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EXHIBIT A
CITY OF NAPLES
TABLE OF CONTENTS
Page
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CITY OF NAPLES.................................................................9
THE ECONOMY...................................................................14
FINANCIAL CONDITION OF THE CITY...............................................16
DEBT OF THE CITY..............................................................28
THE REPUBLIC OF ITALY.........................................................30
OFFICIAL STATEMENTS...........................................................53
AUTHORIZED REPRESENTATIVE IN THE UNITED STATES................................53
SCHEDULE OF OUTSTANDING DEBT AS OF DECEMBER 31, 2001..........................54
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INTRODUCTION
The Euro
The Treaty on 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 EU member
countries that are not Participating Member States were 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 Shillings Marks Lira Drachma
---------- ------ -------- ------ ------- ---------- ------- --------- ------- ------- -------
'E'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 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 'E'1.00.
Exchange Rates
The following tables show, for the periods indicated, information
concerning the exchange rates between the U.S. Dollar and the Lira and between
the U.S. Dollar and the 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 Italian Lire ("Lire", "Lira" or "Lit."), Euro ("EUR", "Euro" or "'E'") or
in United States Dollars ("Dollars", "$", "U.S.$" 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.
The following table sets forth, for the periods and dates indicated,
certain information regarding exchange rates for Euros, based on the Noon Buying
Rate for Euros expressed in Euro for $1.00 (rounded to the nearest Euro).
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Noon Buying Rate for Lira
U.S.Dollar per Euro 1)
- ----------------------------------------------------- ------------------------------------------------------
Year Ended December 31, Period End Average(2) High Low
- ----------------------------------------------------- ---------- ---------- ---- ---
2001............................................... 0.89 0.89 0.96 0.84
2000............................................... 0.94 0.92 1.03 0.83
1999............................................... 1.00 1.07 1.18 1.00
1998............................................... 1.18 1.10 1.18 1.08
1997............................................... 1.10 1.13 1.25 1.05
1996............................................... 1.28 1.25 1.29 1.22
- ---------------
(1) Based on the U.S. Federal Reserve Bank Noon Buying Rate for the Lira for
1996, 1997 and 1998. For 1999 and 2000, based on the Noon Buying Rate for
Euro and then converted to Lire at the fixed Lire/Euro conversion rate of
Lit. 1,936.27 = 'E' 1.00. The Italian Lira ceased to be legal tender in
March 2002.
(2) The average of the Noon Buying Rates on the last business day of each month
during the period indicated.
Given its recent introduction, there is insufficient historical
exchange rate data concerning the Euro. As a result, this section provides
historical exchange rate data concerning the European Currency Unit (or "ECU")
as well. The ECU, the predecessor to the Euro, was a composite (or "basket")
currency, consisting of specified amounts of the currencies of the EU member
states, not all of which are currently members of EMU. In accordance with
European Council Regulation No. 1103/97, substitution of the Euro for the ECU on
January 1, 1999 was at the rate of one Euro per ECU.
U.S. Dollar per Euro(1)
Year ended December 31, End of Period Average(2) High Low
- -------------------------------------------------- ------------- ---------- ---- ---
2002 ............................................. 1.05 0.95 1.05 0.86
2001 ............................................. 0.89 0.89 0.96 0.84
2000.............................................. 0.94 0.92 1.03 0.83
1999.............................................. 1.00 1.07 1.18 1.00
1998.............................................. 1.18 1.10 1.18 1.08
1997.............................................. 1.10 1.13 1.25 1.05
1996.............................................. 1.28 1.25 1.29 1.22
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(1) Based on the U.S. Federal Reserve Bank noon buying rate for ECU for 1996,
1997 and 1998, and for Euro for 1999, 2000, 2001 and 2002.
(2) Based on the average of the exchange rates for the last business day of
each month during the relevant period.
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CITY OF NAPLES
General
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, approximately two-thirds of the way down the Italian peninsula. The
City dates from the sixth or seventh century B.C., when Greek colonizers
established an outpost on what is now Naples. During the Roman period, Naples
became a prosperous commercial center and has remained an important trading port
on the Mediterranean Sea ever since. The City occupies an area of 1,171 square
kilometers (approximately 4,530 square miles). With a population of
approximately one million people as of December 31, 2001, 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) was approximately 3.1
million people as of December 1, 2001.
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, 2001, Campania had a population of
approximately 5.7 million people representing approximately 10% of the
population of Italy. Campania, along with the regions of Abruzzo, Molise,
Apulia, Calabria, Basilicata, Sicily and Sardinia, comprise an area in southern
Italy known as the "Mezzogiorno".
In the late 1980s and early 1990s, the City faced serious financial
problems. At the end of 1992, the City Council failed to approve its 1993 budget
and in May 1993 advised the Central Government of Italy that it was entering
into dissesto finanziario ("dissesto"), an insolvency proceeding for
municipalities. The City remains subject to dissesto, which does not affect
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. In March 1998, however, the statutory receivers
(see below p. 17) completed the verification and accounting of all pre-dissesto
claims and the City has commenced payment of such verified claims. In addition,
on November 30, 2001, the Statutory Receivers approved a final balance. See
"Financial Condition of the City--Summary" and "--Dissesto Finanziario". The
City has made all payments, both interest and principal, on all financial
indebtedness since entering dissesto. See "Debt of City--Debt Record". Since
1993, the City has had a surplus (current and capital revenues less current and
capital expenditures) in each year.
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 108) 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,
and railways and transportation. The Central Government provides a substantial
portion of the funds of regions, provinces and municipalities.
The Region of Campania has powers in general economic and social issues
and is responsible for providing resources to finance municipal and provincial
investment programs. Its powers are largely administrative, covering: 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
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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 separate special entities.
See "Financial Condition of the City--Special Entities".
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
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 the Mayor
and 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 fourteen assessori. Each assessore is
responsible for one or more administrative departments.
The Board of Auditors 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.
Major decisions of the City Council (including with respect to the
City's budget and year-end financials) must be reviewed and validated by the
Regional Control Commission (Comitato Regionale di Controllo) which confirms
that such decisions comply with Italian law. This commission is required within
20 days to either approve, submit a single request for further information
(which recommences the 20 day period) or void the City Council decision. In the
absence of any reply from the commission within 30 days, the City Council's
decisions are automatically validated. The Regional Control Commission consists
of five members, four of which are elected by the Region of Campania and one
appointed by the Central Government. Subsequently to a referendum, the Italian
Parliament approved in March 2001 a constitutional law which modified Title V of
the Italian Constitution (relating to Regions, Provinces and Municipalities),
including the constitutional provision providing for the control of regions on
the actions of local entities. As a result, the City Budget, the City programs,
variations to the City financials and final accounts do not need to be validated
by the Regional Control Commission.
Prior to the electoral reforms of June 1993, the Mayor was selected by
members of the City Council. Shifting political coalitions at the City Council
resulted in frequent changes of the Mayor. Furthermore, the Mayor appointed
assessori who then could also be members of the City Council and therefore
elected officials. The reform of the electoral and administrative system was
designed to promote a more stable administrative body less subject to shifting
political pressures.
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% 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. Assessori continue to be appointed by the Mayor
but cannot be members of the City Council.
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The current mayor, Mrs. Rosa Russo Jervolino, a member of the
center-left coalition (L'Ulivo) was elected in May 2001. His current term
expires in May 2005.
Mrs. Jervolino's electoral platform includes clean government, the
reform of the City's finances and administrations and the restoration of the
City's cultural and artistic activities.
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) 7 11.7%
Gruppo Misto di Maggioranza 4 6.7%
Communist Refoundation (Rifondazione Comunista) 3 5.0%
Greens (Verdi) 3 5.0%
Italian Democratic Left (Sinistra Democratica Italiana) 1 1.7%
Republican Party (Partito Repubblicano) 1 1.7%
----- ----------
Total Majority 37 70.0%
Italy Force (Forza Italia) 13 18.3%
National Alliance (Alleanza Nazionale) 5 8.3%
House of Liberties - Martusciello for Major
(Casa delle Liberta per Martusciello Sindaco) 5 8.3%
----- ----------
Total Opposition 23 30.0%
----- ----------
Total City Council 60 100.0%
===== ==========
Employees of the City
The following table shows the employees of the City and special
entities at the dates indicated:
Employees of the City of Naples and its
Special Entities(1)
Year ended December 31,
------------------------------------------------------
1997 1998 1999 2000 2001
------ ------ ------ ------ ------
City of Naples............................ 16,423 15,833 15,597 15,101 13,402
ANM(2).................................... 4,150 4,409 4,320 4,300 3,952
ARIN(3)................................... 630 629 621 650 650
------ ------ ------ ------ ------
Total................................ 21,203 20,871 20,538 20,051 18,004
====== ====== ====== ====== ======
- ---------------
(1) Includes only wholly-owned special entities.
(2) ANM (Azienda Napoletana Mobilita).
(3) ARIN (Azienda Risorse Idriche di Napoli) was formerly AMAN (Azienda
Municipalizzata Acquedotto di Napoli). The figures for ARIN represent
averages for the year indicated.
At December 31, 2001, the City employed 13,402 employees, representing
a 18.4% decrease from the December 31, 1997 total of 16,423. The decrease in
employees is primarily due to (i) the early retirement of older
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City employees in anticipation of the reform of the Italian pension system and
the moratorium on hiring imposed by the laws governing cities in dissesto; and
(ii) and the creation of special joint stock companies for the management of
certain specific municipal duties (such as management of waste disposal), to
which the City has transferred approximately 1,200 employees.
Unions represent City employees. Separate contracts are negotiated for
non-executive and executive administrators. Both contracts are negotiated on a
national basis. Generally the contracts are for four year terms and the economic
aspects of the contract are 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 national
contract for both non-executive employees and executive administrators was
entered into on January 1, 2000 and will expire on December 31, 2002; the
economic aspects of such contracts were revised on July 1, 2000 and January 1,
2000, respectively. 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.
Major Activities
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. The City conducts a number
of these services through separate special entities (aziende speciali). See
"Financial Condition of the City--Special Entities".
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 2001 the City spent approximately 'E'294.4
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. Five universities are located in Naples, but they are not
the responsibility of the City.
Waste Collection and Disposal. The City and the Region of Campania
share responsibility for waste disposal. Ordinary garbage collection is
performed by outside contractors hired by the City, while all other collection
is done directly 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 3,100 persons. The main responsibilities of the police force are
traffic control and parking violations, certain registry functions, audits for
evasion of City fees and taxes, public building security and enforcement of
building codes. In 2001, significant expenses were incurred (totaling
'E'76.1million) 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, 2001, approximately 85% of the population of the City was connected
to the sewage system, which consisted of over 1,000 kilometers of sewers. Due to
the age of the sewer 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 special entity 100% owned by the City. In 2000, ARIN was
transformed in a joint stock company (societa per azioni) wholly owned by the
City. See "Financial Condition of the City--Special Entities". ARIN utilizes a
network of approximately 2,360 Km of pipes to distribute drinking water to more
than 2 million people in the Naples metropolitan area with an average water
supply of approximately 570,000 cubic meters in 2001. 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"), as opposed to individual municipalities. As a
result, the City is no longer
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responsible for the management of the City's water resources and ARIN will have
to participate in a competitive bidding to become the manager of the water
resource of the ATO comprising the City of Naples.
Urban and Suburban Transportation. The City provides urban
transportation through ANM (Azienda Napoletana Mobilita), a special entity 100%
owned by the City and suburban transportation through CTP (Consorzio Trasporti
Pubblici), a consortium 50% owned by the City and 50% owned by the Provincia di
Napoli. In 2001, ANM and CTP were transformed into joint stock companies or
societa' per azioni. See "Financial Condition of the City--Special Entities".
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 formulates urban infrastructure plans (piano regolatore)
relating to roads, subways, waterworks, sewage works and parks, and urban
development plans relating to 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 891 kilometers of public roads in the
City as of December 31, 2001. While the City is not responsible for the
construction of new roads, it is responsible for their maintenance and lighting.
As of December 31, 2001, there were approximately 2 million cars in circulation
in the metropolitan area of Naples.
Other Transport. Naples International Airport (Capodichino) connects
Naples with other major Italian, European and international airports. The
operations of Capodichino are conducted by GE.S.A.C. (Societa Gestione Servizi
Aeroporti Campani S.p.A.), a limited liability corporation which is owned by
British Airport Authorities Plc ("BAA", which owns 65% 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% each); see
"Financial Condition of the City--Special Entities". In 2001, approximately 3.9
million passengers traveled on flights arriving at or departing from Capodichino
resulting in a 4.9% decrease from the 4.1 million passengers registered in 2000.
In addition, approximately 5.9 thousand tons of merchandise were transported
through the airport as compared to 5.1 thousand tons in 2000, representing an
increase of 13.6%.
The Port of Naples is the largest Italian port with respect to number
of passengers and ships and the fourth largest with respect to tonnage. In 2001,
the Port had a flow of approximately 8 million passengers and approximately 15
million tons of cargo as compared to 1.4 million passengers and 14.8 million
tons of cargo in 2000, representing a 471.4% decrease and a 1.4% increase,
respectively. The port is managed by an autonomous entity (Consorzio Autonomo
Porto).
City Properties. The City owns properties, including land and buildings
(both for public use and residential housing) which at December 31, 2001, had a
value, as set forth at the public registrar's office, of approximately
'E'3,638 million. All such properties are subject to the dissesto procedure.
See "Financial Condition of the City--Dissesto Finanziario".
Utilities. In 2001, Naples had approximately 330,000 private telephone
lines. As in the other parts of Italy, both 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 ex-state electric power distribution
company. As of 2001, the service was provided to approximately 462,000 customers
in the City.
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THE ECONOMY
Region of Campania
The following discussion of the economy of Campania is based on data of
ISTAT (Istituto Nazionale di Statistica) and Bank of Italy (Banca d'Italia).
In 2001, approximately 6.8% of Italy's GDP was generated in Campania.
In the year ended December 31, 2001, Campania's GDP per capita was approximately
'E'14,011 which compares to approximately 'E'20,136 for Italy as a whole.
The unemployment rate in 2001 was 22.5% in Campania (as compared to 9.5% in
Italy during the same period).
The European Union's Operational Programme for Campania.
The European Commission approved on August 8, 2000 an operational
programme (the "Programme") for Campania to support the Region's development
through measures on natural, cultural and human resources, local developments
systems, urban areas, networks and service hubs. The Programme implements the
programming agreement ("Community Support Framework") for Italy for the period
2000-2006, entered into between the European Community and the Italian
authorities to support the economic development of the Mezzogiorno. The total
amount of the grant is 'E'9,216 million approximately. The Community
contribution amounts to 'E'3,825 million (41.5% of the total), the balance
being borne by national and regional authorities and the private sector.
Community funding will come from the European Regional Development Fund
(ERDF)(65.5%), the European Social Fund (ESF)(16.5%), the European Guidance and
Guarantee Fund (EAGGF)(17.0%) and the Financial instrument for Fisheries
Guidance (FIFG)(1.0%).
Funds provided by Central Government and the EU are contingent upon
their being allocated to specific projects and must be returned to the EU if not
spent on such projects.
The Programme principally focuses on six areas: Natural Resources
(measures concern improvements to water resources, soil and coastline
protection, upgrading of natural areas, waste processing and energy management
with special reference to renewable resources); Cultural Resources (enhancement
of the region's cultural resources as a factor contributing to its economic and
social development); 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); 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); Cities (enhancement of
the City's role in its territorial context as a mean of improving
competitiveness and the social potential of urban areas); Networks and Service
Hubs (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); Technical Assistance (measures will be equally provided to assist with
the management of, information on, implementation of, control and evaluation of
all aspects of the Programme).
