EXHIBIT A
CITY OF NAPLES
TABLE OF CONTENTS
Page
----
INTRODUCTION..................................................................7
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..........................................................54
AUTHORIZED REPRESENTATIVE IN THE UNITED STATES...............................54
SCHEDULE OF OUTSTANDING DEBT AS OF DECEMBER 31, 2002.........................55
6
INTRODUCTION
The Euro
The Treaty on the European Union (the "Maastricht Treaty"), which came
into effect on November 1, 1993, established the guidelines for a single
European currency under the monetary control of a European Central Bank. The
European Monetary Institute ("EMI") was subsequently established with
responsibility for the technical preparations for European Monetary Union
(including instruments, procedures and regulations) as well as for strengthening
cooperation and coordination among the monetary authorities of the member
states. With the approval of the Council of the European Union, Italy, Austria,
Belgium, Finland, France, Germany, Greece, Ireland, Luxembourg, the Netherlands,
Portugal and Spain (the "Participating Member States") agreed to adhere to the
Maastricht Treaty.
On January 1, 1999, the Euro officially became a currency, alongside
each of the national currencies of Participating Member States, which were fixed
at irrevocable conversion rates to the Euro, and the currencies of 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 the monetary policy for the Participating Member States centrally.
Beginning on January 1, 2002, the Euro was introduced as the legal tender in
each of the Participating Member States and each of the pre-existing national
currencies continued to be accepted for temporary periods ending no later than
March 1, 2002. The Italian Lira ceased to be legal tender on March 1, 2002 and
has been removed from circulation and replaced by the Euro.
All Lira amounts have been converted into Euro at the fixed exchange
rate of Lit. 1,936.27 to '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", "$", "US$" or "U.S. Dollars"). Amounts
stated in Dollars, unless otherwise indicated, have been translated from Euro at
an assumed rate solely for convenience, and should not be construed as
representations that the Euro amounts actually represent such Dollar amounts or
could be converted into Dollars at the rate indicated or any other rate.
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).
7
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
- ---------------
(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.
8
CITY OF NAPLES
General
The City of Naples (the "City" or the "City of Naples") is located in
the southern portion of the Republic of Italy ("Italy" or the "Republic") on the
Mediterranean coast in the region of Campania, 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 under the name of "Parthenope" on what is now
Naples. Over the centuries, Naples became a prosperous commercial center and has
remained an important trading port on the Mediterranean Sea ever since.
Today, the City occupies an area of 1,171 square kilometers
(approximately 453 square miles). With a population of approximately one million
people as of December 31, 2002, Naples is the third largest city in Italy, after
Rome and Milan. The population of the Naples metropolitan area (known as the
Provincia di Napoli) amounted to approximately 3.08 million people as of
December 31, 2002.
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, 2002, 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,
Puglia, Calabria, Basilicata, Sicily and Sardinia, comprise an area in southern
Italy known as the "Mezzogiorno".
In June 1996, the City of Naples issued $195 million in aggregate
principal amount of senior notes (the "Notes") in a registered offering in the
United States and listed the Notes on the New York Stock Exchange. The Notes
bear interest at a rate of 7.52% per annum and mature on July 15, 2006.
The principal office of the City is located at Palazzo San Giacomo,
Piazza del Municipio, Naples, Italy.
Governmental Organization
Relationship between Central Government and Local Governments
The Republic of Italy has been a democratic republic since June 2,
1946. Its government is organized territorially and administratively on
national, regional and local levels. Legislative, executive and judicial powers
are exercised at the national level by the central government of Italy (the
"Central Government"). Limited legislative and executive powers are exercised by
the governments of regions (regioni, of which there are 20), provinces
(province, of which there are 103) and municipalities (comuni, of which there
are approximately 8,100).
The Central Government has exclusive powers to act, inter alia, in the
areas of international relations, defense, armed forces and national security,
foreign trade and economic, monetary and energy policies. The Central Government
also has powers to act in other areas, such as public works, water resources,
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 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".
9
Local Administration
Naples is governed by a Mayor, a City Council (Consiglio Comunale) and
a City Board (Giunta Comunale). Supervisory and advisory assistance is provided
to the City Council through the Board of Auditors (Collegio dei Revisori). Since
the electoral reforms of June 1993, the mayor is elected directly by popular
vote for an uninterrupted term of five years. The Mayor is responsible for
appointing the members of the City Board. In Naples, the City Council consists
of 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 sixteen 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, in March 2001
the Italian Parliament approved 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, as of March 2001, 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.
The current Mayor, Mrs. Rosa Russo Jervolino, a member of the
center-left coalition (L'Ulivo), was elected in May 2001. Her 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
10
Administrative Election
of May 13, 2001
-----------------------
Political Party Seats Percentage
--------------- ----- ----------
Democratic Party of the Left (Partito Democratico della Sinistra) 18 30.0%
Daisy (Margherita) 9 15%
Mixed Majority Party (Gruppo Misto di Maggioranza) 1 1.7%
Communist Refoundation (Rifondazione Comunista) 3 5.0%
Greens (Verdi) 3 5.0%
Italian Democratic Left (Sinistra Democratica Italiana) 0 0%
Republican Party (Partito Repubblicano) 2 3.3%
--- -----
Total Majority 36 60.0%
Italy Force (Forza Italia) 11 18.3%
National Alliance (Alleanza Nazionale) 5 8.3%
House of Liberties - Martusciello for Major
(Casa delle Liberta per Martusciello Sindaco) 5 8.3%
People's Alliance (Alleanza Popolare) U.D.E.U.R. 3 5.0%
--- -----
Total Opposition 24 40.0%
--- -----
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,
------------------------------------------
1998 1999 2000 2001 2002
------ ------ ------ ------ ------
City of Naples............. 15,833 15,597 15,101 13,457 13,520
ANM(2)..................... 4,409 4,320 4,300 3,952 3,794
ARIN(3).................... 629 621 650 650 674
------ ------ ------ ------ ------
Total................... 20,871 20,538 20,051 18,004 17,988
====== ====== ====== ====== ======
- ---------------
(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 years indicated.
As of December 31, 2002, the City employed 13,520 employees,
representing a 0.5% increase from the December 31, 2001 total of 13,457. The
increase in employees was due to the creation of new employment positions for
city employees.
Unions represent City employees. Separate contracts are negotiated on
a national basis for non-executive and executive administrators. 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 current national contracts for
non-executive employees and executive administrators were entered into on
January 1, 2002 and expired on December 31, 2003. 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.
11
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 2002 the City spent approximately (euro)315.8
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
kindergardens. The City also provides funding for certain expenses of primary
and secondary schools. Further, five universities are located in Naples,
however, they are not the responsibility of the City.
Waste Collection and Disposal. The City and the Region of Campania
share responsibility for waste disposal. Ordinary garbage collection is
performed by outside contractors hired by the City, while all other collection
is performed 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 2,276 officers. 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 2002, significant expenses were incurred (totaling 'E'70.7
million) for public security purposes.
Sewage System and Waterworks. The City is responsible for the
construction, maintenance and management of the sewage system in the City. As of
December 31, 2002, approximately 90% 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 which is 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 kilometers of pipes to distribute
drinking water to more than 2 million people in the Naples metropolitan area
with an average water supply of approximately 570,000 cubic meters in 2002. 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 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. As
of the end of 2002, the relevant ATO had yet to be formed due to uncertainties
in the interpretation of the applicable law.
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
12
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 10,239 kilometers of public roads in
the City as of December 31, 2002. While the City is not responsible for the
construction of new roads, it is responsible for their maintenance and lighting.
As of December 31, 2002, there were approximately 3.45 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 2002, approximately 4.13
million passengers traveled on flights arriving at or departing from Capodichino
resulting in a 3.2% increase from the approximately 4 million passengers
registered in 2001. In addition, approximately 2.68 thousand tons of merchandise
were transported through the airport as compared to 3.13 thousand tons in 2001,
representing a decrease of 14.3%.
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 2002,
the port had a flow of approximately 843,136 passengers and approximately 18.6
million tons of cargo as compared to 811,836 passengers and 15.3 million tons of
cargo in 2001, representing a 3.9% and a 21.9% 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,
2002, had a value of approximately 'E'2,976 million, according to the public
registrar's office. All such properties are subject to the dissesto procedure.
See "Financial Condition of the City--Dissesto Finanziario".
Utilities. In 2002, Naples had approximately 330,000 private telephone
lines. As in other parts of Italy, the construction of the network and its
maintenance are provided by Telecom Italia S.p.A. The electrical power in Naples
is supplied primarily by ENEL, the formerly state-owned electric power
distribution company.
13
THE ECONOMY
Region of Campania
The following discussion of the economy of Campania is based on data
of ISTAT (Istituto Nazionale di Statistica) and Bank of Italy (Banca d'Italia).
In 2001, approximately 6.49% of Italy's GDP was generated in Campania
and 3.5% of Italy's GDP was generated in Naples. In the year ended December 31,
2001, Campania's GDP per capita was approximately 'E'10,920 million which
compares to approximately 'E'1,258,349 million for Italy as a whole and
(euro)15,000 million per capita. The unemployment rate in 2002 was 21.1% in
Campania (as compared to 9% in Italy during the same period).
The European Union's Operational Program for Campania.
On August 8, 2000, the European Commission approved an operational
program (the "Program") for Campania to support the Region's development through
measures on natural, cultural and human resources, local development systems,
urban areas, networks and service hubs. The Program 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 the 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 Program principally focuses on six areas: (i) 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); (ii) Cultural Resources
(enhancement of the region's cultural resources as a factor contributing to its
economic and social development); (iii) Human Resources (measures are closely
linked to the Commission's recommendations and the national action plan in the
context of the European strategy for employment; research and technological
innovation measures are also planned); (iv) Local Development Systems (promoting
local development systems, in particular industrial districts and export
systems, and new companies, supporting demand for high-quality services and
upgrading professional qualifications; special emphasis is placed on boosting
the competitiveness of tourism and developing its potential); (v) Cities
(enhancement of the City's role in its territorial context as a mean of
improving competitiveness and the social potential of urban areas); (vi)
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). In addition, technical assistance measures
will be provided to assist with the management of, information on,
implementation of, control and evaluation of all aspects of the Program.
The City of Naples
General. Naples is the major business, commercial and cultural center
of the Region of Campania. In 2001, the City's GDP per capita was approximately
'E'10,500 as compared to an average of 'E'10,920 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 2002, approximately 4.650 million tourists visited the Region as
compared to 4.656 million in 2001, representing a decrease of 0.13%. The
administration has made the restoration of the historic areas of the City, in
particular near the port, a centerpiece of its agenda to promote tourism.
Employment. The unemployment rate for the City of Naples is higher
than the Italian national average, as is the case for the Region of Campania. In
2002, the unemployment rate was 24.7% in Naples and 21.1% in the Region as
compared to a national average of 9%.
14
Inflation. The table below shows annual increases in the consumer
price index of Naples and Italy for the periods indicated.
Change of Consumer Price Index
Year Ended December 31,
------------------------------------------
1998 1999 2000 2001 2002
------ ------ ------ ------ ------
Naples..................... 1.9% 1.8% 1.9% 2.7% 2.4%
Italy...................... 1.9% 1.7% 2.5% 2.7% 2.5%
- ---------------
Source: ISTAT, Servizi Statistici Comune di Napoli.
