Italy’s draft budget as it stands is a collection of budget-busting campaign giveaways that will do little to support growth or fix Italy’s crumbling roads, bridges and schools. No wonder the EU is threatening financial penalties.
“As a political budget, most of the points were part of the manifesto that the new coalition government was elected on, so it was not a surprise,” says Nicola Beretta Covacivich, global head of infrastructure investments at Santander Asset Management in London.
The budget doesn’t exactly ignore infrastructure, which was thrust onto the national agenda after the collapse of the Morandi Bridge in Genoa last August. But it also includes €10bn for a program to provide temporary incomes for people looking for work and €7bn to fund early retirement programs. Beretta Covacivich believes that these populist policies won’t renew growth and instead will cause the budget’s additional spending on infrastructure to fall far short of what’s needed.
After suffering a triple-dip recession since 2008, Italy desperately needs to invest in growth if it is to have any hope of paying down its colossal public debt, which totals 131 per cent of GDP.
There are very strong macro-economic reasons for Italy to focus narrowly on infrastructure. Historically, the fiscal multiplier that results from these investments creates enormous value for the economy. In the short-term, new jobs provide incomes, get money circulating and boost tax revenue. Longer-term, the assets that are delivered – modern roads, railroads or better schools – boost productivity and attract new investment at home and from abroad.
There’s also an enormous amount of European multilateral and private sector funding available that could leverage government investments, allowing infrastructure to have a meaningful impact on Italy’s economy.
One useful model for tapping the private sector to finance public infrastructure projects is through competitively tendered Public Private Partnerships (PPPs), particularly where they qualify for European Investment Bank (EIB) financing. In addition to providing expertise and risk management, the EIB can provide funding for up to 50 per cent of a project, which takes much of the upfront cost burden off the government.
In 2017 alone, the EIB provided €18bn to support infrastructure projects, including PPPs. Yet Italy has barely used this facility. According to the EIB’s European PPP Expertise Centre (EPEC), between 2008 and 2017, Italy used EIB funding for only eight transportation projects for a total value of €8bn. France, which sits near the top of Europe’s transportation infrastructure quality index, has used EIB funding for transport infrastructure 32 times during that period for a total of €14.9bn.
Beretta Covacivich says that EIB support is essential to attracting private funding for infrastructure. But it isn’t automatic. “Those European funds come with stringent conditions, backed by legislation,” he notes. PPPs undertakings also require a lot of time to tender, evaluate, and finalise. Even countries with well-established PPP programs, such as Canada, require a process that averages between 16 and 18 months.
That is time that Italy’s government may not have. So nearer term solutions are likely to rely on ‘shovel-ready’ projects such as emergency repairs on existing infrastructure.
One idea that is under consideration is for the government to offer a 50-year-plus interest-free second lien mortgage bond to the owners of second properties. This is designed to cover future flat taxes that are due annually on those homes, and would give households greater flexibility around their future tax obligations, including the option to simply roll the tax liability into the price of the property when they sell.
The government for its part would be able to transfer a substantial piece of the public debt, perhaps as much as 20-30 per cent, off its books.
Beretta Covacivich acknowledges there are risks in forfeiting future tax receipts in favour of near-term investment, but he warns: “Italy needs some extraordinary measures to unlock cash flows that are currently being used to pay interest on the debt.”