that the Bank of Italy may
request.
In addition to its supervisory and regulatory role, the Bank of Italy is
the lender of last resort for Italian banks, and banker to the Italian Ministry
of Economy and Finance. It also operates services for the banking industry as a
whole, most notably the CENTRALE DEI RISCHI, a central information database on
credit risk.
On December 28, 2005, a new law introduced some relevant modifications
concerning the competences and organization of the Bank of Italy. In particular,
in accordance with the new legal framework, the Governor of the Bank of Italy is
now appointed for a term of 6 years, renewable only once, while prior to the
reform the Governor was appointed for an indefinite term. In addition, the new
law transferred most of the competences of Bank of Italy regarding competition
in the banking sector to the Antitrust Authority, although joint clearance of
Bank of Italy and Antitrust Authority is required in case of mergers or
acquisitions.
CREDIT ALLOCATION
The Italian credit system has changed substantially during the past decade.
Banking institutions have faced increased competition from other forms of
intermediation, principally securities markets. Lending activity growth
increased by 6.7% in 2004 and in 2003, and was higher than euro area growth of
6.3% in 2004. The growth in Italian lending activity was mainly attributable to
medium- and long-term lending activity, which grew 13.8% in 2004, compared to
13.6% in 2003, while short-term lending activity decreased 3.8% in 2004, after a
2.0% reduction in 2003. The growth rate in lending activity to companies
decreased to 3.5% in 2004, compared to 6.3% in 2003, due principally to a 0.4%
decrease in lending activities in the manufacturing sector, compared to 1.4%
growth in 2003, and to the slower growth of lending activities in both the
construction and service sectors, from 13.1% in 2003 to 8.8% in 2004 and from
11.1% in 2003 to 7.4% in 2004, respectively. Lending activities to the consumer
and residential sector continued to experience high levels of growth at 13.6% in
2004, compared to 10.3% in 2003, mainly due to the growing real estate market.
EXCHANGE CONTROLS
Following the complete liberalization of capital movements in the European
Union in 1990, all exchange controls in Italy were abolished. Residents and
non-residents of Italy may make any investments, divestments and other
transactions that entail a transfer of assets to or from Italy, subject only to
limited reporting, record-keeping and disclosure requirements referred to below.
In particular, residents of Italy may hold foreign currency and foreign
securities of any kind, within and outside Italy, while non-residents may invest
in Italian securities without restriction and may export from Italy cash,
instruments of credit or payment and securities, whether in foreign currency or
euro, representing interest, dividends, other asset distributions and the
proceeds of dispositions.
52
Italian legislation contains certain requirements regarding the reporting
and record-keeping of movements of capital and the declaration in annual tax
returns of investments or financial assets held or transferred abroad. Breach of
certain requirements may result in the imposition of administrative fines or
criminal penalties.
53
THE EXTERNAL SECTOR OF THE ECONOMY
FOREIGN TRADE
Italy is fully integrated into the European and world economies, with
imports and exports in 2004 equal to 28.3% and 28.7% of real GDP, respectively.
The size of Italy's trade surpluses has declined in recent years. Italy's
merchandise exports have suffered from competition with Asian products,
reflecting higher prices of Italian products, the improving quality of
non-Italian products and the increased commercial presence and improved services
offered by non-Italian companies in EU countries. Moreover, Italy's
specialization in more traditional merchandise is unable to meet the increased
demand for high-technology products characterizing the expansion of world trade.
Italy's trade surplus declined from (euro)9.2 billion, or 0.8% GDP in 2001 to
(euro)7.8 billion in 2002 and (euro)1.6 billion, or 0.1% of GDP, in 2003. In
2004, Italy registered a trade deficit of (euro)0.6 billion notwithstanding the
expansion of world trade, reflecting the gradual decline in competitiveness of
Italian products for the reasons described above and a strengthening of the euro
in relation to other currencies.
The following tables illustrate Italy's exports and imports for the periods
indicated. Export amounts do not include insurance and freight costs and only
include the costs associated with delivering and loading the goods for delivery.
This is frequently referred to as "free on board" or "fob." Import amounts
include all costs, insurance and freight, frequently referred to as "charged in
full" or "cif."
FOREIGN TRADE
- ------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
(MILLIONS OF EURO)
EXPORTS (FOB)
Agriculture, forestry and fishing 3,858 4,251 4,171 4,144 3,816
Extractive industries 525 546 683 687 790
Manufactured products 254,679 265,490 261,520 254,541 274,596
Food, beverage and tobacco products 13,066 14,009 15,010 14,904 15,743
Textiles, leather products and clothing 40,078 43,302 41,207 38,945 38,979
Wood and wood products 1,510 1,505 1,471 1,326 1,378
Paper, printing and publishing 5,933 6,084 6,156 6,017 6,222
Refined oil products 5,181 5,061 4,454 5,371 6,355
Chemical and pharmaceutical products 24,136 25,754 26,906 26,059 27,555
Rubber and plastic products 9,389 9,673 9,853 9,845 10,675
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
(MILLIONS OF EURO)
Non-metallic minerals and mineral products 9,230 9,406 9,232 8,711 9,104
Metals and metal products 21,257 21,986 21,627 21,894 27,370
Mechanical products and machinery 50,678 53,957 53,126 53,326 58,142
Electric and precision machinery 26,383 27,625 25,007 23,761 25,905
Transport equipment 30,389 29,620 30,520 29,169 31,879
Other manufactured products 17,449 17,508 16,951 15,214 15,288
Energy, gas and water production 22 46 35 20 59
Other 1,330 2,656 2,654 5,224 5,387
-------- -------- -------- -------- --------
Total exports 260,414 272,990 269,064 264,615 284,647
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
(MILLIONS OF EURO)
IMPORTS (CIF)
Agriculture, forestry and fishing 9,228 9,021 9,047 9,292 9,266
Extractive industries 29,561 28,718 26,282 27,457 31,847
Manufactured products 217,023 220,985 220,441 218,090 236,033
Food, beverage and tobacco products 17,135 18,373 18,450 18,671 19,569
Textiles, leather products and clothing 18,249 20,189 20,266 20,082 20,787
Wood and wood products 3,393 3,249 3,356 3,390 3,498
Paper, printing and publishing 7,207 6,719 6,556 6,271 6,313
54
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
(MILLIONS OF EURO)
Refined oil products 5,378 4,626 5,045 4,735 4,754
Chemical and pharmaceutical products 33,231 33,991 35,279 35,824 38,476
Rubber and plastic products 5,387 5,396 5,509 5,566 6,007
Non-metallic minerals and mineral
products 2,843 2,955 2,956 2,881 3,024
Metals and metal products 26,277 25,674 24,288 24,039 29,675
Mechanical products and machinery 20,354 20,707 20,720 19,902 21,174
Electric and precision machinery 38,269 37,275 34,748 33,600 37,501
Transport equipment 35,038 37,544 39,129 38,935 40,574
Other manufactured products 4,262 4,287 4,140 4,193 4,679
Energy, gas and water production 1,535 1,777 1,879 1,796 1,804
Other 1,160 3,257 3,577 6,363 6,311
Total imports 258,507 263,756 261,226 262,997 285,261
-------- -------- -------- -------- --------
TRADE BALANCE 1,907 9,234 7,838 1,618 (614)
======== ======== ======== ======== ========
Source: Annual Report of the Bank of Italy (May 2005) for the year ended
December 31, 2004.
The Italian economy relies heavily on foreign sources for energy and other
natural resources, and Italy is a net importer of chemical and pharmaceutical
products, agricultural and food industry products, wood and wood products,
minerals, metals and metal products, electric and precision machinery and
transport equipment.
Of all the major European countries, Italy is the most heavily dependent on
import of energy, importing approximately 85.0% of its energy requirements in
2004 and 2003. As a result, Italy's trade balance is vulnerable to fluctuations
in oil prices.
Following two years of declining exports of goods at constant prices (2.9%
and 2.1% in 2002 and 2003, respectively), Italy registered an increase in
exports at constant prices of 3.3% in 2004. The growth in 2004 was primarily due
to an increase in exports of metals and metal products, reflecting growth in
worldwide demand for steel, and in mechanical products and machinery as well as
in transport equipment, particularly automotive spare parts and accessories and
ships. The increase in exports in 2004 was principally attributable to a growth
in exports to France and Spain, while exports to the U.K. and Germany were
stable. Exports to the ten EU member states that joined the EU in May 2004
decreased by 5.9% due principally to lower sales of mechanical products and
machinery and textiles. Italy registered higher growth in exports to non-EU
countries compared to EU countries for the fourth consecutive year. This growth
was principally attributable to exports to Russia and China, which increased by
25% and 13%, respectively, due mainly to exports of mechanical products and
machinery and metals and metal products. Italian exports' growth in 2004 was
significantly slower than worldwide trade growth at 10.7% in 2004, reflecting a
continuing loss of competitiveness of Italian products.
Imports of goods rose by 3.2% at constant prices in 2004, compared to a
0.9% increase in 2003 and a 1.0% decline in 2002, reflecting primarily
increasing imports of machinery, electric machinery, metal and metal products
and transport equipment. The growth of imports of goods is primarily
attributable to the growth of imports from Germany (8.6%), France (4.7%) and
Spain (4.7%), offset by declining imports from the U.K. Imports from non-EU
countries continued to grow faster than imports from EU countries, with imports
from China, which became Italy's principal non-EU supplier in 2004, increasing
by 22.6% and imports from OPEC countries increasing by 14.1%.
GEOGRAPHIC DISTRIBUTION OF TRADE
As a member of the European Union, Italy enjoys free access to the markets
of the other EU member states and applies the external tariff common to all
European Union countries. During the past several years, the European Union
countries have made significant progress in reducing non-tariff barriers, such
as technical standards and other administrative barriers, to trade amongst
themselves, and Italy has incorporated into national law most of the European
Union directives on trade and other matters. With the accession of ten new
members in 2004, the EU has come to encompass many of Italy's most important
central and eastern European trading partners. The following table shows the
distribution of Italy's trade for the periods indicated.
55
DISTRIBUTION OF TRADE
(CIF-FOB)
- ------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
(MILLIONS OF EURO)
EXPORTS (FOB)
Belgium-Luxembourg 7,586 8,838 8,710 7,609 7,754
France 32,933 33,691 33,069 33,033 35,230
Germany 39,558 40,096 37,256 37,233 38,761
Netherlands 6,965 7,280 6,960 6,387 6,701
United Kingdom 18,036 18,474 18,780 18,686 20,153
Ireland 1,890 1,597 1,464 1,391 1,389
Denmark 2,048 2,166 2,090 1,972 2,147
Greece 5,414 5,394 5,721 5,832 6,486
Spain 16,617 16,955 17,354 18,911 20,727
Portugal 3,612 3,652 3,384 3,303 3,419
Austria 5,804 5,928 6,004 6,199 6,988
Finland 1,167 1,305 1,424 1,311 1,438
Sweden 2,631 2,542 2,600 2,680 2,847
-------- -------- -------- -------- --------
Total EU (excluding new EU members) 144,262 147,917 144,814 144,547 154,040
New EU members(1) 12,528 14,493 14,542 15,161 15,816
-------- -------- -------- -------- --------
Total EU (including new EU members) 156,789 162,410 159,356 159,708 169,856
Turkey N.A. N.A. N.A. 4,721 5,687
United States 26,659 26,243 25,802 21,970 22,368
Russia N.A. N.A. N.A. 3,847 4,963
OPEC countries 8,604 10,432 10,937 10,201 11,028
Japan 4,338 4,705 4,495 4,333 4,333
China 2,380 3,275 4,017 3,850 4,448
Other Asia N.A. N.A. N.A. 8,596 8,979
Other N.A. N.A. N.A. 47,389 52,985
-------- -------- -------- -------- --------
Total 260,414 272,990 269,064 264,615 284,647
======== ======== ======== ======== ========
(1) Comprises the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland,
the Slovak Republic, Slovenia, Cyprus and Malta, which joined the EU in May
2004.
