Tuesday,
January 22, 2008
Investing Obstacles in Italy Slow
Growth
To
Americans interested in investing in Italy, it
seemed that they had got out on another planet, full of enemies and with traps
everywhere. A four dimensional obstacle course
It may
only be the desire to maintain the "charm" of Italy, which means
supporting the local proprietor, and eschewing chain and or mega stores, in
contrast to countries such as the UK where urban centres
can tend towards a dreary sameness, which is either purposefully being abetted,
or unconsciously aided by:
1.
The environment is "unreliable" in that there is Excessive
Bureaucracy, and High Taxes
2.
There is a Proliferation of Laws and an extraordinary Slowness of the Civil
Judiciary. Many of the regulations are overlooked and then they are selectively
applied. In a morass of rules, not all of which are applied to everyone in the
same timeframe, you run the risk that someone will find a regulation which they
want to apply in order to keep you out.
3.
Different levels of government - state, regions, provinces, cities - without a
clear definition of which one has jurisdiction.
4.
National Government adverse to Non Italians owning Italian Utilities.
Some
might call it "Obstruction" , others a
"Challenge" :)
Not fast enough: Why investing in Italy is 'like
driving with the brake on'
In Italy,
no dry numbers are needed to see what is glaringly not there. Just tour a town
centre, where local businesses sell chocolates made on the premises, family-run
bars have signature pastries to purvey and handmade shoes are sold by leathery
old men. Mostly absent are chain stores, corporate uniforms and, in particular,
global retail names above the door.
What
happens if you want American-style fast food? There is not one KFC in Italy. There
are only 37 Burger Kings compared with more than 400 in Spain and over 500 in the UK. Even
McDonald's at one point came close to bricking up its Golden Arches.
Mario
Resca, until last year the chairman of McDonald's in Italy, says its executives were near to pulling
the US
group out when he took on the job and became a joint venture partner in 1995. "In 10 years they had managed to open 20 lossmaking restaurants." In a book he co-authored, Mr Resca writes: "To the
Americans it seemed that they had got out on another planet, full of enemies
and with traps everywhere."
Of
course, what to the McDonald's missionaries seemed hostile terrain is to many visitors and residents one of Italy's greatest charms: every town is
different, in contrast to countries such as the UK where urban centres
can tend towards a dreary sameness. Mobile-mad Italy shares only the countless
phone shops.
Although
McDonald's now has a profitable network of 360 outlets in Italy, along
the way it battled bureaucracy, anti-imperialism and corruption. Not all
multinationals are as doggedly determined: the lack of foreign investment
stretches across the Italian economy. As Romano Prodi's
government this week battles confidence votes in parliament and strife in its
shaky coalition, incumbent or aspiring ministers might reflect on links between
the lack of foreign investment and the comparatively slow growth of the Italian
economy. Certainly, whether the country's political or business culture or
legal framework can be blamed, high-profile investment projects have a
persistent habit of falling apart.
AT&T
last year pulled out of an investment in Telecom Italia, citing political
interference from the government, some of whose members expressed the wish that
the country's biggest telephony provider should stay in Italian hands. The
proposed merger between Abertis of Spain and Italy's Autostrade was scrapped amid an unforeseen rewriting of
laws governing toll road concessions. Australia's
Macquarie fell out with its Italian partners over a highly-charged investment
plan for Rome's
airports.
Now,
the UK-based BG Group is launching a new effort to resurrect its stalled Euro
500m ($728m, #373m) gas terminal project in the southern port of Brindisi, five years after it was granted permission to
build the plant, which Italy desperately needs to meet energy demand (see
below). A combination of local opposition, disputed criminal proceedings and a
complex overlap of jurisdictions last year caused permission to be suspended
and construction work to stop.
Some
people have no doubt that the business and political environment acts as a
deterrent. Ronald Spogli, US
ambassador in Rome,
wrote a ferocious letter to the Corriere della Sera
newspaper after AT&T abandoned its bid for a stake in Telecom Italia.
"You should concentrate less on who wants to invest and more on the fact
that Italy is last in Europe in terms of economic growth," he told
Italians, warning: "Investments are not made where they are not welcome,
where the rules of the market can be changed continuously."
Preliminary figures from the United Nations
Conference on Trade and Development show a collapse in new foreign direct
investment in Italy
just when such inflows elsewhere in the European Union have been booming. Unctad
estimates that investment into the EU as a whole grew 15 per cent to $610bn
(#313bn, ?419bn) in 2007. But Italy, the world's sixth largest economy, is not
receiving its share: inward investment fell 28 per cent from an already low
$39bn to $28bn. Investment into France
grew by more than 50 per cent to $123bn.
