Italy: Localization Agreements Offer Incentives to Companies Investing in Italy

Last Updated: 14 September 2004

Article by Alexandra Adrot and Marino Bastianini

Development of Italy’s southern regions has always been a key element of the Italian economic policy, and state aid acts as the main tool of this policy. Under the scrutiny of the European Commission, state aid has avoided becoming mere financial dumping but, instead, has emerged as a rather powerful incentive to increase competitiveness. Legislative instruments such as Law 488/92 have initially been implemented, allowing for the distribution of more than €17 billion a year, mainly through nonrefundable state aid. An international economic context evolution and the growing competition between European regions to attract investments have made it necessary for public authorities to review and modernize their existing investment incentive devices.

Localization agreements are the result of a constructive dialogue between the Italian government and industry. This tool aims at achieving two goals. First, it hopes to attract international investments in the southern regions of Italy, known as the Mezzogiorno, by offering a quick one-stop shop for applications. This strategy remedies the main deterrent for international investment: the sluggishness of local bureaucracy. Second, since it requires the signature of a master agreement between the public authorities concerned, it simultaneously induces and stimulates the improvement of regional infrastructures so any international investment would find the best "localization" feasible and under the best conditions. The localization agreement seems to be a worthwhile instrument that international companies should consider when investing in Italy. Since the launch of this tool, more than 17 companies have applied for an overall amount exceeding €1.3 billion. To date, three of these applications have been declared eligible and should be approved by the ministry before the end of 2004.

A Recent Institution

The localization agreement, Contratto di localizzazione, is stipulated between the Ministry of Industry and a company where the company is allocated nonreturnable aid. It has been created through a complex process of negotiations between the Italian government and industry representatives. In July 2002, these parties created a "Pact for Italy" (Patto per l’Italia), in which the Italian government undertook to modernize available investment tools for southern Italy. This mission was entrusted with Sviluppo Italia, the national agency for enterprise and inward investment development. In a May 2003 decision, an interministerial committee in charge of economic planning (CIPE) established the regime of the new tool and attributed the first financial resources. For the first three years of implementation, the CIPE allocated more than €140 million. In June 2003, an agreement between the Ministry of Industry, Ministry of Economy and Finance and Sviluppo Italia gave the final details about the initiative, creating ad hoc committees to administer the new instrument. Since then, more than 17 applications have been submitted for an overall amount of €1.3 billion.

Characteristics of the Applicant

The Italian government seeks to attract international, highprofile companies to revitalize the Mezzogiorno. For this reason applicants to localization agreements should meet certain criteria. For an investment project to be retained, the investor should be a medium- or large-sized undertaking and a foreign company or Italian company controlled by or affiliated with a foreign company (i.e., in which a foreign company retains a significant holding). This condition has been established by an ad hoc committee (Comitato Operativo) in order to select international investment projects that can guarantee the opening of the region to international capital flows. Even though the committee has given details about the practical aspects of the requirement, it appears those explanations are rather misleading. It is provided that the nature of control or stockholding should be interpreted in accordance with paragraphs 1 and 2 of Article 2359 of the Italian Civil Code. Under these provisions, the parent company controls another company if it holds a majority of the voting rights in it or if it has sufficient voting rights to exercise a dominant influence on it. According to the minutes of the committee, exercising a dominant influence means having the opportunity to veto a decision of the board of directors through the vote of the directors that have been designated by the foreign company, which is not a common interpretation of Article 2359. In order to satisfy the requirement of control and limit the risk of the application being rejected, the applicant should present a project in which a foreign company clearly holds the majority of the voting rights.

Features of the Investment Project

The new state aid instrument is exclusively available for green- field investments (i.e., financing newly built infrastructures, to the exclusion of modernization or extension works). Investment projects are only eligible for the benefit of the state aid in the following fields: manufacturing and extractive industries, industry of production and distribution of energy (electric or hydraulic) and services and tourism industries with the exception of trade. The minimal overall value of investment required depends on the sector of activity pursued by the applicant. To obtain a successful bid it is important to consider the provinces where the revitalization projects should be situated, as stipulated by the committee: Abruzzo, Apulia, Basilicata, Calabria, Campania, Molise, Sardinia and Sicily.

Review and Admission of the Application

The fundamental innovation of the localization agreements is its review procedure and approval process for submitted applications. In the past, the procedure followed for the allocation of state aid has proved particularly discouraging for any foreign project initiative in Italy. The plurality of public authorities to be contacted, complexity of the documentation to be attached to the application and sluggishness of the administrative treatment at each stage of the application have definitely undermined the attractiveness of investing in Italy. This new tool has been designed to remedy all these defects and to convince international companies that Italy is a suitable place for their innovative investments. One of the strongest arguments in favor of localization agreements is that there should not be more than 60 days between the submission of application to the ministry and the final decree of the state aid approval.

Applicants need to submit a business plan that includes the following elements: conditions relating to construction works (administrative and planning permissions), technical and economical feasibility, financial plans and an assessment of creditworthiness as well as any other elements that would be requested from the local public entities in terms of local infrastructure. The application is then presented to Sviluppo Italia, which will contact the local authorities (regions, for example) to discuss the infrastructural aspects of the prospective investments and evaluate the eligibility of the proposal. Once the application has been declared eligible by the operative committee, it will be forwarded to the Ministry of Industry for final approval. Upon approval of the application, the funds should be paid out in two or three tranches, the first of which should be less than 30 days from the date of approval. Funds are nonreturnable.

This instrument will certainly be welcomed by international investors. It guarantees a direct dialogue with the public authority through a one-stop shop, Sviluppo Italia. As a matter of coherency and efficiency, this tool integrated a vast program of infrastructure improvements and territorial marketing. Sviluppo Italia has launched other initiatives that should quickly catalyze the effect of localization agreements. Some of the initiatives include drafting a catalog of localization opportunities (soon available on, setting up of an international network of advisors directed at establishing personal contacts with interested companies and performing international road shows to present the current incentives. Last but not least, this new incentive is genuinely negotiation-oriented and guarantees international investors the maximum cooperation and flexibility on behalf of Italian authorities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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