Source: ISTAT
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
(MILLIONS OF EURO)
IMPORTS (CIF)
Belgium-Luxembourg 11,226 12,433 12,283 12,374 13,880
France 29,682 29,648 29,895 29,951 31,278
Germany 45,471 47,077 46,837 47,521 51,319
Netherlands 15,401 16,588 15,433 15,362 16,862
United Kingdom 14,185 13,540 13,390 12,708 12,294
Ireland 3,509 3,592 3,635 4,082 4,185
Denmark 1,769 1,907 1,821 1,925 2,109
Greece 1,329 1,363 1,269 1,463 1,503
Spain 10,769 11,181 12,102 12,729 13,317
Portugal 1,083 1,268 1,389 1,321 1,333
Austria 6,049 6,472 7,216 7,545 7,803
Finland 2,277 1,776 1,667 1,813 1,552
Sweden 3,819 3,521 3,528 3,542 3,833
-------- -------- -------- -------- --------
Total EU 146,571 150,366 150,464 152,336 161,268
New EU members(1) 7,825 8,591 8,906 11,134 12,327
-------- -------- -------- -------- --------
Total EU (including new EU members) 154,397 158,957 159,370 163,470 173,595
Turkey N.A. N.A. N.A. 3,335 3,971
United States 13,517 12,892 12,548 10,272 9,991
Russia N.A. N.A. N.A. 8,230 9,716
56
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
(MILLIONS OF EURO)
OPEC countries 20,955 18,364 15,822 16,792 19,339
Japan 6,421 6,278 5,321 5,281 5,520
China 7,028 7,484 8,307 9,553 11,828
Other Asia N.A. N.A. N.A. 6,395 7,427
Other N.A. N.A. N.A. 39,669 43,874
-------- -------- -------- -------- --------
Total 258,507 263,756 261,226 262,997 285,261
======== ======== ======== ======== ========
(1) Comprises the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland,
the Slovak Republic, Slovenia, Cyprus and Malta, which joined the EU in May
2004.
Source: ISTAT
Over half of Italian trade is with other European Union members, with 59.8% of
Italian exports and 60.4% of Italian imports attributable to trade with European
Union partners in 2004. This proportion increased considerably in 2004 due to
the accession of ten new EU member states. However, Italian trade with non-EU
countries has grown faster than trade with EU countries (including the ten new
member states) since 2001. Germany is Italy's single most important trading
partner and in 2004 supplied 18.1% of Italian imports and purchased 13.7% of
Italian exports.
Since 2000 Italy has recorded a negative trade balance with other EU
countries. Italy's trade deficit with EU countries was (euro)11.4 billion in
2003 and (euro)12.0 billion in 2004. The negative trade balance with EU
countries was mainly due to the trade deficit with Germany, Italy's largest EU
trading partner, which increased in 2004, principally due to export competition
from emerging market economies.
Italy also recorded an increase in its trade deficit with China, to
(euro)6.7 billion in 2004 from (euro)5.2 billion in 2003, principally due to
imports of metal products, machinery, textiles and clothing from China, which
more than offset growing exports of Italian metal products, machinery and
transport equipment to China. Italy's trade deficit with OPEC countries
increased to (euro)7.1 billion in 2004 from (euro)5.7 billion in 2003 due to
growth in imports of crude oil, offset in part by an increase in exports of
metal products, machinery and electric machinery to OPEC countries.
BALANCE OF PAYMENTS
The balance of payments tabulates the credit and debit transactions of a
country with foreign countries and international institutions for a specific
period. Transactions are divided into three broad groups: current account,
capital account and financial account. The current account is made up of: (1)
trade in goods (visible trade) and (2) invisible trade, which consists of trade
in services, income from profits and interest earned on overseas assets, net of
those paid abroad, and net capital transfers to international institutions,
principally the European Union. The capital account primarily comprises net
capital transfers from international institutions, principally the European
Union. The financial account is made up of items such as the inward and outward
flow of money for direct investment, investment in debt and equity portfolios,
international grants and loans and changes in the official reserves.
The following table illustrates the balance of payments for the periods
indicated.
SELECTED BALANCE OF PAYMENTS
- ------------------------------------------------------------------------------------------------------------
The following table shows the balance of payments for the periods indicated.
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
(EURO IN MILLIONS)
Current Account (740) (10,014) (17,351) (12,471) (22,056)
Capital Account 936 (67) 2,251 1,822 1,779
Financial Account (3,294) 8,532 17,319 8,228 19,041
Errors and omissions 3,098 1,549 (2,218) 2,421 1,236
Source: Annual Report of the Bank of Italy (May 2006) for the year ended
December 31, 2005.
The deterioration of Italy's current account reflects a decrease in the visible
trade surplus from (euro)8.8 billion in 2004 to (euro)0.1 billion in 2005 and
also a decrease in Italy's invisible trade from a surplus of (euro)1.2 billion
in 2004 to a deficit (euro)0.4 billion in 2005, and an increase in the current
transfers deficit from (euro)7.7 billion in 2004 to (euro)8.2 billion in 2005.
This deterioration was offset in part by a decrease in Italy's income deficit
from (euro)14.8 billion in 2004 to (euro)13.6 billion in 2005.
57
The increase in Italy's financial account surplus was principally
attributable to an increase in its portfolio investment surplus from (euro)26.4
billion in 2004 to (euro)43.4 billion in 2005 (mainly due to higher investment
by non-Italians in Italian debt securities, partially offset by an increase in
investment by Italians in non-Italian debt and equity securities) and an
increase in net inflows to Italian banks of (euro)27 billion, compared to net
outflows of (euro)11 billion from Italian banks in 2004. The increase in Italy's
financial account was offset in part by net direct investment outflows of
(euro)17.6 billion in 2005 compared to net direct investment outflows of
(euro)2.0 billion in 2004.
The following table shows total direct investment abroad by Italian
entities and total direct investment in Italy by foreign entities as of the
dates indicated:
DIRECT INVESTMENT BY COUNTRY(1)
- ------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
(MILLIONS OF EURO)
DIRECT INVESTMENT ABROAD
Netherlands 25,588 33,050 30,740 38,716 47,198
Luxembourg 21,659 23,191 23,211 17,383 19,667
United States 19,168 21,312 16,660 14,718 14,063
United Kingdom 14,995 19,768 17,929 16,196 18,022
France 17,241 17,557 15,454 16,716 18,161
Switzerland 10,868 10,175 8,930 8,753 7,877
Germany 11,472 10,776 8,883 10,439 11,756
Spain 7,110 7,034 6,826 7,887 8,118
Brazil 4,538 4,599 2,382 2,775 2,950
Belgium 3,144 3,561 3,228 3,651 3,960
Argentina 2,633 2,418 1,565 1,700 1,625
Sweden 742 683 575 598 646
Other 33,008 30,017 26,163 27,168 28,287
-------- -------- -------- -------- --------
Total 172,166 184,141 162,546 166,700 182,330
======== ======== ======== ======== ========
DIRECT INVESTMENT IN ITALY
Netherlands 16,248 15,909 16,712 21,479 29,101
Luxembourg 10,563 12,134 12,618 14,665 16,663
United States 16,078 15,623 14,728 15,547 16,740
United Kingdom 13,993 14,501 14,075 17,791 19,854
France 15,037 16,181 16,354 17,014 18,358
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
(MILLIONS OF EURO)
Switzerland 17,276 15,757 14,730 14,767 16,317
Germany 10,521 10,053 9,541 11,024 10,677
Spain 834 968 897 1,022 1,448
Brazil 68 62 56 63 96
Belgium 2,194 2,149 2,211 2,368 2,488
Argentina 151 135 124 132 192
Sweden 2,696 2,504 2,329 2,371 2,493
Other 12,347 12,476 11,765 13,445 15,056
-------- -------- -------- -------- --------
Total 118,006 118,452 116,140 131,688 149,483
======== ======== ======== ======== ========
(1) Does not include real estate investment, investments made by Italian banks
abroad and investments made by foreign entities in Italian banks.
Source: Annual Report of the Bank of Italy (May 2005) for the year ended
December 31, 2004.
PORTFOLIO INVESTMENT. Portfolio investment experienced a net surplus of
(euro)28.3 billion in 2004 compared to (euro)3.4 billion in 2003. Foreign
portfolio investment by Italians reached its peak in 1999 at (euro)121.5
billion, and subsequently declined to (euro)17.0 billion in 2002, reflecting a
significant reduction in investment in foreign equity and
58
debt securities. Foreign portfolio investments by Italians and increased back to
(euro)51.1 billion in 2003 due to higher investment in both foreign equity and
debt investments and declined to (euro)21.1 billion in 2004 mainly as a result
of a reduction in investments in debt securities. Investment in Italian
securities by foreign investors decreased in 2004 to (euro)47.5 billion from
(euro)54.4 billion in 2003 due to lower investment in Italian public debt
securities, partially offset by investments in equity securities and debt
securities issued by companies other than banks.
OTHER INVESTMENT. In 2004 Italy recorded a deficit on "other investments"
of (euro)19.7 billion, compared to a surplus of (euro)13.7 billion in 2003,
principally due to net outflows by Italian banks being recorded in 2004,
compared to net inflows in 2003.
ERRORS AND OMISSIONS. The amount recorded in the residual "Errors and
Omissions" account is a common area of concern for all leading countries in the
European Union. The Government believes that this account is largely the result
of exporters not reporting payments by non-residents to accounts abroad. Errors
and omissions amounted to a positive (euro)1.0 billion in 2004, compared to a
negative (euro)2.5 billion in 2003.
RESERVES AND EXCHANGE RATES
When on January 1, 1999, eleven European countries, including Italy,
adopted the euro as their new national currency, the conversion rate between the
lira and the euro was irrevocably fixed at Lit. 1,936.27 per euro. The euro was
introduced as a physical currency on January 1, 2002. On February 28, 2002, the
lira ceased to be legal tender in Italy and was withdrawn from the financial
system.
The following table sets forth, for the periods indicated, certain
information regarding the US Dollar/Euro reference rate, as reported by the
European Central Bank, expressed in U.S. dollar per euro.
US DOLLAR/EURO EXCHANGE RATE
- -------------------------------------------------------------------------------------------------------------------
YEARLY
AVERAGE
PERIOD END RATE(1) HIGH LOW
---------- -------- --------- --------
PERIOD (U.S. $ PER (EURO)1.00)
2000 0.9305 0.9194 1.0388 0.8252
2001 0.8813 0.8917 0.9545 0.8384
2002 1.0487 0.9511 1.0487 0.8578
2003 1.2630 1.1418 1.2630 1.0377
2004 1.3621 1.2462 1.3633 1.1802
2005 1.1797 1.2490 1.3077 1.1667
2006 (up to and including March 31) 1.2104 1.2023 1.2294 1.1826
(1) Average of the reference rates for the last business day of each month in
the period.
Source: European Central Bank
The following table sets forth information relating to euro exchange rates
for certain other major currencies for the periods indicated.
EURO EXCHANGE RATES
- ------------------------------------------------------------------------------------------------------------
YEARLY AVERAGE RATE(1) PER (EURO)1.00
------------------------------------------------------------
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
Japanese Yen 108.8192 118.0825 131.7558 133.9083 137.3838
British Pound 0.6194 0.6298 0.6934 0.6793 0.6865
Swiss Franc 1.5088 1.4660 1.5236 1.5436 1.5543
(1) Average of the reference rates for the last business day of each month in
the period.
Source: European Central Bank
In 2004, official reserves decreased to (euro)45.8 billion from $50.1
billion in 2003. In 2004, the Bank of Italy reduced its annual contribution to
the reserves of the European Central Bank to (euro)7.3 billion from (euro)7.4
billion in 2003.
59
The following table illustrates the official reserves of Italy as of
December 31 in each of the years 2000 through 2004.
OFFICIAL RESERVES
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
(MILLION OF EUROS)
Gold 23,098 24,732 25,764 26,042 25,348
SDRs(1) 255 337 103 123 106
Total position with IMF 2,916 3,647 3,726 3,289 2,719
Net foreign exchange 24,097 23,721 23,447 20,634 17,628
-------- -------- -------- -------- --------
TOTAL RESERVES 50,366 52,437 53,040 50,088 45,801
======== ======== ======== ======== ========
(1) Special Drawing Rights
Source: Annual Report of the Bank of Italy (May 2005) for the year ended
December 31, 2004.
60
PUBLIC FINANCE
THE BUDGET PROCESS
The Government's fiscal year is the calendar year. The budget process
begins in March of each year, when the General Accounting Office (RAGIONERIA
GENERALE DELLO STATO), a department of the Ministry of Economy and Finance,
sends a directive to each Ministry and Government agency to prepare a detailed
budget for the next fiscal year and a summary forecast budget for the next three
years. Other public sector entities also report to the Ministry of Economy and
Finance in March on their cash resources and needs for the following fiscal
year.
In June or July of each year the Ministry of Economy and Finance presents
to Parliament a planning document called DOCUMENTO DI PROGRAMMAZIONE ECONOMICA E
FINANZIARIA (Economic and Financial Program Document, or "Program Document").