The City of Naples
General. Naples is the major business, commercial and cultural center
of the Region of Campania. In 2001, the City's GDP per capita was approximately
'E'11,100 as compared to an average of 'E'14,011 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 and
Ischia. In 2001, approximately 10.3 million tourists visited the Region as
compared to 20.7 million in 2000, representing a decrease of 50.2%. The
administration has made a centerpiece of its agenda cleaning up the historic
areas of the City, in particular near the port, 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. In
2001, unemployment rate was 28% in Naples and 22.5% in the Region as compared to
a national average of 9.5%.
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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(1)
Year Ended December 31,
----------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Naples.................................... 1.8% 1.9% 1.8% 1.9% 2.7%
Italy..................................... 2.0% 1.9% 1.7% 2.5% 2.7%
- ---------------
(1) December vs. December except where noted.
Source: ISTAT, Servizi Statistici Comune di Napoli.
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FINANCIAL CONDITION OF THE CITY
Summary
The relationships between the City, the Central Government and the
regional government is governed by two principal laws, Law 142 and Law 421 (the
Municipal Finance Laws) passed in 1990 and 1992, respectively, as amended since
such dates. The City derives the majority of its revenues from transfers,
primarily from the Central Government. Municipalities are permitted to levy
direct and indirect taxes (other than income taxes) and charges and fees for
services.
The general administration of Naples' finances is the responsibility of
the Mayor 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 sent to the Board of
Auditors who review and comment on the budget. The budget is then passed to the
City Council for approval. Following the approval by the City Council, the
budget is reviewed and, if deemed in compliance with legal requirements,
validated by the Regional Control Commission. The Budget for each year is
required to be approved by October 31 of the previous year. In practice,
however, the budget may be delayed (as was the case in 1997 when the budget was
approved on February 28, 1997) due to the lack of a budget at the Central
Government. The City Budget is completed after 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 make
adjustments if necessary and such adjustments must be made by November 30. Local
authorities must include in the budget a reserve of not less than 0.3% and not
more than 2% of budgeted expenses to be used for extraordinary or greater than
expected expenses.
Special entities submit their budgets to the City's financial services
department for review. The budgets and the financial statements of the special
entities must be approved by the City Council. In the past, all decisions with
respect to the special entities had to be made by the City Council, resulting in
delays. Except for the approval of the budget, annual financial statements and
acquisitions by the City Council, the City has delegated decision-making to the
special entities. Funding of the special entities by the City occurs through
current transfers.
The City Council is required to approve year-end financial statements
no later than June 30 of each year. The financial statements are prepared by the
financial services department and then approved by the City Board. The City's
financial statements are reviewed by the Board of Auditors which prepares an
annual report that accompanies the City's financial statements for approval by
the City Council. Following the approval by the City Council, the financial
statements are reviewed, and if deemed in compliance with legal requirements,
validated by the Regional Control Commission.
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. New borrowing is
only permitted if interest expense, net of interest transfers from the central
and regional governments, is less than 25% of the year's current revenue.
Municipal Treasurer (Tesoriere Comunale). Municipalities in Italy are
required to make 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 the Banco di Napoli.
Delegazione di Pagamento. The municipal treasurer can be delegated with
the 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 delegazione di pagamento by
providing the municipal treasurer with a power and a timetable for payments of
interest and principal. The City may, but is not required to, provide for
delegazione di pagamento on loans other than bonds. Historically the City has
made such irrevocable payment instructions on all its financial indebtedness.
See "Debt of the City". Once delegated the authority, the
16
<Page>
municipal treasurer is required to make future payments as interest and
principal become due. The Municipal Finance Laws require 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 for the
periods indicated the current revenues and expenditures and the capital revenues
and spending:
<Table>
<Caption>
Year Ended December 31,
----------------------------------------------------------------------------
Budget
1997 1998 1999 2000 2001 2002(2)
------- ------- ------- ------- ------- -------
('E' millions)
Current Revenues.................... 1,151.6 1,194.8 1,161.9 1,164.0 1,301.5 1,287.3
Previous Year Balance for Current
Expenditures(1)..................... 122.7 9.9 14.2 -- 5.0 53.2
Current Expenditures................ (1,082.0) (1,051.5) (1,020.2) (1,036.2) (1,036.5) (1,223.6)
------- ------- ------- ------- ------- -------
Current Balance..................... 192.3 153.3 155.9 127.9 139.2 116.9
------- ------- ------- ------- ------- -------
Capital Revenues.................... 328.5 398.7 271.3 263.6 114.3 395.8
Previous Year Balance for Capital
Expenditures(1)..................... 80.9 89.0 77.8 13.3 1.3 0
Capital Spending.................... (521.6) (496.5) (419.1) (513.3) (235.71) 532.2
------- ------- ------- ------- ------- -------
Balance Before Financing............ (50.8) 55.5 8.1 (121.9) (19.2) (19.5)
------- ------- ------- ------- ------- -------
New Borrowing....................... 161.9 9.8 61.2 203.3 93.8 383.8
Reimbursement of Borrowing.......... 112.6 112.6 107.4 72.8 74.3 364.2
------- ------- ------- ------- ------- -------
Total Balance....................... 79.3 41.7 39.7 21.9 38.6 0
======= ======= ======= ======= ======= =======
- ---------------
(1) Represent surpluses from previous years allocated to Current Expenditures
and Capital Expenditures, as indicated.
(2) Approved by the City Council on March 26, 2002.
The City's current balance has showed a surplus since 1991. In the past
years, 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 1997 to 2001, capital spending
was greater than capital revenues because the City used surpluses from previous
years to finance both current expenditures and capital spending.
Dissesto Finanziario
Naples declared dissesto in May 1993. Dissesto occurs when a
municipality is either insolvent or unable further to 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 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 of the Central Government (the "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 make a full
accounting of 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, 1993.
The primary reason Naples went into dissesto was that employees of the
City and the special entities 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.
17
<Page>
Within thirty days of the date on which the declaration of dissesto is
made, the municipality's city council must pass a resolution increasing local
taxes to the maximum extent allowed by law, reduce expenses and conduct its
financial activities on a balanced basis. This resolution cannot be rescinded
during the period of dissesto and consequent restructuring, which lasts for five
years. The Statutory Receivers must present a plan of restructuring to the
Ministry of the Interior, which must approve the plan within six months. Once
the period of restructuring begins, the municipality's main priorities are to
provide basic services to the community, repay any emergency loans made by the
Central Government and refrain from hiring new staff. Within three months of the
appointment of the Statutory Receivers, the City Council must present a
re-balanced financial statement for such year (bilancio stabilmente
riequilibrato) to the Ministry of the Interior, in which reductions in current
expenses and increases in taxes are proposed. The Ministry of the Interior then
must approve the re-balanced financial statement within six months. The City
Council of Naples presented its re-balanced financial statement in November 1993
and the Ministry of Interior approved the re-balanced financial statement in May
1994.
From the declaration of dissesto to the approval of the re-balanced
financial statement, there is a moratorium on interest payments and on the
payment of claims entered into prior to the date of dissesto (pre-dissesto
Claims) other than those payments of financial debt that are subject to
delegazione di pagamento. As a part of the dissesto procedure, the
municipality's tangible assets are held frozen and available to the Statutory
Receivers for payment of claims. These tangible assets include public buildings
and buildings for housing.
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 for its approval a plan for
repayment of the verified pre-dissesto Claims (the "Verified Claims"). The
Central Government through Cassa Depositi e Prestiti is required to grant a
loan, 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 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.
The liquidation procedure of pre-dissesto claims has been simplified
with the enactment of Legislative Decree No. 342 of September 15, 1997.
According to Article 16 of such Decree, the City may now attempt to reach a
settlement with each holder of a Verified Claim, pursuant to which each such
holder would receive immediate payment of an amount ranging from 40% to 100% of
the face value of each Verified Claim. Creditors who opt not to receive
immediate payment of the proposed amount will be paid in due course under the
normally applicable rules. The City has opted to resort to such simplified
procedure for the satisfaction of Verified Claims. Accordingly, it has asked the
Statutory Receivers to prepare a plan of liquidation and proposed settlement of
all Verified Claims. On March 5, 1998, the Statutory Receivers completed the
simplified procedure for accounting and verification of pre-dissesto Claims and
the recovery of credits owed to the City. On March 30, 1998 the City approved
the plan of liquidation presented by the Statutory Receivers, which provides for
payment of the face amount due to preferred creditors, and 60% of the
outstanding amount owed to junior creditors.
On November 30, 2001, the Statutory Receivers completed the procedure
and approved a final amount owed to creditors. Based on such balance, the total
amount of Verified Claims equals 'E'26.1 million of preferred creditors and
'E' 754.4 million of junior creditors (which, however, does not include
claims made by Special Entities which, if paid, would be paid over to the City
in an equal amount). Verified Claims owed to employees of the City qualify as
preferred credit and have been paid in full. Part of the junior creditors
representing a total of 'E'571 million agreed to a settlement agreement
providing for the payment of 60% of the total outstanding amount and therefore
will be paid 'E'343.2 million in the aggregate. The remaining junior
creditors will have to be paid in full. Consequently, the plan proposed by the
Statutory Receivers allocates a total of 'E'556.0 million in Verified Claims
consisting of approximately (i) 'E'343.2 million that cover 60% of the junior
creditors who agreed to settlement, (ii) 'E'182.4 million to pay in full the
junior creditors not part of the settlement agreement, (iii) 'E'26.1 million
to pay in full the preferred creditors and (iv) 'E'4.3 million to pay for
liquidation related expenses.
In connection with the dissesto procedure the City has obtained to date
approximately 'E'608.5 million to cover the outstanding 'E'556.0 million
of Verified Claims. The amount of 'E'608.5 million consists of (i) a
'E'309.8 million loan granted by the Cassa Depositi e Prestiti. Such loan is
to be entirely repaid by the Central Government; (ii) 'E'197.3 million of
available revenues and accruals (versamenti in riscossione); and (iii)
'E'101.4 million from budget surplus in the prior years and the sale of
certain assets owned by the City.
18
<Page>
To date the City has paid approximately 66% of the 'E'556.0 million
in Verified Claims and is in the process of paying the remaining 'E'185.4
million of such claims.
Lending Restrictions. Except for loans for investments granted by the
Central Government or the Region, a City in dissesto cannot enter into a new
loan during the period that commences from the date of the Ministry of the
Interior's approval of the rebalanced financial statements to the end of the
dissesto procedure unless (i) the municipality had a surplus in the previous two
years, and (ii) the municipality has fully repaid all losses incurred by its
utility companies. Naples has met these criteria.
Financial Federalism
Transfers of funds by the Central Government represent the majority of
the revenues of the City. The Municipal Finance Laws transformed the financial
relationship between the Central Government and local authorities 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
an equivalent reduction of tax transfers to local authorities by the Central
Government. See "--Current Revenues."
Further, the Municipal Finance laws established three basic types of
Central Government transfers: ordinary transfers, equalization transfers and
capital transfers. Ordinary transfers are and will 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 for 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. See
"--Republic of Italy."
Current Revenues
Sources of Revenue. Transfers of funds by the Central Government and
the Region represent a majority 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; property
transfer taxes; advertising taxes; municipal concessions fees; business,
professional and cultural activities taxes (Imposta Comunale per l'Esercizio di
Imprese e di Arti e Professioni (ICIAP)); 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 on the third year. The City applied an initial
0.2% tax for the year 1999-2000 and has planned to increase it up to 0.4% for
the year 2000-2001, and 0.5% for the year 2001-2002.
19
<Page>
Current Revenues
Year Ended December 31,
-----------------------------------------------------------------------------
Budget
1997 1998 1999 2000 2001 2002(2)
------- ------- ------- ------- ------- -------
('E' millions)
Tax Revenues:
Imposte........................ 191.9 180.7 187.5 204.3 218.4 216.7
Tasse.......................... 114.7 85.9 93.7 119.9 106.5 105.3
Tributi speciali............... 11.2 71.9 19.1 20.7 1.2 1.3
------- ------- ------- ------- ------- -------
Total tax revenue........... 317.9 338.0 300.3 345.0 326.1 323.3
Current Transfers:
Central Government............. 698.5 694.4 696.6 641.8 715.2 681.4
Campania....................... 7.2 4.6 10.8 20.3 27.9 70.4
Other.......................... 0.1 1.8 0.5 3.0 4.4 1.2
------- ------- ------- ------- ------- -------
Total current transfers..... 705.8 700.8 708.0 665.1 747.6 753.0
Non-Tax Revenue:
Public services................ 55.6 54.2 58.1 82.3 94.5 104.9
Rents.......................... 16.0 19.4 24.3 23.2 27.4 27.1
Interest income................ 12.6 12.1 13.3 12.2 9.5 5.3
Competitions, refunds and
payoffs........................ -- -- -- -- 0.7 --
Corrections.................... -- -- -- -- -- --
Other revenues................. 42.9 70.3 57.8 36.2 95.5 73.7
------- ------- ------- ------- ------- -------
Total non-tax revenues...... 128.0 156.0 153.6 154.0 227.9 211.0
------- ------- ------- ------- ------- -------
Current Revenues............... 1,151.6 1,194.8 1,161.9 1,164.0 1,301.5 1,287.3
======= ======= ======= ======= ======= =======
Previous year balance for
current expenditures(1)........ 122.7 9.9 14.2 -- 5.0 53.2
------- ------- ------- ------- ------- -------
Total Current Revenues......... 1,274.3 1,204.7 1,176.1 1,164.0 1,306.5 1,340.5
======= ======= ======= ======= ======= =======
- ---------------
(1) Represent surpluses from previous years allocated to current expenditures,
as indicated.
(2) Approved by the City of Council on March 26, 2002.
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 (ICI) based on the value of real estate registered at the public
registrar's office at a rate of 0.6% which is the maximum rate allowed by law.
Prior to 1993, ICI was known as INVIM (Imposta sull'Incremento di Valore degli
Immobili) and paid only in connection with the transfer of property. Until 1994,
ICI was collected by the Central Government and credited to Naples. Today ICI is
collected directly by the City. Tasse include fees levied on local enterprises
(based on their revenues and the size of the premises in which the activity is
carried out), on the exploitation of public areas for private use, on the
consumption of electric power and on the performance of administrative duties
(such as the issuance of stamps or notarization). Tributi speciali are fees for
the right to make street advertisements and fees for water purification. Tax
revenues increased by 'E' 20.1 million in 1998 primarily as a result of the
introduction of a new local tax - Imposta Regionale sulle Attivita Produttive,
"IRAP" - and an increase in other taxes offset in part by a decrease in the tax
on solid wastes. In 1999, tax revenues decreased by 'E'37.7 million primarily
as a result of a significant reduction in the special fees collected directly by
the City of Naples. In 2000, tax revenues increased by 'E'44.7 million as a
result of the introduction of a new local personal income tax (Addizionale
IRPEF) and an increase in real estate taxes (ICI). In 2001, tax revenues
decreased by 'E'18.9 million due to (i) a decrease of 'E'13.4 million in
Tasse, deriving from a decrease in fees levied on the exploitation of public
areas for private use as well as a decrease in taxes on solid waste; and (ii) a
decrease of 'E'19.6 million in Tributi speciali as a result of the
elimination of the IRAP local tax,
20
<Page>
which, starting from 2001, has been included in current transfers from the
Central Government. These decreases were partially offset by an increase of
'E'14.0 million in Imposte, mainly due to an increase in revenues from
Addizionale Irpef and ICI taxes.
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 slight decline in current transfers in 1997 and 1998
is essentially due to the new ICI tax regime which provides for the municipality
to collect the entire tax, rather than being collected by the Central Government
and reallocated as a current transfer. See "--Financial Federalism". 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 relating to 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 2001, current transfers increased by 'E'82.5 million, or 12.4% as
compared to 2000. The increase was due to (i) an increase of 'E'73.4 million
in current transfers from the Central Government, as a result of the abolition
of the local IRAP tax, and the severance of certain employees of the City, as
part of the dissesto procedure; and (ii) an increase of 'E'7.6 million in
transfers from the Region due to the implementation of certain regional projects
and the financing of public transportation services and certain local
administrative expenses.