15
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 provided to the
Board of Auditors for its review and comments. Thereafter, the budget together
with an annual report prepared by the Board of Auditors is submitted to the City
Council for approval. The City Council is required to approve year-end financial
statements no later than on June 30 of each year. 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 due to the lack of a budget at the Central
Government, as was the case in 1997. The City Budget is completed after the
approval of the Central Government budget, so that the budgeted revenues from
Central Government transfers are committed, not estimated. If the City's Budget
has not been approved by the beginning of the year, expenditures are limited to
one twelfth of the previous year's amounts, except for payment of personnel,
outstanding obligations, debt payments, taxes and operations necessary to avoid
severe damage to the local authority which are not subject to such limit. At
least once a year, by September 30, the administration is required to review the
budget for imbalances and to make any necessary adjustments by November 30.
Local authorities must include in the budget a reserve of not less than 0.3% and
not more than 2% 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 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 effect all payments and collect all revenues through an account with
a specially appointed municipal treasurer (Tesoriere Comunale). The municipal
treasurer intermediates funds between the City and the Bank of Italy. The
municipal treasurer is required to deposit all surplus cash on a daily basis
into an account at the local branch of the Bank of Italy (Tesoreria Unica). In
the case of Naples, the municipal treasurer is Banco di Napoli.
Irrevocable Payment Instruction (Delegazione di Pagamento). The
municipal treasurer can be granted an irrevocable authorization to pay interest
on, and repay the principal of, debt when due on behalf of the City (delegazione
di pagamento). Upon entering into a bond issue, the City is required to
implement such a delegazione di pagamento by providing the municipal treasurer
with the required power as well as a timetable for payments of interest and
principal. The City may, but is not required to, provide for a delegazione di
pagamento on loans other than bonds. Historically, the City has made such
irrevocable payment instructions on all its financial indebtedness. See "Debt of
the City". Once the authority has been delegated, the municipal treasurer is
required to make future payments as interest and principal become due. The
Municipal 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.
16
Revenues and Expenditures. The following table sets forth the current
revenues, expenditures, capital revenues and spending for the periods indicated:
Year Ended December 31,
---------------------------------------------------------------
Budget
1998 1999 2000 2001 2002 2003(2)
-------- -------- -------- -------- -------- --------
('E' millions)
Current revenues................. 1,194.8 1,161.9 1,164.0 1,301.5 1,304.5 1,344.2
Previous Year Balance for
Current Expenditures(1).......... 9.9 14.2 -- 5.0 7.2 190.7
Current Expenditures............. (1,051.5) (1,020.2) (1,036.2) (1,167.3) (1,149.8) (1,398.4)
-------- -------- -------- -------- -------- --------
Current Balance.................. 153.3 155.9 127.9 139.2 161.9 136.4
-------- -------- -------- -------- -------- --------
Capital Revenues................. 398.7 271.3 263.6 114.3 248.8 488.7
Previous Year Balance for
Capital Expenditures(1).......... 89.0 77.8 13.3 1.3 0 1.3
Capital Spending................. (496.5) (419.1) (513.3) (235.71) (359.7) (769.4)
-------- -------- -------- -------- -------- --------
Balance Before Financing......... 55.5 8.1 (121.9) 17.5 (51.0) (144.3)
-------- -------- -------- -------- -------- --------
New Borrowing.................... 9.8 61.2 203.3 93.8 51.2 548.9
Reimbursement of Borrowing....... 112.6 107.4 72.8 74.3 73.4 403.6
-------- -------- -------- -------- -------- --------
Total Balance.................... 41.7 39.7 21.9 38.6 28.8 2.3
======== ======== ======== ======== ======== ========
- ----------
(1) Represent surpluses from previous years allocated to Current Expenditures
and Capital Expenditures, as indicated.
(2) Approved by the City Council on April 14, 2003.
The City's current balance has shown 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 1998 to 2002, capital spending
was greater than capital revenues because the City used surpluses from previous
years to finance both current expenditures and capital spending.
Dissesto Finanziario
In the late 1980s and early 1990s, the City faced serious financial
problems due to significant unexpected expenses resulting from the earthquake in
1980. In addition, the City's Special Entities made expenditures that were not
appropriated in the budget and had to be covered by the City.
As a result of the above, at the end of 1992, the City Council failed
to approve its 1993 budget and the City of Naples declared dissesto finanziario
("dissesto"), an insolvency proceeding for municipalities which are unable to
unable to further guarantee the supply of basic services, in May 1993.
The procedure of dissesto was introduced by Legislative Decree no. 25
of March 2, 1989, and was converted by law number 144, dated 24 April 1989, and
section 21 of the Legislative Decree dated January 18, 1993. This decree
provided a clear division of competencies between the management of the past
financial situation of the municipality and the financial current situation of
the entity in dissesto. As a result, the local administration is responsible
solely for the re-balanced financial statement of the municipality. The dissesto
is currently governed by sections 204-269 of the Testo Unico degli Enti Locali
of Legislative Decree number 267 dated August 18, 2000.
The City declared dissesto following the declaration to that effect by
the City Council and the publication of such notice by the Italian Ministry of
the Interior of the Central Government (the "Ministry of the Interior") in May
1993. Further, the President of the Republic of Italy appointed the Organo
Straordinario di Liquidazione, a three person committee (the "Statutory
Receivers") in May 1993. The primary purpose of the Statutory Receivers is to
perform a full audit of the claims entered into prior to the date of dissesto
("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 City
Council presented the required re-balanced financial statements (bilancio
stabilmente riequilibrato), in which reductions in current expenses and
increases in taxes are proposed, to the Ministry of the Interior in November
1993. The Ministry of the Interior approved the re-balanced financial statements
in May 1994. The Central Government is
17
required to grant a loan through Cassa Depositi e Prestiti, the amount of which
varies based on the number of inhabitants of the entity in dissesto. Subsequent
debt service for the loan is funded by transfers from the Central Government.
Since 1993, the City has had a surplus (current and capital revenues less
current and capital expenditures) in each year.
The procedure regarding the liquidation of pre-dissesto claims
verified by the Statutory Receivers (the "Verified Claims") was simplified by
the Legislative Decree number 342 dated September 15, 1997. Based on section 16
of such decree, the City tried 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 opted not to receive immediate payment of the proposed
amount are paid in due course under the normally applicable rules. The City
opted to resort to such simplified procedure for the satisfaction of Verified
Claims. Accordingly, it asked the Statutory Receivers to prepare a plan of
liquidation and proposed settlement of all Verified Claims.
In March 1998, the Statutory Receivers completed the simplified
accounting and verification procedure of pre-dissesto Claims and the recovery of
credits owed to the City and commenced payment of such Verified Claims. In
addition, in November 2001, the Statutory Receivers approved a final balance. In
July 2003, the City of Naples submitted its application to the Ministry of the
Interior for the official closure of the dissesto procedure, which had not been
granted as of December 31, 2002.
As a result, the City remains technically subject to dissesto, which
however 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. 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".
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, which 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 surpluses in the prior years and the sale of
certain assets owned by the City.
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 Verified Claims.
On July 23, 2002, the municipality of Naples applied for the official
closure of the dissesto procedure, which had not been granted as of December 31,
2002.
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 by focusing on
greater financial autonomy and financial responsibility of local authorities.
In order to implement such changes, the collection of certain taxes
and fees that were previously the responsibility of the Central Government are
or will become the responsibility of the City. This has resulted and will
18
result in a proportional 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 in connection
with public work projects and cannot be used to finance current expenditures.
Transfers of funds to local authorities are dependent on the finances
of the Central Government. While the City is not aware of any plan to change the
current transfer system, there can be no assurance that transfers from the
Central Government will continue in the manner or the amounts of the past. 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; 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 increased the rate to 0.4% for the year 2001, and to
0.5% for the year 2002.
19
Current Revenues
Year Ended December 31,
---------------------------------------------------------
Budget
1998 1999 2000 2001 2002 2003(2)
------- ------- ------- ------- ------- -------
('E' millions)
Tax Revenues:
Imposte ...................... 180.7 187.5 204.3 218.4 214.6 217.2
Tasse ........................ 85.9 93.7 119.9 106.5 112.6 113.3
Tributi speciali ............. 71.9 19.1 20.7 1.2 78.3 112.9
------- ------- ------- ------- ------- -------
Total tax revenue ......... 338.0 300.3 345.0 326.1 405.5 443.4
Current Transfers:
Central Government ........... 694.4 696.6 641.8 715.2 640.9 548.5
Campania ..................... 4.6 10.8 20.3 27.9 70.4 57.5
Other ........................ 1.8 0.5 3.0 4.4 1.0 4.3
------- ------- ------- ------- ------- -------
Total current transfers ... 700.8 708.0 665.1 747.6 712.3 610.3
Non-Tax Revenue:
Public services .............. 54.2 58.1 82.3 94.5 111.2 92.8
Rents ........................ 19.4 24.3 23.2 27.4 28.0 27.3
Interest income .............. 12.1 13.3 12.2 9.5 5.9 5.6
Competitions, refunds and
payoffs ................... -- -- -- 0.7 0.2 5.5
Corrections .................. -- -- -- -- -- --
Other revenues ............... 70.3 57.8 36.2 95.5 41.3 159.3
------- ------- ------- ------- ------- -------
Total non-tax revenues .... 156.0 153.6 154.0 227.9 186.6 290.5
------- ------- ------- ------- ------- -------
Current Revenues ............. 1,194.8 1,161.9 1,164.0 1,301.5 1,304.4 1,344.2
======= ======= ======= ======= ======= =======
Previous year balance for
current expenditures(1) ... 9.9 14.2 -- 5.0 7.2 190.6
Total Current Revenues ....... 1,204.7 1,176.1 1,164.0 1,306.5 1,311.6 1,534.8
======= ======= ======= ======= ======= =======
- ----------
(1) Represent surpluses from previous years allocated to current expenditures,
as indicated.
(2) Approved by the City of Council on April 14, 2003.
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) (Imposta Comunale sugli Immobili) based on the value of real
estate registered with the public registrar's office at a rate of 0.55% for
household residences. Tasse include fees for the exploitation of public areas
for private use, for the consumption of electric power and for the performance
of administrative duties (such as the issuance of stamps or notarizations).
Tributi speciali are fees for the right to make street advertisements and fees
for water purification. 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 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, 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. In 2002, tax revenues
increased by 79.4 million due to a decrease in ICI, an increase in solid waste
taxes, as well as an increase in IRPEF.
20
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 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 of approximately 1,500 support staff
employees for local schools to the Central Government, thereby decreasing the
City's need for Central Government funds to cover the salaries of such
employees, as well as a decrease in the number of public projects financed by
the Central Government.
In 2002, current transfers decreased by 'E'35.2 million, or 4.71%
as compared to 2001. The decrease was due mainly to a decrease of 'E'74.3
million in current transfers from the Central Government, balanced by the income
from the additional IRPEF and the increase of 'E'43.1 million in transfers
from the Region and the European Union as a result of the implementation of
certain regional projects which entailed social expenses ('E'9.3 million),
and educational ('E'10.2 million) expenses and expenses for restoration
('E'7.2 million).