The Program Document sets forth Government programs, reforms and public finance
targets for the next four to five years. It describes the macroeconomic
framework of the current year and sets forth two sets of forecast general
government revenues and expenditures. The first forecast assumes no change from
current policy and the second assumes the adoption of the programs contemplated
by the Program Document. The Program Document is usually approved by Parliament
by mid-August of each year.
By September 30 of each year the Ministry of Economy and Finance presents
to Parliament its revisions, if any, to the Program Document, and the RELAZIONE
PREVISIONALE E PROGRAMMATICA (Forecast and Planning Report, or "RPP") a document
that shows programs, reforms and public finance targets for the next calendar
year.
In the fourth quarter of each year the Government presents to Parliament
its final budgetary package, which consists of the LEGGE DI BILANCIO (Budget
Law) and the LEGGE FINANZIARIA (Annual Financial Law). The Budget Law formally
authorizes general government revenues and expenditures for the upcoming
calendar year. General government entities may not make payments unless they are
provided for in the Budget Law. The Annual Financial Law sets forth the
financial framework for the upcoming calendar year within the parameters set by
the Program Document. It allocates financial resources to general government
entities and amends laws in order to reflect these allocations.
The Ministry of Economy and Finance and, in particular, the General
Accounting Office, is responsible for the management of Government expenditures.
The Ministry of Economy and Finance submits to the Government and to Parliament
a quarterly cash-flow report (RELAZIONE TRIMESTRALE DI CASSA) that indicates
year-to-date revenues and expenditures and divergence from the budget. If this
divergence is significant, the Government may submit a supplemental budget to
Parliament that, if approved, amends the Annual Financial Law for the
then-current fiscal year.
EUROPEAN ECONOMIC AND MONETARY UNION
Under the terms of the Maastricht Treaty, member states participating in
the EMU, or Participating States, are required to avoid excessive government
deficits. In particular, they are required to maintain:
o a budget deficit, or net borrowing, that does not exceed 3% of GDP,
unless the excess is exceptional and temporary and the actual deficit
remains close to the 3% ceiling. The Commission and the Council may
consider an excess budget deficit resulting from a severe economic
downturn to be exceptional if the excess results from a decrease in
annual GDP or from an accumulated loss of output during a protracted
period of very low annual GDP growth relative to its potential, taking
into account all relevant factors including cyclical conditions,
social and investment policies, fiscal consolidation efforts in "good
times," debt sustainability, public investment, the overall quality of
public finances and the implementation of structural pension reforms
(and their cost); and
o a gross accumulated public debt that does not exceed 60% of GDP or is
declining at a satisfactory pace toward this reference value.
Although Italy's public debt exceeded 60% of GDP in 1998, Italy was included in
the first group of countries to join the EMU on January 1, 1999 on the basis
that public debt was declining at a satisfactory pace toward the 60% reference
value.
In order to ensure the ongoing convergence of the economies participating
in the EMU, to consolidate the single market and maintain price stability, the
Participating States agreed to a Stability and Growth Pact (SGP) that became
61
effective on July 1, 1998. The SGP is an agreement among the Participating
States aimed at clarifying the Maastricht Treaty's provisions for an excessive
deficit procedure and strengthening the surveillance and co-ordination of
economic policies. The SGP also calls on Participating States to target
budgetary positions aimed at a balance or surplus in order to adjust for
potential adverse fluctuations, while keeping the overall budget deficit within
the reference value of 3% of GDP.
Under SGP regulations, Participating States were required to submit a
stability and growth program (each such program a "Stability and Growth
Program"), and non-participating member states are required to submit revised
convergence programs every year. These programs, which cover a three to
four-year period, are required to set forth:
o projections for a medium-term budgetary objective (a country-specific
target which, for Participating States having adopted the euro, must
fall within 1% of GDP and balance or surplus, net of one-off and
temporary measures), and the adjustment path towards this objective;
o the main assumptions about expected economic developments and the
variables (and related assumptions) that are relevant to the
realization of the stability program such as government investment
expenditure, real GDP growth, employment and inflation;
o the budgetary strategy and other economic policy measures to achieve
the medium-term budgetary objective comprising detailed cost-benefit
analysis of major structural reforms having direct cost-saving
effects;
o an analysis of how changes in the main economic assumptions would
affect the budgetary and debt position; and
o if applicable, the reasons for a deviation from the adjustment path
towards the budgetary objective.
Based on assessments by the EU Commission and the Economic and Financial
Committee, the Council of the EU delivers an opinion on whether:
o the economic assumptions on which the program is based are plausible;
o the adjustment path toward the budgetary objective is appropriate; and
o the measures being taken and/or proposed are sufficient to achieve the
medium-term budgetary objective.
The Council of the EU can issue recommendations to the Participating State
to take the necessary adjustment measures to reduce an excessive deficit. When
assessing the adjustment path taken by Participating States, the Council will
examine whether the concerned Participating State pursues the annual improvement
of its cyclically adjusted balance, net of one-off and other temporary measures,
with 0.5% of GDP as a benchmark. When defining the adjustment path for those
Participating States that have not yet reached the respective budgetary
objective or in allowing those that have already reached it to temporarily
depart from it, the Council will take into account structural reforms which have
long-term cost-saving effects, implementation of certain pension reforms, and
whether higher adjustment effort is made in economic good times. If the
Participating State repeatedly fails to comply with the Council of the EU's
recommendations, the Council may require the Participating State to make a
non-interest-bearing deposit equal to the sum of:
o 0.2% of the Participating State's GDP, and
o one tenth of the difference between the budget deficit as a
percentage of GDP in the preceding year and the reference value
of 3% of GDP.
This deposit may be increased in following years if the Participating State
fails to comply with the Council's recommendations, up to a maximum of 0.5% of
GDP and may be converted into a fine if the excessive deficit has not been
corrected two years after the decision to require the Participating State to
make the deposit. In addition to requiring a non-interest-bearing deposit, in
the event of repeated non-compliance with its recommendations, the Council may
require the Participating State to publish additional information, to be
specified by the Council of the EU, before issuing bonds and securities and
invite the European Investment Bank to reconsider its lending policy towards the
Participating State. If the Participating State has taken effective action in
compliance with the recommendation, but unexpected adverse economic events with
major unfavorable consequences for government finances occur after the adoption
of that recommendation, the Council may adopt a revised recommendation, which
may extend the deadline for correction of the excessive deficit by one year.
ACCOUNTING TREATMENT
Italy historically has used two systems of accounting: state sector and
public sector. State sector accounting includes the revenues and expenditures of
the Government and certain agencies and entities whose budgets must be
62
approved by Parliament. Public sector accounting includes the Government,
agencies and entities comprising the state sector, as well as entities with
budgets not subject to Parliamentary approval (including autonomous agencies,
regional and local governments and authorities and the national social security
agencies) to the extent the Government receives and transfers funds to such
entities. Parliament may review the use of funds transferred by the Government
to public sector entities and the financial results of such entities.
Transactions between state-owned joint stock companies and the Government
are only included in state sector accounting or public sector accounting to the
extent the Government is acting in its capacity as shareholder, for example
through the receipt of dividends or the contribution of capital. See "--
Government Enterprises." Certain borrowings of these enterprises are guaranteed,
either by operation of law or specific contractual arrangement, by the
Government. See "Public Debt -- General."
Although Italy will continue to use public sector and State sector
accounting for most internal budgeting and certain other purposes, it also
utilizes general government accounting. General government accounting includes
revenues and expenses from both central and local government and from social
security funds, or those institutions whose principal activity is to provide
social benefits. European Union countries are generally required to use general
government accounting for purposes of financial reporting in accordance with
European Union requirements. The criteria of general government accounting
established by the European system of integrated accounts are being developed
and phased in gradually. EUROSTAT is the European Union entity responsible for
decisions with respect to the application of such general government accounting
criteria.
ESA 95 NATIONAL ACCOUNTS. In 1999, ISTAT introduced a new system of
national accounts in accordance with the new European System of Accounts (ESA95)
as set forth in European Union Regulation 2223/1996. These were intended to
contribute to the harmonization of the accounting framework, concepts and
definitions within the European Union. Under ESA95, all European Union countries
apply a uniform methodology and present their results on a common calendar. Both
state sector accounting and public sector accounting transactions are recorded
on an accrual basis. The general government revenues, expenditure and debt
figures in this annual report from and including 1999 have been restated and are
in accordance with, and reflect the changes introduced by the adoption of ESA95
and differ from data included in SEC filings published before January 2001. They
reflect consolidated revenues and expenditures for the public sector, which is
the broadest aggregate for which data is available.
MEASURES OF FISCAL BALANCE
Italy reports its fiscal balance using two principal methods:
o NET BORROWING, or budget deficit, which is consolidated revenues less
consolidated expenditures of the general government. This is the
principal measure of fiscal balance, and is calculated in accordance
with European Union accounting requirements. Italy also reports its
structural net borrowing, which is a measure, calculated in accordance
with methods adopted by the EU Commission, of the level of net
borrowing after the effects of the business cycle have been taken into
account. Structural net borrowing assumes that the output gap, which
measures how much the economy is outperforming or underperforming its
actual capacity, is zero. As there can be no precise measure of the
output gap, there can be no precise measure of the structural budget
deficit. Accordingly, the structural net borrowing figures shown in
this annual report are necessarily estimates. In 2003, the EU
Commission changed the methods to be used to calculate structural net
borrowing. Accordingly, 2002 structural net borrowing data is not
directly comparable with that provided for subsequent years.
o PRIMARY BALANCE, which is consolidated revenues less consolidated
expenditures of the general government excluding interest payments and
other borrowing costs of the general government. The primary balance
is used to measure the effect of discretionary actions taken to
control expenditures and increase revenues.
The table below shows selected public finance indicators for the period from
2000 through 2004.
63
SELECTED PUBLIC FINANCE INDICATORS 2000 THROUGH 2004
- ------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
(MILLIONS OF EURO, EXCEPT PERCENTAGES)
General government expenditure(1) 543,200 595,234 605,983 640,195 654,852
% of GDP 46.6% 48.8% 48.1% 49.2% 48.5%
General government revenues 534,400 556,493 571,520 598,440 611,200
% of GDP 45.8% 45.7% 45.3% 46.0% 45.2%
Net borrowing(1) 8,800 38,741 34,463 41,755 43,652
% of GDP 0.8% 3.2% 2.7% 3.2% 3.2%
Primary balance(1) 66,533 40,829 38,084 27,520 24,782
2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------
(MILLIONS OF EURO, EXCEPT PERCENTAGES)
% of GDP 5.7% 3.4% 3.0% 2.1% 1.8%
Public Debt 1,298,670 1,350,948 1,364,880 1,389,575 1,440,855
% of GDP 111.3% 110.9% 108.3% 106.8% 106.6%
(1) Includes revenues from UMTS licenses (deducted from capital
expenditures) for the year 2000 ((euro)13,815 million, or 1.2% of GDP)
and revenues from the disposal of state-owned real estate (deducted from
capital expenditures) for the year 2001 ((euro)1,600 million, or 0.2% of
GDP), 2002 ((euro)10,800 million, or 0.9% of GDP), 2003 ((euro)2,700
million, or 0.2% of GDP) and 2004 ((euro)4,500 million, or 0.4% of GDP).
Source: Annual Report of the Bank of Italy (May 2005) for the year ended
December 31, 2004 and Quaderno Stutturale dell'Economia Italiana, dated
June 30, 2005.
Large net borrowing requirements and high levels of public debt were features of
the Italian economy until the early 1990s. In accordance with the Maastricht
Treaty, the reduction of net borrowing and public debt became a national
priority for Italy. Net borrowing, however, was higher than the 3% threshold set
by the Maastricht Treaty in 2001, 2003 and 2004 and is forecasted to continue to
exceed this threshold in 2005 and 2006. Public debt decreased from 108.3% of GDP
in 2002 to 106.8% in 2003 and 106.6% in 2004. The decrease in 2004 was primarily
due to income from disposals of a portion of the State's interest in ENEL and of
state-owned real estate. The decrease in 2003 was due mainly to the
privatization of ETI, the sale of a portion of the State's interest in ENEL and
the transactions with Cassa Depositi e Prestiti described below under
"Government Enterprises." The decrease in 2002 was primarily due to income from
disposals of state-owned real estate and an exchange offer with the Bank of
Italy described below under "Public Debt -- Summary of Internal Debt." Since
1999 the Government has taken steps to lengthen the average maturity of debt and
reduce the variable rate portion that, together with the introduction of the
single currency, made Government debt less sensitive to variations in short-term
interest rates and exchange rates. While the ratio of public debt-to-GDP has
improved substantially, it remains well above the 60% reference rate established
by the Maastricht Treaty.