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 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 (VAT) 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 2001 non-tax revenues increased by 'E'73.9 million, or 48.0%,
primarily as a result of (i) an increase in public services revenues due to an
increase in fines for violations of rules of the road ('E'12.9 million), and
(ii) a substantial increase in other revenues. mainly due to the Region of
Campania contributions for public transportation services provided in past years
('E'41.8 million), and the payment of certain credits in connection with the
liquidation of AMCL, Azienda Municipalizzata Centrale del Latte, Napoli
('E'9.6 million). See "--Special Entities".
Current Expenditures
Current expenditures include personnel, goods and services, current
transfers, interest expense, corrections and unallocated expenditures.
The following table sets forth for the periods indicated the current
expenditures of the City.
21
<Page>
Current Expenditures
<Table>
<Caption>
Year Ended December 31,(1)
---------------------------------------------------------------
Budget
1997 1998 1999 2000 2001 2002(2)
------- ------- ------- ------- ------- -------
('E' millions)
Personnel expenses.......................... 421.0 394.7 407.5 388.8 402.6 407.1
Goods and services.......................... 322.0 343.7 352.5 398.1 493.7 497.8
Rents, leases and related costs............. 10.2 9.7 9.3 9.1 9.8 11.8
Current transfers........................... 48.1 100.4 105.2 98.9 97.3 111.0
Interest expense............................ 111.2 96.2 67.8 56.5 53.5 55.3
Corrections................................. 0.0 0.0 0.0 0.0 0.0 0.0
Taxes....................................... 7.5 36.9 34.4 30.6 28.6 31.9
Extraordinary expenses...................... 162.1 96.2 43.4 54.2 81.7 40.9
Unallocated................................. 0.0 0.0 0.0 0.0 0.0 0.0
Others...................................... - - - - 0.0 -
------- ------- ------- ------- ------- -------
Total Current Expenditures............... 1,082.1 1,051.4 1,020.2 1,036.2 1,167.2 1,223.7
======= ======= ======= ======= ======= =======
- ---------------
(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 of Council on March 26, 2002.
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 solid waste
collection street cleaning, and Special Entities. Current transfers are
transfers made by the Central Government and the Region of Campania and take the
form of both ordinary transfers and equalization transfers. 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. Unallocated expenditures are expenses not included in
individual divisional budgets.
For the past years, the City has been pursuing a policy of containing
the growth of personnel expenses while increasing the amount spent for the
provision of services to the City's inhabitants. However, in 2001 personnel
expenses increased by 'E'13.8 million, or 3.6%, mainly due to an increase in
personnel's salaries, while the ratio of goods and services expenditures to
personnel expenses has steadily grown from 69.6% in 1997 to 122.6% in 2001.
The following table sets forth for the periods indicated the current
expenditures of the City attributable to its major activities.
22
<Page>
Current Expenditures by Major Activity
Year Ended December 31,
--------------------------------------------------------------
Budget
Activity 1997 1998 1999 2000 2001 2002(4)
-------- ------- ------- ------- ------- ------- -------
('E' millions)
Administration.................................... 388.5 307.6 322.7 303.9 375.6 435.4
Roads and Transportation.......................... 214.6 202.0 179.1 171.7 183.5 173.5
Waterworks(1)(3).................................. n/a n/a n/a n/a n/a n/a
Sewage(3)......................................... n/a n/a n/a n/a n/a n/a
Waste Disposal(3)................................. n/a n/a n/a n/a n/a n/a
Education, Culture, Sport and Recreational
Activities........................................ 129.5 122.1 121.8 87.5 99.7 109.5
Public Security................................... 60.8 69.9 55.7 77.4 77.3 85.4
Housing(3)........................................ n/a n/a n/a n/a n/a n/a
Housing and Environmental Management(3)...........
220.8 252.2 218.7 284.3 294.4 278.0
Social Services(2)................................ 73.6 87.6 110.4 107.1 122.7 145.4
Services and Local Economic Promotion.............
7.7 9.1 11.3 8.1 12.0 14.8
Other............................................. 0.5 0.9 0.0 89.7 2.0 0.7
------- ------- ------- ------- ------- -------
Total.......................................... 1,082.1 1,051.5 1,020.1 1,037.1 1,167.2 1,242.7
======= ======= ======= ======= ======= =======
- ---------------
(1) Operated by ARIN, a special entity, the numbers shown are net of fees for
service.
(2) Primarily services for elderly, foster service and disabled.
(3) Starting from 1997 Waterworks, Sewage, Waste Disposal and Housing have been
grouped into a single category: "Housing and Environmental Management".
(4) Approved by the City Council on March 26, 2002.
Current Expenditures in 1998 decreased by approximately 'E'31
million as a result of Administration expenses resulting from the absence of the
one-time payment in 1997 to the Statutory Receivers.
Current Expenditures in 1999 were lower than in 1998, due to a decrease
of the expenses related to public security, housing and environmental matters,
transportation and maintenance of public roads offset in part by an increase of
those attributable to human resources and social services.
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 administration,
road and transportation and social services.
Current Expenditures in 2001 increased by 'E'130.1 million, or
12.5%, as compared to 2000, mainly due to a substantial increase in
administration, roads and transportation and education, culture, sport 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 EU
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 for the period indicated the capital
revenues of the City.
23
<Page>
Capital Revenues
Year Ended December 31,
--------------------------------------------------------------
Budget
1997 1998 1999 2000 2001 2002(1)
----- ----- ----- ----- ----- -----
('E' millions)
Asset sales.................................... 8.9 2.5 1.9 9.7 0.1 12.0
Capital transfers.............................. 319.5 396.1 269.4 253.9 114.2 383.8
----- ----- ----- ----- ----- -----
Total....................................... 328.5 398.7 271.3 263.6 114.3 395.8
===== ===== ===== ===== ===== =====
- ---------------
(1) Approved by the City Council on March 30, 2001.
The decrease in capital revenues in 1999 was mostly due to reduced
transfers from the Central Government and the Region. 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 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 (subway system),
land development and environmental projects and maintenance works for municipal
buildings.
The following table sets forth for the periods indicated the capital
expenditures of the City attributable to its major activities.
24
<Page>
Capital Expenditures
Year Ended December 31,
--------------------------------------------------------------
Budget
1997 1998 1999 2000 2001 2002(4)
----- ----- ----- ----- ----- -----
('E' millions)
Administration................................... 26.2 182.9 48.0 131.9 13.3 121.1
Roads and Transportation......................... 272.1 309.3 272.0 187.8 63.8 285.6
Waterworks(1)(3)................................. n/a n/a n/a n/a n/a n/a
Sewage(3)........................................ n/a n/a n/a n/a n/a n/a
Waste Disposal(3)................................ n/a n/a n/a n/a n/a n/a
Education, Culture, Sport and Recreational
Activities....................................... 12.9 16.2 15.5 39.6 21.5 18.0
Public Security.................................. 0.5 0.0 0.4 0.0 1.2 0.8
Housing(3)....................................... n/a n/a n/a n/a n/a n/a
Housing and Environmental Management(3).......... 237.0 148.2 69.4 132.8 132.9 82.5
Social Services(2)............................... 16.4 19.4 6.1 12.9 0.9 1.6
Services and Local Economic Promotion............ 4.3 2.3 7.4 7.8 2.2 2.6
Other............................................ 1.7 5.1 0.3 0.5 0.0 0.0
----- ----- ----- ----- ----- -----
Total......................................... 571.6 683.2 419.1 513.3 235.7 512.2
===== ===== ===== ===== ===== =====
- ---------------
(1) Operated by ARIN, a special entity, the numbers shown are net of fees for
service.
(2) Primarily services for elderly, foster service and disabled.
(3) Starting from 1997 Waterworks, Sewage, Waste Disposal and Housing have been
grouped into a single category: "Housing and Environmental Management".
(4) Approved by the City Council on March 26, 2002.
Capital Expenditure in 2001 included both capital expenditures financed
in part by the City and capital expenditures financed through transfers from the
Central Government, the Region and the EU. The amount financed by the City
included funds accumulated from the budget surpluses in the previous years,
borrowings and asset sales. In 2001 the significant decrease in Capital
Expenditure was due to a slowdown in the implementation of certain public
projects, including roads and transportation projects (subway system), land
development and environmental projects and maintenance works for municipal
buildings.
Special Entities
The City owns interests in several special entities currently organized
as aziende speciali. The business areas in which these entities operate are
urban and suburban transportation, water supply and airport management. During
the past, these entities have incurred substantial losses largely as a result of
inefficient management.
In 1995, the City transformed the status of these entities from aziende
municipalizzate into aziende speciali, except CTP, which remains a consortium.
As aziende municipalizzate these entities had no separate legal status and
required the approval of the City Council for every decision. As aziende
speciali such entities have a separate legal status from the municipality and
have managerial independence. The directors of aziende speciali are appointed by
the mayor of the City and the City Council approves the budget and the financial
statements of the entities and the acquisition of interests in other companies
by such entities. Prior to 1996, special entities' losses have been covered by
transfers from the City. Since 1996, monies transferred to the Special Entities
have been reclassified as current expenditures for goods and services as opposed
to current transfers, except for CTP, which is a consortium and continues to
receive funds in the form of transfers.
25
<Page>
The primary reason Naples went into dissesto was that employees of the
City and the special entities made expenditures that were not appropriated in
the budget. Legislation enacted in 1996 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.
The following table sets forth the revenue and net income (loss) for
each special entity for the last five fiscal years at December 31.
Year Ended December 31,
----------------------------------------------------
1997 1998 1999 2000 2001
------ ------ ------ ------ ------
('E' millions)
ANM
Revenue......................................... 92.8 96.0 101.8 113.0 101.3
Net Income (loss)(1)............................ 0 0 (6.8) 4.2 (12.1)
CTP
Revenue......................................... 8.5 8.7 9.2 9.8 8.1
Net Loss........................................ (59.7) (45.7) (43.9) (42.7) (30.0)
Transfers from the City(2)...................... 21.7 19.1 22.0 21.4 14.8
ARIN
Revenue......................................... 88.7 89.9 91.5 93.6 95.3
Net Income (loss)............................... 0 0 (14.5) (48.4)(4) (6.4)
- ---------------
(1) Includes a reimbursement of 'E'111 million received by ANM relating to
the overpayment of social security benefits (INPS) that is to be paid over
a ten year period until 2002.
(2) Includes both transfers to cover losses in prior years and interest on
loans contracted in prior years. As of 1996 such transfers are contributed
as ordinary transfers, paid in a lump sum at the beginning of each year.
(4) These losses relate to extra-ordinary events, as a result, the City of
Naples covered only part of the losses for an amount equal to 'E'1,5
million. The remaining portion of the loss has been covered through a
re-evaluation of certain fixed assets (such as distribution grid, and
equipment)
The principal special entity is ANM, Azienda Napoletana Mobilita
S.p.A., (formerly ATAN, Azienda Tranvie Autofilovie, Napoli). The entity is 100%
owned by the City. In June 1995 it changed its form into an azienda speciale and
finally in March 2001, it became a joint stock company (societa' per azioni).
ANM is primarily responsible for the operation of the City's bus fleet. In 1998,
its fleet comprised approximately 1,272 vehicles, of which approximately 767
were functional. During 1998 ANM operated 151 autobus routes and 4
trolleys/tramways routes which covered approximately 29.5 million kilometers.
ANM is also responsible for the operation of three funiculars. Since 1998 ANM
has maintained and operated line no. 1 of the Naples subway.
In 2001 Metronapoli S.p.A, a joint stock company (societa' per azioni)
was formed to manage and expand the subway network of the City.
In 2001, ANM incurred a net loss of 'E'12.1 million as compared to a
net income of 'E'4.2 million in 2000. In 2000, revenues increased by
'E'11.2 million as a result of an increase in the sale of tickets. The loss
incurred in 2001 was mainly due to an increase of 'E'10.4 million, or 53%, in
costs for services, due to an increase in insurance costs and the incurrence of
costs relating to the investment in Metronapoli. In 2001, revenues decreased by
'E'11.7 million mainly as a result of a decrease in payments for services
transferred from the City, due to the City's challenge of certain billing items.
Payments by the City to ANM from 1998 to 2001 have been, respectively,
'E'66 million, 'E'86 million, 'E'65.3 million and 'E'65.4 million.
In 2000, ANM and the City entered into a vendor-supplier relationship pursuant
to which ANM bills the City for its services.
The primary source of revenue remains payments for services transferred
from the City. ANM also collects revenues directly from riders' payment of
fares. ANM believes that significant fare evasion occurs and is seeking to
reduce such evasion. An important step to control such evasion was made by the
introduction of a special ticket, Napolipass, which can be used on both buses
and subways, which is printed on paper that is difficult to counterfeit. Another
measure includes the empowerment of bus controllers as public officials and
therefore enabling them to request the identity of transgressors. ANM's losses
are required to be covered by capital transfers from the City.
26
<Page>
While these transfers were previously effected on an annual basis, since 1994
transfers by the City occur on a monthly basis. In addition, such transfers are
now paid by the City as consideration for services provided by ANM, in the
amounts and pursuant to the terms and conditions provided for by the related
service agreement entered into between City and ANM.
CTP, Consorzio Trasporti Pubblici S.p.A. (formerly ACTP, Azienda
Consortile Trasporti Pubblici di Napoli) operates transport between the City and
the suburbs of Naples. The City owns 50% of CTP (the other 50% is owned by the
Provincia di Napoli). CTP was transformed in 1995 into an azienda speciale, and,
subsequently, in March 2001, it was transformed into a joint stock company
(societa' per azioni). In 2001 CTP incurred a net loss of 'E'30.0 million, as
compared to a net loss of 'E'42.7 million in 2000 and a net loss of
'E'43.9 million in 1999. 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. At December 31, 2001, the
entity employed approximately 1,948 persons. In 2001, its fleet was comprised of
491 buses, which covered approximately 28.8 million kilometers and transported
approximately 16 million passengers.
ARIN, Azienda Risorse Idriche di Napoli S.p.A. (formerly AMAN, Azienda
Municipalizzata Acquedotto di Napoli) supplies water to the City and to 26
municipalities surrounding the City. In 2001, ARIN supplied approximately
153,620,000 cubic meters of water to 2 million inhabitants. ARIN owns a water
distribution system of approximately 19,000 kilometers of pipe and purchases its
water from the Acquedotto del Serino, Gestione Regionale and the Acquedotto di
Integrazione e Riserva. The entity is 100% owned by the City and in 2001, it was
split into two new companies as a result of the spin-off of Special ARIN, which
operates as an azienda speciale. All liabilities relating to the original ARIN,
including the 2000 liabilities, have been now transferred to Special ARIN that
will manage all pending payments up to the year 2000. ARIN, however, may still
be held liable if Special ARIN defaults on any payment due. At December 31,
2001, ARIN employed approximately 630 persons. Future plans include the
implementation of a national law regarding the restructuring of the national
water works, which is expected to result in ARIN serving a larger community and
managing their clients' sewage and water purification systems. In addition, the
City is considering a plan turning ARIN into a "utility company" supplying both
water and gas services.
In 2001, ARIN's recorded a net loss of 'E'6.4 million while in 2000
ARIN had a net loss equal to approximately 'E'48.4 million. The decrease in
losses was due to the execution of a spin off transactions, whereby all existing
liabilities were transferred from the existing company ARIN to the spun off
company Special ARIN. In 1999, the City made a capital contribution of 'E'36
million to ARIN. In 2000, since most of the losses derived from extraordinary
activities not part of the ordinary course of business, the City provided a
capital contribution of only 'E'1.6 million. In 2001, the City made no
capital contribution.
27
<Page>
DEBT OF THE CITY
Debt of the City principally consists of loans borrowed in the domestic
market from the Cassa Depositi e Prestiti (approximately 'E'448.7 million at
December 31, 2001) and from Italian banking institutions ("Internal Funded
Debt") and the Notes. The Cassa Depositi e Prestiti is an entity managed and
funded by the Central Government and lends exclusively to local authorities.