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 2002, non-tax revenues decreased by 'E'41.3 million, or 18.13%,
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'10.9 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'0.5 million). See "--Special Entities".
Current Expenditures
Current expenditures include personnel, goods and services, current
transfers, interest expense, corrections and unallocated expenditures.
21
The following table sets forth for the periods indicated the current
expenditures of the City.
Current Expenditures
Year Ended December 31,(1)
---------------------------------------------------------
Budget
1998 1999 2000 2001 2002 2003(2)
------- ------- ------- ------- ------- -------
('E' millions)
Personnel expenses ................ 394.7 407.5 388.8 402.6 421.2 406.6
Goods and services ................ 343.7 352.5 398.1 493.7 485.4 558.0
Rents, leases and related costs ... 9.7 9.3 9.1 9.8 10.5 12.2
Current transfers ................. 100.4 105.2 98.9 97.3 118.0 61.5
Interest expense .................. 96.2 67.8 56.5 53.5 51.5 50.0
Corrections ....................... 0.0 0.0 0.0 0.0 0.0 0
Taxes ............................. 36.9 34.4 30.6 28.6 32.0 32.8
Extraordinary expenses ............ 96.2 43.4 54.2 81.7 31.2 112.6
Unallocated ....................... 0.0 0.0 0.0 0.0 0.0 0.0
Others ............................ -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total Current Expenditures ..... 1,051.4 1,020.2 1,036.2 1,167.2 1,149.8 1,233.7
======= ======= ======= ======= ======= =======
- ----------
(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 April 14, 2003.
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 2002 personnel
expenses decreased by 'E'14.6 million, or 4.62%, mainly due to renegotiated
employment contracts, while the ratio of goods and services expenditures to
personnel expenses has steadily grown from 87.08% in 1998 to 115.24% in 2002.
22
The following table sets forth the current expenditures of the City
attributable to its major activities for the periods indicated.
Current Expenditures by Major Activity
Year Ended December 31,
---------------------------------------------------------
Budget
Activity 1998 1999 2000 2001 2002 2003(4)
-------- ------- ------- ------- ------- ------- -------
('E' millions)
Administration ............................... 307.6 322.7 303.9 375.6 435.9 670.8
Roads and Transportation ..................... 202.0 179.1 171.7 183.5 138.5 151.1
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 ................................ 122.1 121.8 87.5 99.7 101.8 121.6
Public Security .............................. 69.9 55.7 77.4 77.3 71.7 80.8
Housing(3) ................................... n/a n/a n/a n/a n/a n/a
Housing and Environmental Management(3) ...... 252.2 218.7 284.3 294.4 258.3 266.1
Social Services(2) ........................... 87.6 110.4 107.1 122.7 126.9 97.8
Services and Local Economic Promotion ........ 9.1 11.3 8.1 12.0 14.6 8.4
Other ........................................ 0.9 0.0 89.7 2.0 2.1 2.9
------- ------- ------- ------- ------- -------
Total ..................................... 1,051.5 1,020.1 1,037.1 1,167.2 1,149.8 1,399.4
======= ======= ======= ======= ======= =======
- ----------
(1) Operated by ARIN, a special entity, the numbers shown are net of fees for
service.
(2) Primarily services for elderly and disabled persons as well as foster
service.
(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 April 14, 2003.
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.
Current Expenditures in 2002 decreased by 'E'17.5 million, or 1.5%,
as compared to 2001, mainly due to a decrease in roads and transportation
activities.
Capital Revenues and Capital Expenditures
Capital Revenues consist of asset sales, capital transfers and credit
collections. Asset sales consist of the sale of City-owned assets. Capital
Transfers include contributions from the Central Government, the Region, the
European Union and other public entities. The City incurs Capital Expenditures
for the development and
23
improvement of facilities for housing, transportation, the renovation of public
property for general use and other civic purposes.
The following table sets forth the capital revenues of the City for
the period indicated.
Capital Revenues
Year Ended December 31,
-----------------------------------------------
Budget
1998 1999 2000 2001 2002 2003(1)
----- ----- ----- ----- ----- -------
('E' millions)
Asset sales......... 2.5 1.9 9.7 0.1 12.0 17.5
Capital transfers... 396.1 269.4 253.9 114.2 383.8 411.1
----- ----- ----- ----- ----- -----
Total............ 398.7 271.3 263.6 114.3 395.8 428.6
===== ===== ===== ===== ===== =====
- ----------
(1) Approved by the City Council on April 14, 2003.
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 increase in 2002 was attributable to the implementation of
additional public projects.
24
The following table sets forth the capital expenditures of the City
attributable to its major activities for the periods indicated.
Capital Expenditures
Year Ended December 31,
-----------------------------------------------
Budget
1998 1999 2000 2001 2002 2003(4)
----- ----- ----- ----- ----- -------
('E' millions)
Administration 182.9 48.0 131.9 13.3 22.7 116.4
Roads and Transportation..................... 309.3 272.0 187.8 63.8 265.5 357.0
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................................ 16.2 15.5 39.6 21.5 10.5 49.2
Public Security.............................. 0.0 0.4 0.0 1.2 1.5 0.3
Housing(3)................................... n/a n/a n/a n/a n/a n/a
Housing and Environmental Management(3)...... 148.2 69.4 132.8 132.9 54.4 222.9
Social Services(2)........................... 19.4 6.1 12.9 0.9 1.6 10.6
Services and Local Economic Promotion........ 2.3 7.4 7.8 2.2 3.5 13
Other........................................ 5.1 0.3 0.5 0.0 0.0 0.0
----- ----- ----- ----- ----- -----
Total..................................... 683.2 419.1 513.3 235.7 359.7 769.4
===== ===== ===== ===== ===== =====
- ----------
(1) Operated by ARIN, a special entity. The numbers shown are net of fees for
service.
(2) Primarily services for elderly and disabled persons as well as foster
service.
(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 April 14, 2003.
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 European Union. 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 implementation of certain public
projects, including roads and transportation projects (subway system), land
development and environmental projects and maintenance works for municipal
buildings.
Capital Expenditure in 2002 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 increase in 2002 was
attributable to the implementation of additional public projects.
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 (Consorzio Trasporti
Pubblici S.p.A.), 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
25
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.
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,
----------------------------------------
1998 1999 2000 2001 2002
----- ----- ----- ----- -----
('E' millions)
ANM
Revenue...................... 96.0 101.8 113.0 101.3 94.4
Net Income (loss)(1)......... 0 (6.8) 4.2 (12.1) (14.3)
CTP
Revenue...................... 8.7 9.2 9.8 8.1 10.2
Net Loss..................... (45.7) (43.9) (42.7) (30.0) (37.0)
Transfers from the City(2)... 19.1 22.0 21.4 14.8 18.5
ARIN
Revenue...................... 89.9 91.5 93.6 95.3 98.1
Net Income (loss)............ 0 (14.5) (48.4)(4) (6.4) (5.3)
AMCL(3)
Revenue...................... 2.4 2.9 -- -- --
Net Income................... 0 3,043 -- -- --
- ----------
(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.
(3) The entity ceased to operate on January 1, 1995 and was liquidated in 2000.
(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 and tramway
fleet. In 2002, its fleet comprised approximately 1,036 vehicles, of which
approximately 767 were functional. During 2002, ANM operated 151 autobus routes
and 4 trolleys/tramways routes which covered approximately 500 kilometers of
urban and suburban routes and transported an average of 250 million passengers.
ANM is also responsible for the operation of three funiculars. Since 1998, ANM
has maintained and operated line number 1 of the Naples subway as well as
several parking lots and an electric car hiring service.
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 2000, revenues of ANM increased by 'E'11.2 million as a result
of an increase in the sale of tickets. 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. 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 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
26
challenge of certain billing items. In 2002, ANM incurred a loss of 'E'14.3
million, mainly as a result of a decrease in payments for services transferred
from the City and an increase in costs for services.
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. In 2002, payments by the City to
ANM amounted to 'E'61.8 million.
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. 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 the 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.
Subsequently, in March 2001, it was transformed into a joint stock company
(societa per azioni). In 2002, CTP incurred a net loss of 'E'36.9 million, as
compared to a net loss of 'E'30 million in 2001 and a net loss of 'E'42.7
million in 2000. 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, 2002, the
entity employed approximately 2,031 persons. In 2002, its fleet was comprised of
approximately 500 buses, which covered approximately 2,300 kilometers and
transported approximately 25 million passengers per year.
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 2002, ARIN supplied approximately
570,000 cubic meters of water to more than 2 million inhabitants. ARIN owns a
water distribution system consisting of approximately 2,360 kilometers of pipes.
ARIN 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.
In 2002, 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, were transferred to Special
ARIN which managed all pending payments up to the year 2000. ARIN, however, may
still be held liable if Special ARIN defaults on any payment due. ARIN had
approximately 600 employees in 2002. 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 its 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 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 2002, the City did not make any
capital contribution to ARIN.
In 2001, ARIN recorded a net loss of 'E'64 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 transaction, whereby all existing
liabilities were transformed from the existing company ARIN to the spun-off
company Special ARIN. In 2002, ARIN's recorded a net loss of 'E'5.3 million
while in 2001 ARIN had a net loss equal to approximately 'E'6.4 million.
27
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'479.0
million at December 31, 2002) and from Italian banking institutions ("Internal
Funded Debt") (approximately 'E'219.2 million) and the Notes, of which
'E'61.9 million remained outstanding as of December 31, 2002. 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 borrowings in its budgets provisions to permit short term borrowings.
The Central Government contributes to the debt service of the City. For loans
contracted prior to 1980, the Central Government is responsible for 100% 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,
-------------------------------------
1998 1999 2000 2001 2002
----- ----- ----- ----- -----
('E' millions)
Fixed Rate Debt.................... 822.0 797.6 782.6 758.1 752.5
Floating Rate Debt................. 0.9 0.0 8.5 8.1 7.7
----- ----- ----- ----- -----
Total Debt Outstanding............. 823.0 797.6 791.1 766.2 760.2
===== ===== ===== ===== =====
Debt for which service is paid with
Central Government transfers.... 73.3 66.3 47.8 41.6 80.5
- ----------
(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,
---------------------------------------
1998 1999 2000 2001 2002
------ ------ ----- ----- -----
('E' millions)
Outstanding at Beginning of Year... 932.5 822.9 797.6 791.1 766.2
New Borrowings..................... 3.1 82.1 66.3 49.6 67.4
Debt Repayments.................... (112.6) (107.4) (72.8) (74.5) (73.4)
------ ------ ----- ----- -----
Outstanding at End of Year...... 822.9 797.6 791.1 766.2 760.2
====== ====== ===== ===== =====
The following table sets forth the maturity and debt service schedules
of the City's debt outstanding on December 31, 2002.