THE COUNCIL RECOMMENDATION TO ITALY RELATING TO ITS EXCESSIVE GOVERNMENT DEFICIT
On March 18, 2005, Eurostat, the European Commission statistical authority,
published a press release detailing government deficit and debt data for the
years 2001 through 2004 (including partial estimates for 2004) transmitted by
the 25 EU Member States to the Commission as part of the March 1 reporting round
under relevant EU regulations. The press release included the following data for
Italy:
2001 2002 2003 2004
------------ ------------ ----------- -----------
Primary balance, as a percentage of GDP 3.6 3.2 2.4 2.0
Public debt (in millions of euro) 1,348,360 1,362,074 1,383,088 1,429,917
Public debt, as a percentage of GDP 110.7 108.0 106.3 105.8
Net borrowing (in millions of euro) 35,963 32,656 37,792 40,877
Net borrowing, as a percentage of GDP 3.0 2.6 2.9 3.0
GDP (nominal value, in millions of euro) 1,218,535 1,260,598 1,300,928 1,351,794
Source: Eurostat
Eurostat noted that all such data transmitted by Member States is subject to
revision, notably through a further data submission due by September 1, 2005.
With respect to Italy, Eurostat noted it was engaged in ongoing discussions with
ISTAT, the Italian statistical authority, that could lead to an upward revision
in Italy's net borrowing statistics, most notably for 2003 and 2004. These
ongoing discussions related to the recording of payments to the Government
64
by financial institutions that act as tax collectors (CONCESSIONARI D'IMPOSTA),
the sectoral classification of Government-owned entities, the treatment of a
government securitisation operation, the recording of transactions with the EU
budget, inconsistencies between data on cash and accrual bases and statistical
discrepancies in Government accounts.
On April 28, 2005, the government announced an update to the Annual Program
Report for 2005 (RELAZIONE PREVISIONALE E PROGRAMMATICA PER IL 2005) dated
September 29, 2004, providing the following revised public finance indicators:
2004 2005
-------- -------
(RESULT) (TARGET)
Primary balance, as a percentage of GDP 2.0 2.1
Interest expense, as a percentage of GDP 5.0 5.0
Net borrowing, as a percentage of GDP 3.0 2.9
Public debt, as a percentage of GDP 105.8 105.3
GDP (% real growth rate) 1.2 1.2
Source: Ministry of Economy and Finance
On May 23, 2005, following the discussions with ISTAT mentioned above,
Eurostat announced upward revisions to Italy's budget deficit and public debt
data for 2003 and 2004. Eurostat noted that it continued to be engaged in
discussions with Italian authorities relating to the recording of transactions
with the EU budget, inconsistencies between data on cash and accrual bases and
statistical discrepancies in government accounts, which could lead to a further
upward revision in Italy's budget deficit for the period between 2001 and 2004.
On May 24, 2005, ISTAT released revised budget deficit and public debt data
for the four-year period ended December 31, 2004, accounting for Eurostat's
decisions. Italy's budget deficit, as a percentage of GDP, was provisionally set
at 0.8% in 2000, 3.2% in 2001, 2.7% in 2002 and 3.2% in 2003 and 2004. Public
debt, as a percentage of GDP, was provisionally set at 111.3% in 2000, 110.9% in
2001, 108.3% in 2002, 106.8% in 2003, and 106.6% in 2004.
On July 12, 2005, the Council performed an overall assessment of Italy's
economic situation pursuant to the Maastricht Treaty. The Council concluded that
Italy's exceeding of the 3% reference value for budget deficit as a percentage
of GDP in 2003 and 2004 was not due to unusual events beyond the control of
Italian authorities nor due to a severe and unpredictable economic downturn. In
addition, the Council noted that Italy's output gap was estimated to have
decreased from 2.1% of potential GDP in 2001 to a negative output GAP equal to
1.3% of potential GDP in 2004, concluding therefore that the slow economic
growth in 2003 and 2004 could not be qualified as exceptional under the Treaty
and the SGP. Moreover, the Council noted that Italy's budget deficit would
continue to exceed the reference value in 2005 and 2006 and a rapid decline in
the budget deficit was not expected given the slow pace at which public debt was
being reduced and due to Italy's declining primary surplus. Accordingly, the
Council adopted a recommendation requiring that Italy's excessive budget deficit
be brought within the 3% reference value.
The Council noted that given Italy's high debt-to-GDP ratio, the high level
of structural deficit and Italy's continuing economic slow down, the adjustment
path Italy was called to undertake would require a longer time than would
otherwise be imposed under the terms of the Maastricht Treaty in order to ensure
the adjustment did not prove economically counter-productive. Accordingly, the
Council granted Italy an extension to 2007 to correct its budget deficit and set
January 12, 2006 as the time limit for the necessary measures to be implemented,
provided these resulted in a cumulative reduction in the structural budget
deficit of at least 1.6% of GDP over 2006 and 2007 relative to its level in 2005
(with at least half of this correction occurring in 2006).
THE 2005 STABILITY AND GROWTH PROGRAM
In December 2005 Italy presented the update to its stability and growth
program for the period 2005-2009 ("2005 Stability Program") to the Council of
the EU and the EU Commission. The 2005 Stability Program is based on the
2006-2009 Program Document approved by Parliament in July 2005, the RPP for 2006
presented to Parliament on September 29, 2005 and Annual Financial Law approved
in September 2005. The following table compares the principal finance indicators
included in the 2004 Stability Program and the 2005 Stability Program:
65
COMPARATIVE TABLE
2004 STABILITY PROGRAM AND 2005 STABILITY PROGRAM TARGETS
2004 2005 2006 2007 2008
-------- ------- -------- -------- -------
REAL GDP GROWTH RATE
2004 Stability Program 1.2 2.1 2.2 2.3 2.3
2005 Stability Program 1.2 0.0 1.5 1.5 1.7
Difference 0.0 2.1 0.7 0.8 0.6
NET BORROWING, AS A % OF GDP
2004 Stability Program 2.9 2.7 2.0 1.4 0.9
2005 Stability Program 3.2 4.3 3.5 2.8 2.1
Difference 0.3 1.6 1.5 1.4 1.2
PUBLIC DEBT, AS A % OF GDP
2004 Stability Program 106.0 104.1 101.9 99.2 98.0
2005 Stability Program 106.5 108.5 108.0 106.1 104.4
Difference 0.5 4.4 6.1 6.9 6.4
Source: 2004 and 2005 Stability Programs
On March 14, 2006, the Council of the EU issued an opinion setting forth the
following considerations with regard to the achievement of the budgetary targets
set forth in Italy's 2005 Stability Program:
o Information available at the date of the Council's opinion indicated
that the growth projections underpinning Italy's 2005 Stability
Program were plausible throughout the period covered by the Program.
o The Program's medium-term objective for the budgetary position is at
an appropriate level and reflects the debt ratio and average potential
output growth in the long term.
o Budgetary outcomes could be worse than projected in the 2005 Stability
Program. The Council noted that there are significant uncertainties
regarding the implementation of the 2006 budget, in particular
concerning the magnitude of expenditure savings. In addition, beyond
2006 the Program does not offer information on measures envisaged and
may underestimate the magnitude of necessary fiscal correction.
Therefore, correction of the excessive deficit by the 2007 deadline
set by the Council crucially relies upon a full and effective
implementation of the 2006 budget and the specification and
implementation of substantial corrective measures for 2007.
o The Council expressed concern with the pace of Italy's debt reduction,
noting that the evolution of the debt to GDP ratio could be less
favorable than projected, given the risks to the budgetary targets
mentioned above and uncertainty about the stock-flow adjustment. As a
consequence of this risk assessment, in the Council's view, a further
strengthening of the budgetary position would be necessary to
guarantee a sufficiently diminishing debt ratio towards the 60%
reference value established by the Maastricht Treaty.
o Italy continues to be at medium risk with respect to long-term
sustainability of its public finances. Italy's past reforms, however,
have helped to contain future increases in public expenditure and full
implementation of these reforms, notably of the 2004 pension reform,
will be crucial to obtain expected results. The currently high level
of gross debt and weak budgetary position indicate the necessity for
strong consolidation of public finances over the medium-term to reduce
risks to public finance sustainability.
o The 2005 Stability Program can be considered as consistent with a
correction of the excessive deficit by 2007, subject to a full and
effective implementation of the 2006 budget and the specification and
adoption of further substantial measures for 2007.
In its opinion the EU Council invited Italy to:
o achieve the structural efforts envisaged in the Program for 2006 and
2007 in order to ensure the correction of the excessive deficit by
2007 in a credible and sustainable manner;
o spell out the broad measures underlying the adjustment path in 2007
and the outer years of the Program and ensure that the adjustment
towards the medium-term objective remains in line with the SGP
requirements;
o ensure that the debt-to-GDP ratio is declining towards the 60%
reference value established by the Maastricht Treaty at a more rapid
pace, including by paying particular attention to factors other than
net borrowing which contribute to the change in debt levels; and
66
o improve the budgetary process by increasing its transparency and by an
effective implementation of the past and new mechanisms to monitor,
control and report expenditure.
On April 5, 2006 the Ministry of Economy and Finance presented to the Government
and Parliament the Quarterly Cash-Flow Report (Relazione Trimestrale di Cassa).
Based on that Report, real GDP growth rate, net borrowing as a percentage of GDP
and public debt as a percentage of GDP for the year ended December 31, 2005 were
0.0%, 4.1% and 106.4%, respectively.
THE 2006-2009 PROGRAM DOCUMENT
In July 2005 the Government finalized and presented to Parliament its
2006-2009 Program Document, which contemplates as its main objective achieving
long-term economic growth.
Italy's budget deficit was in excess of the 3% threshold established by the
Maastricht Treaty for the years 2001, 2003 and 2004, notwithstanding Italy's
recourse to extraordinary one-off measures aimed at containing its net borrowing
increase. Such measures included the sale of UMTS licenses in 2000, disposals of
state-owned real-estate assets since 2001 and the tax amnesty implemented in
2003. One-off measures reduced Italy's budget deficit by 1.5% in 2002, 2.0% in
2003 and 1.5% in 2004. The Government estimated in 2004 that one-off measures in
2005 would represent a significant portion of the measures adopted by Italy to
achieve its budgetary target (accounting for 1.0%). However, such measures would
be phased-out entirely in 2006.
The 2006-2009 Program Document projected that structural reforms over the
four-year period would include improvement of Italy's infrastructure, a
reduction in the tax burden and an increase in incentives to small and medium
sized enterprises aimed at increasing investment in research and development.
Structural measures would also be aimed at further reducing tax evasion.
Furthermore, Italy plans to accelerate the pace at which it is reducing
public debt as a percentage of GDP by containing public expenditure.
The following table shows Italy's principal public finance targets for the
years indicated, as well as the gross domestic product, inflation and
unemployment assumptions underlying the Program Document.
2006-2009 PROGRAM DOCUMENT OBJECTIVES
- ------------------------------------------------------------------------------------------------------------------
2006 2007 2008 2009
------- -------- -------- -------
(TARGET)
GDP (% real growth rate) 1.5 1.5 1.7 1.8
Unemployment rate (%) 8.1 8.0 7.8 7.7
Net borrowing, as a percentage of GDP 3.8 2.8 2.1 1.5
Primary balance, as a percentage of GDP 0.9 1.8 2.5 3.0
Public debt, as a percentage of GDP 107.4 105.2 103.6 100.9
Structural net borrowing, as a percentage of GDP 3.0 2.1 1.6 1.1
Structural primary balance, as a percentage of GDP 1.7 2.5 3.0 3.4
Structural net borrowing, net of one-off measures,
as a percentage of GDP 3.0 2.1 1.6 1.1
Structural primary balance, net of one-off measures,
as a percentage of GDP 1.7 2.5 3.0 3.4
Source: 2006 - 2009 Program Document.
The Program Document targets real GDP growth of 1.5% in 2006, down from the 2.2%
growth targeted in the 2005-2008 Program Document. It also targets annual budget
deficit reductions with the budget deficit as a percentage of GDP decreasing
from 3.8% in 2006 to 1.5% in 2009. The targeted reductions in budget deficits in
the 2006-2009 Program Document are significantly less ambitious than those set
forth in the 2005-2008 Program Document. This reflects lower targets for primary
surplus as a percentage of GDP, increasing from 0.9% in 2006 to 3.0% in 2009, in
the 2006-2009 Program Document, compared to targets of 3.3% for 2006 and 4.8% in
2008 in the 2005-2008 Program Document. The Quarterly Cash-Flow Report
(RELAZIONE TRIMESTRALE DI CASSA) released on April 5, 2006
67
revised some of the estimates for 2006 included in 2006-2009 Program Document.
