* Constitutional change difficult to achieve
* Business leaders say red tape holding back oil, gas deals
* Powers of local government hold up permits
By Stephen Jewkes
MILAN, Nov 20 (Reuters) - Fed up with a Byzantine bureaucracy that is scaring off foreign investors, Mario Monti's technocrat government has proposed changing Italy's constitution to hack through a tangle of local veto powers that have been stifling infrastructure projects.
Getting permits to build badly-needed power plants, roads and tunnels in Italy can require a nod from 30 different local and regional entities, eating up time and money and prompting some investors to abandon projects.
This month Royal Dutch Shell became the latest foreign investor to pull the plug when it dropped plans to build a large liquefied natural gas (LNG) plant in Sicily after seven years spent on paperwork.
And earlier this year UK gas producer BG Group threatened to shelve plans to build another LNG plant, this time in Puglia, after failing for 11 years to obtain all the necessary permits despite lobbying by former premier Tony Blair.
To stem this worrying trend, Monti aims to change a constitutional clause that delegates wide powers to Italy's regions, provinces and even tiny towns in matters of permits for energy and infrastructure projects.
"Let's just say things as they are... could tempt a foreign operator to seriously think of moving investments elsewhere," says Fabio Bocchiola, who heads the Italian unit of Swiss energy group Repower.
The company is still awaiting permits for a project to build a coal power plant in Calabria it filed for back in 2008.
"It's not so much the rules as how they are applied - they often get interpreted differently, creating a climate of uncertainty that is not conducive to investors," Bocchiola said.
Paolo Scaroni, head of Italy's oil major ENI, said Italy still has much to offer in the way of domestic oil and gas production, but the potential will amount to little without change of the sort Monti is proposing.
"Italy can give a lot and it's worth it," Scaroni told the newspaper Corriere della Sera in October. "But I feel if (the constitution) is not changed it's just a lot of talk for nothing."
Although investors are welcoming Monti's proposal, getting the draft bill approved before general elections due early next year will be a challenge as constitutional reforms require four staggered votes in parliament.
"I don't think it's doable short term. It's uphill all the way with the government's mandate coming to an end. The regions will also find it difficult to take a step back," says Massimo Orlandi, CEO at Italy's biggest private energy group Sorgenia.
Corruption and organised crime have long kept investors at bay but for the World Bank it is chronic red tape that's put Italy behind Botswana or Fiji as a place to do business. Even though Italy's overall standing improved last year, it still ranked 103th in the world for dealing with construction permits and 160th when it came to enforcing contracts.
Besides a complex administrative structure, strong local powers have also favoured a widespread "not in my backyard" or "nimby" sentiment, with small towns often rejecting or blocking a project deemed of national utility.
The Bank of Italy estimates delays in the logistics field alone cost the country 40 billion euros a year. And the 180 billion euro investments Rome hopes to attract under a new energy plan will depend on streamlining the granting of permits.
While many agree simplification is the order of the day, not everyone thinks constitutional reform is the way to do it.
Loredana Capone, in charge of economic development in the southern region of Puglia, says it is important to engage local communities when it comes to big infrastructure projects.
"It's crucial to build a consensus. Otherwise people will go to the courts or take things into their own hands," said Capone, whose region hosts some of Italy's biggest power plants.
Failure to win over grassroots opposition prompted clashes with demonstrators that dogged the building of a 15-billion-euro high-speed rail link between France and Northern Italy agreed back in 2001.
Entrepreneurs say Italy badly needs to upgrade its ageing infrastructure to boost productivity and cut energy prices. According to business association Confcommercio the infrastructure gap with Germany has cost Italy some 142 billion euros over 10 years.
Monti's government has so far done little to lift the burden on business of red tape at a time when the euro zone crisis has sent borrowing costs ballooning and unemployment higher.
Specialised think-thank Nimby Forum says that in the year since Monti took office the number of public projects held up has only grown.
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