From 1993 to 1995, the City did not borrow due to restrictions on municipalities
in dissesto. The City regularly includes in its budgets provisions to permit
short term borrowings, although the City has generally not made such borrowings
with the exception of the 'E'162 million borrowed in 1997. The Central
Government contributes to the debt service of the City. For loans contracted
prior to 1980, the Central Government is responsible for 100% 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,
----------------------------------------------------------
1997 1998 1999 2000 2001
-------- ----- ----- ----- -----
('E' millions)
Fixed Rate Debt........................... 900.7 822.0 797.6 782.6 758.1
Floating Rate Debt........................ 31.8 0.9 0.0 8.5 8.1
-------- ----- ----- ----- -----
Total Debt Outstanding.................... 932.5(1) 823.0 797.6 791.1 766.3
======== ===== ===== ===== =====
Debt for which service is paid with
Central Government transfers............ 86.3 73.3 66.3 47.8 41.6
- ---------------
(1) Does not include a 'E'162 million loan to be repaid in full by the State.
The following table sets forth the changes in the debt of the City for
the periods indicated:
Year Ended December 31,
----------------------------------------------------------
1997 1998 1999 2000 2001
-------- ------- ------- ------ -----
('E' millions)
Outstanding at Beginning of Year.......... 1,045.1 932.5 822.9 797.6 791.1
New Borrowings............................ 0.0 3.1 82.1 66.3 49.6
Debt Repayments........................... (112.6) (112.6) (107.4) (72.8) (74.4)
-------- ------- ------- ------ -----
Outstanding at End of Year............. 932.5 822.9 797.6 791.1 766.3
======== ======= ======= ====== =====
28
<Page>
The following table sets forth the maturity and debt service schedules
of the City's debt outstanding on December 31, 2000.
Maturity of Debt and Debt Service
Principal Interest Debt Transfers from Net Debt
Maturing during the Year Due Due(1) Service Central Government Service
------------------------ --------- -------- ------- ------------------ --------
('E' thousands)
2001............................. 74,391 51,415 125,806 47,813 77,993
2002............................. 69,347 48,869 118,216 41,576 76,640
2003............................. 72,938 44,112 117,050 41,085 75,965
2004............................. 76,802 39,107 115,909 39,020 76,889
2005............................. 69,546 34,003 103,549 36,952 66,597
2006............................. 73,156 29,232 102,388 26,949 75,439
2007............................. 57,627 24,542 82,169 25,446 56,723
2008............................. 50,691 20,800 71,491 18,805 52,686
2009............................. 46,838 17,487 64,325 14,583 49,742
2010............................. 46,190 14,361 60,551 12,879 47,672
2011............................. 42,183 11,322 53,505 6,330 47,175
2012............................. 37,372 8,579 45,951 6,330 39,621
2013............................. 19,487 6,441 25,928 5,678 20,250
2014............................. 20,559 5,367 25,926 5,678 20,248
2015............................. 18,975 4,273 23,248 5,678 17,570
2016............................. 13,258 3,325 16,583 -- 16,583
2017............................. 13,996 2,587 16,583 -- 16,583
2018............................. 13,125 1,807 14,932 -- 14,932
2019............................. 12,142 1,140 13,282 -- 13,282
2020............................. 8,047 545 8,592 -- 8,592
2021............................. 3,905 156 4,061 -- 4,061
- ---------------
(1) The interest due on floating rate debt was calculated at 12.75% per annum.
Short-term Debt
As of December 31, 2001, the City had no outstanding principal amount
of short-term debt. Short-term borrowings of the City are limited to 25% of
budgeted current revenues by law.
The City did not borrow on a short-term basis in the period from 1985
to 1994. During this period, the City utilized unused funds appropriated for
other specific purposes to cover temporary current expenditure or cash flow
needs. Cities in dissesto are no longer permitted to use appropriated funds for
other purposes. In 1995 the City borrowed 'E'29 million from its Municipal
Treasurer for a period of 2 days to meet a time lag. No further short-term debt
was incurred by the City since 1996, with the exception of a loan totaling
'E'162 million borrowed in 1997.
Debt Record
The City has never failed in the past 50 years (i.e. since 1946, the
date of the establishment of the Republic of Italy) 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 and --Dissesto
Finanziario."
29
<Page>
THE REPUBLIC OF ITALY
The Notes are not the obligations of, or guaranteed by, the Republic of
Italy.
The discussion set forth below is primarily based on the Annual Report
of the Bank of Italy (1998, 1999, 2000 and 2001), the Annual Report of the
Ministry of the Economy and Finance (1999 and 2000), the Italian Government's
2001-2004 Economic Program Document ("Documento di Programmazione Economica")
and on data provided by ISTAT (Istituto Nazionale di Statistica, the Italian
statistical service).
Central Government Administration
The Executive Branch. The head of state is the President, who is
elected for a seven-year term by an electoral college that includes 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 (who is the effective head of government) and to dissolve
Parliament. Silvio Berlusconi has served as Prime Minister since June 2001. The
Constitution also grants the President the power to appoint one-third of the
members of the Constitutional Court, to call general elections and referenda and
to command the armed forces.
The Judicial Branch. Italy is a civil law jurisdiction. Judicial power
is vested in the ordinary, administrative and accounting courts. 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 hears claims against the state and local authorities, is the
Consiglio di Stato in Rome. The Corte dei Conti in Rome supervises the
preparation of, and adjudicates, the state budget of Italy.
The Legislative Branch. The Parliament constitutes the legislative
branch of the Central Government. It consists of a Chamber of Deputies and a
Senate with 630 and 315 elected members, respectively. In 1993, the Parliament
enacted electoral reforms. From the adoption of the Italian Constitution in 1948
to 1993, both chambers of Parliament (the Chamber of Deputies and the Senate)
were elected by a system of proportional representation with a nominal lower
limit on the percentage of votes needed to achieve representation. Except for a
brief period, no one party has been able to command an overall majority in
Parliament, and Italy has a long history of weak coalition governments. The
electoral reform legislation adopted by Parliament in August 1993 provides that
75% of the members of both houses of Parliament be elected through a "first past
the post" system or single-member districts in which the candidate receiving the
largest number of votes wins. The remaining 25% are elected through a
proportional representation system. In the Chamber of Deputies, only parties
that receive at least 4% of the total vote on a nationwide basis are eligible
for the seats elected by proportional representation. These modifications of the
voting system have significantly reduced the number of parliamentary seats held
by parties that receive a relatively small share of the popular vote.
Since the electoral reforms, Italy has held three general elections,
the latest on May 13, 2001. The following tables show the results of the last
election:
30
<Page>
General Election of May 13, 2001
House of Deputies Senate
- -------------------------------------------------- ------------------------------------------------
Political Party Seats Political Party Seats
- -------------------------------------------------- ----- ------------------------------------------------ -----
Center-Right Coalition (Casa delle Liberta) ...... 368 Center-Right Coalition (Casa delle Liberta) .... 177
Center-Left Coalition (L'Ulivo)................... 242 Center-Left Coalition (L'Ulivo)................. 125
Communist Refoundation (Rifondazione Comunista)... 11 Italian Values (Italia dei Valori).............. 1
Sudtiroler Volkspartie - Olive (SVP-Ulivo)........ 8 European Democrats (Democrazia Europea)......... 2
Others (Altri).................................... 1 Sudtiroler Volkspartie - Olive (SVP - L'Ulivo).. 3
Communist Refoundation (Rifondazione Comunista). 3
Sudtiroler Volkspartie (SVP).................... 2
Individual Candidates (Candidati Individuali)... 1
Autonomist List (Lista Autonoma)................ 1
----- -----
Total............................................. 630 Total........................................... 315
The last general elections held on May 13, 2001, resulted in a victory
of the Right-Right Coalition, which includes Go Italy (Forza Italia), the
National Alliance (Alleanza Nazionale), the Northern League (Lega Nord), the
Christian Democratic Center (Centro Cristiano Democratico) and the Christian
Democratic Union (Cristiani Democratici Uniti). A new government, led by Silvio
Berlusconi, was formed on June 11, 2001, and won the vote of confidence in
Parliament on June 20, 2001. The Center-Right Coalition obtained an
unprecedented majority of both the House of Deputies and the Senate.
Economy
The economy of the Republic of Italy, as measured by gross domestic
product ("GDP"), was the fifth largest in the developed world at the end of
2000, after the United States, Japan, Germany and U.K. (Source: OECD). Italy is
a founding member of the European Union, and its economy is closely linked with
those of the other EU members. Over half of both Italy's exports and imports
involve other EU countries.
As a result of persistent budget deficits financed by borrowing,
Italy's public debt reached 124.8% of GDP in 1995. In 1995, the Government
achieved its long standing objective of stabilizing the debt-to-GDP ratio.
Italy's public debt as a percentage of GDP further decreased in subsequent years
reaching an estimated 109.4% of GDP at the end of 2001, although it remains
above the debt ceiling of 60% required under the Maastricht Treaty. Public debt
is estimated to have increased by 3.3% in 2001 (Source: ISTAT). The primary
balance (which excludes interest costs) has improved steadily over the past five
years and has shown surpluses since 1992.
Beginning in 1989, GDP growth began to slow in Italy as in other
countries of the EU, reaching 0.6% in 1992. The downturn in Italy became a
recession in the third quarter of 1992, which lasted until the end of the third
quarter of 1993. For the 1994-95 period, Italy experienced an average annual
real GDP growth rate of 2.9%, reflecting Italy's recovery from the recession.
Economic growth began to slow in the last quarter of 1995, and Italy's real GDP
growth rate in 1996 was 0.9%. In 1997, after a first quarter of negative growth,
the Italian economy began to recover, primarily as a result of stronger domestic
consumption, and real GDP grew by 2% for the year. In 1998, the real GDP growth
rate slowed to 1.8% and, in 1999, the real GDP growth rate increased to 1.6%. In
2000, the real GDP growth rate increased to 2.9%, the highest rate since 1995,
as compared to an average annual increase of 3.4% in the member countries of the
European Union. The growth in 2000 is primarily attributable to increased
domestic demand and expenditures, coupled with higher exports. In 2001 GDP grew
by 1.8% due primarily to increases in gross fixed investment and total
consumption.
The following tables set forth nominal and real GDP and expenditures
for Italy for the periods indicated:
31
<Page>
GDP Summary
Year Ended December 31,
--------------------------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
Nominal GDP(1).......................... 1,026,285 1,073,019 1,108,497 1,164,767 1,216,583
Real GDP(1)(2).......................... 952,050 969,130 984,567 1,012,802 1,030,910
% Change (real)......................... 2.0% 1.8% 1.6% 2.9% 1.8%
Population (thousands).................. 57,563 57,613 57,680 57,844 --
Nominal per capita GDP(3)(2)............ 17,829 18,625 19,218 20,136 --
Real per capita GDP(3).................. 16,539 16,821 17,069 17,509 --
- ---------------
(1) 'E' millions.
(2) Constant euro, with purchasing power equal to the average for 1995.
(3) Euro.
Source: ISTAT (2002).
32
<Page>
GDP and Expenditures
Year Ended December 31,
-----------------------------------------------------------------------
1997 1998 1999 2000 2001
----------- ---------- --------- --------- ----------
('E' millions)
Real GDP................................. 952,050 969,130 984,567 1,012,802 1,030,910
Imports of goods and services............ 232,621 253,285 266,639 291,669 292,151
--------- --------- --------- --------- ---------
Total supply of goods and services....... 1,184,671 1,222,415 1,251,206 1,304,471 1,323,061
Less: Exports of goods and services...... 267,151 276,325 277,059 309,510 311,897
--------- --------- --------- --------- ---------
Total goods and services available for
domestic expenditure..................... 917,520 946,090 974,147 994,961 1,011,164
Private sector consumption............... 562,337 580,294 594,271 610,265 616,981
Public sector consumption................ 171,175 171,730 174,131 177,164 181,321
--------- --------- --------- --------- ---------
Total consumption........................ 733,512 752,024 768,402 787,429 798,302
Gross fixed investment................... 179,114 186,229 196,755 209,446 214,464
Changes in inventories................... 4,894 7,837 8,991 (1,914) (1,602)
--------- --------- --------- --------- ---------
Total domestic expenditure............... 917,520 946,090 974,147 994,961 1,011,164
- --------------
Source: ISTAT (2002).
In 1997, domestic consumption in Italy, particularly of household
durable goods (such as furniture and appliances), communications and
recreational services, grew by 2.6%. In 1998, domestic consumption of goods and
services increased by 2.4%, fuelled mostly by motor vehicle purchases (which
benefited from government incentives for scrapping old vehicles), household
consumption and stockbuilding by firms. In 1999, domestic consumption of goods
and services grew by 2.10% due to the weakening of consumer spending power and
an atmosphere of uncertainty regarding the Italian economic situation. In 2000,
domestic consumption of goods and services registered a growth of 2.8% as a
result of an increase in the purchases of durable goods (particularly motor
vehicles, telecommunication and recreational products, furniture and electric
appliances) and services (primarily communication services, hotels and
recreational services, insurance and other financial services). In 2001,
domestic consumption of goods and services grew by 1.3%.
Gross fixed investment grew by 2.1% in 1997, 4.0% in 1998, 5.7% in
1999, 6.4% in 2000 and 2.9% in 2001. The growth in 2000 was mainly attributable
to increased investments in construction, motor vehicles and intangibles.
Total domestic expenditure, encompassing consumption, investment and
changes in inventories, grew only marginally in 1996, by 0.8%, reflecting the
slowdown in economic activity that began in late 1995 and continued throughout
1996. In 1997, consumer spending was especially robust in the first half of the
year but subsequently lost momentum, eventually registering a rate of growth of
2.7%. In 1998 and 1999, total domestic expenditure increased by 3.0% and 2.8%,
respectively, while in 2000 and 2001, it increased by 2.4% and 1.6%,
respectively.
In 2001, the following sectors of the economy contributed the indicated
percentage of GDP: agriculture, fishing and forestry (2.7%), industry and
manufacturing (25.9%), construction (4.9%) and services (60.3%) (including
commerce, hotels, public works, transport and communications, financial
services, rent and other miscellaneous services). (Source: ISTAT). VAT and
tariffs on imports accounted for the remaining 6.2% of GDP.
Principal Sectors of the Economy
Services
In 2001, market services represented 60.3% of GDP and employed 63.5% of
the economically active population.
33
<Page>
Transport. Italy's transport sector has been relatively fast-growing
largely as a result of trade integration with European markets. Roads are the
dominant mode of transportation in Italy and include, among others, local roads
that are managed and maintained by regions and local authorities, roads outside
the local areas that are managed and maintained by the State Road Board and a
system of toll highways that are in part managed and maintained by Autostrade -
Concessioni e Costruzioni Autostrade S.p.A., Italy's largest motorway company.
Autostrade manages 3,120 kilometers of the 6,478 kilometer system of motorways
under a twenty-year concession granted by the State Road Board. Toll motorways
represent 85 per cent of the total motorway network.
Italy's railway system is small in relation to its population and land
area, and has historically suffered from overstaffing, high pay and inadequate
infrastructure. The Government provides substantial operating subsidies to the
State-owned railroads, making passenger tickets less expensive than for most
European railroads. The Italian State Railway Company (Ferrovie dello Stato
S.p.A., or "FS") had losses of 'E'1.4 billion in 1999, compared to 'E'1.2
billion in 1998. In March 1999, the Government issued a directive for the
reorganization of the state railways. In January 2000, the infrastructure
components and transportation services business were legally separated. A new
protocol agreement was signed in November 1999 by the Italian Ministry of the
Economy and Finance (the "Treasury") (as shareholder), FS and the unions
providing for the return to a balanced financial account by 2003 and 2005 for
the service division and the infrastructure division, respectively. One of the
most important objectives under the protocol is the shift towards a new fare
system. The gradual review of the current under-priced passenger fare system,
which started in January 1999, will cause upward revisions of long distance
fares, while short distance fares will remain stable. The new protocol also
provides for a new wage and labor contract according to which wages would start
to be aligned to productivity gains and employment conditions made more
flexible. The transport activity has been divided into three separate business
units (freight and inter-city businesses, which the Government plans to
privatize, and local transport and infrastructure, which 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. By January
2000, many regions had published plans with the government setting targets for
regional transportation. Under the planned decentralization process, regions
will become responsible for the whole range of local transportation services
through contracts entered into with the Central Government. A project for a new
high-speed train system (Treno ad alta velocita) linking Turin to Milan and
Milan to Rome and Naples, is expected to be substantially completed by 2008.
