*3.2. Milan: Institutional Innovation and a Way Out*

The history of corruption, lack of transparency, legal proceedings as well as costly BOT contracts have provided for a tough heritage for MM Spa to sort through. MM Spa itself is a joint-stock company 100% owned by the Municipality of Milan. Originally primarily an engineering company and formed in 1955 for the construction of Milan's metro system, it today covers both mobility and infrastructure engineering as well as management duties for municipal housing and other public assets. Outside these core activities MM Spa also engaged in international investments with a joint venture in Moscow with Millenium Bank, part of the Russian Railways group, which shortly thereafter went bankrupt and lost its banking license [25].

The territory and duties for operations of MM Spa is defined by the restructuring of water supply and sanitation operations in Italy through the 1994 Galli Law. According to it, responsibility for water supply and sanitation is transferred to a public authority called ATO (Ambito Territoriale Ottimale). The ATO's governing body selects the water operator and determines the organizational form for water operations. It further carries the responsibility for surveying infrastructure, developing the investment program, setting tariffs and regulating the water operator. This is done via the technical secretariat within the administrative structure of the municipality of Milan.

This sets the framework within which actors aim to provide adequate solutions despite historical baggage and pressing future challenges. Following the 2014/2015 updates to the ATO plan, MM Spa was presented with the challenge of developing an investment strategy to match the plan's requirements to maintain the current level of service as well as adapt the system to future technical and environmental challenges [26].

The key innovative moment is the bilateral development of principles for the financial strategy design and execution between MM Spa and the municipality. This is done to balance the systems long-term requirements with financial viability and current economic opportunities. Stefano Cetti, the director general of MM Spa, summarizes these as follows: "first, total IWS financial needs coverage; second, source diversification; third, risk and collateral minimization; fourth, increase in debt maturity" [27].

The first aspect refers to the principle that the total financial needs of the system up until 2037 (the end of the concession of the system to MM Spa) have to be covered, while guaranteeing coherence between old and newly employed tools, acknowledging current obligations and avoiding the insurgence of refinancing risks [27]. Source diversification refers to the fact that MM Spa aims to take advantage of favorable market conditions and be able to employ different financial instruments outside of traditional bank loans that line up with tariff and investment projections. In order to be able to do this MM Spa acquired credit ratings at the corporate level from Moody's and Standard and Poor's. As a result of this diversification, risks are spread more widely. Risk and collaterals minimization further refers to the fact that the overarching aim is self-sufficiency, thus it aims to minimize risks both to MM Spa as well as the municipality of Milan resulting from instruments that require specific collaterals. The final aspect focusses on the employ of instruments that match in duration the lifetime of the underlying assets. This effectively greatly extends the debt duration, thus heavily emphasizing long-term instruments with a duration of up to 20 years (id.).

These principles were successfully put to practice with the employment of two financial instruments: first, by issuing institutional amortizing notes for an amount EUR 100 mln, to be listed on the regulated Main Securities Market of the Irish Stock Exchange; second, the negotiation with the European Investment Bank (EIB) for a credit facility of EUR 70 million. Both of these instruments are innovative on several levels in reference to Italian water sector practices [27].

#### *3.3. Innovation, Precaution and Shining a Light*

The London case focusses on an individual infrastructure project and shows how financial innovation has shaped the case. The Milan case presents a longer-view perspective

that shows how structural changes in the infrastructure sector have enabled an environment for institutional innovation that gave rise to sustainable financial innovation. With regard to technological innovation for infrastructural solutions, the Tideway Tunnel project is filled with such innovations that make the construction of a tunnel under a river across the breadth of city possible. The project itself greatly stimulated the logistics, construction and engineering sectors across the city. Similar patterns occurred in Milan, where individual technical solutions won awards for their innovative approaches [28].

However, the cases provide two different perspectives on financial innovation in the field. The London case focusses on a specific project that employs a highly individualized financial strategy to the benefit of investors, whereas the Milan case presents a perspective that is more focused on the city's long-term needs. Both of these had to employ financial as well as institutional innovation to develop a viable model for the cities' infrastructure development. However, how we pay for infrastructure influences what is to be built, how it is going to be done and the location where it will happen. Thus, a novel financial model introduces new variables into a city's water system, potentially introducing new risks and vulnerabilities.

The innovative impetus induced by the regulatory framework triggered a cascade of innovation in the water sectors of both cities. A critique could be made of the fact that these innovations are unintended and thus unguided, often resulting in the shifting of risks from one area to the next. The vacuum of the infrastructural gap has provided an arena in which, as illustrated in the London case, financial innovation can take advantage of obfuscation strategies and profit of off an imbalance of knowledge between actors. However, the Milan case shows how even despite a difficult starting proposition, financial and institutional innovation can occur in a sustainable and impactful manner. Here in particular, potential exists to translate this occurrence of an institutional innovation into a social innovation that emphasizes transparency and the co-creation of financial strategy development for urban infrastructure provision.

