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

3.4Region profile¹

DATA	CONCEPT
DEMOGRAPHY AND ECONOMICS
Population density (persons/km )	182 persons/Km^2 ^17
Population growth rate
Current (% per year)	[1,298,799 (in 2002)-1,358,693 (in 1982)]/ 1,358,693 (in 1982) = -4.43 %^18
Forecasted (% per year)	- 3.57% (in 10 years, foreseen in 2012 = 1.252.431); average for the future 10 years = -0.357%^19
Gross National Product per capita (EUR/capita/a)	€ 43,800^20
ENVIRONMENT (
Yearly rainfall
Average (l/m^2/a)	1,003.8 mm/year (average for the past 30 years)^21
Maximum (l/m^2/a)	1,456.4 mm (1977)^22
Minimum (l/m2/a)	614.8 mm (2003)^23

3.5Performance indicators

INDICATOR	CONCEPT
CUSTOMER COMPLAINTS
Customer complaints, water supply (no/connect/a)	About 2,000/49,000
Customer complaints, wastewater (no/connect/a)	n/a
WATER LOSSES
Non-revenue water by volume (%)	10.13%
Water losses by volume (%)	n/a
Sewer network leakage (%)	About 0%

4Actors in water and wastewater services provision and production

It might be interesting to note the prominence of institutional actors, from the EU to the national and regional governments, throughout the whole local decision making process. This is due to the path dependency of a number of legislative initiatives and the quality of the relative decision making processes, that is to say the decision making process on the content of provisions contained in the national and regional laws passed.

Also, French multinationals have directly and indirectly shaped the local decision making process in many forms.

5Episodes

5.1Decision to award BOT contracts for the wastewater treatment plants

With its 1.3 million inhabitants, Milan has been until a few months ago the only European metropolis without an adequate wastewater treatment system. As raw sewage was discharged directly into the rivers Lambro, Seveso and Olona, in October 2001 the municipality was facing an estimated ITL 69bn (€ 35.63m) penalty from the European Commission for its failure to comply with the requirements of EU Directive 271/91/CE (Global Water Report, 2001). On those grounds, the EU Commission had started an infringement procedure against Italy in 1999 and condemned the Italian government, and thus indirectly the municipality of Milan, in April 2002, although without imposing pecuniary sanctions. Failure to impose the envisaged multi-million penalty might be explained with the fact that, after decades, a decision was eventually taken to award two BOT contracts to two private consortia, thus demonstrating the willingness of the municipal administration to put an end to its breach of EU law²⁴.
Lack of transparency had led more than one project to a standstill in previous years. The upgrading of the metropolitan wastewater treatment system has been discussed since 1973, but projects have been repeatedly frustrated by a host of court cases and investigations. Also, the debate on the construction of the wastewater treatment plants protracted since the 70’s for a number of reasons²⁵:

• 
  Changing demographic patterns meant that water consumption fell considerably and that changed the technical variables to be taken into consideration in planning a comprehensive wastewater treatment plant for the city²⁶.
  
• 
  The studies on the treatment plant localisation prolonged during the 80’s (being conditioned by the characteristics of the Milan water system). Frequently the project proposal was hindered by the protest of the residents of the concerned areas (i.e. NIMBY syndrome²⁷). These protests were exacerbated by the proposal to built a pipe which would have transferred the treatment discharges from Milano Sud to Nosedo;
  
• 
  During the 90’s several bribe episodes, and the emerging of the Tangentopoli phenomenon (“Bribesville”), had de facto blocked public works for several years (see Lobina, 2005: p. 22).
  

