A research project supported by the European Commission fp5: Energy, Environment and Sustainable Development


Decision to award a short-term water supply and sewerage concession to a municipally-owned PLC: 1994 to 2004



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5.2Decision to award a short-term water supply and sewerage concession to a municipally-owned PLC: 1994 to 2004




5.2.1Failure to award concession to a municipal “azienda speciale”: 1994-1997


Milan water supply has been provided under direct municipal management since its establishment back in 1887 and a municipal department was carrying out water supply and sewerage operations. Despite some problems in terms of delayed interventions due to the bureaucratic procedures associated with direct municipal management, Milan’s public water supply and sewerage provision was satisfactory as demonstrated by the low tariffs and positive efficiency indicators such as Unaccounted-for-Water (UFW). As of 1999, UFW was estimated as being below 10%, although this was on the increase compared with the period 1980-1982 when UWF was in the range of 4% to 6%. Also, with its 540 employees, Milan’s water service had an estimated 600,000m3 yearly supplied /employee, while the same ratio for all Italian aqueducts was in average below 300,000 (Venegoni, 2000: pp. 83-86).
The first proposal to separate the water service book-keeping from the municipality budget by the constitution of an appropriated management body was made in 1995. The overtaking of the direct labour management was discussed by the Formentini’s administration. In March 1997, the municipality executive committee, at the end of its office term, approved a resolution to form a municipally-owned “Azienda Speciale” (see Lobina, 2005: pp. 7-9) which would be responsible for operating water supply and sanitation services43 under a concession44.
The scarce transparency of direct municipal management, due to the absence of a separated book-keeping, was the cause of the under investments in water sector. According to an interviewed stakeholder, water services were in fact considered the “Cinderella” among the municipality-owned public utilities. This was due to the fact that water network maintenance costs were deemed less important than other expense items45. Giuseppe Raimondi, Director of the Environment and Energy department of the municipality of Milan, has explained that despite the fact that water tariffs covered some 80% of total costs, direct municipal operations were capable of generating a yearly sum ranging from ITL 20 billion to ITL 30 billion which was made available to the municipality. The commune, in the light of the satisfactory service quality and state of the infrastructure, as well as in view of requirements to invest in other municipal services, often decided to use revenues perceived from water operations to fund expenditure in other areas rather reinvesting them into the water system46.
The decision to restructure water supply and sewerage operations was aimed at tackling a number of problems that direct municipal management found difficulty in solving, including the following47:

  • groundwater contamination;

  • pollution of rivers;

  • rising groundwater levels;

  • the absence of a wastewater treatment system.

In particular, the municipality executive committee identified organizational problems associated with municipal direct management in the “considerable lack of personnel and adequate resources”. Restructuring into a different form of municipal enterprise would have addressed such shortfalls, as “the legal status and the management autonomy will allow the Azienda Speciale to use resources in a more efficient, effective and innovative way than under direct municipality management”48. Also, the proposal to form an Azienda Speciale “aimed at insuring the full administrative, management and accounting autonomy and at defining clearly the relationships with the Municipality Administration necessary to continue the Azienda Speciale activity”.


The establishment of a municipally-owned PLC was considered as an option but was not chosen, as was deemed not “feasible”49, in “the absence of technical, economic and social reasons to justify a delegated management”50. Instead it was stressed that the Azienda Speciale would allow the preservation of a strong interdependence between the Azienda Speciale and the Municipality, which was regarded of strategic importance to maintain a control over water and sewerage activities.
The municipality decided that the new “azienda speciale” would operate according to the principles of cost-effectiveness, effectiveness and efficiency, principles already established by the Galli Law, as well as pursuing innovation and operational flexibility51.
It should be noted that the decision was adopted by the city council in March 1997 but not implemented as the Formentini administration did not have enough time prior to the 1997 municipal elections which saw the victory of Gabriele Albertini. A reason for the delay in the adoption of the municipal decision to restructure municipal water and sewerage operations was the absence of a regional law integrating the Galli Law with more detailed provisions, for example defining the territory of the concession areas (ATO) in which the region Lombardy would be divided. Although such a delay was explained with the technical complexity of the task, the municipality had decided to restructure its water services as this was seen as no longer deferral.

5.2.2Failure to award concession to majority municipally-owned PLC SOGEA: June 1997 to December 2001


In May 199752, Gabriele Albertini became mayor after winning municipal elections on a neo-liberal ticket, emphasizing the privatization of municipal services. Mr. Albertini decided to reverse the decision of the prior administration to restructure water operations into an “azienda speciale” and opted instead for a municipally majority-owned PLC.
Although the Galli Law did not require the transformation of services provided under direct municipal management (see Lobina, 2005: pp. 7-9), organisational change was imposed by the regional law L.R. n. 21/98, approved on 20th October 1998, which aimed at defining more punctual rules for the implementation of the Galli Law. Art. 7, L.R. n. 21/98 provided for the provision of water supply and sanitation services to be organised according to any of the organisational modes listed by l. n. 142/90, with the exception of direct municipal management which was explicitly excluded. In other words, the regional law left local authorities with the option to choose the organisational mode for the provision of water supply and sanitation in each ATO among the following: “azienda speciale”; PLC or limited company majority or minority owned by local authorities; privatised concession.
In October 1999, Milan city council adopted a decision, pursuant to art. 7, L.R. n. 21/98, to abolish the municipal department which had since operated water supply and sewerage, and to transfer operations (including its 540 employees) to a PLC majority owned by the city council, after the latter had been set up.