Maturity of Debt and Debt Service
- -----------------------------------------------------------------------------------------------
Principal Interest Due(1) Debt Transfers from Net Debt Service
--------- --------------- ------- Central Government ----------------
------------------
Maturing during Due Service
the Year --------- -------
- ---------------
('E' thousands)
-----------------------------------------------------------------------------
2002 73,437 48,775 122,212 41,576 80,636
2003 78,160 47,232 125,392 41,085 84,307
2004 81,067 46,302 127,369 39,020 88,349
2005 77,131 45,816 122,947 36,952 85,995
2006 81,077 40,709 121,786 26,949 94,837
2007 66,084 35,665 101,749 25,446 76,303
28
2008 60,376 31,529 91,905 18,805 73,100
2009 56,980 27,758 84,738 14,583 70,155
2010 56,849 24,153 81,002 12,879 68,123
2011 53,347 20,610 73,957 6,330 67,627
2012 49,063 17,339 66,402 6,330 60,072
2013 37,732 14,647 52,379 5,678 46,701
2014 33,385 12,993 46,378 5,678 40,700
2015 32,409 11,291 43,700 5,678 38,022
2016 27,404 9,702 37,106 0 37,106
2017 28,824 8,281 37,105 0 37,105
2018 28,669 6,786 35,455 0 35,455
2019 28,437 5,367 33,804 0 33,804
2020 25,128 3,986 29,114 0 29,114
2021 22,121 2,768 24,889 0 24,889
2022 19,147 1,727 20,874 0 20,874
2023 14,519 869 15,388 0 15,388
2024 7,664 274 7,938 0 7,938
(1) The interest due on floating rate debt was calculated at 12.75% per annum.
Short-term Debt
As of December 31, 2002, 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 'E'162 million
loan entered into in 1997.
Debt Record
Since 1946, the date of the establishment of the Republic of Italy,
the City has never failed to pay when due the full amount of principal of, and
interest and premium on, and amortization or sinking fund requirements with
respect to, its outstanding public debt. Although the City entered into dissesto
in 1993, payments on financial indebtedness were not affected. See "Financial
Information of the City--Summary" and "Financial Information of the
City--Dissesto Finanziario."
29
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 (2004), the Annual Report of the Ministry of the Economy
and Finance (2002), the Italian Government's 2001-2004 Economic Program Document
("Documento di Programmazione Economica"), the 2003-2006 Stability and Growth
Program of the Italian Government, 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 the Central Government) and to
dissolve Parliament. Silvio Berlusconi has served as Prime Minister since June
11, 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 Council of Ministers is
appointed by the President on the Prime Minister's advice. The Prime Minister
and Council of Ministers are responsible to both houses of Parliament and must
resign if Parliament passes a vote of no confidence in the administration.
The Judicial Branch. Italy is a civil law jurisdiction. Judicial power
is vested in the ordinary and administrative courts and courts of accounts. The
highest ordinary court is the Corte di Cassazione in Rome, where judgments of
lower courts of local jurisdiction may be appealed. The highest of the
administrative courts, which 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
Constitutional Court (Corte Costituzionale) does not exercise general judicial
powers, but adjudicates conflicts among the other branches of the Central
Government and determines the constitutionality of statutes.
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. The Chamber of Deputies
and the Senate equally share and have substantially the same power. Any statute
must be approved by both assemblies before being enacted. Members of Parliament
are elected for five years by direct universal adult suffrage. 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
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 Volkspartei - Olive (SVP-Ulivo)........ 8 European Democrats (Democrazia Europea).......... 2
Others (Altri).................................... 1 Sudtiroler Volkspartei - Olive (SVP - L'Ulivo)... 3
Communist Refoundation (Rifondazione Comunista).. 3
Sudtiroler Volkspartei (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 Centre-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 sixth largest in the developed world at the end of
2002, after the United States, Japan, Germany, France and the United Kingdom
(Source: OECD). Italy is a founding member of the European Union, and its
economy is closely linked with those of the other EU members.
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 109.9% of GDP at the end of 2001, and 106.7% at the end of
2002 although it remains above the debt ceiling of 60% required under the
Maastricht Treaty. Public debt is estimated to have decreased by 2.8% in 2002
(Source: ISTAT).
Beginning in 1989, GDP growth began to slow in Italy as well as in
other countries of the EU, reaching 0.6% in 1992. The downturn in Italy turned
into a recession in the third quarter of 1992, which lasted until the end of the
third quarter of 1993. During 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 1.1%. 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 1.7%. In 2000, the real GDP growth rate increased to 3.1%, 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 was primarily
attributable to increased domestic demand and expenditures, coupled with higher
exports. In 2001, real GDP grew by 1.8% due primarily to the decrease in the
world trade resulting from the slowdown in the global and U.S. economies, the
volatility of financial markets, a rise in petrol prices and a slowdown in
domestic private sector consumption and investments. In 2001, Italy's GDP growth
rate was higher, for the first time since 1995, than the GDP growth of the
European Economic Area as a whole. In 2002, the real GDP growth rate decreased
to 0.4%, the slowest growth rate registered by Italy since 1993. The decrease in
real GDP growth in 2001 and 2002 was due primarily to the decrease in world
trade resulting from the slowdown in the global and U.S. economies, the
volatility
31
of financial markets, a slowdown in domestic private sector consumption and
investments and a decrease in net exports.
The following tables set forth nominal and real GDP and expenditures
for Italy for the periods indicated:
GDP Summary
Year Ended December 31,
---------------------------------------------------------
1998 1999 2000 2001 2002
--------- --------- --------- --------- ---------
Nominal GDP(1).......................... 1,073,019 1,107,994 1,166,548 1,218,535 1,260,428
Real GDP(1)(2).......................... 969,130 985,253 1,015,077 1,032,985 1,036,701
% Change (real)......................... 1.8% 1.6% 3.1% 1.8% 0.4%
Population (thousands).................. 57,040 57,078 57,189 57,348 57,474
Nominal per capita GDP(2)(3)............ 18,625 19,209 20,167 21,406 21,953
Real per capita GDP(3).................. 16,821 17,081 17,568 18,152 18,115
- ----------
(1) 'E' millions
(2) Constant Euro, with purchasing power equal to the average for 1995.
(3) Euro
Source: Annual Report of the Bank of Italy (May 2004) and ISTAT (2004).
GDP and Expenditures
Year Ended December 31,
---------------------------------------------------------
1998 1999 2000 2001 2002
--------- --------- --------- --------- ---------
('E' millions)
Real GDP................................. 969,130 985,253 1,015,077 1,032,985 1,036,701
Imports of goods and services............ 253,285 267,349 286,418 287,798 287,164
--------- --------- --------- --------- ---------
Total supply of goods and services....... 1,222,415 1,252,602 1,301,495 1,320,783 1,323,864
Less: Exports of goods and services...... 276,325 276,584 303,311 308,131 297,733
--------- --------- --------- --------- ---------
Total goods and services available for 946,090 976,018 998,184 1,012,652 1,026,131
domestic expenditure..................
Private sector consumption............... 580,294 595,251 611,570 616,427 619,232
Public sector consumption................ 171,730 174,188 177,227 184,011 187,468
--------- --------- --------- --------- ---------
Total consumption........................ 752,024 769,439 788,797 800,438 806,700
Gross fixed investment................... 186,229 195,623 209,217 213,121 215,622
Changes in inventories................... 7,837 10,958 (171) (906) 3,810
--------- --------- --------- --------- ---------
Total domestic expenditure............... 946,090 976,020 996,300 1,012,653 1,018,512
- ----------
Source: Annual Report of the Bank of Italy (May 2004)
In 1998, domestic consumption of goods and services increased by 2.4%,
fuelled mostly by motor vehicle purchases (which benefitted from government
incentives to surrender old vehicles for subsidies for the purchase of new
vehicles), household consumption and stockbuilding by firms.
In 1999, domestic consumption of goods and services grew by 2.0% due
to the weakening of consumer spending power and an atmosphere of uncertainty
regarding the Italian economic situation.
32
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).
Domestic consumption of goods and services grew by 0.8% in 2001 and
0.5% in 2002. The slowdown in the growth of private sector consumption in Italy
reflected primarily a decrease in demand for durable and non-durable goods and a
slowdown in the growth of demand for services, due principally to the low growth
in disposable income, reflecting stagnating wages and salaries and low income
from capital, and to uncertainties regarding the worldwide economic slowdown.
Gross fixed investment grew by 4.0% in 1998, 5.0% in 1999, 6.9% in
2000, 1.9% in 2001 and 1.2% in 2002. The significant growth in 2000 was mainly
attributable to increased investments in construction, motor vehicles and
intangibles. The slowdown in investment in 2002 was mainly attributable to the
decrease in domestic and worldwide demand.
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 2002, total domestic expenditure increased by 0.7%.
In 2002, the following sectors of the economy contributed the
indicated percentage of GDP: agriculture, fishing and forestry (3.1%), industry
and manufacturing (23.8%), construction (5%) and services (68.1%) (including
commerce, hotels, public works, transport and communications, financial
services, rent and other miscellaneous services). (Source: ISTAT).
Principal Sectors of the Economy
Services
In 2002, services represented 65.7% of GDP and employed 65.9% of the
economically active population (Source: ISTAT). Among the most important service
sectors are: commerce, hotels and public works; transports and communications;
financial services and public administration.
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 (ANAS)
and a system of toll highways that are in part managed and maintained by
Concessioni e Costruzioni Autostrade S.p.A., Italy's largest motorway company.
Autostrade manages 3,408.1 kilometers of the 6,487.3 kilometer system of
motorways under a twenty-year concession granted by ANAS. Toll motorways
represent 86.2% 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. Approximately 30% of the network carries 80% of the traffic,
resulting in congestion and under-utilization of large parts of the network. In
2002, there were approximately 22,200 kilometres of railroad track, a large
majority of which were controlled by state-owned railways, with the remainder
controlled by private firms operating under concession from the Government. In
2002, Italian railways carried approximately 23 billion tons-km of freight and
recorded 47.1 billion passenger-km. The Italian State Railway Company (Ferrovie
dello Stato S.p.A., or "FS") recorded a consolidated profit of 'E'77 million
in 2002, compared to a profit of 'E'29 million in 2001, and a loss of
'E'683 million in 2000.
In response to EU directives and intervention by the Italian Antitrust
Authority, the Government issued a directive for the reorganization of the state
railways in March 1999. In January 2000, the infrastructure components business,
Rete Ferroviaria Italiana S.p.A., and the transportation services business FS,
were legally separated and railway transportation liberalized. A protocol
agreement was signed in November 1999 by the Italian Ministry of the Economy and
Finance (as shareholder), FS and the unions providing for the return to a
balanced financial
33
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 by the Inter-Ministerial Committee for
Prices, which started in January 1999, will cause upward revisions of long
distance fares, while short distance fares will remain stable, subject to the
achievement of certain quality index criteria, while also reducing Government
subsidies. The 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. Under the planned decentralization process, regions will become
responsible for the whole range of local transportation services through
contracts entered into with the State. The international segment of railway
transport was liberalized in 2000 and as of June 2002, 27 licenses had been
granted to international operators. Projects for new high-speed train systems
(Treno ad alta velocita) linking the principal urban centers of Italy with one
another and with neighboring European countries as well as other infrastructure
projects designed to upgrade the railway network, are under way.
In 2002, La Spezia and Genoa were ranked among the fifteen largest
European Mediterranean ports for container shipping. In an effort to make
Italian ports more competitive, regulations have been liberalized and an early
retirement scheme adopted. 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. Tissenia, a state-owned company, operates
ferry operations and regional maritime activities.