Of the three projected wastewater treatment plants, Milan South is certainly the most controversial project, as a corruption scandal has led to the conviction of local politicians and a Veolia executive. The contract was then awarded to then Iberdrola subsidiary Pridesa, but ONDEO Degrémont obtained the annulment of the award 14 months after works had started. After a meeting with Environment Minister Altero Matteoli on 24^th September, Milan mayor and extraordinary commissioner to wastewater treatment plants Gabriele Albertini decided to award the contract to the Degrémont-led consortium. As for the Nosedo contract, following three investigations this was eventually awarded in early 2001 to a consortium including Suez Degrémont and Veolia’s OTV (Global Water Report, 2001). Finally, the Peschiera Borromeo plant was awarded to a joint venture between Veolia subsidiary SIBA and Degrémont.

5.1.1Milan South wastewater treatment plant

In March 1997, Milan city council approved the preliminary project²⁸. On 18^th June 1998, a competitive bidding procedure was held (sistema dell’appalto-concorso²⁹) for the building of the Milan South wastewater treatment plant. The starting offer for the procurement auction was fixed at ITL 180 billion (about 93m €) and the amount for the management was determined in 36ml Lire (about 18,600€)³⁰. Apart from Pridesa and Degrémont, other consortia were given permission to put forward bids, respectively led by Ansaldo, Impregilo, SnamProgetti and OTV³¹.
The corruption scandal broke out in March 2000 but the court ruling and conviction of Veolia executive Alain Maetz among others came only in July 2001³². On 10th August 2000, the contract for the construction and management of the plant for two years was awarded to a consortium led by Spanish Pridesa, then wholly owned by energy company Iberdrola since December 2000 (Pridesa is now a wholly-owned subsidiary of German-owned and UK-based water multinational Thames Water³³). Pridesa placed the best offer with ITL 129bn (€ 66.62m) for construction and ITL 22bn (€ 11.36m) per year for management and operation, against Degrémont’s ITL 143bn for construction and ITL 30bn per year for management and operation. As a result, Pridesa obtained 93,400 points in the tender evaluation versus Degrémont’s 86,452 points. Veolia’s OTV bid a total ITL 195bn (ITL 160bn + ITL 35bn) but was excluded from the tender for failure to comply with formal requirements in the presentation of the economic offer. Second qualified Degrémont requested Lombardy’s Regional Administrative Tribunal (TAR) to annul the award, but its request was rejected on 18^th April 2000 as the regional court did not find any substantial flaw. Degrémont then appealed to the State Council, Italy’s Supreme Court in matters of administrative law, which annulled the award on 5^th June 2000 ruling that Pridesa lacked the requirements to participate in the tender. In assessing the value of works carried out by Pridesa, the court did not consider the ITL 16bn treatment plant in Talavera whose works were not completed, so that the remaining works accounted for only ITL 86bn against the ITL 90bn required to participate in the tender. Following the cancellation of the award, the municipality was left with four alternatives: 1) award the contract to Degrémont; 2) the mayor could use his powers as the extraordinary commissioner for wastewater services to renegotiate Pridesa’s bid, as this was the only company among the bidders to be able to start works immediately; 3) hold a new competitive tender; 4) a competitive assessment of Pridesa’s and Degremont’s bids. Speculations had it that Environment Minister Altero Matteoli instructed the municipality to stick to the State Council’s decision and award the contract after redefining evaluation parameters. Which would automatically result in the exclusion of Pridesa and the award to Degrémont (Global Water Report, 2001).
The Milan South contract was effectively awarded to Degrémont in late 2001 without holding a new competitive tendering nor a competitive assessment of Pridesa’s and Degremont’s bids. The threat of the EU-imposed multi-million penalty apparently was a major factor in the local decision to expeditiously award the contract. However, this led to a surge in the total costs of the construction and management of the plant not only as Degrémont had projected higher construction costs than Pridesa. Construction costs of the Milan South plant are currently set at € 87.75 million, while management and realisation of complementary works will be remunerated with a total € 48.46 million, that is to say € 9.69 million per year. Overall, the cost of the Milan South contract will be € 136.21 million which compares unfavourably with Pridesa’s original bid, even when considering that the duration of the management contract has been extended from two to five years, but also with the cost of the Nosedo wastewater treatment plant. This is larger than the Milan South plant (1,250,000 population equivalent as opposed to 1,050,000) and will be operated by the successful bidder for longer than the Milan South plant (12 and a half years as opposed to 5 years)³⁴. Interestingly, the opposition had criticised the municipal administration for setting the starting initial offer for the Nosedo procurement auction at 5/4 of the maximum initial offer for the Milan South plant, fearing that this would have inflated the construction and management costs of the Nosedo plant.
In September 2000, city councillor Basilio Rizzo requested Italy’s national audit body Corte dei Conti to look at the economics of the Nosedo concession. Mr. Rizzo criticised the municipality for setting the cost of the Nosedo plant by comparison with the maximum price fixed in the bidding procedure for the Milan South plant (ITL 180bn for construction and ITL 36bn for management) rather than with Pridesa’s best offer. In other words, as the Nodeso plant is slightly larger than the Milan South plant, the municipality calculated the value of construction by multiplying ITL 180bn for 5/4. According to Mr. Rizzo, this led to overestimating the costs of the Nosedo plant by ITL 48.8bn for construction and ITL 18.6bn per year for management (Global Water Report, 2001).
“We are astonished at the intricacies of Italian bureaucracy which wiped out one year and two months of our work. We have constructed some 500 treatment plants in the last 15 years and never had any such problem”, a Pridesa source told GWR commenting the facts. While the State Council’s decision will provoke further delays which might cost dearly to the municipality of Milan, Pridesa is nearing completion of a 2,250,000 population equivalent wastewater treatment plant in Barcelona one and a half years after being awarded the contract. Nor they had any problem in timely completing a US$ 25m, 800,000 population equivalent water treatment plant in Shanghai. “The technical merits of our bid are unquestionable, as is demonstrated by the fact that Milan municipality asked us to sell the plans and costing we elaborated; an option which we ruled out due to our interest in bidding for the concession. Also, Pridesa was the only firm among the bidders to have experience of management of a larger plant than Ronchetto delle Rane (Milan South). We have in fact operated a 1.3 million population equivalent wastewater treatment plant in Madrid for 12 years until the contract was recently renewed for a further 6 years”, the source added (Global Water Report, 2001).