The alternatives considered by the Municipality Executive Committee consisted on the creation of an ad hoc PLC company or in the delegation of the service Management to another municipality-owned utility53.


The Municipality Council decided to constitute a municipally-owned PLC, which would be named SOGEA and would operate under a 30 year concession and would pay a yearly concession fee (“canone”) for the use of municipally-owned infrastructure, for a total value of ITL 31,724 billion (about €16.4 million). The aggregate value of concession fees was calculated in the light of the remuneration of municipal assets to be transferred to the concessionaire and the repayment of loans contracted by the municipality for the construction of infrastructure (Venegoni, 2000: p.6). SOGEA would have had to act according to the principles of cost-effectiveness, effectiveness, efficiency and was bound to ensure the financial balance of operations.
The decision to award a concession to a PLC appears to have been informed by parliamentary works on a draft bill that had to reform the discipline of local public services, including water supply and sanitation. The draft bill provided for the award of concessions through competitive tendering procedures in which only PLCs would be entitled to participate. Concessions directly awarded without competitive bidding would have been safeguarded only temporarily, for a limited number of years (Venegoni, 2000: pp: 65-68). The municipal administration was of the view that establishing SOGEA as a PLC would serve its purposes54 in that it would allow to55:

  • make the management aware of its responsibilities about the Azienda Speciale;

  • manage water services in an entrepreneurial way, with a higher flexibility than the direct labour management;

  • increase the transparency of accounts; the set up of the company allowed to separate the water service book keeping from the Municipality general budget, in order to “convoy to the water service the resources that it generated”.

  • create the conditions to find shareholders willing to inject financial capacity and know how.

About the choice of the firm controlled by the Milan Municipality, semi-privatised electricity operator AEM was chosen to hold 1% of SOGEA shares.


The PLC, which was to be named SOGEA (Società Generale delle Acque SpA), would be 99% owned by the city council and 1% owned by the partly municipally-owned electric utility AEM Milan56. The mayor pointed out that AEM had been chosen as private partner as this was a PLC, although still majority owned and controlled by the city council itself, which would facilitate and speed up the decision making process. Apparently, the city administration intended to proceed with the privatisation of SOGEA at a later stage.

The company was expected to start operations at the end of 200157. Since 2000, AEM had been interested in acquiring water supply and sanitation operations until then managed by Milan municipality58. AEM, whose core business at that time included electricity and gas, was supposed to become a SOGEA shareholder had through an alliance with Geonoa’s semi-privatised multi-utility AMGA59.


In January 2001, the procedure for the SOGEA set up went on, when a report of Milan Municipality60 identified the workers that had to be transferred to the company. The workers came from the water, sewerage and book-keeping departments61. However, the process to establish SOGEA was eventually slowed down by the lack of an agreement on the industrial partner choice62.
Before SOGEA was set up, the Italian Parliament approved l. n. 448/2001 in December 2001 (the 2002 Budget Law) whose art. 35 imposed de facto the selection of water operators exclusively through competitive tendering, with the only exception being represented by the direct award of a concession to a wholly publicly-owned company provided that within two years of the concession award an equity stake of at least 40% was sold to a private operator selected through competitive tendering (see Lobina, 2005: p. 15).

5.2.3Short-term concession award to 100% municipally-owned PLC and uncertain future: December 2001 to date