In particular, the 2006 targets for real GDP growth and primary surplus were set
at 1.3% and 0.6% respectively.
The objectives set forth in the Program Document and the Quarterly
Cash-Flow Report, the latter in respect of 2006, are based on assumptions
relating to future economic developments, including international economic
trends, and may therefore not be realized. See also "The Italian Economy -- 2005
Developments."
REVENUES AND EXPENDITURES
GENERAL GOVERNMENT REVENUES AND EXPENDITURES
- ------------------------------------------------------------------------------------------------------------
2001(1) 2002 2003 2004 2005
--------- --------- --------- --------- ---------
(MILLIONS OF EURO)
EXPENDITURES
CURRENT EXPENDITURES 548,765 567,051 590,828 612,180 630,241
OF WHICH
Total consumption 227,693 238,456 250,382 262,244 272,669
OF WHICH
2001(1) 2002 2003 2004 2005
--------- --------- --------- --------- ---------
(MILLIONS OF EURO)
Wages and salaries 131,647 137,621 144,749 149,609 155,533
Cost of goods and services 96,046 100,835 105,633 112,635 117,136
Interest expense 78,764 71,519 68,514 65,753 64,549
Production grants 15,156 14,450 14,213 14,533 13,201
Social services 202,332 214,078 224,485 234,627 241,692
Other current expenditures 24,820 28,548 33,234 35,023 38,130
CAPITAL EXPENDITURES(2) 52,077 46,932 57,060 54,496 57,050
Investments 29,630 22,468 32,778 33,276 33,499
Investment grants 16,891 18,440 19,463 17,728 18,909
Other capital expenditures 5,556 6,024 4,819 3,492 4,642
TOTAL EXPENDITURES 600,842 613,983 647,888 666,676 687,291
as a percentage of GDP 48.1% 47.4% 48.5% 48.0% 48.5%
REVENUES
CURRENT REVENUES 558,872 571,231 579,562 607,301 623,153
OF WHICH
Tax revenues 360,950 364,728 365,515 380,798 390,911
OF WHICH
Direct taxes 183,998 179,554 178,745 185,400 189,052
Indirect taxes 176,952 185,174 186,770 195,398 201,859
Social security contributions 153,823 161,275 168,776 176,550 182,416
Revenues from capital 8,142 8,249 8,087 7,477 8,118
Other current revenues 35,957 36,979 37,184 42,476 41,708
CAPITAL REVENUES 3,469 5,667 22,290 11,723 5,964
TOTAL REVENUES 562,341 576,898 601,852 619,024 629,117
as a percentage of GDP 45.0% 44.5% 45.1% 44.6% 44.4%
CURRENT SURPLUS/(DEFICIT) 10,107 4,180 (11,266) (4,879) (7,088)
as a percentage of GDP 0.8% 0.3% (0.8)% (0.4)% (0.5)%
NET BORROWING 38,501 37,085 46,036 47,652 58,174
as a percentage of GDP 3.1% 2.9% 3.4% 3.4% 4.1%
PRIMARY BALANCE 40,263 34,434 22,478 18,101 6,375
as a percentage of GDP 3.2% 2.7% 1.7% 1.3% 0.4%
GDP (NOMINAL VALUE) 1,248,648 1,295,226 1,335,354 1,388,870 1,417,241
(1) Eurostat published in July 2002 a decision relating to the methods of
accounting for securitizations. Pursuant to the Eurostat decision, Italy is
required to account for receipts, aggregating approximately (euro)6.7
billion, from certain real estate and state lottery proceeds securitization
transactions, which took place in 2001, in the three-year period 2002-2004
and not in 2001. The general government revenues and expenditures figures
presented in the table above take into account the effects of the Eurostat
decision.
(2) Includes revenues from the disposal of state-owned real estate (deducted
from capital expenditures) for the year 2001 ((euro)1.6 million), 2002
((euro)10.8 million), 2003 ((euro)2.7 million), 2004 ((euro)4.5 million)
and 2005 ((euro)2.7 million).
Source: Annual Report of the Bank of Italy (May 2006) for the year ended
December 31, 2005.
68
General government expenditures and revenues have increased in each of the last
five years. General government expenditures rose by 3.1 per cent in 2005,
compared to 2.9 per cent in 2004. Higher expenditure growth in 2005 was
principally due to higher wages and salaries and costs of goods and services,
which collectively accounted for 19.2 per cent of GDP in 2005 compared to 18.9
per cent in 2004 as well as higher social services expenditures, which accounted
for 17.1 per cent of GDP in 2005 compared to 16.9 per cent in 2004.
EXPENDITURES
Italy has a comprehensive system of social services, including public
health, public education and pension, disability and unemployment benefits
programs, most of which are administered by the Government or by local
authorities receiving Government funding. These social services are funded in
part by contributions from employers and employees and in part from general tax
revenues.
SOCIAL SERVICES. Social Services includes expenditures for pensions,
disability and unemployment benefits. The two principal social security agencies
for private sector employees, the ISTITUTO NAZIONALE PREVIDENZA SOCIALE ("INPS")
and the ISTITUTO NAZIONALE ASSICURAZIONI E INFORTUNI SUL LAVORO ("INAIL"),
provide old-age pensions and temporary and permanent disability compensation for
all the employees of the private sector and their qualified dependents and
coverage for accidents in the workplace or permanent disability as a consequence
of employment for workers of the industrial and agricultural sectors and for
certain service sector employees. The social security entity for government
employees, the ISTITUTO NAZIONALE DI PREVIDENZA PER I DIPENDENTI
DELL'AMMINISTRAZIONE PUBBLICA ("INPDAP") provides similar services.
Old-age pensions in Italy, as in much of the developed world, continue to
present a significant structural fiscal problem. Controlling pension spending is
a particularly important Government objective given Italy's aging population.
The following are the principal reforms to the Italian pension system since
1992:
o Beginning in 1992, the Government adopted several measures designed to
control the growth of pension expenditures. Among other measures, the
Government abolished the indexation of pensions to reflect wage
increases and froze or delayed early retirement pensions for certain
categories of workers, raised the retirement age and increased the
minimum contribution period for early retirement pensions.
o In 1995, Parliament enacted legislation to reform the pension system.
Under these reforms, each individual's pension is determined on the
basis of the contributions, adjusted for GDP growth, made to the
system by the individual or by his employer on his behalf. No
additional contributions are made by the Government. The Government,
however, continues to provide welfare and disability pensions.
Individuals with lower levels of contribution to the public pension
system are encouraged to seek additional pension benefits through
voluntary contributions to private funds.
o In July 2004, Parliament enacted legislation to further reform Italy's
pension system. The reform, which will take effect in 2008, will
further raise retirement age and increase minimum contribution periods
required to qualify for early retirement pension and old age pension,
as shown in the table below. In addition, the reform includes
incentives to employees to delay retirement and, as with the 1995
reforms, seek additional pension benefits through contributions to
private funds and will substantially delay severance payments.
KEY 2004 PENSION REFORMS
Expenditures for social services grew by 4.3% in 2004, compared to 4.9% in
2003 and 5.8% in 2002. The decline in growth rate in 2004 reflects slower growth
of pension expenditures, decreasing from 4.5% in 2003 to 4.0% in 2004,
principally due to the effect of pension reforms that raised the age required to
qualify for old age pension effective as of 2004. As a percentage of GDP, in
2004 and 2003 social services expenditures remained stable at 17.3%, up from
17.0% in 2002.
EXPENDITURES FOR PUBLIC HEALTH AND PUBLIC EDUCATION. Expenditures for
public health and education are accounted for under wages and salaries, cost of
goods and services and production grants. Italy has a public health service run
principally by regional governments with funds provided by the Government. Local
health units adopt
69
their own budgets, establish targets and monitor budget developments. Public
health care expenditures rose rapidly in 2000 and 2001, by 12.6% and 11.0%,
respectively. The growth rate for public health care expenditures increased to
7.1% in 2004 from 2.5% in 2003 due to increasing expenditures for pharmaceutical
products. Public health care expenditures as a percentage of GDP amounted to
2.7% in 2004 and 2.6% in 2003.
Italy has a public education system consisting of elementary, middle and
high schools and universities. Attendance at public elementary, middle and high
schools is generally without charge to students, while tuition payments based on
income level are required to attend public universities. Public schools
generally follow a standard curriculum, and nationwide testing is used for
graduation purposes. The Government has introduced programs to increase
vocational and technical training. In 1997, the Government implemented a major
reform of the education system, which, among other things, increased the number
of years of compulsory education from eight to ten and imposed higher standards
for the end-of-school exam (ESAME DI MATURITA).
COMPENSATION OF PUBLIC EMPLOYEES. As a percentage of GDP, compensation of
public employees decreased to 11.0% in 2004 from 11.1% in 2003. Compensation of
public employees increased by 3.0% in 2004 compared to 5.5% in 2003, due to the
renegotiation and subsequent renewal of certain collective bargaining
agreements, which led to a 5.7 increase in gross wages. The number of public
employees decreased by 1.7% in 2004, after remaining substantially unchanged in
2003 and 2002, mainly due to a reduction of public employees in the public
education sector.
INTEREST PAYMENTS. Interest payments by the Government declined by
(euro)841 million in 2004, after declining by (euro)3.3 billion and (euro)7.0
billion in 2003 and 2002, respectively. The ratio of interest payments to GDP
fell from 12.1% in 1993 to 5.1% in 2004, declining 0.2% from 2003 to 2004 and
0.5% from 2002 to 2003. Average interest rates, which declined steadily from
1991, were stable at 6.0% in 1999 to 2001 and decreased from 5.2% in 2002 to
4.7% in 2004 mainly as a result of the repayment of bonds with higher coupons
issued between 1990 and 1995. Between May 1999 and October 2000, the average
gross rate on Treasury bills rose from 2.6% to 5.1%, before falling to 1.9% in
June 2003 and rising to 2.1% at the end of 2003. It remained substantially
stable at 2.1% throughout 2004. Similarly, the gross yield on ten-year domestic
bonds rose from 3.9% in January 1999 to 5.7% in September 2000, fell to 3.7% at
June 2003 and rose to 4.4% at the end of 2003. It remained stable at 4.4% until
June 2004, then fell to 3.8% at the end of the year.
REVENUES
TAXES. Italy's tax structure includes taxes imposed at the State and local
levels and provides for both direct taxation through income taxes and indirect
taxation through a value added tax ("VAT") and other transaction-based taxes.
Income taxes consist of an individual tax levied at progressive rates and a
corporate tax levied at a flat rate. In 2004, the maximum individual tax rate
was 45% and the maximum corporate tax rate was 33%. Under the 2005 Budget Law
the maximum individual tax rate was reduced to 43%. Corporations also pay local
taxes, and the deductibility of those taxes for income tax purposes has been
gradually eliminated over the last few years.
VAT is imposed on the sale of goods and the rendering of services performed
for consideration in connection with business or professions and on all imports
of goods or services. Italy has issued legislation to harmonize its VAT with
applicable European Union directives. The basic VAT rate is 20%, although
certain goods and services qualify for an exemption from VAT or a reduced rate.
In addition to VAT, indirect taxes include customs duties, taxes on real estate
and certain personal property, stamp taxes and excise taxes on energy
consumption, tobacco and alcoholic beverages.
Italy has negotiated bilateral treaties for the avoidance of double
taxation with virtually all industrialized countries.
Low taxpayer compliance has been a longstanding concern for the Government,
which has adopted measures to increase compliance. Some of these measures are
aimed at identifying tax evasion and include systems of cross-checks between the
tax authorities and social security agencies, public utilities and others. One
of the areas of greatest concern to the Government has been under-reporting of
income by self-employed persons and small enterprises. The Government's efforts
to increase tax compliance during the last four years have led to an increase in
the general tax base and to an improvement in compliance.
In each year 1999 through 2002, Italy enacted reforms to reduce the level
of taxation. With the 2000 Budget Law the Government lowered taxes on purchases
of a principal residence, on house rents and on building renovations,
70
s
established further and higher allowances on personal income tax, lower
inheritance and estate taxes, and reduced the tax rate on corporate merging and
demerging operations from 27% to 19%. As part of the tax reforms implemented
since 2001, income tax rate for companies was reduced from 37% to 33%. Income
tax for companies was also partially reformed and consequently renamed IRES
(formerly IRPEG). Italy's fiscal burden, which is the aggregate of direct and
indirect taxes and social security contributions as a percentage of GDP, rose
from 41.9% in 2002 to 42.6% in 2003 before decreasing to 41.7% in 2004,
principally due to a reduction in capital gains taxes.