5.1.1.1Conviction of Veolia executive and a senior politician on corruption charges

On 18^th July 2001, Milan court magistrates convicted Alain Maetz, a senior manager in Veolia’s water division, and local politicians for bribery in connection with the award of the tender for the construction and operation of the Milan South wastewater treatment plant. Former president of Milan city council Massimo De Carolis received a prison sentence of two years and 10 months and Mr. Maetz received a prison sentence of one year and eight months with conditional discharge³⁵. According to the judges, in 1998 Mr. Maetz paid a bribe of ITL 25m (€ 12,911) to Mr. De Carolis, who expected to receive up to ITL 200m (€ 103,291) to favour Vivendi subsidiary OTV in the bidding procedure. Also, in September 1998 Mr. De Carolis disclosed the list of bidders to Mr. Maetz, a list which should have remained secret until 28^th October 1998. Reportedly, in January 1999 OTV bought 51% of Italian company Siba, which appeared in the secret list of competitors. Mr. De Carolis and Mr. Maetz, together with three intermediaries, will have to pay ITL 1bn (€ 516,456) damages to the city council. Mr. De Carolis’s lawyer said his client would appeal against the verdict.
The case first exploded in March 2000 when daily La Repubblica exposed that Mr. Maetz planned to bribe politicians in the majority and opposition parties on Milan city council in order to win the ITL 200bn (€ 103.29m) contract. The evidence included a floppy disk, found by the French police and handed over to Italian magistrates, containing a letter by Mr. Maetz. In the letter, dated July 1998, he informed OTV’s partners in the venture that he had “excellent contacts” within the rightwing coalition governing the city and planned to pay a total ITL 4bn (€ 2.06m) bribes. Of which, some ITL 2.3bn would go to the majority parties, ITL 600m to the opposition and other money would go to grease the wheel through “experts” and “mediators”. He also stated that, as a condition to closing the corrupt deal, the consortium would have to include Coge, a firm 40% owned by Paolo Berlusconi, brother to media tycoon and current Prime Minister Silvio Berlusconi. However, as a matter of caution, Mr. Maetz stated he would request that Paolo Berlusconi sell his stake in Coge before this could become part of the bidding consortium. Finally, Mr. Maetz instructed the readers to destroy the letter.
Mr. De Carolis belonged to the centre-of-right party Forza Italia of Silvio Berlusconi and, like Mr. Berlusconi, is a former member of the secret Masonic association P2 (Propaganda Two) which was banned under Italian law in 1981. It was Silvio Berlusconi who wanted Mr. De Carolis appointed as president of Milan city council. However, Mr. De Carolis resigned from the city council presidency following the March 2000 revelations and after repeated clashes with Milan mayor and extraordinary commissioner to wastewater treatment plants Gabriele Albertini, also of Forza Italia (Global Water Report, 2001).
According to Italian news agency ANSA, in May 2003 the appeal sentence reduce Mr. De Carolis conviction to one year and eight months, as he was acquitted of the charge of revealing official secrets. However, the sentence confirmed corruption charges against Mr. De Carolis. Also, the appeal sentence confirmed Mr. Maetz’ conviction to one year and eight months on corruption charges. Both Mr. De Carolis and Mr. Maetz would resort to Corte di Cassazione, whose verdict would be final³⁶.