Alitalia, Italy's national airline, was partially privatized in 1998
and re-capitalized in 2002. In 2002, 37.6% of Alitalia's share capital is owned
by the public and by employees and 53% is owned by the Ministry of Economy and
Finance. In 2002, it registered a consolidated net profit of approximately
'E'93 million compared to losses of 'E'907 million in 2001. Alitalia has
commercial alliances with Air France, the French national carrier, Delta
Airlines, Aeromexico, Korean Air and CSA Czech Airlines.
Passenger air traffic in Italy is concentrated, with 57.1% of all air
traffic in 2002 attributable to Ciampino and Fiumicino airports in Rome, and
Linate and Malpensa airports in Milan. A Government decree had intended to shift
all of Milan's international traffic from Linate airport to Malpensa airport in
October 1998. In January 2001, however, as a result of opposition from the
European Union Commission based on the anti-competitive effects of the decree,
the Italian Government issued a revised decree that shifted only part of Milan's
international traffic to Malpensa airport and permitted European carriers to
operate "point to point" connections between Linate airport and other airports
of the European Union, subject to certain limits.
Communications. In 1997, Parliament enacted legislation to reform the
telecommunications market with the aim of promoting competition in accordance
with European Union 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, "AGCOM"), established in January
1998, is responsible for issuing licenses to fixed and mobile telephony
operators, which are valid for 15 years and are renewable, and has the power to
regulate tariffs and impose fines and other sanctions.
Italy's telecommunications market is one of the largest and
fastest-growing markets in Europe, utilizing an aggregate of approximately 28.6
million fixed lines in 2002. The market was deregulated in January 1998 and
Telecom Italia, which was privatized in 1997 and later acquired by Olivetti in
1999, remains the largest operator, but is facing increasing competition from
new operators. In 1998, the Government granted three national fixed telephony
licenses to Wind (a joint venture between Enel and France Telecom), Infostrada
and Albacom (a consortium controlled by British Telecom, Banca Nazionale del
Lavoro, Mediaset and ENI). As of December 31, 2001, licenses for national and
local telephone services had been granted to several telecommunications
operators, including Tele2, Tiscali, Colt, Interroute, Planetwork and Metroweb.
Competition among telecommunications operators has resulted in lower charges and
a wider range of services offered. In January 2000, access to local loop
telephony was liberalized. In 2001, Infostrada merged into Wind.
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
34
also granted mobile licenses to Omnitel (controlled by the Vodafone Group) and
Wind. As of December 31, 2001, the Italian mobile telephony market comprised
approximately 53.1 million lines compared to 51 million at December 31, 2001.
In 1998, the European Parliament authorized European Union 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. The allocation process of UMTS
licenses in Italy was carried out by an auction among pre-qualified applicants.
As of December 2002, six UMTS licences have been granted to the following
companies: Vodafone-Omnitel, Ipse 2000 (controlled by Telefonica, Sonera and
Atlanet, which has suspended its activities), Wind, H3G (controlled by Hutchison
Whampoa and Tiscali), TIM and Blu (which has ceased to exist and whose assets
were broken up and sold). Each licence lasts for 15 years. (Source: Ministry of
Communications data processed by the Italian Telecommunication Authority)
Internet penetration rates in Italy have grown substantially in recent
years. In 2002, the number of people with internet access was 25.3 million as
compared to 23 million in 2001, an increase of 2.3% from 2001. The market for
internet services is dominated by three providers (Tin.it, Wind/Infostrada and
Tiscali), which together had approximately 26 million subscribers at December
31, 2001.
Financial Services. Historically, a significant portion of Italy's
domestic investment has been allocated to public debt. However, the percentage
of domestic investment allocated to holdings of foreign assets, investment fund
units and shares, increased from 18.5% in 1995 to 36% in 2001, while the
percentage allocated to bonds decreased from 30.6% in 1995 to 21.2% in 2001. The
large shift of household assets into managed products generated substantial fee
income for financial institutions. In 2002, due to the weakness of the equity
markets in Italy and abroad, investment in holding of foreign assets, investment
fund units and shares decreased to approximately 34% of domestic investment,
while the percentage allocated to bonds increased to approximately 20.8%.
Share prices rose in Italy in 1999 and 2000, fuelled by restructuring
in the banking industry, privatization and reform of corporate taxation, and
decreased in 2001 and 2002. The Italian stock exchange recorded a 23.7% average
decrease in share prices in 2002, compared to decreases of 24.8% in the United
Kingdom, 33.7% in France and 43.9% in Germany. Italian household indebtedness as
a percentage of GDP grew from 21% in 1995 to 31% in 2001. However, it remains
lower than in other comparable countries in the EU such as Germany, France and
the United Kingdom, which registered household indebtedness as a percentage of
GDP of 73%, 46% and 84%, respectively, in 2001. Bank lending to Italian
residents has increased since 1997 accommodating the economic expansion.
However, the rate of growth in bank lending decreased from 7.2% in 2001 to 6.3%
in 2002.
Tourism. Tourism is an important sector of the Italian economy. In
2002, tourism revenues, net of amounts spent by Italians traveling abroad, were
approximately 'E'10.4 billion, representing a 16.3% decrease over the
corresponding period in 2001.
Manufacturing
In 2002, manufacturing represented 22.5% of GDP and employed 21% of
the economically active population (source: ISTAT). In 2002, manufacturing
output decreased by 1% compared to a 0.8% growth registered in 2001.
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.
The number of large private companies in Italy is relatively small in
comparison to other European Union countries. The most significant include Fiat
(automobiles and other transportation equipment), Pirelli (tires, cables and
industrial rubber products), Fininvest (media and publishing), Ferrero (food)
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
35
share of their production. These companies have significant market shares in
their respective product markets in Europe.
Traditionally, investments in research and development (R&D)
activities have been very limited in Italy. Italy's trade specialization in
products characterized by low R&D was accentuated in recent years, despite the
fact that the country was already a strong exporter of these goods at the
beginning of the 1990s. Total and corporate R&D spending has continued to be
proportionally lower in Italy than in other industrial countries, reflecting
Italian industry's persistent difficulty in closing the technology gap with
other advanced economies. Total R&D spending in Italy decreased from 1.23% of
GDP in 1991 to 1.07% in 2000. This compares to total R&D spending as a
percentage of GDP in 1999 of 2.49% in Germany, 2.18% in France, 1.88% in the EU,
2.72% in the United States and 2.98% in Japan.
Energy production. In 2002, oil represented 48.7% of Italy's primary
energy consumption, with natural gas accounting for 31.1%, renewable energy
resources accounting for 6.7%, solid combustibles accounting for 7.6% and
purchased electricity for 5.9%. Italy depends on imported oil and other fossil
fuels for a significant portion of its energy needs. Overall, Italy imported
approximately 94.7% of its energy requirements and 89.6% of its natural gas
requirements in 2002. 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 30.3% 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, 61% owned by the Government, is the largest electricity company in Italy
and is engaged principally in the generation, importation, transmission and
distribution of electricity. Domestic capacity is insufficient to meet current
demand, and Italy imports a portion of its electricity requirements.
The Electricity and Gas Authority (Autorita per l'Energia Elettrica e
il Gas) regulates electricity activities and natural gas distribution in Italy
with the aim of promoting competition while ensuring adequate levels of service
quality. The Authority is led by a board of three members appointed by
Parliament. 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.
While several companies operate in the gas distribution market, during
2002 natural gas sales by ENI accounted for about 75.1% of domestic consumption.
A Government Decree issued in May 2000, in line with European Directives,
provided for a partial liberalization of the natural gas market. Pursuant to
that decree, no single operator could have after January 1, 2003 a 50% or higher
market share of the Italian natural gas market and no single operator would be
allowed to control more than 75% of gas imports, with a further yearly reduction
of 2 percentage points until 2010. Following the determination of gas
distribution tariffs by the Authority, ENI has sold a 40.2% stake in the share
capital of its distribution subsidiary (SNAM Rete Gas) through an initial public
offering in December 2001.
A Government decree, known as Bersani Decree, issued in March 1999 in
line with European Directives, provided for the partial liberalization of the
generation, importation, purchase and sale of electricity. Pursuant to the
Bersani Decree:
o the electricity supply market has been restructured to
increase competition with the intention that 40% of the
electricity supply market be open to new suppliers by 2002;
o a maximum market share level has been set that limits
individual producers to 50% of Italian electricity
generation and imports after January 1, 2003
o a separate state-owned entity controlled by the Treasury
referred to as the Gestore della Rete, or System Operator,
was created in April 2000 and has taken over from ENEL
responsibility for electricity dispatching and national
transmission network grid management;
o competition in the generation market will increase through
the creation of a pool market (Borsa dell'Energia Elettrica)
for purchases of electricity from producers through
competitive bidding processes, expected to become
operational at the beginning of 2003;
36
o an entity wholly owned by the System Operator referred to as
the "Single Buyer" has been created and will be responsible
for all electricity purchases on behalf of small consumers
thereby ensuring their access to lowest competitive price;
o only one license for the distribution of electricity is to
be granted in each municipality, with multiple companies now
serving any municipality therefore having to consolidate.
In accordance with the Bersani Decree, during 2000 ENEL established
three new generating companies (Eurogen, Elettrogen and Interpower or,
collectively, Gencos) representing approximately 25% of ENEL's generation
capacity. In September 2001, a consortium led by Endesa, a Spanish utility,
acquired Elettrogen, the second largest Genco, with a total generation capacity
of 5,400MW. In May 2002, Edipower S.p.A., a consortium led by Edison S.p.A
acquired Eurogen, the largest Genco, with a total generation capacity of 7,000
MW. In November 2002, a consortium comprising Acea S.p.A., Electrobel S.p.A. and
Energia Italiana acquired Interpower, the third Genco, with a total generation
capacity of 2,611 MW.
Effective January 1, 2000, a new tariff regime significantly lowered
fixed tariff rates for the generation, transmission and distribution of
electricity.
Construction
In 2002, construction represented 4.9% of GDP and employed 6.9% of the
economically active population. Construction activity increased by 0.5% in 2002,
compared to 4.1% in 2001. Gross fixed investment in construction, which includes
investment for building renovation and by the public administration, increased
by 0.3% in 2002, compared to 3.2% in 2001 and 5.9% in 2000.
Agriculture, Forestry and Fisheries
Agriculture, forestry and fisheries accounted for 2.6% of GDP in 2002,
and employed 5.5% of the economically active population. The agricultural share
of Italian GDP has declined steadily with the growth of industrial output since
the 1960s. Italy's average farm size remains less than half of EU average. Italy
is a net importer of all categories of food, except fruits and vegetables. The
principal crops are wheat (including the durum wheat used to make pasta), maize,
olives, grapes and tomatoes. Cereals are grown principally in the Po valley in
the North and in the Southeast plains, olives are grown principally in Central
and Southern Italy, and grapes are grown throughout the country.
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 1990s, 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. From February 1994 to June 30, 2002, the Government
has raised approximately 'E'66 billion, making the Italian privatization
program one of the largest privatization programs in Europe. In 1999, the
proceeds from privatizations were 'E'22,641 million (2.5% of GDP). In 2000,
privatization receipts fell to 'E'15,450 million. The proceeds from
privatization further declined to 'E'3,000 million in 2001, the lowest since
1994, compared to approximately 'E'10,000 million in 2002.