The following table sets forth the composition of tax revenues for each of
the five fiscal years ended December 31, 2004.
COMPOSITION OF TAX REVENUES(1)
2001 2002 2003 2004 2005
--------- --------- --------- --------- ---------
(MILLIONS OF EURO)
DIRECT TAXES(1)
Personal income tax 120,931 120,204 124,238 127,689 132,608
Corporate income tax 32,521 29,651 29,022 28,073 33,688
Investment income tax 11,363 10,598 8,543 7,914 8,875
Other(2) 12,745 9,860 15,796 18,640 4,401
Total direct taxes 177,560 170,313 177,599 182,316 179,572
--------- --------- --------- --------- ---------
INDIRECT TAXES(1)
VAT 91,515 93,881 96,177 100,051 105,536
Other transaction-based taxes 14,518 16,499 15,789 18,176 17,953
Production taxes 24,586 24,667 26,087 24,906 26,353
Tax on State monopolies 7,305 7,685 7,770 8,502 8,511
National Lottery 7,722 8,858 6,839 14,658 12,343
Others 1,988 2,003 5,144 3,167 2,104
Total indirect taxes 147,634 153,593 157,806 169,460 172,800
--------- --------- --------- --------- ---------
TOTAL TAXES 325,194 323,906 335,405 351,776 352,372
========= ========= ========= ========= =========
(1) The data presented in this table does not correspond to the general
Government direct and indirect tax revenue figures contained in the
preceding table entitled "General Government Revenues and Expenditures ",
primarily because this table is prepared on the basis of State sector (cash
basis) accounting criteria while the "General Government Revenues and
Expenditures" table is prepared on an accrual basis in accordance with
ESA95. Generally, State sector accounting does not include indirect taxes
levied by, and certain amounts allocable to, regional and other local
governments and entities. However, because this table is prepared on a cash
basis, it reflects tax receipts of entities that are excluded from State
sector accounting (such as local government entities) that are collected on
their behalf by the State (and subsequently transferred by the State to
those entities).
(2) The taxes classified as "other" are non-recurring and, accordingly, this
item is highly variable.
Source: Annual Report of the Bank of Italy (May 2006) for the year ended
December 31, 2005
In 2005, direct taxes receipts decreased by 2.7 per cent from (euro)182.3
billion in 2004 to (euro)179.6 billion in 2005, principally due to lower
receipts from non-recurring tax receipts, offset in part by higher receipts from
personal income and corporate income taxes. Indirect taxes include VAT, excise
duties, stamp duties and other taxes levied on expenditures. Indirect tax
receipts increased approximately 3.4 per cent from (euro)169.4 billion in 2004
to (euro)172.8 billion in 2005, mainly due to increases in VAT receipts, offset
in part by a decrease in receipts from the national lottery.
IRAP DISPUTE. In November 2003, the Regional Tax Court of Cremona
(COMMISSIONE TRIBUTARIA PROVINCIALE DI CREMONA) instituted a proceeding before
the European Court of Justice (ECJ), referred to as the IRAP case, requesting
that the ECJ issue a preliminary ruling in the case of BANCA POPOLARE DI CREMONA
SOC. COOP.A.R.L. V. AGENZIA ENTRATE UFFICIO DI CREMONA on the question of
whether Italy's regional tax on production (IMPOSTA REGIONALE SULLE ATTIVITA
PRODUTTIVE or IRAP) is incompatible with the EU's prohibition of national
turnover taxes other than VAT. IRAP was introduced in 1998 in connection with
Italy's regional devolution program. IRAP receipts are reflected in indirect
taxes in the "General Government and Revenues" table set forth above and totaled
(euro)31.3 billion, (euro)32.8 billion and (euro)32.3 billion in 2002, 2003 and
2004, respectively. They are collected by the Italian government on behalf of
Italy's regions and they represent one of the principal sources of funding of
regional
71
expenditures. In March 2005, the EU advocate general opined before the ECJ that
IRAP possessed the essential features of VAT and therefore should be ruled to be
incompatible with VAT. Italy's position is that IRAP does not violate the EU's
prohibition on national turnover taxes other than VAT. The ECJ has not yet
delivered its preliminary ruling on the IRAP case. If the ECJ ruled that IRAP is
incompatible with EU law, the Italian Government estimates that the retroactive
entitlement to reimbursement would be in excess of (euro)120 billion.
Accordingly, in order to avoid material adverse effects on Italy's regional
finances, the EU Advocate General requested that the ECJ limit the effects of
its ruling from a temporal standpoint by reference to a fixed date. A hearing on
this matter was held in December 2005.
GOVERNMENT ENTERPRISES
The following chart summarizes, certain key data for each of the principal
state-owned enterprises for the periods indicated. The Government currently
continues to participate in the election of the respective boards of directors
but does not directly participate in the management of these companies.
PRINCIPAL GOVERNMENT ENTERPRISES
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL TOTAL
ASSETS LIABILITIES
PERCENT OF ---------- ----------- NET PROFIT (LOSS)
GOVERNMENT AT DECEMBER 31, AS OF DECEMBER 31,
OWNERSHIP AS ----------------------- -------------------------
OF FEBRUARY 2,
COMPANY INDUSTRY SECTOR 2006(1) 2004 2004 2002 2003 2004
- ----------------------------------------------------------------- -------------- ----------- ----------- -------- -------- ---------
(MILLIONS OF EURO)
Alitalia Linee Aeree Italiane S.p.A. Airline 49.9% 4,476 4,024 93 (520) (812)
Cassa Depositi e Prestiti Banking/Financial Services 70.0% 107,533 103,152 72 N.A. 286
ENEL S.p.A. Electricity/Utility 32.2%(2) 69,385 48,407 2,008 2,509 2,700
ENI S.p.A. Energy 30.3%(2) 72,524 36,829 4,593 5,585 7,274
Ferrovie dello Stato S.p.A. Railroads 100.0% 91,818 55,820 77 31 (125)
Poste Italiane S.p.A. Post 100.0%(2) 47,886 46,339 N.A. N.A. 215
Finmeccanica S.p.A. Aerospace/Defense 32.4% 28,622 24,898 203 199 526
RAI Holding S.p.A. Broadcasting 99.6% 2,341 1,581 (17) 82 82
GRTN S.p.A. Energy transmission 100.0% 3,388 3,293 11 12 15
(1) The percentages refer to the holding company (S.p.A.), while the financial
data refers to the entire group on a consolidated basis.
(2) Including the share indirectly owned by the Government through Cassa
Depositi e Prestiti S.p.A. In December 2003 the Treasury transferred shares
representing 10.35% of ENEL, 10% of ENI and 35% of Poste Italiane to Cassa
Depositi e Prestiti ("CDP"), a wholly owned entity with historical
responsibility for promoting local development and managing postal savings
instruments, in exchange for the transfer by CDP to the Treasury of
approximately (euro)11 billion. These transfers were part of a series of
transactions that included the conversion of CDP into a joint stock
company, the further assumption by the Treasury of a portion of CDP's
assets and liabilities, and the subsequent sale by the Treasury of a 30%
minority stake in CDP to 65 Italian banking foundations for an aggregate
consideration of (euro)1.1 billion.
Source: Ministry of Economy and Finance
\
Finmeccanica is Italy's second largest manufacturer in the aerospace and
defense sector. Due to Finmeccanica's involvement in the defense sector, the
Government has maintained a significant interest in the share capital of the
company through the Ministry of Economy and Finance (approximately 32%), has
retained a golden share, and has limited the maximum ownership of any
shareholder to 3%.
PRIVATIZATION PROGRAM
PRIVATIZATIONS MANAGED BY THE ITALIAN TREASURY. Since 1994, the Treasury
has carried out a number of privatizations in the financial institutions sector,
the telecommunications sector, integrated oil companies and electricity
utilities. Based on Treasury data, from February 1994 to December 2004 the
Government raised
72
approximately (euro)136 billion (including revenues from the IRI disposal
program), making the Italian privatization program one of the largest
privatization programs in Europe.
The Italian Treasury currently holds majority or controlling interests in
27 public companies. Italy recorded lower receipts from privatizations in 2005
than targeted in its 2005-2008 Program Document. However, Italy continues to
rely on proceeds from privatizations, state-owned real estate disposals and
securitizations to reduce public debt as a percentage of GDP and achieve the
targets set out in its 2006-2009 Program Document.
The table below illustrates the principal Italian privatizations since 1994
managed by the Treasury since 1994 that generated proceeds of over (euro)100
million.
PRINCIPAL PRIVATIZATIONS MANAGED DIRECTLY BY THE ITALIAN TREASURY
(FROM 1994 TO DECEMBER 2004)
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS PROCEEDS PERCENTAGE OF
INDUSTRY IN MILLIONS CAPITAL
COMPANY NAME SECTOR OFFER DATE OFFERING TYPE OF EURO DISPOSED OF
- ----------------------------------------------------------------------- ------------------------------------------------------------
IMI Banking Feb 1994 Public Offering 927 27.90(1)
INA Insurance June 1994 Public Offering 2,343 47.45(1)
IMI Banking July 1995 Private Placement 472 14.48
INA Insurance Oct 1995 Private Placement 871 18.37
ENI Oil Nov 1995 Public Offering 3,254 15.05(1)
INA Insurance June 1996 Exchangeable 1,684 31.08
IMI Banking July 1996 Marketed block trade 259 6.94
ENI Oil Nov 1996 Public Offer 4,586 16.19(1)
Istituto San Paolo di Torino Banking June 1997 Public Offer 148 3.36
ENI Oil July 1997 Public Offering 6,833 18.21(1)
Telecom Italia Telecom Nov 1997 Public Offer/Private 11,818 29.18
Seat Publishing Nov 1997 Competitive bidding 854 44.74
ENI Oil July 1998 Public Offer 6,712 15.20(1)
BNL Banking Sept/Dec 1998 Public Offer/Private Placement 3,464 68.25
ENEL Utility Nov 1999 Public Offer 16,550 32.42
Mediocredito Centrale Banking Dec 1999 Trade sale 2,037 100.00
Banco di Napoli Banking Nov 2000 Government tender in Public Offer 494 16.16
ENI Oil Feb 2001 Competitive Bidding 2,721 5.00
Telecom Italia Telecom Dec 2002 Private placement Trade Sale 1,434 2.67
ENEL Electricity Nov 2003 Private Placement 2,173 6.60
ENEL Electricity Oct 2004 Public Offer 7,636 18.86
(1) Inclusive of bonus shares which were allocated to Italian retail investors
who retained the shares sold for a specified period.
Source: Ministry of Economy and Finance
73
The legislation governing privatizations contemplates a variety of methods
of sale, including public offerings (including employee offerings), public
auctions, private placements and trade sales and also allows the creation of
stable core shareholder groups. In addition, this legislation grants the State
certain special powers in connection with any transfer of a controlling interest
in certain state-owned companies operating in public service sectors.
Under Italian law, and in order to achieve the public finance objectives
established with the Maastricht Treaty, all proceeds of the privatization of
entities directly owned by the Treasury are deposited into a fund established in
1993 (FONDO PER L'AMMORTAMENTO DEI TITOLI DI STATO), prior to their use for the
purchase or repayment of outstanding Treasury securities.
The original purpose of the privatization program was to reduce the level
of direct Government ownership; thereby lowering the level of State subsidy and
improving industrial efficiency. The privatization program has resulted in a
major structural change in the Italian industrial and financial markets, with a
significant decrease in direct Government involvement in the management of
industrial and financial companies.
The success of the privatization program is largely attributable to capital
market reforms, to the implementation of a clear regulatory framework and to the
increased interest by Italian retail investors in the equity market. The Italian
Stock Exchange was privatized in 1997 and initiatives have been introduced to
protect minority shareholders, promote transparent corporate governance and
eliminate barriers to changes in corporate control. Increased participation by
retail investors in domestic capital markets has been a leading contributor to
the success of Italy's privatization program. Prior to the commencement of
Italy's privatization program in 1993, Italy's domestic retail investors
historically had demonstrated a strong preference for investing in Government
bonds and other fixed income securities rather than equities. As Italy has
historically benefited from one of the highest domestic saving rates in Western
Europe, the success of Italy's privatization program has been largely
attributable to the Government's ability to attract domestic savings and promote
the growth of equity investment. The Government has attained this goal through a
combination of innovative offer structures, attractive retail incentive packages
and widespread marketing campaigns. Between 1991 and 2004, the ratio of overall
market capitalization of Italian Stock Exchange listed companies to nominal GDP
increased from 12% to 43%, having reached a peak of 70% in 2000. At December 31,
2004 total market capitalization was (euro)569 billion, up from (euro)487 and
(euro)458 billion as of December 31, 2003 and 2002, respectively.