5.1.2Nosedo wastewater treatment plant (south-east of Milan)

This project has also been controversial. In November 1984, a contract for construction of the Nosedo plant was competitively awarded to a consortium led by Acqua SpA owned by the Pisante brothers, who then became the subject of investigations carried out by Milan magistrates due to alleged irregularities in the award. Throughout the years, the Pisante brothers have also been investigated by Italian magistrates in Novara, Monza, Catania, and Savona, in relation to their activities (Global Water Report, 2001)³⁷. The Nosedo scheme was then suspended for 4 years pending an environmental impact assessment. In March 1990, the local government awarded a contract without holding a competitive tender to a consortium led by Emit, the former Acqua SpA, and including Degrémont and Unieco among others. The renegotiated contract covered the construction and 15-year management of the treatment plant, with construction costs estimated at ITL 238bn. In April 1995, Emit resorted to arbitration seeking damages for the delays suffered although the municipality declined responsibility. In July 1998, the two parties settled the dispute by agreeing that the city council would pay ITL 3billion damages to Emit. Also, the municipality of Milan would have contributed 45% of project costs, corresponding to ITL 117.5 billion³⁸. The project has been bitterly criticised by the opposition for its costs, with projected investment costs rising from ITL 74billion in 1984 to ITL 294billion in 1992, to be finally reduced to some ITL 227billion, as well as lack of transparency and competitiveness. Opposition councillor Basilio Rizzo also noted that “the amount of investment contributed by the concessionaire has been reduced when compared with previous plans, so that the city council has had to participate substantially in financing the works” (Global Water Report, 2001).
The contract, initially for the construction and 15-year operation of the Nosedo wastewater treatment plant, then reduced to 12 and a half tears of operations, was awarded in early March 2001 to a consortium led by Siba (Società Italo Britannica dell’Acqua) and including Suez Degrémont, Veolia’s OTV and Italian companies Unieco and Grassetto among others. Suez Degrémont held an 18% stake in the consortium. Works have been carried out by Siba, which is 50% owned by Veolia with the remaining 50% held by Emit (Global Water Report, 2001). The total cost of the project amounts to € 134.79 million, including borrowing costs. More precisely, construction costs amount to € 117.21 million with operation costs totalling € 17.58 million. The private operator has also been granted € 2.44 million for extra works requested in the light of ministerial indications. The municipality of Milan will directly contribute 45% of total costs (equal to some €60.66 million), by tapping into an ad hoc fund constituted by water bills paid by consumers since 1997, while the remaining 55% (corresponding to €74.14 million) is to be tapped by the private consortium in the form of project finance³⁹.

