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Risks and uncertainties

In order to allow for greater transparency of the information disclosed, this report evidences the main risks detected from the evaluation and analysis on the part of the Group's management:

Risks related to the increase of the degree of competitiveness of the markets in which Ansaldo STS operates

The Signalling and Transportation Solutions markets, where the Group operates, are marked by rapid technological change and by a high level of business competition mostly among a limited number of great international industrial groups with size and financial resources that are significantly greater than those of the Group. In this regard, Ansaldo STS believes that one of the key factors to contend with competitors is technological innovation and a continuous focus on the efficiency of planning and realisation. In this regard, the Group's policy envisages constant investments in R&D activities, aiming at offering innovative high-technology products paired with projects for improving efficiency. The above does not exclude that in the future the Group may not be able to carry on this investment and innovation policy in a different way from its competitors. This, together with pressure on prices generated by the entry of new market participants, could lead to the deterioration of the Group's market position and consequent adverse effects on its activity, earnings, capital and financial position. In view of this uncertainty, the Group has defined a strategic plan on which the 2009-2012 guidelines supplied to the financial market are based; the plan is focused on market opportunities and on more efficient and integrated management of the Group.

Risks related to the international dimension of the Group's activity

The Group exercises its activity in different countries with a strategy aimed at intensifying its presence in international markets. This strategy, however, exposes the Group, in certain countries in which it operates or in which it intends to operate, to certain risks, including the risk of political, social and economic instability, hyper-inflation, changes in local regulations, difficulties in protecting intellectual property, fluctuation of exchange rates, and creditworthiness of counterparties. Such international expansion strategy, together with a dependence on customers subject to specific regulations or whose activity is conditioned by the policies of the state or public administrations or entities, exposes the Group to risks connected with the change in such regulations or policies, both in Italy, and in others countries, with consequent higher charges or limitations on its activity. In order to mitigate such risks, the Group maintains continuous analysis of the situation of the different countries in which it operates, through the stable presence of subsidiaries and with the support of local partners and consultants. The processes for bidding and managing long-term contracts take into account the aforementioned risks. The close working relationships that the Group manages to develop with public authorities that govern or influence the sectors of the Group's activity make it possible to monitor the risk related to regulatory changes.

Prospects for the financial markets and economic trends

The financial markets crisis that began in the final months of 2008 and the uncertainties stemming from it with regard to the performance of the financial markets and the global economy entail risks for the Group with regard to the eventuality of contract cancellation or deferral, possible payment delays, less favourable financial conditions for new contracts, and more restrictive policies on the part of banks for the granting of guarantees. The Group has nonetheless a solid capital and financial structure such as not to require external financing; it also has a significant order backlog equivalent to roughly three years of production. With this capital and financial solidity, the Group is able to tap bank guarantees without significant difficulties. With reference to new contracts, the demand for less favourable conditions for the Company and for the Group companies will need to be negotiated with attention, maintaining as a reference the Group's parameters for the contract's creation of value. In addition, the risk of contract cancellations or deferrals, as well as the risk of payment delays are less significant in the case of customers of a public nature since the state authorities in many countries are committed to policies to support the economy in order to moderate the current recession. The economic support policies of major countries may conversely turn out to be an opportunity for the Group, given the significant infrastructure investments included within the framework of such policies.

Risks related to dependence on important long-term contracts

Operating as technological systems experts in the rail and metro transport systems and in the complex technology of signalling, the Company and the Group are active in businesses largely dependent on long-term contracts involving significant amounts. Any interruption or cancellation of one or more important long-term contracts may adversely affect the business and the earnings, capital and financial position of Company and of the Group companies. Such contracts are significantly concentrated with a few large customers, in several companies of the Group, even though less significant at a Group level. The risk therefore that large customers, in particular, customers in the public sector and whose spending programmes thus depend on public financing, revise or cancel their spending programmes has a lesser impact at a Group level and is monitored by risk management processes both during the bid phase and during the execution of the project. The diversification of the markets and the monitoring of country risk and compliance risk make it possible to mitigate the risk. The risk of business concentration with a few large customers, to the extent in which it exists within several companies of the Group, is monitored by risk management processes both during the bid phase and during the execution of the project.

Third-party risks (subcontractors, suppliers and partners)