37
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." 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, however, it remains above the debt ceiling
required under the Maastricht Treaty. As a result, Italy's public debt as a
percentage of GDP reached 124.8% in 1995, and has been dropping gradually since
then, reaching an estimated 110.5% in 2000 and 109.9% of GDP in 2001. In 2002,
the ratio of Italy's public debt to GDP fell by 2.8 percentage points to 106.7%.
Under the long-term reduction plan presented by the Government in September 30,
2002 (which updated the 2003-2006 Program Document), the debt-to-GDP ratio is
projected to fall by an average of 3% of GDP per year from 109.4% in 2002 to
96.4% in 2006, meeting the Maastricht Treaty requirement of 60% in 2016.
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 19.2% in 2000, 18.9%
in 2001 and 18.8% in 2002, 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 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 than the
per-capita GDP of Northern Italy although it has been narrowing in recent years
due mainly to migration from the south to the northern regions of Italy, 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 Northern and 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 and 1990s. At the end of the 1970s, the
unemployment rate in the South was approximately 10%. By the end of 1999,
unemployment was twice as high in Southern Italy than in Italy as a whole.
Unemployment in Southern Italy was approximately 21.0% in 2000, 19.3% in 2001
and 18.3% in 2002 as compared to 10.6%, 9.5% and 9% 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
38
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 accounting for
25.3% and 26.2%, respectively, of Italian GDP in 2001. 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 53.7% of
Italian exports and supplied approximately 56.5% 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'2.2 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'9,522 million in 2001 and 'E'14.6 billion in 2002 (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 1998 and
2002. 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.
Employment and Unemployment
Year Ended December 31
------------------------------------------
1998 1999 2000 2001 2002
------ ------ ------ ------ ------
Employment Volume (entire economy)(1)..... 23,180 23,361 23,575 23,781 23,993
Participation Rate (%)(2)................. 51.7% 52.5% 53.5% 54.6% 55.4%
Unemployment Rate (%)..................... 11.8% 11.4% 10.6% 9.5% 9.0%
- ----------
(1) Euro thousands
(2) Participation rate of population aged 15-64.
Source: ISTAT (2004) and Registration Statement filed by the Republic of Italy
under Schedule B of the Securities Act of 1933 (January 16, 2003).
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 2001 and to 9% in 2002.
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, 4 million in 1998, 50.2 million
in the period 1991-1997 and 23.3 million in the period 1998-2001. In 2002, 6.1
million hours were lost to strikes as compared to 7.03 million in 2001.
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
39
the next ten years. Further reforms to the pension system have been enacted by
legislation tied to the 1998 budget law, which are aimed at further reducing and
harmonizing the level of benefits.
The Italian Government has recently implemented reforms aimed at
creating greater flexibility in the labor market. Italian trade unions responded
strongly to these reforms and conducted a general one-day strike on April 16,
2002. The primary conflict between the Government and the trade unions has
concerned the proposed temporary suspension of the application of an article of
a 1970 labor law. Currently, this article provides that an employee dismissed
without just cause has the right to seek reinstatement and indemnification from
his or her employer.
After long negotiations, the government has revised its proposed
reforms to this article. The new proposal would temporarily suspend the article
for newly-hired employees only at firms with more than 15 employees. To balance
such temporary suspension, the government has offered the trade unions higher
unemployment indemnity for employees. The new proposal has caused a split in the
trade unions: two trade unions, CISL and UIL, have resolved to agree to the
government's new proposal by signing an agreement on July 5, 2002, in which the
government has committed to reduce the tax burden, not to introduce any change
to the current pension system and to increase the unemployment allowances. The
primary trade union, CGIL, opposes the new proposal and is expected to organize
new strikes and protests in the future.
Unemployment in Southern Italy has been persistently higher than in
Northern Italy and was approximately 21.0% in 2000, 19.3% in 2001 and 18.3% in
2002 as compared to 4.7%, 4.0% and 4.0% respectively 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 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 job trainings, particularly in the
South, and programs that provide certain incentives to companies that hire young
workers.
The Government believes that a substantial "hidden economy" exists in
Italy, consisting of persons who claim, for tax and other purposes, to be
unemployed but actually hold a job, or who claim to hold a job but also perform
other income-earning activities. The hidden economy is believed to be
particularly persistent in areas of high official unemployment and among
immigrant workers. The increase in employment in 2001 may partly be attributable
to the "emergence" of workers that were not previously accounted for in national
statistics. According to OECD data, the number of irregular workers in the
Mezzogiorno is estimated to equal approximately 30% of the overall workforce in
industry and services. Irregular labor is defined as irregular and unregistered
workers, including foreign workers, taking account of second jobs.
Wages and Prices
Wages. Unit labor costs historically have been lower in Italy, on
average, than in most other European countries. This is due to lower average
earnings per employee, combined with higher productivity levels.
Wages, as measured by gross earnings per standard labour unit,
increased by an average of 2.6% in 2002, as compared with increases of 3.5% in
2001 and 3.1% in 2000. Labor costs per employee per standard labor unit,
measured in terms of unit remuneration (i.e. the total of gross wages and social
security charges) increased by 2.5% in 2002 as compared to 3.2% in 2001. Labor
costs per employee in the public sector increased by 3.3% in 2002 and in the
private sector by 2.2% in 2002. Labor costs per product unit, or LCPU, increased
by 2.8 per cent. in 2001, compared to 3.2 per cent. in 2002. LCPU growth remains
higher than in other major European countries. (Source: the Bank of Italy
Economic Bulletin.) 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 2.0%, 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, 2001 and 2002, the
Consumer Price Index grew by 2.5%, 2.7% and 2.5% respectively. The increase in
2001 was primarily due to increases in core inflation (which is the harmonized
consumer price index net of energy, unprocessed food, alcohol and tobacco
products) offset by slower growth in the prices of energy and unprocessed food.
In addition inflationary pressures have been to a great extent driven by the
ongoing increase of
40
service prices. Inflation as measured by the Consumer Price Index was 2.5%
during 2002, mainly due to price increases in education, hotels rents and
clothing.
The following table illustrates trends in prices and wages for the
periods indicated:
Prices and Wages
Year Ended December 31,
--------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
('E' thousands, except percentages)
Cost of Living Index(1)............. 1.7 1.6 2.6 2.7 2.5
Consumer Price Index(1)(2).......... 2.0 1.7 2.5 2.7 2.6
Change in per capita gross wages ... (1.8) 1.6 3.1 3.5 2.6
Change in unit labor costs(3)....... (1.3) 1.6 0.7 2.6 3.2
Core Inflation Index(4)............. 2.3 1.8 1.9 2.4 2.5
- ----------
(1) The cost of living index reflects the change in price of a basket of goods
and services (net of tobacco) typically purchased by non-farming families
headed by an employee. It differs from the harmonized consumer price index
in that the cost of living index is smaller in scope.
(2) In accordance with European Commission regulations, since January 2002 the
harmonized consumer price index reflects reductions in prices (e.g.
seasonal sales and promotional offers) taking place for a minimum period of
15 days (formerly 30 days). As a consequence, figures for 2002 are not
directly comparable to previous data.
(3) Unit labor costs are per capita wages reduced by productivity gains.
(4) The basket of goods and services used to measure the core inflation index
is equivalent to the harmonized consumer price index basket less energy,
unprocessed food, alcohol and tobacco products.
Source: Registration Statement filed by the Republic of Italy under Schedule B
of the Securities Act of 1933 (February 11, 2003) and Bank of Italy Annual
Report 2003 (May 2004).
Foreign Trade
Italy is fully integrated into the European and world economies, with
imports equal to 25.3% of GDP and exports accounting for 26.2% of GDP in 2001.
(Source: ISTAT 2002) In 2002, imports and exports amounted to 28.7% and 29.8% of
GDP, respectively. Italy's trade surplus declined from 'E'26.6 billion in
1997 to 'E'1.9 billion in 2000 (or 0.1% of real GDP). In 2001, Italy's trade
surplus rose back to 'E'9.9 billion (or 1.0% of real GDP) primarily as a
result of the decline in the trade deficit with OPEC countries, due to the
decrease in oil prices. In 2002, Italy's trade surplus was 'E'14.6 billion.
The following tables illustrate Italy's exports and imports for the
years 1998 through 2002. 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".
41
Foreign Trade
Year Ended December 31,
-----------------------------------------------
1998 1999 2000 2001 2002
------- ------- ------- ------- -------
('E' millions)
Exports (fob)
Agriculture, forestry and fishing............... 3,605 3,687 3,858 4,251 4,171
Minerals........................................ 433 430 525 546 683
Manufactured products........................... 214,981 215,803 254,679 265,490 261,520
Food, beverage and tobacco products.......... 11,484 12,051 13,066 14,009 15,010
Textiles, leather products and clothing...... 35,683 34,411 40,078 43,302 41,207
Wood and wood products....................... 1,247 1,329 1,510 1,505 1,471
Paper, printing and publishing............... 4,934 5,029 5,933 6,084 6,156
Refined oil products......................... 2,428 2,604 5,181 5,061 4,454
Chemical and pharmaceutical products......... 17,961 19,472 24,136 25,754 26,906
Rubber and plastic products.................. 8,114 8,228 9,389 9,673 9,853
Non-metallic minerals and mineral products... 8,253 8,332 9,230 9,406 9,232
Metals and metal products.................... 18,496 17,513 21,257 21,986 21,627
Mechanic products and machinery.............. 45,270 45,060 50,678 53,957 53,126
Electric and precision machinery............. 21,275 21,619 26,383 27,625 25,007
Transport equipment.......................... 25,394 25,253 30,389 29,620 30,520
Other manufactured products.................. 14,442 14,902 17,449 17,508 16,951
Energy, gas and water production................ 22 23 22 46 35
Other........................................... 1,064 1,098 1,302 2,656 2,654
------- ------- ------- ------- -------
Total exports................................ 220,105 221,040 260,414 272,990 269,064
======= ======= ======= ======= =======
- ----------
Source: Bank of Italy Annual Report 2002 (May 2003).
42
Year Ended December 31,
-----------------------------------------------
1998 1999 2000 2001 2002
------- ------- ------- ------- -------
('E' millions)
Imports (cif)
Agriculture, forestry and fishing............... 8,864 8,603 9,228 9,021 9,047
Extractive industries........................... 13,025 15,243 29,561 28,718 26,282
Manufactured products........................... 172,159 181,552 217,023 220,985 220,442
Food, beverage and tobacco products.......... 15,668 15,645 17,135 18,373 18,450
Textiles, leather products and clothing...... 14,737 14,743 18,249 20,189 20,266
Wood and wood products....................... 2,791 2,980 3,393 3,249 3,356
Paper, printing and publishing............... 5,896 6,222 7,207 6,719 6,556
Refined oil products......................... 2,727 3,161 5,378 4,626 5,045
Chemical and pharmaceutical products......... 26,686 28,097 33,231 33,991 35,279
Rubber and plastic products.................. 4,455 4,792 5,387 5,396 5,509
Non-metallic minerals and mineral products... 2,388 2,509 2,843 2,955 2,956
Metals and metal products.................... 21,857 20,350 26,277 25,674 24,288
Mechanic products and machinery.............. 16,075 17,564 20,354 20,707 20,720
Electric and precision machinery............. 28,267 30,982 38,269 37,275 34,748
Transport equipment.......................... 27,340 30,978 35,038 37,544 39,129
Other manufactured products.................. 3,271 3,529 4,262 4,287 4,140
Energy, gas and water production................ 1,456 1,424 1,535 1,777 1,066
Other........................................... 122 193 1,160 3,256 1,879
------- ------- ------- ------- -------
Total imports................................ 195,626 207,015 258,507 263,756 3,577
======= ======= ======= ======= =======
Trade Balance................................... 24,479 14,024 1,907 9,234 261,226
======= ======= ======= ======= =======
- ----------
Sources: Bank of Italy Annual Report 2003 (May 2003).