Italy is also missing indirect
investment. According to Federation of European Securities Exchanges data for
2005, the latest available, Italy
had the smallest percentage of foreign ownership, at 13 per cent, of any stock
market in Europe. The country lags its peers
in private equity and venture capital activity too. Mr
Resca, who works often with foreign private equity
groups, says: "They are in principle very interested in Italy . . . But
they always realise they lose a lot of time going
through the political system."
Alessandro
Daffina, head of Rothschild in Italy, told the newspaper Il Sole 24 Ore this month he doubted that sovereign wealth funds
would go to Italy.
"The system is unfortunately never that attractive. Excessive bureaucracy
and a slow judiciary weigh heavily. Above all, high taxes make [investors]
worry."
He
then cited an unnamed foreign group that had been ready to start a joint
venture, invest - 800m and create 500 jobs somewhere in Europe or the Middle East. It had "ruled out Italy because a
large consultancy judged the country to be unreliable". Speaking to the
Financial Times, Mr Daffina
says the group said the government "has no real power to impose decisions
and there is no guarantee the law will prevail".
Mr Spogli puts it only
slightly differently: "Many of the regulations are overlooked and then
they are selectively applied. In a morass of rules, not all of which are
applied to everyone in the same timeframe, you run the risk that someone will
find a regulation which they want to apply in order to keep you out."
That
raises the spectre of economic nationalism - from
which a number of Italy's
own top industrialists, whose businesses benefit from open markets abroad, are
keen to distance themselves. Sergio Marchionne, chief
executive of Fiat, cautioned in a speech late last year that Europe should not
fall "prey to certain protective mechanisms which are in use in many
countries and which especially in Italy can seriously threaten the
industrial recovery of the country".
The
automotive chief acknowledged that Italy did not always offer the
level playing field available to companies investing elsewhere. "In Italy these
conditions are not always so easy to find. That is part of the reason why there
is such a low level of foreign investment."
Paolo
Gentiloni, communications minister, says he does not
think Italian bureaucracy is impossible to wade through. He points to
home-grown companies such as Benetton as having shown it is perfectly possible
to build a chain of shops in Italy.
Some
sectors are indeed open. Mr Gentiloni
points out that notwithstanding AT&T's aborted effort, most Italian mobile
companies are in the hands of foreigners - the UK's
Vodafone, Egypt's
Orascom and Hutchison Whampoa of Hong
Kong. Telefsnica of Spain is now part of
a controlling shareholder group at Telecom Italia. Moreover, Mr Prodi's centre-left government
has taken a sword to many bureaucratic trade restrictions.
Mr Gentiloni accepts there
are still "different levels of government - state, regions, provinces,
cities - without a clear definition of which one has jurisdiction. There is a
proliferation of laws and an extraordinary slowness of the civil judiciary. If
you have a business disagreement, it takes so long to resolve."
As
Mr Resca puts it, complying
with the law in Italy
is like "driving with the handbrake on". He recalls: "It was
impossible for McDonald's to open new stores. They had local Italians as
advisers to help on planning and other permits but whose fees meant that
opening up any location was very expensive." In 1996 the company persuaded
an Italian chain called Burghy to sell its 80 venues
as a big step in building size.
McDonald's
made it through patience and, seemingly, the right partner in Mr Resca. He had 15 years as a
headhunter with Egon Zehnder
and good political connections - he was offered a cabinet post by Silvio Berlusconi, former prime minister. But other countries
appear an easier prospect for rivals. KFC says it is "extremely
interested" in Italy
but has "no immediate plans of opening". It has 52 stores in France and
plans to double that tally over three years.
In
the case of food, then, is it simply that Italians' preference for their own
cuisine is stronger even than that of the French? Given McDonald's success,
that seems unlikely. Burger King says it will grow in Italy "as quickly as prudently
possible" and there are "no material differences which restrict growth
in Italy".
Other
consumer sectors are drawing foreign interest. Ladbrokes of the UK is in the
middle of an initial investment of ?100m aimed at
opening 60 betting shops and another 50 smaller betting locations in places
such as cafes. The company was given licences to run
these outlets by the government in 2006 - as long as they open by September.
It
has so far managed to open just 17 shops and four smaller outlets. Finding
appropriate property is an issue. There are strict restrictions on not siting outlets near existing betting shops. Russell Thorpe,
chief operating officer in Italy,
says: "Site finding can be difficult in some areas due to the legislative
requirements of the tender. This is very different from the UK, as are some
of the other legal applications that need to be made."
But
he is confident Ladbrokes will make it; dogged perseverance seems to be the
key. "Whilst progress was initially slow", Mr
Thorpe says, "we were learning".
http://www.msnbc.msn.com/id/22787614/
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