In carrying out its activity, the Group makes use of third parties, including subcontractors for producing, assembling and testing part of the Group's products, and suppliers of raw materials, semi-finished goods, sub-systems, components and services. The Group's capacity to meet its obligations with respect to contractors is thus subject to the proper fulfilment of contractual obligations on the part of both subcontractors and suppliers. Accordingly, should the aforementioned subcontractors and suppliers be partially in default with respect to Ansaldo STS, supplying the latter with products and/or services at times other than those agreed or products and/or services that do not have the quality requested or that are defective, Ansaldo STS could, in turn, end up in default or cause damage with respect to its contractor. In such circumstances, Ansaldo STS could be the target of damage claims on the part of the contractor, without prejudicing its right to seek recourse with respect to the subcontractors and suppliers, to which could be added possible negative effects in terms of reputation. If Ansaldo STS were not to be able to exercise the right of recourse to transfer the entire damage claim to the aforementioned parties, the events could have negative effects on the activity and on the earnings, capital and financial position of the Company and of the companies of the Group. Each company of the Group plans and executes contracts on its own, or in association with other market participants. In the latter case, each party is generally jointly and severally liable to the contractor for the planning and execution of all of the work. Were a participant in the association to default or cause damages with respect to the contractor, the Company or the companies of the Group could be called on to substitute the defaulting or damaging party, and to pay all damages accrued by the contractor, without prejudice to the right of recourse with respect to the defaulting association participant. The inefficacy or the protraction of recourse actions with respect to the association participants in default or responsible for possible damages could negatively affect the activity, earnings, capital and financial position of the Company and of the companies of the Group. These risks are mitigated by the Company's selection of qualified subcontractors and suppliers, by working relationships with partners already known and with proven reliability, by the definition, execution and management of suitable contractual and group clauses, by risk management processes, and if applicable, the requirement for special guarantees.

Risks related to legal proceedings

The complexity of the relationships with third parties (customers, subcontractors/suppliers and partners) and of the content of the systems and products produced, and specific business risks expose the Group to a significant risk of legal disputes. Legal disputes may also regard orders for the adjudication of the tenders. Despite the existence of rigorous risk management processes during both the bidding phase and the operational phase, and the adoption of a prudential approach in the recognition of reserves for project risks, the risk arising from legal disputes could be manifested, thereby causing delays in the execution of the contracts, with negative effects on the activity and on the earnings, capital and financial position of the Company and of the companies of the Group. Risk management processes during both the bidding phase and the operational phase, the careful checking of contractual clauses with the support of legal counsel, and the adoption of a prudential approach to recognising reserves for project risks contribute to mitigating this risk.

Risks related to the need to finance a high level of current activities

The planning and execution of contracts by the Company and the companies of the Group requires an adequate level of financing of current activities. The Group generally finances such activities through the sums paid to it by the contractor in the form of advances and in the form of payments related to the state of completion of the works, and through centralised treasury management. Possible difficulties in negotiating suitable financial conditions, delays and/or interruptions in such payments, and changes to make the payment terms worse than those agreed are situations that could negatively affect the earnings, capital and financial position of the Company and of the companies of the Group. In addition, the Group's organisation in many operating companies could limit the inflow to Ansaldo STS of the cash generated by those companies because of regulatory or tax limitations, due to the companies' financial needs or other factors. A commercial/operational policy for the contracts attentive to financial aspects and centralised treasury management are factors that contribute to mitigating this risk.

Risks related to Ansaldo STS' capacity to secure guarantees

The nature of the projects of the Company and of the companies of the Group requires the release of banking and/or insurance guarantees in favour of the contractor during various phases of the projects (bid bonds, advance payment bonds, performance bonds, retention money bonds, and warranty bonds) and/or guarantees released by the Parent company. The capacity to secure such guarantees at economical conditions depends on the assessment of the earnings, capital and financial position of the Company and of the companies of the Group. In particular, this capacity is generally linked to different valuation indicators, including the analysis of the earnings, capital and financial position of the Company and of the companies of the Group, the analysis of the contract risk, and the experience and competitive positioning in the sector of reference. Ansaldo STS believes that it respects the pertinent valuation indicators. Should this capacity to secure guarantees at economical conditions disappear or diminish, there would be negative effects on the Group's activity, earnings, capital and financial position. At 30 June 2009 the Group had exposure for guarantees equal to EUR 1,328,861 thousand. The earnings, capital and financial solidity of the Company and of the companies of the Group, together with the positive valuation indicators regarding the contracts (monitored during the bid process) and the Group's competitive positioning that can be evidenced are factors that contribute to mitigating this risk.

Risks in relation to liability to customers or third parties for defects in the products supplied

Possible design and production defects on the products of the Company and of the companies of the Group could generate civil and criminal liability with respect to customers and/or third parties. Even though the engineering and validation processes are carefully governed, in order to protect against this risk, the Group companies generally make specific provisions and take out specific insurance policies to cover any damages sustained by customers and/or third parties. Events not covered by the insurance policies that cause damages or events covered by the policies that cause damages in excess of the policy limits are events that could have adverse effects on the activity, earnings, capital and financial position of the Company and of the companies of the Group. In addition, the supply of defective products could require additional activities or the possible withdrawal of the products from the market. This eventuality could specifically occur in relation to new products for which the Group has not yet built up significant operating expertise. The costs that might be sustained in relation to the additional activities or to the withdrawal of the products from the market could negatively affect the Group's activity, earnings, capital, financial position and reputation. Cautious governance of the engineering and validation processes, monitoring of returns, together with the budgeting of appropriate reserves in the job-order costs and specific policies to cover damages possibly sustained by customers and/or third parties are factors that contribute to mitigating this risk. The company and the Group are also exposed to financial risks – market (exchange rate and interest rate), liquidity and credit risks : please refer to the related paragraph in the explanatory notes for a description of the same risks and of the risk management processes.