PRIVATIZATIONS MANAGED BY IRI. IRI has played a major role in the Italian
privatization program. Proceeds from the privatization activities of the IRI
group were (euro)56.6 billion for the period from July 1992 to December 2001.
During the three years ended December 31, 2002, IRI paid to the Ministry of
Economy and Finance, its shareholder, dividends totaling (euro)6.2 billion. On
June 27, 2000 IRI was put into liquidation proceedings having completed its
mandate. In connection with its liquidation IRI made advance payments to the
Ministry of Economy and Finance amounting to (euro)8.0 billion in 2000 and
(euro)3.0 billion in 2001. On November 30, 2002, IRI merged into Fintecna S.p.A.
MAJOR PRIVATIZATIONS MANAGED DIRECTLY BY IRI IN THE PERIOD 1999-2001
- ----------------------------------------------------------------------------------------------------------------------
GROSS
REVENUE IN PERCENTAGE
MILLIONS OF OF CAPITAL
COMPANY NAME INDUSTRY SECTOR OFFER DATE OFFER TYPE EURO DISPOSED OF
- ---------------------- --------------------- --------------------- ---------------------- -------------- -------------
Autostrade Infrastructure Oct 1999 Private Placement 2,536 30.0
Infrastructure Dec 1999 Secondary Public Offer 4,185 52.0
Aeroporti di Roma Infrastructure Nov 1999/June 2000 Private Placements 1,379 54.2
Finmeccanica Aerosp./Defense June 2000 Secondary Public Offer 5,505 43.8
Cofiri Financial services Feb 2001 Private Placement 508 100.0
Source: Treasury's evaluations based on IRI data
74
GOVERNMENT REAL ESTATE DISPOSAL PROGRAM
The Government plans to dispose of its real estate assets to reduce the
costs associated with owning those assets and to further reduce State debt.
In September 2001, the Government approved new legislation to accelerate
its real estate disposal program in light of the disappointing results attained
in 2000 and early 2001. The program has been extended to all of the State's real
estate assets, including real estate assets owned by social security entities,
and includes a securitization program. The Government completed its first real
estate securitization transaction in December 2001. The proceeds of this
securitization transaction totaled (euro)2.1 billion, which were paid to the
Government in December 2001 and, pursuant to Eurostat methodology, accounted for
in the three-year period 2002-2004. The Government completed its second real
estate securitization transaction in December 2002, raising proceeds of
(euro)6.6 billion. In December 2004 and December 2005 the Government disposed of
additional real estate assets through sales to two real estate investment funds,
raising proceeds of (euro)3.3 billion and (euro)600 million in 2004 and 2005,
respectively.
75
PUBLIC DEBT
GENERAL
The Annual Financial Law and the Budget Law authorize the incurrence of
debt by the Government. See "Public Finance -- The Budget Process." The Annual
Financial Law sets a gross limit on issuances of Treasury securities other than
BUONI ORDINARI DEL TESORO or BOTs, which are zero-coupon notes with a three-,
six-, or twelve-month maturity. The Budget Law sets a net limit on all issuances
of Treasury securities, excluding issuances to refinance outstanding Treasury
securities. In addition to Treasury securities and borrowings, Italy's public
debt includes debt incurred by public social security agencies, regional and
local governments and other authorities.
The Treasury administers the public debt and the financial assets of Italy.
The Bank of Italy provides technical assistance to the Treasury in connection
with auctions for domestic bonds and acts as paying agent for Treasury
securities.
While Italy's debt-to-GDP ratio has decreased from 124.3% of GDP in 1994 to
106.5% of GDP in 2004, it remained substantially higher than the 60% Maastricht
reference value at the end of 2004.
The following table summarizes Italy's public debt as at December 31 in
each of the years 2000 through 2004, including debt represented by Treasury
securities and liabilities to holders of postal savings.
PUBLIC DEBT
- -------------------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
---------- ---------- ---------- ---------- ----------
(MILLIONS OF EURO)
Debt incurred by the Treasury:
Short term bonds (BOT)(1) 102,093 113,810 113,740 119,645 118,750
Medium and long term bonds (initially
incurred or issued in Italy) 937,248 948,244 946,535 952,084 979,506
External bonds (initially incurred or
issued outside Italy)(2) 69,471 79,795 81,201 84,147 85,262
Total Treasury Issues 1,108,812 1,141,849 1,141,476 1,155,876 1,183,518
Postal savings(3) 117,895 138,207 151,939 101,067 117,734
Debt incurred by:
FS bonds and other debt(4) 11,012 6,932 4,889 3,408 1,753
ANAS bonds and other debt(5) 2,141 900 384 218 52
Other State sector entities(6) (7) 13,115 9,960 9,503 40,105 37,817
Other general government entities(7) 45,695 53,512 56,816 88,549 98,881
TOTAL PUBLIC DEBT 1,298,670 1,351,360 1,365,007 1,389,223 1,439,755
AS A PERCENTAGE OF GDP 111.3% 110.9% 108.3% 106.8% 106.5%
Treasury accounts(8) (19,331) (21,487) (21,185) (13,048) (15,709)
Total public debt net of Treasury accounts 1,279,339 1,329,873 1,343,822 1,376,175 1,424,046
(1) BOTs (BUONI ORDINARI DEL TESORO) are short-term, zero-coupon notes with a
maturity of three, six or twelve months.
(2) Italy often enters into currency swap agreements in the ordinary course of
the management of its debt. The total amount of external bonds shown above
takes into account the effect of these arrangements.
(3) Postal savings are demand, short- and medium-term deposit accounts, as well
as long-term certificates that may be withdrawn by the account owner prior
to maturity with nominal penalties. As of the date of conversion of Cassa
Depositi e Prestiti ("CDP") into a joint stock company in 2003, the
Ministry of Economy and Finance assumed certain postal savings liabilities
as described in greater detail below.
(4) Includes FS bonds, which are securities issued by FERROVIE DELLO STATO
S.P.A., or FS, the State railway entity and other debt incurred by FS and
assumed by the Treasury by law in 1996.
(5) Includes ANAS (AZIENDA NAZIONALE PER LE STRADE) bonds, which are securities
issued by ANAS, the State Road Board and other debt incurred by ANAS.
(6) Includes loans and securities issued by the Institute of Credit for Public
Works (CREDIOP) and certain other entities. All indebtedness included in
this line item is net of Treasury securities owned by such entities. The
indebtedness of INFRASTRUTTURE S.P.A., relying on the TAV project
(high-speed railroad infrastructure), is included since 2004.
(7) The increase in debt of "other State sector entities" and "other general
government entities" in 2003 was largely due to the conversion of CDP into
a joint stock company in 2003, as described in greater detail below.
(8) The line item "Treasury accounts" includes all the funds of the Treasury
deposited with the Bank of Italy, including the sinking fund, supplied by
privatizations. See "Monetary System -- Monetary Policy."
Source: Ministry of Economy and Finance
76
On December 5, 2003, the Ministry of Economy and Finance issued a Decree
pursuant to which CASSA DEPOSITI E PRESTITI ("CDP"), an administrative entity
with historical responsibility for promoting local development, including by
lending to local government entities, and managing postal savings instruments,
was converted into a joint stock company, wholly owned by the Italian Treasury.
Subsequently, in December 2003, the Treasury sold a 30% stake in CDP to 65
Italian banking foundations.
From December 12, 2003, the date of its conversion into a joint stock
company, CDP is no longer considered part of the general government and its
liabilities are no longer accounted for as public debt. In connection with the
conversion of CDP into a joint stock company:
o the Ministry of Economy and Finance assumed (euro)101 billion of CDP's
postal bonds and accounts, shown in the table above as "Postal
Savings." Prior to December 2003, Italy accounted for CDP's entire
postal savings liabilities under "Postal Savings";
o the remaining approximately (euro)73 billion of CDP's obligations in
respect of postal savings ceased to be accounted for as a portion of
public debt; and
o loans totaling (euro)28 billion, granted by CDP to local government
entities, which previously had not been accounted for as public debt
as they were loans made from one general government entity to another,
were thenceforth included in public debt of local government entities
(shown in the table above under "other general government entities")
or in the debt of central government, when it was fully committed to
the refunding ("other State sector entities" in the table above). The
increase in debt of "other State sector entities" and "other general
government entities," shown in the table above, is largely the result
of this recharacterization.
Debt management continues to be geared towards lengthening the average maturity
of public debt, which steadily increased from 5.73 years at December 31, 2000 to
6.43 years at December 31, 2004. The average maturity of public debt decreased
to 5.56 years at December 31, 2002 due principally to a bond exchange with the
Bank of Italy on December 31, 2002. The Ministry of Economy and Finance issued
to the Bank of Italy (euro)15.4 billion of BTPs with interest rates ranging from
5.0% to 6.5% and maturing between 2012 and 2031 in exchange for (euro)39.4
billion of outstanding 1.0% BTPs maturing between 2014 and 2044 issued in 1993.
The Government's objectives with respect to the management of public debt
are to minimize the cost of borrowing in the medium-term and to reduce the
volatility of interest payments. In accordance with these objectives, the
Treasury has, in the past, gradually increased the proportion of total
Government bonds in circulation represented by fixed-rate securities, while
reducing the proportion represented by floating rate and short-term securities,
from approximately two-thirds to less than one third.
The following table shows the total of debt securities issued by the
Treasury and outstanding as of the dates indicated. Total Treasury issues differ
from Italy's total public debt as the former do not include liabilities to
holders of postal savings accounts, debt incurred by FERROVIE DELLO STATO S.P.A.
and ANAS (AZIENDA NAZIONALE PER LE STRADE) and debt incurred by other state
sector entities and other general government entities.
DECEMBER 31, MARCH 31, JUNE 30,
2005 2006 2006
------------ ------------ ------------
(MILLIONS OF EURO)
Short term bonds (BOT) 117,806 136,250 142,803
Medium and long term bonds
(initially issued in Italy) 1,006,589 1,021,144 1,050,189
External bonds (initially
issued outside Italy)(1) 87,798 87,113 85,629
------------ ------------ ------------
Total Treasury issues 1,212,193 1,244,507 1,278,620
============ ============ ============
(1) Italy often enters into currency swap agreements in the ordinary course of
the management of its debt. The total amount of external bonds shown above
takes into account the effect of these arrangements. The total amounts of
external bonds shown above include outstanding debt under Italy's (euro)10
billion Commercial Paper program, with maturity of less than one year. All
amounts of debt outstanding under Italy's Commercial Paper Program are
repaid in full every year by year-end.
The amount of external bonds shown above is not directly comparable to the
total amount of external bonds
77
indicated in the table "External Bonds of the Treasury as of June 30, 2006"
below, which does not take into account (i) the effect of currency swaps
and (ii) the amount of debt outstanding under Italy's Commercial Paper
Program.
Source: Ministry of Economy and Finance
In addition to its direct indebtedness, the Government also guarantees
certain third-party indebtedness, such guarantees arising by operation of law.
Under Italian commercial law, a sole shareholder guarantees the company's
indebtedness incurred while such joint stock company is wholly-owned by such
shareholder. Such guarantee is limited to cases of insolvency of a joint stock
company. Therefore, indebtedness of joint stock companies incurred during the
period that such companies are or were wholly-owned by the Government is
guaranteed by the Government by operation of law. In 1993, Parliament extended
this provision to all preexisting indebtedness of State holding companies
converted to joint stock companies.
SUMMARY OF INTERNAL DEBT
Internal debt is debt initially incurred or issued in Italy, regardless of
the currency of denomination. Italy's total internal public debt as at December
31, 2004 was (euro)1,347,206 million, an increase of (euro)59,074 million from
December 31, 2003.
The following table summarizes the internal public debt as at December 31 in
each of the years 2000 through 2004.
INTERNAL PUBLIC DEBT
- -------------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
----------- ------------ ----------- ----------- ------------
(MILLIONS OF EURO)
Debt incurred by the Treasury:
Short Term Bonds (BOT)(1) 102,093 113,810 113,740 119,645 118,750
Medium and Long Term Bonds
CTZ(2) 62,416 48,577 59,193 52,636 45,603
CCT(3) 239,740 228,214 215,470 197,540 197,435
of which:
Floating rate 238,240 228,214 215,470 197,540 197,435
CTE(4) 1,500 -- -- -- --
BTP(5) 635,092 671,453 671,872 691,705 707,890
BTP(euro)i(6) 10,203 28,578
Total 1,039,341 1,062,054 1,060,275 1,071,729 1,098,256
Postal bonds(7) 69,255 73,387 77,250 57,522 53,094
Postal accounts(7) 48,640 64,820 74,689 43,545 64,640
FS bonds and loans(8) 5,578 2,065 1,032 1,032 0
ANAS bonds and loans (9) 1,622 384 384 218 52
Other State sector entities(10) 11,282 8,507 7,352 11,204 37,141
Other general government entities(11) 39,647 46,430 47,991 74,795 94,023
Total internal public debt 1,215,365 1,257,647 1,270,106 1,288,132 1,347,206
Treasury accounts(12) (19,331) (21,487) (21,185) (13,048) (15,709)
Total internal public debt net of
Treasury account 1,196,034 1,236,160 1,248,921 1,275,084 1,331,497
(1) BOTs (BUONI ORDINARI DEL TESORO) are short-term, zero-coupon notes with a
maturity of three, six or 12 months.