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 products as well as
minerals, metals and metal products, electric and precision machinery and
transport equipment. Of all major European countries, Italy is the most heavily
dependent on imports of energy, importing 83.6% of its energy requirements in
2001. 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. Italy had a current account surplus in each year from
1992 through 1999. However, following decreases in the current account surplus
in each of 1997, 1998 and 1999, Italy registered a current account deficit in
2000. This was due to a deterioration in Italy's visible trade balance, as
overall growth in imports exceeded growth in exports, reflecting Italy's
weakening position relative to trade with EU member countries. In 2001, the
current account deficit decreased to 'E'740 million principally due to growth
in exports exceeding growth in imports, before increasing to 'E'10.1 billion
in 2002 principally due to the deficit on services and widening income deficit.
43
Capital Account. 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'3,195 million, respectively, representing
increases of 23.9% and 14.4% respectively as compared to the previous year.
These increases were principally due to higher transfers from the EU through the
Regional Development Fund. In 2002, the capital account amounted to a deficit of
'E'66 million as compared to 'E'0.9 billion in 2001.
The following table illustrates the balance of payments for the
periods indicated:
Balance of Payments
Year Ended December 31,
------------------------------------------------
1998 1999 2000 2001 2002
------- -------- ------- ------- -------
Current Account................................. 20,444 7,692 (6,305) (740) (10,014)
Goods........................................... 32,584 22,044 10,368 17,405 14,409
Exports...................................... 220,104 221,484 260,906 273,596 267,582
Import....................................... 187,520 199,440 250,538 256,191 253,533
Services........................................ 4,386 1,125 1,167 18 3,043
Income.......................................... (9,869) (10,392) (13,099) (11,635) (15,396)
Transfers....................................... (6,658) (5,085) (4,742) (6,527) (5,624)
to EU Institutions........................... (5,940) (4,684) (4,905) (5,634) (5,6727)
Capital Account................................. 2,249 2,789 3,195 936 (67)
Intangible assets............................... (121) (3) (72) (312) (206)
Transfers....................................... 2,370 2,792 3,267 1,248 1,139
to EU Institutions........................... 2,748 3,201 3,624 1,748 1,626
Financial Account............................... 1,282 (8,867) 4,287 (3,294) 8,532
Direct Investments.............................. (10,580) 178 1,149 (7,377) (2,739)
Abroad....................................... (14,418) (6,309) (13,368) (23,995) (18,194)
In Italy..................................... 3,838 6,487 14,517 16,618 15,455
Portfolio Investments........................... 7,075 (23,635) (26,255) (7,640) 16,107
Assets....................................... (86,315) (121,493) (86,340) (40,070) (16,968)
Liabilities.................................. 93,390 97,858 60,085 32,430 (33,075)
Financial derivatives........................... (762) 1,766 2,501 (477) (2,710)
Other Investments............................... (13,547) 5,725 29,950 11,716 985
Change in official reserves..................... 19,096 7,099 (3,058) 484 (3,111)
Errors and Omissions............................ (23,975) (1,614) (1,177) 3,098 1,549
- ----------
Source: Annual Report of the Bank of Italy 2003 (May 2004).
(1) Both exports and imports are stated on a "FOB" basis for purposes of the
current account.
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 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
44
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 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. At the end of 2002, Italy's official reserves
stood at 'E'53,000 million, compared to 'E'52,437 million in 2001.
The following table illustrates the foreign exchange reserves of Italy
for the periods indicated:
Foreign Exchange Reserves
Year Ended December 31,
------------------------------------------
1998 1999 2000 2001 2002
------ ------ ------ ------ ------
Gold .............................. 20,562 22,775 23,098 24,732 25,764
SDRs(1) ........................... 95 163 255 337 103
Total position with IMF ........... 3,697 3,537 2,916 3,647 3,726
Net foreign exchange .............. 21,425 18,537 24,097 23,721 23,447
Other net reserves ................ -- 1,769 -- -- --
------ ------ ------ ------ ------
Total reserves .................... 45,807 45,100 50,366 52,437 53,040
====== ====== ====== ====== ======
- ----------
Source: Annual Report of the Bank of Italy 2002 (May 2003).
(1) Special Deposit Rights
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 the 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;
45
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;
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 independent budget, 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'4,1 billion at December 31, 2002.
(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 of 'E'147,338 million
at December 31, 2001.
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 12.2% to 'E'45,356 million in 2002 after decreasing by 13.8%
in 2001. As a percentage of total loans, bad debts declined 7.8% in 1999, 5.7%
in 2000 and 4.7% in 2001.
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.
46
Measures of Fiscal Balance
Italy reports the fiscal balance of the public sector using the
following two principal measures:
(i) Net borrowing 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 NBR have not been materially different. General
government is narrower than 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 Statistical Office of the European Communities, or Eurostat,
published in July 2002 a decision relating to the methods of
accounting for securitizations. Pursuant to the Eurostat decision,
Italy will be required to account for receipts, aggregating
approximately 'E'6.7 billion, from certain real estate and state
lottery proceeds securitization transactions, which took place in
2001, in the three-year period 2002-2004 and not in 2001. As a result
of the Eurostat decision, Italy's net borrowing for 2001 rose from
1.6% of GDP to 2.2% of GDP.
The table below shows selected public finance indicators for the
periods indicated.
Selected Public Finance Indicators
1998 1999 2000 2001 2002
--------- --------- --------- --------- ---------
('E' millions)
Public government expenditure ... 528,747 536,105 541,944 588,841 600,007
% of GDP ........................ 49.3% 48.4% 46.5% 48.3% 47.6%
General government revenues ..... 498,549 516,980 534,400 556,579 571,604
% of GDP ........................ 46.5% 46.7% 45.8% 45.7% 45.3%
Net borrowing ................... 30,198 19,125 7,544 32,262 28,403
% of GDP ........................ 2.8% 1.7% 0.6% 2.6% 2.3%
Primary balance ................. 55,813 55,613 67,789 47,308 44,144
% of GDP ........................ 5.2% 5.0% 5.8% 3.8% 3.4%
Public debt ..................... 1,247,775 1,273,243 1,290,459 1,347,805 1,360,253
% of GDP ........................ 116.3% 114.9% 110.6% 110.6% 107.9%
- ----------
Source: Annual Report of Bank of Italy 2003 (2004).
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 derived 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 net borrowing and stabilizing the debt-to-GDP ratio, in a four year
planning document (referred to as the " Economic and Finance Program Document").
47
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.
The 2003 - 2006 Program Document
For the past four years Italy has been successful at meeting the
ambitious targets set for fiscal consolidation, while introducing reforms to
modernize the public sector and tax system. Although Italy substantially reduced
its budget deficit, the ratio of public debt-to-GDP remains well above the 60%
reference rate established by the Maastricht Treaty.
In July 2002, the Government finalized and presented to parliament its
2003-2006 Program Document, which, as its main objective, contemplates the
following reforms:
o fiscal reform, designed to continue to reduce the tax burden in
order to stimulate economic growth while reducing current
expenditures to balance the lower tax revenues;
o labour market reforms, aimed at increasing the efficiency and
liquidity of the labor market by introducing new standard forms
of labor contracts, improving the flow of information relating to
job opportunities, strengthening job training programs and
reforming unemployment and other types of employment-related
compensation; and
o pension reform, aimed at promoting supplementary private pension
provisions and increasing the labor force participation rate of
the Italian population aged 55-64.
The following table shows Italy's principal public finance targets for
the years indicated, as well as the gross domestic product, inflation and
unemployment assumptions underlying the 2003-2006 Program Document.
2003 2004 2005 2006
----- ---- ---- ----
(Target)
Current account surplus, as % of GDP .... 2.2 2.7 2.7 3.1
Primary balance, as % of GDP ............ 5.1 5.5 5.8 5.7
Interest expense, as % of GDP ........... 5.9 5.8 5.7 5.5
Net borrowing, as % of GDP .............. (0.8) (0.3) 0.1 0.2
Structural net borrowing, as % of GDP ... (0.4) 0.1 0.2 0.2
Public debt, as % of GDP ................ 104.5 99.8 97.1 94.4
GDP (% real growth rate) ................ 2.9 2.9 3.0 3.0
Inflation (% real growth) ............... 1.4 1.3 1.2 1.2
Unemployment rate (%) ................... 8.5 8.0 7.5 6.8
The 2003 - 2006 Stability and Growth Program
In November 2002, Italy presented its update to its stability and
growth program for the period 2003 - 2006 ("2002 Stability Program") to the
Council of the EU and the EU Commission. The 2002 Stability Program is based on
the 2003 - 2006 Program Document approved by parliament in July 2002 and amended
on September 30, 2002, the RPP for 2003 approved by Parliament on September 30,
2002 and the Annual Financial Law presented to Parliament for approval on
September 30, 2002. The following table compares the principal finance
indicators included in the 2002 Stability Program:
2002 Stability Program
48
2001 2002 2003 2004 2005 2006
----- ----- ----- ----- ---- ----
(Percentage of GDP)
Real GDP growth rate ......... 1.8 0.6 2.3 2.9 3.0 3.0
Net borrowing, as % of GDP ... (2.2) (2.1) (1.5) (0.6) (0.2) 0.1
Public debt, as % of GDP .... . 109.9 109.4 105.0 100.4 98.4 96.4
- ----------
Source: 2002 Stability Program; Update November 2002
The Council of the EU issued opinions in February 2002 and January 2003, setting
forth the following considerations associated with the achievement of the
budgetary targets set forth in Italy's 2001 and 2002 Stability Programs
respectively and the November 2002 Program Update:
o short term real GDP growth forecasts were based on the assumption
that global economic recovery would begin during early 2002 but
the projected deficit for 2002 significantly exceeds the original
objectives;
o budgetary targets in 2002 and 2003 rely heavily on one-off
measures, in particular the sales of publicly-owned real estate
assets, while few details are provided on the planned sizeable
reduction in non-interest expenditure as percentage of GDP over
the program period;
o even assuming that such one-off measures yield the expected
results, the cyclically adjusted budget position may fail to
improve as planned on account of the risks to the trend budgetary
projections;
Furthermore, the Council of the EU recommended that Italy:
o adopt rules allowing for a more effective monitoring and control
of current expenditures at all levels;
o replace one-off measures with structural ones on the expenditure
side;
o accelerate the implementation of the pension reform to control
expenditure and to promote supplementary private pension
provisions; and
o implement labor market reforms and accelerate the reduction of
its debt ratio.