In 1996, six Italian ports ranked among the thirty largest ports in the
European Union in terms of volume of freight traffic. In the late 1990s, IRI
S.p.A. ("IRI") completed the privatization of its international maritime
companies and has concentrated its activities in the shipping sector on ferry
operations and regional maritime activities. IRI plans to privatize its
remaining shipping activities by 2003.
Alitalia, Italy's national airline, was partially privatized in 1997
and is 47% owned by the public and 53% owned by the Treasury. As a result of a
major restructuring program, Alitalia returned to profitability in late 1997
(after incurring losses for the previous ten years). In 2001, it registered a
consolidated net loss of approximately 'E'907 million. Alitalia currently has
strategic partnerships with certain airline carriers, including Delta Airlines,
a U.S. carrier, and CSA Czech Airlines. In 2001, Alitalia negotiated a strategic
alliance with Air France, the national flag carrier of France.
Passenger air traffic in Italy is concentrated, with 58.6 per cent of
all air traffic in 1999 attributable to Ciampino and Fiumicino airports in Rome
and Linate and Malpensa airports in Milan. A Government decree would have
shifted all of Milan's international traffic from Linate to Malpensa in October
1998. In January, 2001, as a result of opposition from the EU Commission based
on the anti-competitive effects of the action, the Italian Government issued a
revised decree that shifted part of Milan's international traffic to Malpensa
airport but also permitted EU carriers to operate "point to point" connections
between Linate and other airports of the EU, subject to certain limits.
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), established in January 1998, is
responsible for issuing licenses, which are valid for 15 years and are
renewable, and has the power to regulate tariffs and impose fines and other
sanctions.
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Italy's telecommunications market is characterized by very high
fixed-line penetration estimated at 97.5 per cent of households in 1999. The
market was deregulated in January 1998 and Telecom Italia, which was privatized
in 1997, acquired by Olivetti in 1999, and now controlled by a consortium headed
by Pirelli, remains the largest operator, with a market share of approximately
77 per cent, but is facing increasing competition from new operators. Telecom
Italia is engaged in the sale of domestic and international telephone, telex and
telegraph services, domestic and international satellite transmission,
publishing and data transmission and the installation and sale of
telecommunications equipment, systems and networking. In 1998, the government
granted three national fixed telephony licenses to Infostrada (now controlled by
Wind), Wind (a joint venture between ENEL S.p.A. ("ENEL") and France Telecom)
and Albacom (a consortium controlled by British Telecom, Banca Nazionale del
Lavoro, Mediaset and ENI S.p.A. ("ENI")). As of December 31, 1999, eight
licenses for local telephone services had been granted to several
telecommunications operators in Italy. Competition among telecommunications
operators has resulted in lower charges and a wider range of services offered.
In January 2000, access to the local telephone loop was deregulated.
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. The Government also granted
mobile licenses to Omnitel (controlled by the Vodafone Group), Wind and Blu
(controlled by Autostrade and British Telecom). The Italian mobile telephony
market has been one of the fastest growing in Europe.
In 1998 the European Parliament authorized EU member countries to grant
a limited number of Universal Mobile Telecommunications System, or UMTS,
licenses for third-generation, or 3G, mobile telephony services, through which
companies will provide additional and enhanced services including high-speed
wireless internet access.
In accordance with the Decision of AGCOM in January 2000, the
allocation process of UMTS licenses in Italy has been carried out by an auction
among pre-qualified applicants. Only six candidates qualified for the auction,
which started on October 19, 2000. UMTS licenses were granted to Omnitel, Ipse
2000 (controlled by Telefonica and Sonera), Wind, Andala Opco (controlled by
Hutchison Whampoa and Tiscali) and TIM. Each license will last for 15 years,
commencing on January 1, 2002. Italy raised 'E'14 billion through the UMTS
license auction.
The market for internet services is dominated by three providers
(Seat/Tin.it, Wind/Infostrada and Tiscali), which together account for
approximately 80 per cent of the subscriber base (approximately 2.8 million
subscribers). (Source: Registration Statement filed by the Republic of Italy
under Schedule B of the Securities Act of 1933 (February 20, 2001)).
Financial Services. Historically, a significant portion of Italy's
domestic investment has been allocated to public debt. In 1998 and 1999, the
household sector reallocated its portfolio, with investments in holding in
foreign assets, investment funds and shares increasing, while the percentage of
domestic portfolios allocated to government securities decreased. The large
shift of household assets into managed products generated substantial fee income
for financial institutions.
Tourism. Tourism is an important sector of the Italian economy and
makes a significant and positive contribution to the balance of payments. In
2000, tourism revenues, net of amounts spent by Italians traveling abroad, were
approximately 'E'12,891 million, representing a 18.8% increase over the
corresponding period in 1999, primarily due to an increase in spending by
foreign visitors to Italy, partially offset by an increase in spending by
Italian tourists abroad.
Manufacturing
In 2001, manufacturing represented 25.9% of GDP and employed 25.5% of
the economically active population.
Non-energy production. 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.
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The number of large private companies in Italy is relatively small in
comparison to other EU countries. Among the most significant are Fiat
(automobiles and other transportation equipment), Pirelli (tires, cables and
industrial rubber products), Fininvest (media and publishing), Montedison
(chemicals) and Benetton (clothing). However, much of Italy's industrial output
is produced by small and medium-sized firms, which also have accounted for much
of the economic growth over the past 20 years. They 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.
Energy production. Italy depends on imported oil and other fossil fuels
for a significant portion of its energy needs. Overall, Italy imported
approximately 83.4% of its energy requirements in 2000 (source: Bank of Italy).
In 2000, oil accounted for 49.4% of primary energy consumption. The largest
domestic source of energy is natural gas. Natural gas provided approximately
31.4% of primary energy consumption in 2000, of which approximately 77.0% was
imported. The only other significant imported energy source is coal. A
referendum rejected the use of nuclear power in Italy in 1987.
The domestic energy industry consists primarily of ENI and ENEL. ENI,
which is 35.3% 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, the supply, transmission and
distribution of natural gas and oil field services contracting and engineering.
ENEL is engaged principally in the generation, importation, transmission and
distribution of electricity. ENEL's domestic capacity is insufficient to meet
current demand, and Italy imports a portion of its electricity requirements. The
Government sold a 31.74% stake in ENEL to the public in late 1999.
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, led by a board of three members appointed by Parliament,
became operational in April 1997. It has a large degree of independence and
significant powers, including the power to establish base tariffs and the
criteria for tariff adjustments, as well as the power to issue fines and other
sanctions. As part of the gradual liberalization of the Italian hydrocarbons
industry in line with European Union directives, a legislative decree
eliminated, with effect from January 1997, certain exclusive rights benefiting
ENI and all other disparities in the regulatory treatment between ENI and other
oil and natural gas companies operating in Italy.
A Government decree issued in March 1999 provided for the partial
liberalization of the generation, importation, purchase and sale of electricity.
Beginning in April 1999, major customers were permitted to purchase electricity
from any European purchaser. The decree also provides that from 2003, no company
will be permitted to own more than 50 percent of the electrical energy generated
or imported into Italy. A single agency (Gestore della Rete di Trasmissione
Nazionale S.p.A.) has been formed to act as exclusive manager of the national
power grid and the transmission of electricity.
In accordance with the above decree, in August 1999 the Government
approved a plan whereby ENEL established three new generating companies
(Eurogen, Elettrogen and Interpower or, collectively, Gencos), which are
expected to be sold to independent power generators by no later than January 1,
2003. To date, ENEL has sold Elettrogen, the second largest Genco, with a total
generation capacity of 5,400MW and has entered into preliminary arrangements
(subject, among other things, to the approval of competition authorities) for
the sale of Eurogen, the largest Genco, with total generating capacity of 7,000
MW. In order to achieve an effective privatization of this sector, the
Government has required that no more than 30 per cent of each bidding consortium
will be owned by a State-controlled company (including municipalities).
A new tariff regime took effect on January 1, 2000. The new regime
significantly lowered fixed tariff rates for the generation, transmission and
distribution of electricity in 2000. In addition, tariff rates for transmission
and distribution will be subject to a price cap for the period 2001-2003.
Construction
In 2001, construction represented 4.9% of GDP and employed 7.9% of the
economically active population. Italy has been characterized by an increase in
construction in recent years, principally due to the special fiscal incentives
provided for residential construction and repair implemented in 1997 and also to
an increase in public works due in part to the preparations for the Jubilee.
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Agriculture, Forestry and Fisheries
Agriculture, forestry and fisheries accounted for 2.7% of GDP in 2001,
and employed approximately 5.2% of the economically active population. The
agricultural share of Italian GDP has declined steadily with the growth of
industrial output since the 1960s. 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, and
olives are grown principally in Central and Southern Italy, whereas grapes are
grown throughout the country. Italy is one of the largest wine producers in the
world.
Other Characteristics of the Italian Economy
Role of the Central Government in the Economy. Government-owned
enterprises play a significant though decreasing role in the Italian economy.
The state participates in the energy, banking, insurance, shipping,
transportation and communications industries, among others, through its
ownership of IRI (under voluntary liquidation since July 2000), ENI, ENEL and
various other entities. In the 1980s, government-owned enterprises accounted for
approximately 20% of GDP in terms of value added. By the end of 1997, such share
had fallen to approximately 11% of GDP. In addition, the Central Government
directly and indirectly owns shares in a number of publicly traded companies.
Since 1993, the Government has been privatizing various operating
subsidiaries of the state holding companies and certain entities owned directly
by the Ministry of Treasury. These privatizations include entities in the
financial institution sector (IMI, INA, Istituto Bancario San Paolo di Torino,
Banco di Napoli, Mediocredito Centrale), the telecommunications sector (Telecom
Italia), oil integrated companies (ENI) and electricity utilities (ENEL). Under
Italian law, all proceeds of the privatization of entities directly owned by the
Treasury must be deposited into a fund established in 1993 for the purchase and
repayment of outstanding Treasury securities. Accordingly, such proceeds reduce
the ratio of public debt to GDP, but cannot be taken into account to offset
current account deficits. Since January 1, 1993, the Government has raised
'E'78,681 million. In 1999, the proceeds from privatizations were
approximately 'E'24,959 million (2.5% of GDP).
Budget Deficits. Substantial budget deficits have been a persistent
problem affecting the Italian economy. Prior attempts to deal with this problem
have been hampered by, among other things, high levels of social spending and
the fact that social services and other non-market activities of the central and
local governments and their agencies and instrumentalities account for
approximately 19% of total employment. The wages of these employees, like those
of the private sector, were indexed to the inflation rate until the end of 1991,
exacerbating both inflation and the budget deficit. In 1993, the Central
Government, the principal unions and the industrial employers' association
reached an agreement ending such indexation. In 1995, the Central Government
reformed the pension system by linking each individual's benefits to the
contributions made by such individual to the system. This plan is to be
implemented over an 18 year period and is expected to produce a reduction in
projected pension expenditures. Further reforms to the pension system have been
enacted by recent legislation tied to the 1998 budget law. See "--Measures of
Fiscal Balance - Health, Education, Labor and Other Social Welfare
Expenditures." Countries participating in the European Monetary Union are
required to reduce "excessive deficits" and adopt a budgetary balance as a
medium term objective. The reduction of the budget deficit has been a Central
Government priority since 1992, as Italy pursued a policy of debt reduction to
meet the conditions for membership in the European Monetary Union.
In 1995, the Central Government achieved its long standing objective of
stabilizing its debt-to-GDP ratio. As a result, Italy's public debt as a
percentage of GDP reached 124.8%, and has been dropping gradually since then,
reaching an estimated 109.4% of GDP in 2001.
Savings Rate. Historically, Italy has had a high savings rate. Although
the savings rate has declined over the past three decades (most notably in the
last five years) in Italy as in most of the developed world, household savings
as a percentage of household disposable income was 19.0% in 2000, among the
highest of any G-7 country, according to OECD data. In 1999, only France
recorded a higher figure than Italy, with a savings rate equal to 15.8%. By
contrast, household savings as a percentage of household disposable income in
1999 was 1.5% in the U.S., 5.1% in the United Kingdom, 10.2% in Germany, 3.2% in
Canada and 14.1% in Japan. As a consequence, Italy has a significant domestic
pool of capital available for investment and, although its fiscal deficits
historically
37
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have been large, the high private savings rate has enabled the Government to
finance those deficits principally in the domestic bond market.
Regional Disparities. The Italian economy is characterized by
significant regional disparities. The level of economic development of Southern
Italy is well below that of Northern Italy; per capita GDP of the Mezzogiorno
(which includes the regions of Abruzzo, Molise, Campania, Puglia, Calabria and
Basilicata, plus the islands of Sicily and Sardinia) is lower (although it has
been narrowing in recent years due mainly to migration from the south to the
northern regions of Italy) and its unemployment is substantially higher (21.0%
as compared to 10.6% for Italy as a whole in 2000) than that of the remainder of
the country despite large and long-standing infusions of development funds and
other income transfers from the Central Government.
Since 1985, growth in Southern Italy has lagged as compared to Northern
and Central Italy and has been concentrated in services, while agriculture has
declined and industrial output has been stagnant. In 1994, agriculture accounted
for approximately twice the proportion of employment in Southern Italy as
compared to North-central Italy, and manufacturing for 13% of value-added as
compared with 25% elsewhere. Despite significant state intervention, the
employment disparity between the Mezzogiorno and the rest of the country grew in
the 1980s. At the end of 1970s, the unemployment rate in the South was
approximately 10%. By the end of 1999 unemployment was twice as high in Southern
Italy as compared to Italy as a whole. Unemployment in Southern Italy was
approximately 22.0% in 1999 and 21.0% in 2000, as compared to 11.4% and 10.6%,
respectively, for Italy as a whole.
Investment Incentive Scheme. The Central Government has in the past
funded an investment incentive scheme to encourage investment in the
Mezzogiorno. This program has been terminated and its benefit was gradually
phased out at the end of 1999. The Mezzogiorno investment scheme consisted of
investment grants, tax incentives and exemptions from social security
contributions for businesses operating in the Mezzogiorno. The Mezzogiorno
Investment Scheme has been replaced by a new incentive scheme that covers all
under-industrialized areas of Italy. The areas covered by this new scheme are
the same areas covered by the EU Regional Development Fund. See "The Economy --
Region of Campania". Italy receives certain grants and other transfers from the
EU. However, in each of the past ten years, its payments to the EU have exceeded
its receipts from the EU.
Imports and Exports and Balance of Trade. Italy is fully integrated
into the European and world economies, with imports and exports each accounting
for more than 25% of Italian GDP in 2000. Italy's exports are dominated by
manufactured goods, including industrial machinery, office machinery,
automobiles, clothing, shoes and textiles. The EU accounts for over half of
Italian trade value. In 2000, countries within the EU purchased 54.9% of Italian
exports and supplied approximately 56.3% of imports. Italy's trade surplus with
EU countries, however, decreased from 'E'10,565 million in 1996, to
'E'3,401 in 1997, and registered a slight increase to 'E'3,784 million in
1998, mainly due to higher exports to the United Kingdom, the Netherlands and
Spain. In 1999 and 2000, Italy's trade balance with EU countries registered a
surplus of 'E'1,427 million and a deficit of 'E'3,018 million,
respectively. Italy's trade balance decreased substantially in 1999 and 2000 as
compared to prior years due to higher trade deficits with Germany, the
Netherlands and Ireland which were not balanced by higher exports to the other
EU member countries. Italy's overall trade surplus also decreased from
'E'34,912 million in 1996 to 'E'26,619 million in 1997, 'E'24,479
million in 1998, 'E'14,026 million in 1999 and 'E'1,907 million in 2000,
before increasing to 'E'9,517 million in 2001 (source: ISTAT, Bank of Italy).