As a reaction to the adoption of art. 35, l. n. 448/2001, in November 2002 Milan city administration decided to award a 3 to 5 year water supply and sanitation concession for the ATO Città di Milano to Metropolitana Milanese (MM), a publicly-owned engineering and construction company operating the underground service in Milan. As the city council owned 99.97% of MM, with the remaining 0.3% owned by the municipal company SEA (the operator of Milan’s airport, also to be privatised), it was decided that the city council would acquire the remaining stake so to own 100% of MM and comply with the provisions of art. 35, l. n. 448/2001. The mayor motivated the decision to award the concession to MM in the light of legislative requirements allowing a direct award only to 100% publicly-owned companies, otherwise there would have been a competitive tender which would have been presumably won by a French multinational, something that the administration wanted to avoid. MM was chosen as the concessionaire as it appeared relatively more prepared to assume water operations due to its activity in constructing tunnels and the consequent knowledge of Milan groundwater. However, it should also be noted that, in order to obtain the required 100% ownership of the water concessionaire, it was less costly for the city council to acquire the remaining 0.3% owned by SEA in MM than the 49% necessary to become the sole owner of AEM.
The water service management had not been transferred to AEM because “It had to be sold to a company that was totally controlled by the Milan Municipality. Otherwise, we would be obliged to call a competitive tender. In this case the French firms would have won. To avoid that we preferred to delegate the public activities to MM which excavated galleries and was the company more suitable for this sector” 63.
The municipal administration deemed that, while prospects of succeeding in international competitive tenders were not strong at the moment, the local water operator would have participated in competitive bidding once that it had acquired sufficient capacity64. Furthermore, the decision to award the concession to MM was adopted in the light of its experience and technical know-how, its potential and in order to enhance its valorization65.
The award to MM was harshly criticised by Italian Minister for the Environment Altero Matteoli who claimed that this was in sharp contrast with EU and Italian law and protested that the concession should have been awarded through competitive tendering. In fact, the statutory instruments required to define the duration of the concession directly awarded (although within the limits set by art. 35 of between 3 and 5 years) had not been approved as in the meantime art. 35, l. n. 448/2001 had become the object of the EU infringement procedure and its constitutional legality had been challenged by a number of Italian regional governments (see Lobina, 2005: pp. 15-16). In December 2003, Italian legislation changed again and this time it allowed the direct award of a concession to wholly-publicly owned companies (see Lobina, 2005: pp. 17-18), apparently safeguarding MM’s legal position. Nonetheless, it is not clear how the new legal framework will affect future decisions by Milan’s city council on the organisational structure of water supply and sanitation services in the ATO (e.g. extension of the duration of the current concession, privatisation of MM or else).
On 18th June 2003, a short term water supply and sewerage concession of a maximum duration of 5 years was awarded to MM. The duration has been initially set in two years and in June 2005 this will be subject to review with a possibility of an extension. It should be noted that the decision to limit the duration of the concession to two and five years, has been adopted pursuant to art. 35 of the 2002 Budget Law66. This provision has been subsequently amended allowing for concessions to be directly awarded to wholly municipally-owned PLCs up to a maximum of thirty years (see Lobina, 2005: pp. 17-18). However, Milan city council has not taken advantage of such possibility and in July 2004 the mayor was considering whether to list MM on the stock exchange or to sell around 40% of its capital to a private partner67.
Although the temporary duration of the concession is two years, the investment plan drawn by the ATO secretariat, whereby the ATO is constituted solely by the municipality of Milan, is for a total of three years.
MM started operations on 30th June 2003 and projected investments of € 98.5 million in 3 years, especially in sewerage. The municipal administration would have benefited from payment of concession fees of € 21.6 million in 2003 and € 22 million in 2004 for the use of infrastructure owned by the city, plus dividends. The concession agreement (art. 6) establishes the duties of the operator concerning the investments. This is obliged to make all the interventions related to the ordinary and extraordinary maintenance and every intervention arranged in the annual and medium term plans approved by the ATO authorities. MM took over the contracts stipulated by the Municipality from the date of the Convention. It acts as an indirect organ of the municipality. About the interventions, MM can present to ATO a proposal for the program (art.13). Tariffs are fixed by the ATO governing body.
During the first months of the service management MM focused on the reduction of the network losses, that were 10% of the withdrawn water (lower than the national average). The units of first intervention were strengthened and a reduction concerning the leakage signaling (from 12 during the direct labour management to 5 now) was registered. MM was charged to reduce the hidden losses68. The maintenance interventions held in an urban context densely inhabited favored the research of excavation techniques less invasive, to avoid discomfort to the citizens. This need highlighted the shortage of skillful staff. Besides the quantitative aspects (that however are not a problem because the town is endowed of a huge good quality amount of water), MM adapted its activity to the new standards introduced by the D.Lgs. 31/01 (implementing the dir. 98/83/EC) which tightened the supplied water purity parameters. After the law came into effect some wells were closed and actions to withdraw the water from deep aquifers were arranged.
The respect of these qualitative parameters involved the purification techniques adaptation and highlighted the necessity to improve the company know how on this matter. For this aim a research department was created. A crucial factor concerning the transition from the direct labour management to the MM delegation was the transfer of almost 500 workers from the Water Service department of Milan Municipality to MM. Crucial factors in the success of this transition has been the employee motivation (which was crucial in improving the service management effectiveness) and a more dynamic environment.

MM was awarded a water supply and sanitation concession because the Galli Law requires the integration of water supply, sewerage and wastewater treatment services. As a matter of fact, at least initially, MM will operate only the services transferred from the municipal management, that is say water supply and sewerage, as the two main BOT contracts are still underway. In order to solve this contradiction, MM has been awarded the responsibility for providing all the three services, which implies that it can directly operate water supply and sewerage while monitoring the operations of the private consortia. More precisely, it is uncertain whether MM will operate Milan South wastewater treatment plant at the expiry of the concession to ONDEO Degremont (construction + 5 years of operations). As regards the Nosedo wastewater treatment plant, where the private consortium enjoys a longer concession (12 and a half years of operations), MM will only supervise the private operator. Whether MM will eventually directly operate the Nosedo wastewater treatment plant depends on future decisions by Milan city council on the extension of MM’s concession. Current arrangements provide that water supply and sanitation bills are collected by MM, which then provides to transfer to the private consortia operating the wastewater treatment plants their share.




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