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 became effective in 1998
reduced the maximum rate payable by individuals and introduced a two-tiered
system for corporate taxation. For 2001, the top individual tax rate was 45% and
the corporate tax rate was 36%. 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. Tax reform legislation that became effective
in 1998 reduced the maximum rate payable by individuals and introduced a
two-tiered system for corporate taxation.
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
49
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 1998, 1999, 2000 and 2001, social services, which include pensions
and other social security payments and unemployment compensation, constituted
the largest share of government spending (34.4%, 35.4%, 36.1% and 34.7%,
respectively). The overall amount of social expenditure in Italy is in line with
the EU average, accounting for approximately 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 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's public health service 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 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 110.6% in 2001. The public debt of Italy as of
December 31, 2002 amounted to 107.9%, representing 2.3% of GDP as compared to
2.6% in 2001, 1.7% in 1999 and 1.2% in 1998.
50
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,
----------------------------------------------------------
1998 1999 2000 2001 2002
--------- ---------- --------- --------- ---------
('E' millions)
Medium and long term debt ..... 940,501 977,831 1,014,507 1,035,192 1,038,547
Short term debt ............... 137,459 119,966 102,053 113,947 113,515
Other debts ................... 170,555 107,069 101,844 106,858 106,481
Total public debt ............. 1,248,514 1,312,675 1,330,969 1,384,845 1,401,731
of which:
Source: Annual Report of Bank of Italy (2002).
Guaranteed Debt. In addition to its direct indebtedness, Italy is also
a guarantor of certain third-party indebtedness arising by operation of law.
Under Italian commercial law, the sole shareholder of a joint stock company
guarantees 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 the Government is
guaranteed by the Government by operation of law. Total guaranteed debt as of
December 31, 1998 and 1999 amounted to '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, 2002, was 'E'95,695 million, as compared to
'E'91,572 million as of December 31, 2001. (Source: Registration Statement
filed by the Republic of Italy under Schedule B of the Securities Act of 1933
(January 16, 2003)).
The following table summarizes the external public debt as of December
31 in each of the years 1998 through 2002.
51
External Public Debt
Year Ended December 31,
------------------------------------------
1998 1999 2000 2001 2002
------ ------ ------ ------ ------
('E' millions)
External Treasury Bonds ............. 56,325 58,140 69,471 79,795 81,201
FS Bonds ............................ 1,981 1,862 1,683 1,741 943
ANAS Bonds .......................... 789 782 519 516 0
Other State sector entities ......... 6,380 6,444 5,584 4,579 3,932
Other general Government entities ... 5,363 1,554 6,291 7,668 9,619
------ ------ ------ ------ ------
Total external public debt(1) ....... 70,838 68,782 83,548 94,299 95,695
====== ====== ====== ====== ======
- ----------
Source: Registration Statement filed by the Republic of Italy under Schedule B
of the Securities Act of 1933 (February 11, 2004)
(1) Does not include other external debt incurred by FS and ANAS.
The following table sets forth a breakdown of the external public
debt, excluding external public debt of other State sector entities and other
Central Government entities, by currency, as of December 31 in each of the years
1998 through 2002.
Year Ended December 31,
---------------------------------------------------------
1998 1999 2000 2001 2002
--------- --------- --------- --------- ---------
(millions)
Euro ............... 31,164 21,073 21,496 25,310 21,753
U.S. Dollars ....... 26,532 24,692 29,074 30,866 38,591
Swiss Francs ....... 2,300 3,800 5,800 6,800 7,800
Japanese Yen ....... 1,650,000 1,475,000 1,675,000 1,475,000 1,475,000
British Pounds ..... 700 700 1,305 2,505 2,005
Norwegian Kroner ... -- -- -- -- 2,000
- ----------
Source: Registration Statement filed by the Republic of Italy under Schedule B
of the Securities Act 1933 (February 11, 2004).
Debt Service. The aggregate amount of scheduled repayments in respect
of the principal amount on Treasury securities constituting external debt
outstanding as of December 31, 2002 was as follows:
Year Ended December 31,
------------------------------------
2004 2005-2010 2011 and after
------- --------- --------------
(millions)
Euro ............... 3,098 7,596 9,882
U.S. Dollars ....... 6,366 18,639 8,500
Japanese Yen ....... 150,000 675,000 450,000
British Pounds ..... -- 105 1,900
Swiss Francs ....... 1,000 5,800 --
Norwegian Kroner ... -- -- 2,000
- ----------
Source: Registration Statement filed by the Republic of Italy under Schedule B
of the Securities Act 1933 (February 11, 2004).
Debt Record. Since its founding in 1946, the Republic of Italy has
never defaulted on the payment of principal or interest on any of its internal
or external indebtedness.
52
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 Lira, 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.
53
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.
54
Schedule of Outstanding Debt as of December 31, 2002.
- -------------------------------------------------------------------------------------------------------------------------
Final year of Outstanding at
Lender Year of Issue maturity Interest Rate Original Amount Issued December 2002
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
CASSA DEPOSITI E PRESTITI 1968 2002 5.00 1,239,269.72 --
- -------------------------------------------------------------------------------------------------------------------------
CASSA DEPOSITI E PRESTITI 1969 2003 5.00 217,944.81 2,499.77
- -------------------------------------------------------------------------------------------------------------------------
CASSA DEPOSITI E PRESTITI 1970 2004 5.00 1,698,352.18 78,007.62
- -------------------------------------------------------------------------------------------------------------------------
CASSA DEPOSITI E PRESTITI 1971 2005 5.00 139,443.36 1,848.41
- -------------------------------------------------------------------------------------------------------------------------
CASSA DEPOSITI E PRESTITI 1972 2006 5.50 157,519.35 4,877.17
- -------------------------------------------------------------------------------------------------------------------------
CASSA DEPOSITI E PRESTITI 1973 2007 5.50 77,468.53 2,916.12
- -------------------------------------------------------------------------------------------------------------------------
CASSA DEPOSITI E PRESTITI 1973 2007 5.30 623,776.64 80,657.00
- -------------------------------------------------------------------------------------------------------------------------
CASSA DEPOSITI E PRESTITI 1975 2009 5.50 8,609,197.06 3,198,172.91
- -------------------------------------------------------------------------------------------------------------------------
CASSA DEPOSITI E PRESTITI 1979 2013 7.00 26,223.10 6,072.69
- -------------------------------------------------------------------------------------------------------------------------
CASSA DEPOSITI E PRESTITI 1981 2015 7.00 25,822,844.95 17,997,831.81
- -------------------------------------------------------------------------------------------------------------------------
CASSA DEPOSITI E PRESTITI 1981 2015 4.00 61,974,827.89 33,156,797.77
- -------------------------------------------------------------------------------------------------------------------------
CASSA DEPOSITI E PRESTITI 1985 2004 7.00 101,953,699.64 20,481,826.27
- -------------------------------------------------------------------------------------------------------------------------
CASSA DEPOSITI E PRESTITI 1987 2006 7.00 1,704,905.94 624,635.62
- -------------------------------------------------------------------------------------------------------------------------
CASSA DEPOSITI E PRESTITI 1988 2007 7.00 106,276,242.47 44,320,828.61
- -------------------------------------------------------------------------------------------------------------------------
CASSA DEPOSITI E PRESTITI 1989 2008 7.00 75,906,776.84 35,122,875.16
- -------------------------------------------------------------------------------------------------------------------------
CASSA DEPOSITI E PRESTITI 1990 2009 7.00 12,076,167.06 6,525,025.79
- -------------------------------------------------------------------------------------------------------------------------
CASSA DEPOSITI E PRESTITI 1991 2010 7.00 71,651,021.29 42,602,623.30
- -------------------------------------------------------------------------------------------------------------------------
CASSA DEPOSITI E PRESTITI 1992 2011 7.00 77,306,461.39 49,820,759.58
- -------------------------------------------------------------------------------------------------------------------------
CASSA DEPOSITI E PRESTITI 1993 2012 4.00 8,949,337.30 5,341,088.97
- -------------------------------------------------------------------------------------------------------------------------
S.Paolo 1998 2012 8.00 164,494,962.89 131,628,461.50
- -------------------------------------------------------------------------------------------------------------------------
S.Paolo 1998 2018 6.30 37,536,354.11 32,574,093.48
- -------------------------------------------------------------------------------------------------------------------------
CREDIOP 1999 2006 4.95 24,015,422.68 13,164,391.41
- -------------------------------------------------------------------------------------------------------------------------
CREDIOP 1999 2009 6.35 15,925,538.14 11,333,458.34
- -------------------------------------------------------------------------------------------------------------------------
INPDAP 2000 2014 6.00 26,395,480.20 22,785,205.26
- -------------------------------------------------------------------------------------------------------------------------
CASSA DEPOSITI E PRESTITI 2000 2019 4.85 59,625,243.38 53,890,724.42
- -------------------------------------------------------------------------------------------------------------------------
CREDIOP 2001 2015 var. 3,873,426.74 3,507,745.26
- -------------------------------------------------------------------------------------------------------------------------
UNICREDIT 2001 2015 var. 4,648,112.09 4,213,624.55
- -------------------------------------------------------------------------------------------------------------------------
CASSA DD.PP. 2001 2015 5.65 2,836,781.54 2,580,840.84
- -------------------------------------------------------------------------------------------------------------------------
CASSA DD.PP. 2001 2020 5.75 53,858,766.60 50,778,465.84
- -------------------------------------------------------------------------------------------------------------------------
CASSA DD.PP. 2001 2015 5.65 1,074,230.35 977,310.91
- -------------------------------------------------------------------------------------------------------------------------
CASSA DD.PP. 2002 2021 5.75 8,237,487.54 8,009,495.89
- -------------------------------------------------------------------------------------------------------------------------
CASSA DD.PP. 2002 2021 5.50 658,482.55 639,749.45
- -------------------------------------------------------------------------------------------------------------------------
CASSA DD.PP. 2002 2021 5.25 40,596,408.79 39,409,470.66
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Prestito Obbligazionario in USD 1997 2006 154,937,069.72 61,974,827.89
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL 1,155,125,246.89 696,837,210.30
- -------------------------------------------------------------------------------------------------------------------------
55
Schedule of Outstanding Debt as of January 1, 1998, 1999, 2000, 2001
and 2002 by Lender
Outstanding at January 1,
-------------------------------------
Lender 1998 1999 2000 2001 2002
- ------------------------------------ ----- ----- ----- ----- -----
('E' millions)
CASSA DEPOSITI E PRESTITI........... 475.3 505.4 434.5 448.7 415.6
BANCO DI NAPOLI..................... 230.1 198.4 190.8 182.6 164.2
ISTITUTI DI PREVIDENZA.............. 38.0 27.6 26.4 25.3 22.8
I.B.S. PAOLO DI TORINO (CREDIOP).... 30.0 39.9 36.4 36.5 28.0
OTHER............................... 19.6 1.9 5.7 5.0 4.2
PRESTITO OBBLIGAZIONARIO............ 139.4 123.9 108.5 93.0 62.0
----- ----- ----- ----- -----
TOTAL OUTSTANDING DEBT........... 932.5 897.3 802.3 791.1 696.8
===== ===== ===== ===== =====
56