Employment. The following table shows the change in total employment,
the official employment rate and the official unemployment rate between 1997 and
2001. The unemployment rate does not include workers paid by the Wage
Supplemental Fund (Cassa Integrazione Guadagni - "CIG"), which guarantees part
of the wages of workers in the industrial sector who are temporarily laid off or
have had reduced working hours.
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Employment and Unemployment
Year Ended December 31,
-------------------------------------------------------------
1997 1998 1999 2000 2001
------ ------ ------ ------ ------
Employment Volume (entire economy)(1)........ 20,207 20,435 20,692 21,080 21,514
Participation Rate (%)(2).................... 57.9% 58.7% 59.3% 59.9% 60.4%
Unemployment Rate (%)........................ 11.7% 11.8% 11.4% 10.6% 9.5%
- ---------------
(1) Euro thousands
(2) Participation rate of population aged 15-64.
Source: ISTAT (2002).
The unemployment rate rose from 11.7% in 1997, to 11.8% in 1998, mainly
due to a slight increase in the supply of labor. The unemployment rate steadily
decreased to 11.4% in 1999 and 10.6% in 2000, principally due to positive trends
in the service sector (in particular, business and household services) resulting
in a greater number of available jobs. The unemployment rate in Italy fell to
9.5% in December 2001.
Although there were a series of short strikes between 1992-94
protesting certain aspects of the Government's program to reduce the budget
deficit, the disruption to the economy from labor disputes has decreased
significantly since the 1970s and early 1980s. In the six-year period 1992-97,
an average of 8.4 million man-hours of labor per year were lost as a consequence
of labor disputes. By contrast, the average number of man-hours lost per year as
a consequence of labor disputes was 116.6 million over the period 1978-1982, and
43.6 million over the period 1983-1990. In 2000, 6.2 million hours were lost due
to strikes as compared to 6.3 million in 1999, and 4 million in 1998.
Since October 1992, the Central Government has initiated a series of
reforms to the state pension system designed to reduce the level of benefits
provided by the Central Government and to promote the development of private
pension funds to supplement Central Government retirement benefits. Employer and
employee contributions to the national social security pension system continue
to be compulsory and have not been reduced by the reforms, although benefits
have been reduced. In August 1995, the Central Government reformed the pension
system by linking each individual's benefits to the contributions made by such
individual to the system. This plan is to be implemented over an 18 year period
and is expected to produce a reduction in projected pension expenditures over
the next ten years. Further reforms to the pension system have been enacted by
recent legislation tied to the 1998 budget law, which are aimed at further
reducing and harmonizing the level of benefits.
Unemployment in Southern Italy has been persistently higher than in
Northern Italy and was approximately 21.9% in 1998, 22.0% in 1999, and 21.0% in
2000 as compared to 6.8%, 6.0% and 5.3% in the northwestern regions. The
differential narrowed slightly in the early 1990s, principally because
unemployment in Northern and Central Italy is more sensitive to the business
cycle than is employment in Southern Italy, but the gap widened again in the
last few years, as the economic contraction was larger in the South.
Unemployment is also substantially higher among younger workers and women. The
Central Government has adopted a number of programs to correct these imbalances,
including programs that provide money for jobs training, particularly in the
South, and that provide certain incentives to firms that hire young workers.
Wages and Prices
Wages. Prior to July 1992, Italy had a system known as the scala mobile
under which wages set pursuant to collective bargaining agreements were indexed
to the annual inflation rate.
The Central Government, the unions and the industrial employers'
association subsequently reached the Incomes Policy Accord of July 1992, which
abolished the scala mobile and froze firm-wide wage increases until the end of
1993. In June 1993, the principal unions and the industrial employers'
association reached a four-year wage agreement covering all public and private
sector industrial employees. The agreement bases wage increases on the
Government's inflation targets rather than on the actual rate of inflation. As a
consequence of the Incomes Policy Accord and the effects of the economic
downturn, wage growth slowed, rising by an average annual rate of 3.7% from 1992
to 1994. Italian firms experienced productivity gains during the same period,
which contributed to a fall in unit labor costs in manufacturing in 1994 for the
first time in several years. In July 1993, the principal unions and
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the industrial employers' association formulated guidelines for a new collective
bargaining system covering all public and private sector employees. Unit labor
costs in Italy in 1999 increased by 1.8% to 'E'11,948 from 'E'11,732 in
1998, as compared to a slight increase of 0.7% in 1998 from 'E'11,650 in
1997. Unit labor costs remained stable between 1996 and 1997.
The increase in the Consumer Price Index slowed steadily from 1996
through 1999. The decrease in the rate of growth of inflation continued into
1997 when, due to a general slow down in domestic demand, the Consumer Price
Index grew by only 1.9%, well below the Government target of 2.5% and the
Maastricht criteria requirement of 2.7%. In 1998, the Consumer Price Index grew
by 2.0% and inflation decreased to 1.9% due primarily to a decline in the cost
of new materials and the appreciation of the Euro-area currencies against the
Dollar. At the end of 1999, the Consumer Price Index increased by 1.7% primarily
as a result of higher oil costs. In 2000 and 2001, the Consumer Price Index grew
by 2.5% and 2.7% respectively.
The following table illustrates trends in prices and wages for the
periods indicated:
Prices and Wages
Year Ended December 31,
----------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
('E' thousands, except percentages)
Consumer Price Index.............................. 4.0% 2.0% 1.9% 1.7% 2.5%
Per capita gross wages (1)........................ 5.7 4.1 (1.8) 1.6 1.7
Unit labor costs (1).............................. 5.1 2.8 (1.3) 1.6 (0.7)
Private consumption deflator...................... 4.4 2.2 2.1 2.1 2.9
- ---------------
(1) Entire economy.
Source: ISTAT (2002) and Registration Statement filed by the Republic of Italy
under Schedule B of the Securities Act of 1933 (March 14, 2001).
Foreign Trade
Italy is fully integrated into the European and world economies, with
imports equal to 28.3% of GDP and exports accounting for 27.6% of GDP in 2001.
(Source: ISTAT 2002)
The following tables illustrate Italy's exports and imports for the
years 1997 through 2001. 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".
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Foreign Trade
Year Ended December 31,
-----------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
('E' millions)
Exports (fob)
Agriculture, forestry and fishing................. 3,525 3,605 3,687 3,858 4,150
Minerals.......................................... 448 433 430 525 538
Manufactured products............................. 206,253 214,981 215,803 254,706 262,813
Food, beverage and tobacco products............. 10,850 11,484 12,051 13,066 13,873
Textiles, leather products and clothing......... 35,512 35,683 34,411 40,078 43,007
Wood and wood products.......................... 1,183 1,247 1,329 1,510 1,478
Paper, printing and publishing.................. 4,662 4,934 5,029 5,960 5,977
Refined oil products............................ 2,959 2,428 2,604 5,181 4,944
Chemical and pharmaceutical products............ 17,333 17,961 19,472 24,136 25,547
Rubber and plastic products..................... 7,649 8,113 8,228 9,389 9,525
Non-metallic minerals and mineral products...... 8,008 8,253 8,332 9,230 9,343
Metals and metal products....................... 17,783 18,496 17,513 21,257 21,567
Mechanic products and machinery................. 44,089 45,269 45,060 50,678 53,397
Electric and precision machinery................ 20,176 21,275 21,619 26,383 27,361
Transport equipment............................. 21,701 25,394 25,253 30,389 29,459
Other manufactured products..................... 14,208 14,442 14,902 17,449 17,335
Energy, gas and water production.................. 23 22 23 22 46
Other............................................. 1,048 1,064 1,098 1,302 2,151
------- ------- ------- ------- -------
Total exports................................... 211,297 220,105 221,041 260,413 269,698
======= ======= ======= ======= =======
- ---------------
Source: ISTAT (2001 and 2002).
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Year Ended December 31,
-----------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
('E' millions)
Imports (cif)
Agriculture, forestry and fishing................. 8,666 8,864 8,603 9,228 8,786
Extractive industries............................. 15,792 13,025 15,243 29,561 28,703
Manufactured products............................. 158,608 172,159 181,552 217,071 218,434
Food, beverage and tobacco products............. 15,418 15,668 15,645 17,135 18,036
Textiles, leather products and clothing......... 14,015 14,737 14,743 18,249 20,097
Wood and wood products.......................... 2,532 2,791 2,980 3,393 3,207
Paper, printing and publishing.................. 5,442 5,896 6,222 7,255 6,665
Refined oil products............................ 3,808 2,727 3,161 5,378 4,611
Chemical and pharmaceutical products............ 25,520 26,686 28,097 33,231 33,671
Rubber and plastic products..................... 4,016 4,455 4,792 5,387 5,342
Non-metallic minerals and mineral products...... 2,270 2,388 2,509 2,843 2,915
Metals and metal products....................... 20,244 21,857 20,350 26,277 25,370
Mechanic products and machinery................. 13,615 16,075 17,564 20,354 20,441
Electric and precision machinery................ 25,574 28,267 30,982 38,269 36,562
Transport equipment............................. 23,139 27,340 30,978 35,038 37,259
Other manufactured products..................... 3,016 3,271 3,529 4,262 4,258
Energy, gas and water production.................. 1,459 1,456 1,424 1,535 1,798
Other............................................. 153 122 193 1,111 2,469
------- ------- ------- ------- -------
Total imports................................... 184,678 195,626 207,015 258,506 260,181
======= ======= ======= ======= =======
Trade Balance..................................... 26,619 24,479 13,716 1,907 9,517
======= ======= ======= ======= =======
- ---------------
Sources ISTAT (2001 and 2002).
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 and agricultural and food industry. Of all the major
European countries, Italy is the most heavily dependent on imports of energy,
importing 82.3 per cent of its energy requirements in 1999. As a result, Italy's
trade balance is vulnerable to fluctuations in oil prices. The long term
challenge of Italian industries is to produce the surplus necessary to fund the
purchase of imported energy, raw materials and agricultural products.
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.
Current Account. From the oil shock of 1973 until 1992, Italy
experienced persistent, though generally small, current account deficits.
However, a current account surplus was achieved in each year from 1992
through 1999, initially as a result of the devaluation of the lira following its
suspension from the Exchange Rate Mechanism ("ERM") in September 1992, as well
as weaker domestic demand and the increased competitive positions of Italian
industry. The surplus steadily decreased from 'E'31,338 million in 1996 (3.4%
of GDP) to 'E'29,341 million in 1997 (3.1% of GDP), 'E'20,044 million in
1998 (2.1% of GDP) and 'E'7,692 million (0.8% of GDP) in 1999. In 2000, the
current account registered a deficit of 'E'6,091 million (0.6% of GDP). The
decreases in 1999 and 2000 were mainly due to a growth in imports of energy
products.
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Capital Account. In recent years, Italy's financial markets have become
increasingly integrated internationally, as exchange rate restrictions have been
lifted and Italian companies have become more international in scope.
The capital account totaled 'E'2,922 million in 1997 due to an
increase in the utilization of grants from EU programs. In 1998, the capital
account totaled 'E'2,249 million, representing a decrease of 23.0% as
compared to 1997, mainly due to lower EU transfers. In 1999 and 2000, the
capital account amounted to 'E'2,789 million and 'E'3,191, respectively,
representing increases of 23.9% and 14.4% as compared to the previous year.
These increases were principally due to higher transfers from the EU through the
Regional Development Fund.
The following table illustrates the balance of payments for the periods
indicated:
Balance of Payments
Year Ended December 31,
-----------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
('E' millions)
Current Account............................... 31,338 29,341 20,444 7,692 6,091
Goods......................................... 43,021 35,172 32,584 22,044 11,772
Exports.................................... 200,843 211,296 220,104 221,484 259,551
Import..................................... 157,822 176,124 187,520 199,440 247,779
Services...................................... 5,724 6,846 4,386 1,125 33
Income........................................ (12,112) (9,010) (9,869) (10,392) (13,096)
Transfers..................................... (5,248) (3,666) (6,658) (5,085) (4,800)
to EU Institutions......................... (4,560) (2,628) (5,940) (4,684) (4,905)
Capital Account............................... 57 2,922 2,249 2,789 3,191
Intangible assets............................. (333) 93 (121) (3) (72)
Transfers..................................... 390 2,829 2,370 2,792 3,263
to EU Institutions......................... 842 3,264 2,748 3,201 3,624
Financial Account............................. (15,760) (18,279) 1,282 (8,867) (4,287)
Direct Investments............................ (4,106) (6,404) (10,580) 178 1,149
Abroad..................................... (6,923) (10,768) (14,418) (6,309) (13,368)
In Italy................................... 2,817 4,364 3,838 6,487 14,517
Portfolio Investments......................... 37,857 17,171 7,075 (23,635) (26,255)
Assets..................................... (17,409) 47,127 (86,315) (121,493) (86,340)
Liabilities................................ 55,267 64,298 93,390 97,858 60,085
Financial derivatives......................... 207 (1,631) (762) 1,766 2,501
Other Investments............................. (40,090) 15,656 (13,547) 5,725 29,950
Change in official reserves................... (9,628) 11,759 19,096 7,099 (3,058)
Errors and Omissions.......................... 15,682 (13,985) (23,975) (1,614) (1,387)
- ---------------
Source: Annual Report of the Bank of Italy (2000).
(1) Both exports and imports are stated on a "FOB" basis for purposes of the
current account.
According to the Bank of Italy, the balance of payments in Italy for
2001 (provisional) was divided as follows: (i) the current account was equal to
'E' 2.8 billion; (ii) Italy's capital account was equal to 'E' 1.3
billion; (iii) Italy's financial account showed a debit of 'E' 4.5 billion.
Errors and omissions in 2001 were equal to 'E' 0.3 billion. Exports of goods
increased to 'E'270.5 million (provisional) and import of goods increased
slightly to 'E'251.0 million (provisional).
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Exchange Rates
The suspension of the Lira from the ERM in 1992 marked an end to the
role of the Lira exchange rate as the cornerstone of Italian monetary policy.
The value of the Lira subsequently declined sharply against the German Deutsche
Mark, the U.S. Dollar and the other major currencies. This fall in the value of
the Lira made Italian exports more competitive in world markets and resulted in
a significant increase in exports until 1996, when the rate of growth in exports
decreased, in part because of the strengthening of the Lira. On November 24,
1996, the Lira was readmitted to the ERM at a rate of 990 lire per Deutsche
Mark, and 1,906.48 per ECU agreed among the Bank of Italy and the central banks
of the other nations participating in the European Monetary System ("EMS"). In
January 1999, Italy, together with ten other European countries, introduced the
Euro as its new national currency. The exchange rate was invariably fixed at
Lit. 1,936.27 per Euro. As of January 1, 2002, the Euro was adopted as a single
common currency, which replaced, over a maximum period of 2 months, the
pre-existing national currencies.
Reserves
By the end of 1991, official reserves stood at 'E'48,721 million,
but the effect of the 1992 currency crisis on the official reserves of Italy was
significant. By the end of September 1992, the total amount of the official
reserves had dropped to 'E'16,949 million, a decrease of 65.1% from the
reserves at December 31, 1991. Since 1992, the Central Government has followed a
policy of generally strengthening official reserves. By the end of 1999,
official reserves amounted to 'E'45,100 million. In 2000, official reserves
increased to 'E'50,366 million, mainly due to variations in exchangeable
currencies acquired during 2000.