Furthermore, if we understand the implementation of precautionary principle in terms of RRI, as introduced earlier, the solution found in Milan seems to be more in line with the precautionary principle than the one found in London. With respect to the criterion of democratic governance, the stakeholder-oriented, public structure of MM Spa is preferable to the non-transparent financing construct of the Tideway Tunnel. Additionally, with respect to the responsiveness criterion, the "rolling" development and funding solution in Milan seems more advantageous than the ring-fenced technology-led solution in London.

#### **4. Discussion**

London's individual infrastructure case shows how the implementation of a marketbased strategy skews the selection of actors and the resulting decision-making process towards an overly economically focused solution, that fails to address some of the longterm planning and financial risks. The viability of this strategy will only become known with time, the Milan case though provides some evidence towards the risks inherent in this strategy. Milan presents the longer-term perspective and the effects of past decisions in terms of path dependencies for the adaptation of the water system to future challenges. The process that was developed was informed by the complicated history of the case and innovative in the regard that it developed a process that involved a more balanced set of opinions and outlooks during the decision-making process than the previous case.

The application of the precautionary principle through the UWWTD has significant impact on urban development, particularly due to its skewed emphasis on triggering punitive measures without providing help for implementing precautionary measures (see [2]). Its application creates space for innovation with both potential for sustainable social innovation as well as unintended shifting of risks from environmental impacts towards long-term planning risks and economic vulnerability of cities. The examination of the cases further shows how the complexity of the water sector challenges good governance practices and how external pressures such as those instigated by the directives can lead to potentially undesirable reconfigurations. It is thus evident that the role of transparency and good local governance practices are essential for a successful implementation of precautionary measures in a city's water sector.

These findings speak directly to Koop and Van Leeuwen's key elements for good water governance ([14], see Table 1). Particularly the first element's emphasis on a shared long-term perspective (1) becomes evident and is further supported by the need for the involvement of all affected actors (2) and the acknowledgement of the complexity and long-term effects (3). As the Milan case has shown, better long-term solutions become viable when these measures are adhered to (4). In particular, the crucial role of financial innovation has been well documented in the cases (5).

As we have shown, it is not always possible to adhere to these principles, especially in a scenario where legal requirements push for immediate action on projects with significant long-term impacts. This often leads to more reactive and ad-hoc implementation of infrastructural solutions. This dynamic paired with the vested interests of certain actor groups in the water sector increases the risk of the creation of 'white elephants', that is expensive infrastructure assets that are more trouble in the long-run than they are worth in the short-term. The case of London provides a telling example of this dynamic. The case of Milan on the other hand shows how past experience and a pro-active use of the innovation aspect of the precautionary principle can foster an environment that achieves good local governance practices and transparent processes that not only help to avoid the creation of further white elephants, but facilitate the creation of a sustainable social innovation in the guise of the co-creation of financial strategy development between utility and city.

Triggering and applying the precautionary principle requires a series of science-based risk assessments [2]. How these should be commissioned and interpreted is politically and legally underdetermined. In this respect, reference can really only be made to the more developed policy advice of risk and technology impact research. Stakeholder inclusion, modeling anticipation and systemic consideration of reversibility have become standards in this field [29,30].

What remains is that the precautionary principle's impact on European cities by means of the WFD and its daughter directives is immense: while triggering the principle is relatively easy for cities, implementing the precautionary measures necessary for fulfilling its obligations is not (see [2]). The repercussions of these impacts are not yet fully explored, especially when it comes to the aspect of innovation. We here have provided some evidence towards the instigation of a social innovation in the financial frameworks of water infrastructure development in the case of Milan.

**Supplementary Materials:** The following are available online at https://www.mdpi.com/article/10 .3390/su13169130/s1, Table S1: Documents and interviews.

**Author Contributions:** Conceptualization, F.-J.G. and H.A.M.; methodology, F.-J.G. and H.A.M.; investigation, F.-J.G.; writing—original draft preparation, F.-J.G.; writing—review and editing, H.A.M.; visualization, F.-J.G.; supervision, H.A.M.; project administration, H.A.M.; funding acquisition, H.A.M. Both authors have read and agreed to the published version of the manuscript.

**Funding:** The RECIPES project has received funding from the European Union's Horizon 2020 research and innovation programme under grant agreement No. 824665.

**Informed Consent Statement:** Informed consent was obtained from all subjects involved in the study.

**Conflicts of Interest:** The authors declare no conflict of interest. The funders had no role in the design of the study; in the collection, analyses, or interpretation of data; in the writing of the manuscript, or in the decision to publish the results.