5.1.3Peschiera Borromeo wastewater treatment plant (east of Milan)

In July 2001, publicly-owned water company CAP published the auction “a procedura ristretta” ⁴⁰ (following the D. Lgs. 158/95) for the planning, the construction and the management of the Peschiera Borromeo wastewater treatment plant. The initial offer was set at ITL 47 billion (over €24 million), excluding VAT⁴¹. On 14^th December 2001, a joint venture between Veolia’s OTV subsidiary SIBA and Suez Degrémont won the auction and on 7^th March 2002 signed the contract. However, on 13^th May 2002 Lombardy’s Regional Administrative Tribunal (sentence n. 2061) accepted the appeal of Passavano Impianti and Torno Internazionale S.p.A) for the annulment of the award. On 17^th July 2002 CAP and Milan municipality appealed against this decision. On 7^th January 2003, the Council of State, Italy’s Supreme Court in administrative matters, rejected the appeal (sentence n. 1577/03) reversing the decision of the regional tribunal. As a result the Peschiera Borromeo has been definitely been awarded to the joint venture between SIBA and Degrémont.
Total construction cost amount to some € 22.16 million, of which nearly € 17.44 million for construction of the plant and around € 4.72 million for construction of the main sewage trunk connecting Milan to the plant. The Peschiera Borromeo plant is expected to become operational by April 2005.

5.1.4Restricted competition, corruption and exclusion from tendering

In July 1998, Milan deputy prosecutors turned down a 103 pages long dossier, submitted by former Milan vice-mayor Giorgio Malagoli and a number of Milan city councillors, without bringing charges. The dossier denounced the anti-competitive practices of a number of Italian and foreign companies in relation to the award of the wastewater BOTs in Milan. More precisely, the dossier exposed a December 1988 accord between 6 companies including EMIT (the former Acqua of the Pisante brothers, which owned 100% of SIBA until 1999 when Veolia’s subsidiary OTV acquired 50% of its capital), and Degremont, aiming at rigging the award of works contracts related to Milan’s wastewater treatment system. In case a wastewater treatment plant had been awarded to any of the parties to the accord, titled “Progetto Milano”, works contracts would be distributed to all the signatories according to a predetermined percentage of total value: EMIT would be entitled to 16.70%, Degremont would be also entitled to 16.70%, and so on. The judges decided not to proceed arguing that no corruption had taken place, although Mr. Malagoli had requested magistrate to investigate on the possibility of other crimes having been committed⁴². However, this suggests that private companies might have incentives at rigging competition in pursuit of commercial considerations.
Although the “Progetto Milano” accord appeared to be confined exclusively to works contracts, the behaviour of the two major multinationals in the sector (Suez through Degrémont and Veolia through OTV and SIBA) has resulted in restricted competition in the award of the three contracts for the Milan wastewater treatment plants. In fact, the SIBA-led consortium awarded the BOT for Nosedo also includes Degrémont while the construction of the Peschiera Borromeo plant has been awarded to a joint venture between SIBA and Degrémont.
Furthermore, the conviction of Veolia's senior manager Alain Maetz on grounds of corruption has apparently not affected the multinational's ability to bid for wastewater contracts in Milan. It should be noted that the court ruling on the corruption case was rendered in July 2001, but the scandal broke out in March 2000 as it emerged that the Italian police had obtained hard evidence of Maetz's plans to bribe local politicians in the majority and opposition parties.

In relation to the bidding procedure for the Milan South plant, OTV, which had submitted a higher bid than Pridesa and Degrémont, was excluded for failure to comply with formal requirements in the presentation of the economic offer. The contract was awarded in August 2000. As regards the bidding procedure for the Peschiera Borromeo plant, the conviction of Alain Maetz did not prevent Veolia from bidding through its subsidiary SIBA.