The following table illustrates the foreign exchange reserves of Italy
for the periods indicated:
Foreign Exchange Reserves
Year Ended December 31,
---------------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
('E' millions)
Gold.................................. 19,814 19,407 21,138 22,775 23,098
SDRs.................................. 23 61 94 167 255
Total position with IMF............... 1,466 2,036 3,697 3,537 2,916
ECUs.................................. 8,430 8,228 -- -- --
Other investments..................... 23,161 36,009 19,130 16,733 10,548
Other net reserves.................... 2,232 3,279 2,405 1,888 13,549
Total reserves........................ 55,127 69,021 46,464 45,100 50,366
- ---------------
Source: Annual Report of the Bank of Italy (2000).
Interest Rates and Money Supply
Following the Lira's suspension from the ERM in 1992, Italian medium-
and long-term interest rates fell steadily until 1994. From mid-1994 until the
end of 1995, interest rates grew modestly but have been falling steadily since
the beginning of 1996. Between 1995 and 1997 the average gross yield on Treasury
bills (Buoni Ordinari del Tesoro) fell by approximately 4.5%, from 10.8% to
6.3%, while the gross yield on Treasury bonds with maturities from 2 to 30 years
(Buoni del Tesoro Poliennali) fell from 11.9% to 6.8%. In 1998 and 1999, the
average gross yield on Treasury bills was 4.6% and 3.0%, while the gross yield
on Treasury bonds with maturities from 2 to 30 years was 4.9% and 4.7%,
respectively.
The following table shows the basic monetary supply (M1) and the
broader aggregate (M2) of Italy for the periods indicated:
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Money Supply and Credit
Year Ended December 31,
----------------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
('E' millions)
Notes and coins.................... 51,701 60,046 64,541 71,961 76,416
Demand deposits.................... 261,340 319,609 354,215 389,875 412,275
Other items(1)..................... 10,545 -- -- -- --
Total: M1.......................... 323,587 374,304 412,842 455,986 481,954
Total: M2(2)....................... 445,852 601,406 618,901 650,591 665,348
- ---------------
Source: Bank of Italy - Supplemento al Bollettino Statistico No. 50/2001.
(1) Postal sight deposits, bankers' drafts issued by the Bank of Italy and other
banking institutions and deposits with the Treasury.
(2) Excludes longer-term CDs.
Prior to 1992, M1 was defined as notes and coins in circulation, demand
deposit accounts and postal sight deposits. The broader monetary aggregate, M2,
was defined as M1 plus time deposits, bank certificates of deposits, postal
savings accounts (excluding postal sight deposits but including postal
certificates) and repurchase agreements between banks and their customers. In
the fall of 1991, the Bank of Italy announced revised definitions of the
monetary aggregates consistent with agreements within the EU. It redefined M1 to
include bankers' drafts, and it redefined M2 most notably to exclude postal
certificates and repurchase agreements between banks and their customers.
Effective January 1997, bank certificates of deposit having a maturity of 18
months or more were excluded from the definition of M2, consistent with changes
in the Italian tax treatment of different categories of bank deposits.
Despite a government target for annual growth in M2 ranging from 5% to
7%, M2 grew by 3.5% in 1996. In 1997, however, M2 growth (at 9.7%) was nearly
twice the Government target, owing chiefly to structural changes in the public's
portfolio preferences. M2 growth in 1998 and 1999 was 2.9% and 5.1%,
respectively.
Monetary Policy
The European System of Central Banks. Prior to Italy's adoption of the
euro, the Bank of Italy was responsible for conducting monetary policy. 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.
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 (Denmark, Sweden and the United Kingdom), there
will be a distinction between the 12-country Eurosystem and the 15-country ESCB.
The three 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;
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; and
o promoting the smooth operation of payment systems.
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;
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o the Governing council, composed of the members of the Executive
Board and the governors of the 11 national central banks, in
charge of formulating the monetary policy in the euro area; and
o the General Council composed of the Executive Board and the 15
national central banks and contributes to the advisory functions
of the ECB.
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 which have adopted the euro, pro-rated to the GDP and population of each
such member State. The ECB had paid up capital of approximately 'E'4 billion
at December 31, 2000. (Source: European Central Bank)
The Bank of Italy. The Bank of Italy was founded in 1893. It supervises
and regulates the Italian banking industry, as discussed below, and operates
services for the banking industry as a whole, including a central information
office on credit risks. It also supervises and regulates non-bank financial
intermediaries. The Bank of Italy had assets at December 31, 1999 of
'E'1,944,669 million.
The Bank of Italy has long been a non-political entity and has enjoyed
an increasing degree of independence in recent years. Since 1981, the Bank of
Italy has ceased to act as a residual buyer of Treasury bonds at issuance. More
recently, through laws enacted in May 1991 and January 1992, Parliament gave the
Bank of Italy total autonomy in setting the discount rate and the short-term
interest rate on funds advanced to commercial banks (anticipazioni a scadenza
fissa or the rate on fixed term advances), both previously set by the Minister
of the Treasury acting on a proposal from the Governor of the Bank of Italy.
Also, in November 1993, Parliament enacted legislation that eliminated the
Treasury's ability to run an overdraft with the Bank of Italy, thereby severing
the link between public sector borrowing and the sources of money creation. In
accordance with this legislation, which meets the standards for central bank
independence contained in the Maastricht Treaty, the previously existing
overdraft on the Treasury's current account, which was 'E'39,357 billion at
December 31, 1993, has been converted into Treasury securities with maturities
between 20 and 50 years and bearing a below-market, nominal interest rate of 1%.
Following the adoption of this law, the Treasury opened an interest-bearing
account at the Bank of Italy. In 1994, the Bank of Italy ceased intervening in
the primary market for Treasury securities, in accordance with the provisions of
the Maastricht Treaty.
Prior to September 1992, the Bank of Italy maintained the value of the
Italian Lira within the narrow band contemplated by the ERM of the EMS. In
September 1992, in response to strong downward pressure on the exchange rate of
the Lira from the ERM, the Italian government, in consultation with Bank of
Italy, suspended the Lira from the ERM, and the value of the Italian Lira then
declined sharply against the U.S. Dollar, the German Mark and the Euro (then
represented by the European Currency Unit). The currency gradually strengthened
beginning in 1995, and the Lira re-entered the ERM in November 1996. See
"--Exchange Rates".
The Bank of Italy's monetary policies prior to January 1, 1999, were
aimed at achieving the convergence objectives of the Maastricht Treaty. The Bank
of Italy followed a cautious approach in easing monetary policy, intended to
strengthen expectations and promote price stability. From 1996 through 1998,
monetary policy was adjusted in relation to actual and expected inflation and
the outlook for government spending. The Bank of Italy began reducing official
interest rates in the summer of 1996. In 1997, the Bank of Italy lowered the
discount rate and the rate of fixed-term advances on three occasions. A further
reduction was implemented in April 1998, after the new medium-term fiscal plan
for the years 1991-2001 was submitted to Parliament. Key official rates were cut
again in October 1998, bringing the discount rate to 4% and the rate on
fixed-term advances to 5.5%. A reduction of 0.5% in early December 1998 was the
first to be coordinated with the other national central banks of the Euro zone.
A final reduction of 0.5% on December 23, 1998 brought the discount rate to
3.0%, the level at which the first refinancing operations in Euro were carried
in January 1999.
Under the provisions of the Maastricht Treaty, a European Monetary
Union with a single European currency under the monetary control of a European
Central Bank superseded the ERM and EMS. After ratification by member states,
the Maastricht Treaty came into force on November 1, 1993. The European Monetary
Institute was subsequently established with responsibility for the technical
preparations for EMU (including instruments, procedures and regulations) as well
as for strengthening cooperation and coordination among the monetary authorities
of the member states and monitoring the EMS. The European Monetary Institute is
also empowered to make recommendations about the monetary policy of member
states.
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On May 2, 1998, the Council of the European Union determined that
Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the
Netherlands, Portugal and Spain (the "Participating Member States") fulfilled
the necessary conditions (price stability, governmental finances, including
annual deficits and total debt, exchange rates stability and long-term interest
rate stability) to join EMU and to adopt the Euro as a single currency1. This
last stage of EMU took place, pursuant to the Maastricht Treaty, on January 1,
1999, and the Euro was substituted for the national currencies of Participating
Member States at irrevocable fixed conversion rates. The national currencies of
Participating Member States continued to be legal tender for transactions
between Participating Member States and all other nations for different
temporary periods ending no later than March 1, 2002. The Lira ceased to be
accepted as legal tender on March 1, 2002 and has been removed from circulation
and replaced by the Euro. As of January 1, 1999, the European Central Bank in
Frankfurt began to determine monetary policy for the Participating Member States
centrally, and the existing ERM was replaced by a system in which the currencies
of EU member countries that are not Participating Member Countries are linked to
the Euro rather than to the fixed grid central rates of the ERM. See "--Exchange
Rates" above.
Regulation of Italian banks is conducted by the Interministerial
Committee for Credit and Savings, the Treasury and the Bank of Italy. The
principal objectives of such regulation are the sound and prudent management of
the institutions subject to supervision and the overall stability, efficiency
and competitiveness of the financial system. During the 1980s, Italian banking
and European Community authorities began a process of substantial deregulation,
which has resulted in a significant increase in competition in the Italian
banking industry in virtually all bank and bank-related services.
The Interbank Fund (Fondo Interbancario di Tutela dei Depositi),
established in 1987 by a group consisting of the principal Italian banks,
protects depositors against the risk of insolvency of their bank and the loss of
their deposited funds. The Interbank Fund assists banks that are declared
insolvent or are subject to temporary financial difficulties and, in the case of
declared insolvency, guarantees the refund of deposits of banking customers up
to a predetermined percentage of each deposit account (which is 100% for
accounts up to 'E'103,291 million and 75% for the subsequent 'E'435,166),
subject to a maximum limit of 'E'516,457 billion per account.
Italian banks' bad debts as a share of total loans in 2000 decreased by
approximately 14.0% to 'E'51.7 million from 'E'60.2 million in 1999 as
compared to a decrease of 8.9% in 1999 from 'E'66.1 million in 1998.
Public Finance
The State budget includes the revenues and expenditures of the Central
Government and certain agencies and entities whose budgets must be approved by
Parliament. Other entities whose budgets are not subject to Parliamentary
approval, including autonomous agencies, regional and local governments and
authorities and the national social security agencies (which are referred to,
collectively with the Central Government and the agencies included in the
budget, as the "public sector"), are reflected in the state budget only to the
extent of the Central Government's receipts from and transfers to such entities.
In April 1997, Parliament enacted legislation to reform the budget process. The
objectives of the reform are to simplify the structure of the budget, to enable
quicker decision making by Parliament, to promote a more efficient allocation of
resources and more effective monitoring of expenditures and to increase the
responsibility and administrative autonomy of senior civil servants.
Measures of Fiscal Balance
Italy reports the fiscal balance of the public sector using the
following two principal measures:
(i) Financial Balance, which, when in deficit, is referred to as the
Public Sector Borrowing Requirement ("PSBR"), is the consolidated
revenues minus the consolidated expenditures of the general
government (as defined and adopted by EU countries). This is the
principal measure of fiscal balance, and is calculated in
accordance with European Union accounting requirements. For most
internal purposes, Italy uses the state sector borrowing
requirement as its principal measure of financial balance. The
state sector is narrower than the public sector because it
excludes local and regional governments and authorities and the
national social security agencies. However, in the past, the
Central Government has been the principal source of funds for
financing deficits of the public sector, and consequently in the
past the state sector borrowing requirement and the
- ------------------
(1) On June 19, 2000, the Council of the European Union allowed Greece to join
the EMU with effect from January 1, 2001.
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PSBR have not been materially different. General government is
narrower that the public sector because it excludes certain
agencies and authorities; and
(ii) Primary Balance, which is the Financial Balance less interest
payments and other borrowing costs of the Central 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
periods indicated.
Selected Public Finance Indicators
Year Ended December 31
---------------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
('E' millions)
Public sector revenue.................. 449,872 493,338 497,153 515,684 533,335
% of GDP............................... 45.8% 48.2% 46.6% 46.9% 45.8%
Public sector expenditure.............. 519,618 521,081 527,285 536,606 537,239
% of GDP............................... 52.9% 50.9% 49.4% 48.8% 46.1%
Balance (Public Sector Borrowing
Requirement)........................... 69,746 27,743 30,132 20,922 3,904
% of GDP............................... 7.1% 2.7% 2.8% 1.9% 0.4%
Primary balance........................ 34,153 64,375 47,586 54,288 57,740
% of GDP............................... 4.5% 6.7% 5.2% 4.9% 5.0%
- ---------------
Source: Annual Report of Bank of Italy (2000).
The improvements in the primary balance in 1998 and 1999 were primarily
due to an increase in public sector revenues and lower than budgeted public
sector borrowing as a result of the faster than envisaged fall in interest rates
and the larger than expected growth in GDP. The decrease in public sector
borrowing requirements in 2000 was due principally to extraordinary income of
'E'13,815 million deriving from the sale of UMTS licenses to
telecommunication companies.
Governmental Objectives. The Central Government sets forth the
principal policy objectives, which, since 1992, have been principally focused on
reducing the PSBR and stabilizing the debt-to-GDP ratio, in a four year planning
document (referred to as the " Economic and Finance Program Document").
The Economic and Finance Program Document ("Documento di Programmazione
Economica e Finanziaria"), prepared by the Treasury and presented each year to
the Parliament, sets forth two sets of forecast revenues and expenditures: the
first assuming no change from current policy and the second assuming the Central
Government's proposed programmatic changes are adopted. The Economic and Finance
Program Document is presented to the Parliament along with the draft budget.
In the 2000-2003 Economic and Finance Program Document (the "Program
Document"), the Central Government stated that its main objectives were
continued fiscal consolidation, economic growth and more equal income
distribution. The Program Document assumes annual average deficit reduction of
approximately 0.5% of GDP for each year during the period, with a balanced
budget achieved in 2003. To achieve a balanced budget, the Program Document also
assumes a stable primary surplus of approximately 5.0% of GDP throughout the
period and a reduction in interest payments from 6.5% of GDP in 2000 to 5.3% in
2003. The Program Document also assumes that the current surplus will grow
progressively, reaching 3.1% of GDP in 2003. The Program Document assumed that
the capital account would peak in 2000 at 3.5% of GDP, and would gradually
decline to 3.2% of GDP in 2003. The ratio of public debt to GDP is projected to
decrease each year during the period from 2000 through 2003, reaching 100% by
2003.
Taxation. Italy's tax structure includes taxes imposed at the Central
Government and local level and provides for both direct taxation and indirect
taxation through a value added tax ("VAT") and other transaction-based taxes.
Direct taxes include income taxes, corporate taxes and local taxes. Income taxes
consist of an individual tax levied at progressive rates and a corporate tax
levied at a flat rate. Tax reform legislation that
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became effective in 1998 reduced the maximum rate payable by individuals and
introduced a two-tiered system for corporate taxation. For 1999, the top
individual tax rate was 46% and the corporate tax rate was 37%. Corporations
also pay certain 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 a business or profession, and on
all imports of goods or services. Italy has already issued legislation to
harmonize its VAT with applicable EU 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, IRAP
(discussed below), taxes on real estate and certain personal property, stamp
taxes and excise taxes on energy consumption, tobacco and alcoholic beverages.
Low tax compliance has been a longstanding concern for the Central
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 Central
Government is under-reporting of income by self-employed persons and small
enterprises. In response to this problem, Parliament has enacted a new form of
minimum income tax for self-employed persons and small enterprises. The minimum
tax is determined on a presumed minimum income for such a self-employed person
or small enterprise, based on location, age, organization and type of activity.
If the taxpayer does not declare the minimum income set forth, there will be an
automatic intervention by the tax authorities to verify the accounts of such
taxpayer. The Parliament has also enacted a new tax on enterprises' capital
which may, in the case of medium- and small-sized enterprises, be levied based
on assets. The Central Government's efforts to increase tax compliance during
the last three years have led to an increase in the general tax base and to an
improvement in compliance.
