The Italian job

At the beginning of lauded 1960s movie The Italian Job, a Lamborghini crashes and explodes in an Alpine tunnel. A bulldozer pushes the wreckage down a gorge just as a sharp-suited gangster steps forward to hurl a wreath into the abyss. Fifty years on, this scene could have neatly symbolised the Italian economy during the Global Financial Crisis.

At the famous end of the movie, a criminal gang huddled in a getaway coach is celebrating its theft of a haul of gold – just as the gold slides to the back of the coach, resulting in the vehicle balancing perilously over the edge of a cliff. This acts as a very useful symbol of the Italian economy as it is today.

Austerity measures have restored some sanity to the economy in 2013, but huge issues still remain with Italy battling high unemployment and slumping consumer demand as it seeks to drag itself out of recession. In truth, the Italian job today doesn’t look a whole lot easier than it did five years ago.

One perceived remedy to the on-going crisis is investment in infrastructure – a job creator and economy booster in the making. Hence, as rating agency Standard & Poor’s (S&P) noted in a report earlier this week, Italy has been making legislative changes designed to pave the way for institutions to help pay for an estimated €340 billion infrastructure financing requirement over the next seven years.

Among changes that were introduced last year, Italy streamlined its infrastructure procurement process, introduced a new form of public-private partnership (PPP) and allowed project companies to issue bonds to finance projects for the first time. This latter initiative is particularly significant, since Italian infrastructure has traditionally had a huge reliance on bank finance. Thanks to the restrictions on banks imposed by Basle III regulations, a shift from bank loans to bonds is an absolute must.

A snapshot of the Italian PPP market taken today would provide room for encouragement. The country’s BreBeMi motorway deal was the largest PPP to complete in Europe in the first half of this year, while the €2.2 billion Tangenziale Est Milano road concession is expected to complete by the end of the year. On the downside, both of these deals relied on bank funding – indicating that any significant transition in financing sources will not happen overnight.

Furthermore, these deals may be seen as outliers. S&P figures showed Italy’s PPP market as having been virtually non-existent in 2012 (though, to be honest, that applied to pretty much the whole of Europe with the exceptions of the UK, France and the Netherlands). Sceptics will point out that two deals don’t necessarily make a trend.

Moreover, when you canvass opinion about Italy from PPP investors – as Infrastructure Investor did this week – you find profound concerns being expressed about country risk, political risk and what one described as “business culture” risk (including the threat of contracts being undermined).

As Giles Frost, chief executive of London-based Amber Infrastructure, noted: “Italy was a big casualty of the Eurozone crisis which has been slowly recovering, but it has not progressed as far as Ireland in restoring confidence. Therefore, there is caution from those who invest on the basis of capital preservation and income generation.”

Investors stress that Italy still looks challenging for investors seeking lower risk, lower return opportunities. But they made the additional point that, for those seeking to spice up their returns in exchange for added risk, Italy just might be a decent bet.

All in all, optimism in Italy’s prospects – both in relation to the overall economy and its infrastructure – may not be entirely misplaced. And the country’s legislators deserve some applause for at least trying to create a more benign investing environment. It’s hard to escape the conclusion, however, that the Italian job appears daunting.