(2) CTZs (CERTIFICATI DEL TESORO ZERO-COUPON), introduced in 1995, are
zero-coupon notes with maturities of eighteen or twenty-four months.
(3) CCTs (CERTIFICATI DI CREDITO DEL TESORO) are medium- and long-term notes at
a variable interest rate with a semiannual coupon.
(4) CTEs (CERTIFICATI DEL TESORO DENOMINATED IN ECU) were CCTs issued in ECU.
78
(5) BTPs (BUONI DEL TESORO POLIENNALI) are medium- and long-term notes that pay
a fixed rate of interest, with a semiannual coupon.
(6) BTP (INFLATION-LINKED BTPS) are medium- and long-term notes with a
semiannual coupon. Both the principal amount under the notes and the coupon
are indexed to the euro-zone harmonized index of consumer prices, excluding
tobacco.
(7) "Postal Bonds" are long-term certificates that may be withdrawn by the
account owner prior to maturity with nominal penalties, and "Postal
Accounts," are demand, short- and medium-term deposit accounts held by the
private sector and by the Treasury on behalf of public companies, such as
INFRASTRUTTURE S.P.A., FINTECNA S.P.A. and companies formed in connection
with securitization transactions carried out by the Treasury. As of the
date of conversion of CDP into a joint stock company in 2003, the Ministry
of Economy and Finance assumed certain postal savings liabilities as
described in greater detail above under "Debt -- General."
(8) Includes FS bonds and other debt incurred by FS and assumed by the Treasury
by law in 1996.
(9) Includes ANAS bonds and other debt incurred by ANAS.
(10) Includes loans and securities issued by the Institute of Credit for Public
Works (CREDIOP) and certain other entities. All indebtedness included in
this line item is net of Treasury securities owned by such entities.
(11) All indebtedness included in this line has been treated as funded debt in
this "Public Debt" section. A small portion, however, may have had a
maturity at issuance of less than one year or may have been incurred or
issued abroad. The increase in debt of "other general government entities"
in 2003 was largely due to the conversion of CDP into a joint stock company
in 2003, as described in greater detail above under "Debt -- General."
(12) The line item "Treasury accounts" includes all the funds of the Treasury
deposited with the Bank of Italy, including the sinking fund, supplied by
privatizations. See "Monetary System -- Monetary Policy." Source: Ministry
of Economy and Finance
The following table divides the internal public debt into floating debt and
funded debt as at December 31 in each of the years 2000 through 2004. Floating
debt is debt that has a maturity at issuance of less than one year. Funded debt
is debt that has a maturity at issuance of one year or more.
2000 2001 2002 2003 2004
----------- ----------- ------------ ----------- -----------
(MILLIONS OF EURO)
Floating internal debt(1) 78,604 108,131 119,680 92,189 111,390
Funded internal debt 1,136,761 1,149,516 1,150,426 1,195,943 1,235,816
Total internal public debt 1,215,365 1,257,647 1,270,106 1,288,132 1,347,206
(1) Includes BOTs with a maturity at issuance of three and six months and
postal accounts.
Source: Ministry of Economy and Finance
Italy reduced the ratio of short-term bonds to total debt issued from 23.22% in
1994 to 9.16% in 2000. This ratio has remained stable at approximately 10% in
the four years to December 31, 2004. Italy reduced the ratio of CCTs to total
debt issued from 21.38% in 2000 to 16.67% in 2004. The ratio of BTPs to total
debt issued increased from 56.99% in 2000 to 59.78% in 2004.
SUMMARY OF EXTERNAL DEBT
External debt is debt initially incurred or issued outside Italy,
regardless of the currency of denomination. Total external public debt as at
December 31, 2004 was (euro)92,549 million, a decrease of (euro)8,542 million
from December 31, 2003.
The following table summarizes the external public debt as at December
31 in each of the years 2000 through 2004.
79
EXTERNAL PUBLIC DEBT
2000 2001 2002 2003 2004
------- ------- ------- ------- -------
(MILLIONS OF EURO)
External Treasury Bonds(1) 69,471 79,795 81,201 84,147 85,262
FS bonds and loans(2) 5,434 4,867 3,857 2,376 1,753
ANAS bonds 519 516 -- -- --
Other State sector entities 1,833 1,453 1,018 814 676
Other general government entities 6,048 7,082 8,825 13,754 4,858
Total external public debt 83,305 93,713 94,901 101,091 92,549
(1) Italy often enters into currency swap agreements in the ordinary course of
the management of its debt. The total amount of external bonds shown above
takes into account the effect of these arrangements. All amounts of debt
outstanding under Italy's $10 billion Commercial Paper program are repaid
in full every year by year-end.
(2) Includes FS bonds and other debt incurred by FS outside Italy and assumed
by the Treasury by law in 1996.
Source: Ministry of Economy and Finance
The following table sets forth a breakdown of the external public debt of the
Treasury, by currency, as at December 31 in each of the years 2000 through 2004.
The amounts shown below are nominal values at issuance, before giving effect to
currency swaps, and do not include external public debt of other state sector
entities and other general government entities. The US$ amount shown below
includes US$989 million of debt originally incurred outside Italy by FS and
assumed by the Treasury by law in 1996. Italy often enters into currency swap
agreements in the ordinary course of the management of its debt.
2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------
(MILLIONS)
Euro 21,496 25,310 21,753 21,354 20,328
British Pounds 1,305 2,505 2,005 2,605 2,855
Swiss Francs 5,800 6,800 7,800 8,800 9,800
U.S. Dollars 29,074 30,866 38,591 45,675 49,589
Japanese Yen 1,675,000 1,475,000 1,475,000 1,325,000 1,225,000
Norwegian Kroner -- -- 2,000 4,000 4,000
Australian Dollars -- -- -- -- 1,000
Source: Ministry of Economy and Finance
Although historically Italy has not relied heavily on external debt, the
Treasury raised approximately US $76.3 billion by issuing bonds denominated in
euro and currencies other than euros during the period 2000 through 2004. As of
December 31, 2004, external debt accounted for approximately 6.43% of total
public debt, compared to 6.41% at December 31, 2000. As of December 31, 2004,
external Treasury bonds denominated in euro and those denominated in currencies
other than euro accounted for 5.09% and 2.17% of total Treasury bonds,
respectively.
Italy accesses the international capital market through a Global Bond
Program registered under the United States Securities Act of 1933, a US$ 40
billion Medium-Term Note Program established in 1998 and a $10 billion
Commercial Paper Program established in 1999. The Global Bond Program has been
Italy's principal source of funding from the international capital markets since
2001. Italy introduced collective action clauses (CACs) in the documentation of
all New York law governed bonds issued after June 16, 2003.
DEBT SERVICE
The aggregate nominal amount, before giving effect to currency swaps, of
scheduled repayments in respect of the principal amount on Treasury securities
constituting external debt outstanding as at December 31, 2004 was as follows:
80
2013
2005 2006 2007-201 AND AFTER
------- ------- -------- ---------
(MILLIONS)
Euro 3,000 2,000 8,763 6,565
British Pounds 105 -- 600 2,150
Swiss Francs 1,300 2,000 6,500 --
U.S. Dollars 4,100 15,000 22,989 7,500
Japanese Yen 225,000 200,000 350,000 450,000
Norwegian Kroner -- -- 2,000 2,000
Australian Dollars -- -- 1,000 --
Source: Ministry of Economy and Finance
DEBT RECORD
Since its founding in 1946, the Republic of Italy has never defaulted in
the payment of principal or interest on any of its internal or external
indebtedness.
81
OFFICIAL STATEMENTS
Information included herein which is identified as being derived from a
publication of the City or one of its agencies or instrumentalities is included
herein on the authority of such publication as a public official document of the
City. All other information herein and in the Registration Statement of which
this Prospectus is a part, other than that included under the caption
"Underwriting" herein, is included as a public official statement made on the
authority of Dott. Enrico Cardillo, ASSESSORE ALLE RISORSE STRATEGICHE, City of
Naples.
AUTHORIZED REPRESENTATIVE IN THE UNITED STATES
The Authorized Representative of the City in the United States of America is
Mr. Donald J. Puglisi, Puglisi & Associates, whose address is 850 Library
Avenue, Suite 204, P. O. Box 885, Newark, Delaware 19715.
82
SCHEDULE OF OUTSTANDING DEBT AS OF DECEMBER 31, 2005
OUTSTANDING AT
FINAL YEAR OF ORIGINAL AMOUNT ISSUED DECEMBER 31, 2005 / JANUARY 1, 2006
LENDER MATURITY (EURO) (EURO) (EURO)
- ---------------------------------------------- ----------------- ------------------------ -----------------------------------
Cassa Depositi e Prestiti...................... 2006 157,519.35 1,318.87
Cassa Depositi e Prestiti...................... 2007 98,667,696.14 18,080,059.25
Cassa Depositi e Prestiti...................... 2008 75,906,776.84 19,242,047.93
Cassa Depositi e Prestiti...................... 2009 20,258,021.45 5,948,034.15
Cassa Depositi e Prestiti...................... 2010 71,651,021.29 29,295,996.51
Cassa Depositi e Prestiti...................... 2011 77,306,461.39 36,500,854.72
Cassa Depositi e Prestiti...................... 2012 8,949,337.30 3,952,400.43
Cassa Depositi e Prestiti...................... 2013 26,223.10 4,842.30
Cassa Depositi e Prestiti...................... 2015 61,974,827.89 26,931,786.03
Cassa Depositi e Prestiti...................... After 2015 246,888,570.85 364,866,017.50
Banca OPI...................................... 2012 11,331,937.47 10,279,064.65
Banca OPI...................................... 2025 127,059,338.16 127,059,338.16
Banca OPI floating........................... 2023 450,000.00 417,067.11
Banca OPI floating........................... 2024 350,000.00 337,402.45
Banca OPI After 2025 121,551,037.03 120,390,040.51
Crediop floating............................... 2015 3,873,426.74 2,899,493.98
Crediop floating............................... 2025 13,023,047.00 13,023,047.00
Crediop floating............................... After 2025 47,530,228.17 47,277,707.41
Unicredit floating............................. 2015 4,648,112.09 3,368,080.13
Banca Nazionale Lavoro floating................ 2024 7,769,200.00 7,460,396.08
Banca Nazionale Lavoro......................... 2025 23,996,000.00 23,996,000.00
Banca Nazionale Lavoro......................... 2035 20,695,512.07 20,620,539.00
Monte Paschi Siena............................. 2024 10,000,000.00 9,601,356.59
Prestito Obbligazionario....................... 2006 154,937,069.72 15,493,706.98
Prestito Obbligazionario....................... 2024 400,000,000.00 389,128,000.00
-----------------------------------
TOTAL..................................... 1,296,174,597.74
===================================
SCHEDULE OF OUTSTANDING DEBT AS OF JANUARY 1, 2001, 2002, 2003, 2004 AND 2005 BY LENDER
OUTSTANDING AT JANUARY 1,
-----------------------------------------------------------
LENDER 2001 2002 2003 2004 2005
------- ------- ------- ------- -------
((EURO) MILLIONS)
CASSA DEPOSITI E PRESTITI .................... 448.7 454.1 479.0 632.0 427.3
BANCA OPI .................................... 182.6 173.8 164.2 154.3 143.5
ISTITUTI DI PREVIDENZA ....................... 25.3 24.0 22.8 21.4 20.0
I.B.S. PAOLO DI TORINO (CREDIOP) ............. 36.5 32.4 28.0 23.5 18.6
OTHER ........................................ 5.0 4.4 4.2 4.1 45.5
PRESTITO OBBLIGAZIONARIO ..................... 93.0 77.5 62.0 46.5 431.0
------- ------- ------- ------- -------
TOTAL OUTSTANDING DEBT 791.1 766.2 760.2 881.8 1085.9
======= ======= ======= ======= =======
83