The Government enacted legislation under the tax-reforming powers it
was granted, which took effect in 1998. A regional tax on productive activities
(IRAP) was introduced in place of certain health service contributions and other
various taxes. The structure of personal income tax (IRPEF) and the system for
taxing income from financial assets was revised. A new system of corporate
income tax was introduced, known as Dual Income Tax. The reforms were aimed at
simplifying and rationalizing the tax system, reducing the fiscal autonomy of
lower levels of government and giving relief to large families. In using its
delegated powers, the Government set itself the objective of keeping revenues
basically unchanged. Subsequent reforms enacted in 2001 increased the fiscal
autonomy of lower levels of government.
Health, Education, Labor and other Social Welfare Expenditures. The
Central Government currently administers almost all the country's social
security and welfare programs. These programs are funded in part by
contributions from employers and employees and in part from general tax
revenues. In 1997, 1998, 1999 and 2000, social services, which include pensions
and other social security payments and unemployment compensation, constituted
the largest share of government spending (34.1%, 34.4%, 35.6% and 36.3%,
respectively). The overall amount of social expenditure in Italy is in line with
the EU average, accounting for approximately 24.9% of GDP in 1997 and 25.7% in
1998 and 1999. However, Italy spends approximately 60% of all social expenditure
on pensions, compared with the EU average of approximately 45%, and
approximately 4% in support of the unemployed, vocational training, families in
need and other benefits, significantly less than the EU average of approximately
32%. Italy's health expenditures are in line with the EU average, accounting for
approximately one-fifth of total social expenditures. A key objective of the
Government is to shift social spending from pensions, through reforms of the
state pension system, to programs designed to increase employment.
In 1995, Parliament enacted legislation to reform the pension system
and reduce pension expenditures by approximately 'E'51,645,690 billion over
ten years. The new pension system, which will apply to all employees with 18
years or less of employment experience, has begun to be implemented and will be
completed through 2013. Once phased in, each individual's pension will be
determined on the basis of the contributions, adjusted for GDP growth, made to
the system by the individual or by his or her employer on their behalf. No
additional contributions will be made by the Central Government.
Italy has a public health service which was traditionally run
principally by regional governments with funds provided by the Central
Government. In lieu of such transfers the Regions will be granted rights to
raise certain taxes and to receive a portion of certain taxes raised by the
Central Government. All local health care authorities were converted to joint
stock companies in 1993 and are directed by managers with fixed-term work
contracts and
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with pay partly contingent on performance. In response to rising costs, the
Central Government began imposing charges for treatment and drugs beginning in
1998, subject to exemptions for low-income patients and for life-preserving
measures.
Most children attend the state school system, and attendance is
compulsory from ages six to fifteen. The Central Government has introduced
programs to increase vocational and technical training. In 1997, the Central
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
years and imposed higher standards for the end-of-school exam.
Public Debt
Italy's public debt includes Treasury securities and borrowings, debt
incurred by the social security agencies and regional and local governments and
authorities and debt incurred by autonomous agencies within the state sector.
Italy's public debt as a percentage of GDP remains the highest among
G-7 countries. However, in 1995, the Central Government reduced the debt-to-GDP
ratio for the first time in 16 years as compared to 1994 from 124.3% to 123.8%
and then steadily down to 109.4% in 2001. The public debt of Italy as of
December 31, 2001, was estimated to be 'E'1,330,711 million, representing an
increase of approximately 3.3% over 2000 as compared to increases of 1.5%, 1.7%
and 1.2% in 2000, 1999 and 1998, respectively. Because of the substantial
interest component in the annual budget, continued stabilization will require
significant reductions in expenditures. See "--Public Finance--Governmental
Objectives".
In this section, "external debt" means debt initially incurred or
issued outside Italy, regardless of the currency of denomination and "short term
debt" means debt that has a maturity at issuance of up to eighteen months.
The following table summarizes Italy's public debt as of the periods
indicated:
Public Debt
Year Ended December 31,
------------------------------------------------------------------------
1996 1997 1998 1999 2000 2001(2)
---- ---- ---- ---- ---- ------
('E' millions)
Medium and long term debt.............. 840,304 902,241 940,501 968,778 1,005,312 1,029,295
Short term debt........................ 197,956 155,725 137,459 119,777 102,074 113,570
Other debts(1)......................... 167,251 175,760 170,555 180,693 180,326 187,846
Total public debt...................... 1,205,512 1,233,726 1,248,514 1,269,248 1,287,711 1,330,711
of which: - - - - - -
External debt.......................... 65,462 73,809 67,292 70,691 84,359 93,942
Debt with Bank of Italy................ 88,323 79,965 63,693 59,396 62,487 -
- --------------
Source: Annual Report of Bank of Italy (2000).
(1) Includes postal borrowing operations, debt with banks and other liabilities.
(2) Estimates provided by Bank of Italy.
Guaranteed Debt. In addition to its direct indebtedness, Italy is also
a guarantor of certain third-party indebtedness, the guarantee of which may
arise either by contract or by operation of law. Italy has issued formal
contractual guarantees of certain indebtedness of partially state-owned
entities. In addition, under Italian commercial laws the sole shareholder of a
joint stock company is liable for the indebtedness of such company incurred
while wholly-owned by such shareholder. Therefore, indebtedness of joint stock
companies incurred during the period that such companies are or were
wholly-owned by Italy is guaranteed by Italy by operation of law. Public debt
does not include debt that is guaranteed by Italy, whether by contract or by
operation of law. Total guaranteed debt as of December 31, 1997, 1998 and 1999
amounted to 'E'19,926 million, 'E'14,184 million and 'E'13,192 million,
respectively. Total guaranteed debt as of December 31, 2000 was estimated at
'E'9,800 million.
External Debt. External debt is debt initially incurred or issued
outside Italy, regardless of the currency of denomination. Total external
public debt as of December 31, 2001, was 'E'82,653 million, as compared to
'E'72,563
50
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million as of December 31, 2000. (Source: Registration Statement filed by
the Republic of Italy under Schedule B of the Securities Act of 1933
(March 14, 2002).
The following table summarizes the external public debt as of December
31 in each of the years 1997 through 2001.
External Public Debt
Year Ended December 31,
----------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
('E' millions)
External Treasury Bonds....................... 59,800 55,506 59,006 70,048 80,082
FS Bonds(1)................................... 7,870 1,981 1,862 1,683 1,742
ENAS Bonds(2)................................. 809 789 783 519 516
Other State sector entities................... 717 1,869 1,865 313 313
------ ------ ------ ------ ------
Total external public debt.................. 69,196 60,145 63,515 72,563 82,653
====== ====== ====== ====== ======
- ---------------
Source: Registration Statement filed by the Republic of Italy under Schedule B
of the Securities Act of 1933 (March 14, 2002)
(1) Securities issued by FS.
(2) Securities issued by ENAS.
The following table sets forth a breakdown of the external public debt,
excluding external public debt of other State sector entities and other general
government entities, by currency, as of December 31 in each of the years 1997
through 2001.
Year Ended December 31,
----------------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(millions)
EMU currencies (including ECU)......... 40,939 31,103 20,770 21,496 25,310
U.S. Dollars........................... 24,036 26,532 24,692 29,074 30,866
Swiss Francs........................... 1,300 2,300 3,800 5,800 6,800
Japanese Yen........................... 1,850,000 1,650,000 1,475,000 1,675,000 1,475,000
British Pounds......................... 400 700 700 1,305 2,505
Greek Drachmas(1)...................... - 20,000 100,000 - -
Total in euros......................... 77,162 68,500 63,503 74,306 81,825
- ---------------
Source: Registration Statement filed by the Republic of Italy under Schedule B
of the Securities Act 1933 (March 14, 2002).
(1) Greece joined the EMU on January 1, 2001.
Debt Service. The aggregate amount of scheduled repayments in respect
of the principal amount on Treasury securities constituting funding debt
outstanding as of December 31, 2001 was as follows:
51
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Year Ended December 31,
----------------------------------------------------------------
2002 2003 2004-2009 2010 and after
---- ---- --------- ---------------
(millions)
EMU currencies (including ECU)....................... 3,956 2,075 8,772 10,505
U.S. Dollars......................................... 2,575 6,366 12,675 9,250
Japanese Yen.........................................100,000 150,000 675,000 550,000
British Pounds....................................... 500 0 105 1,900
Swiss Francs......................................... 0 1,000 4,300 1,500
Total in euro........................................ 8,567 11,274 32,079 29,904
- ---------------
Source: Registration Statement filed by the Republic of Italy under Schedule B
of the Securities Act 1933 (March 14, 2002).
Debt Record. Since its foundation in 1946, the Republic of Italy has
never defaulted on the payment of principal on interest on any of its internal
or external indebtedness.
Exchange Controls
The following discussion of exchange controls in Italy summarizes
relevant Italian laws in force at the date hereof, but may not contain all of
the exchange control considerations that may be relevant to an investor in
deciding whether to invest in the Notes.
There are no exchange controls as such in Italy restricting rights
deriving from the ownership of the Notes. Residents and non-residents of Italy
may effect any investments, divestments and other transactions relating to
transfers of assets to or from Italy, subject only to the reporting,
record-keeping and disclosure requirements described below. Residents of Italy
may hold foreign currency and foreign securities of any kind, within or outside
of Italy. Non-residents of Italy may invest in Italian securities without
restriction and may export funds, instruments of credit or payment and
securities from Italy, whether in foreign currency or lire, representing
interest, dividends, other asset distributions and the proceeds of dispositions.
Certain procedural requirements, however, are imposed by law. Italian
residents, as well as non-resident investors who transfer, directly or
indirectly (through banks or other intermediaries) into or out of Italy, cash,
investments of credit or other securities in excess of 'E'10,329 must report
all such transfers to the Italian Exchange Office (Ufficio Italiano dei Cambi or
"UIC"). In case of indirect transfers, banks or other intermediaries are
required to maintain records of all such transfers for five years (for
inspection, inter alia, by Italian tax and judicial authorities). Non-compliance
with these reporting and record-keeping requirements may result in
administrative fines or, in the case of false reporting or in certain cases of
incomplete reporting, criminal penalties. The UIC is required to maintain
reports for a period of ten years and may use such reports, directly or through
other government offices, to police money laundering, tax evasion and any other
crime or violation.
Individuals, non-profit entities and informal partnerships that are
residents of Italy must disclose on their annual tax returns all investments and
financial assets held outside Italy, as well as the total amount of transfers
to, from, within and between countries other than Italy relating to such foreign
investments or financial assets, even if at the end of the taxable period such
persons no longer own foreign investments or financial assets. No such tax
disclosure is required if: (i) such foreign investments or financial assets are
exempt from income tax; or (ii) the total value of such foreign investments of
financial assets at the end of the taxable period of the total amount of the
transfers effected during the fiscal year does not exceed 'E'10,329.
Corporate residents of Italy are exempt from such tax disclosure requirements
with respect to their annual tax returns because this information is required to
be discussed in their financial statements.
There can be no assurance that the present regulatory environment in or
outside Italy will stay intact or that particular policies presently in effect
will be maintained, although Italy is required to maintain certain regulations
and policies by virtue of its membership in the European Union and other
international organizations and its adherence to various bilateral and
multilateral international agreements.
52
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OFFICIAL STATEMENTS
Information included herein which is identified as being derived from a
publication of the City or one of their 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.
53
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Schedule of Outstanding Debt as of December 31, 2001
Year of Interest Original Amount Outstanding at Final year
Lender Issue Rate Issued December 2001 of maturity
- ---------------------------------------- --------- --------- ---------------- --------------- -------------
('E')
CASSA DEPOSITI E PRESTITI............... 1967 5.00 1,730,957 0 2001
CASSA DEPOSITI E PRESTITI............... 1968 5.00 1,239,270 26,186 2002
CASSA DEPOSITI E PRESTITI............... 1969 5.00 217,945 4,866 2003
CASSA DEPOSITI E PRESTITI............... 1970 5.00 1,698,352 114,246 2004
CASSA DEPOSITI E PRESTITI............... 1971 5.00 139.443 2,411 2005
CASSA DEPOSITI E PRESTITI............... 1972 5.50 157,519 5,942 2006
CASSA DEPOSITI E PRESTITI............... 1973 5.00 77,469 3,411 2007
CASSA DEPOSITI E PRESTITI............... 1973 5.30 623,777 94,436 2007
CASSA DEPOSITI E PRESTITI............... 1975 5.50 8,609,197 3,564,870 2009
CASSA DEPOSITI E PRESTITI............... 1979 7.00 26,223 6,430 2013
CASSA DEPOSITI E PRESTITI............... 1981 7.00 25,822,845 18,825,424 2015
CASSA DEPOSITI E PRESTITI............... 1981 4.00 61,974,828 35,074,272 2015
CASSA DEPOSITI E PRESTITI............... 1985 7.00 101,953,670 29,713,080 2004
CASSA DEPOSITI E PRESTITI............... 1986 7.00 1,918,379 711,831 2005
CASSA DEPOSITI E PRESTITI............... 1987 7.00 2,893,419 1,282,558 2006
MONTE PASCHI SIENA...................... 1987 12.50 2,582,284 0 2001
CASSA DEPOSITI E PRESTITI............... 1988 7.00 120,415,226 58,349,078 2007
CASSA DEPOSITI E PRESTITI............... 1989 7.00 61,465,093 33,430,528 2008
CASSA DEPOSITI E PRESTITI............... 1989 4.00 14,751,558 6,514,903 2008
CASSA DEPOSITI E PRESTITI............... 1990 7.00 12,076,167 7,226,252 2009
CASSA DEPOSITI E PRESTITI............... 1991 7.00 71,651,021 46,461,850 2010
CASSA DEPOSITI E PRESTITI............... 1992 7.00 77,306,461 53,683,837 2011
CASSA DEPOSITI E PRESTITI............... 1993 4.00 8,949,337 5,768,843 2012
BANCO NAPOLI............................ 1998 8.00 164,494,963 139,965,593 2012
BANCO NAPOLI............................ 1998 6.30 37,536,354 33,797,585 2018
CREDIOP................................. 1999 4.95 24,015,423 16,076,794 2006
CREDIOP................................. 1999 6.35 15,925,538 12,589,568 2009
INPDAP.................................. 2000 6.00 26,395,480 24,059,393 2014
UNICREDIT............................... 2001 Floating 4,648,112 4,436,404 2015
CREDIOP................................. 2001 Floating 3,873,427 3,695,123 2015
CASSA DEPOSITI E PRESTITI............... 2001 5.65 4,272,532 4,085,161 2015
CASSA DEPOSITI E PRESTITI............... 2000 4.85 59,625,243 55,894,529 2019
CASSA DEPOSITI E PRESTITI............... 2001 5.75 53,497,246 52,016,585 2020
Sub total............................ 647,481,988
Prestito Obbligazionario................ 1996 154,937,069 77,468,534 2006
-----------
TOTAL.............................. 724,950,522
===========
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Schedule of Outstanding Debt as of January 1, 1998,
1999, 2000 and 2001, by Lender.
Outstanding at January 1,
--------------------------------------------------------------------
Lender 1998 1999 2000 2001
------------------- ---- ---- ---- ----
('E'millions)
CASSA DEPOSITI E PRESTITI....................... 475.3 505.4 434.5 448.7
BANCO DI NAPOLI................................. 230.1 198.4 190.8 182.6
ISTITUTI DI PREVIDENZA.......................... 38.0 27.6 26.4 25.3
I.B.S. PAOLO DI TORINO (CREDIOP)................ 30.0 39.9 36.4 36.5
OTHER........................................... 19.6 1.9 5.7 5.0
PRESTITO OBBLIGAZIONARIO........................ 139.4 123.9 108.5 93.0
----- ----- ----- -----
TOTAL OUTSTANDING DEBT..................... 932.5 897.3 802.3 791.1
===== ===== ===== =====
55