By Alvise Lennkh-Yunus, Giulia Branz and Alessandra Poli, Sovereign Ratings

Delays in implementing projects using funds from Italy’s EUR 191.5bn Recovery and Resilience Facility (RRF), equivalent to a weighty 10.8% of 2021 GDP, are a growing risk to the outlook for economic growth which is critical to sustain the country’s high public debt burden and maintain its BBB+/Stable credit rating.

So far, Italy has met all the milestones and targets required to receive planned funds from the European Commission of EUR 67bn. These disbursements were conditional on implementing judicial, public administration and competition reforms. An additional EUR 37bn will be unlocked this year if the planned 43 milestones and 53 targets are achieved.

However, the government spent only EUR 5.5bn in 2020-21, well below the original plan of EUR 18.5bn, while 2022 spending amounted to EUR 15bn compared with an originally expected EUR 28.7bn. The slower-than-expected implementation of investment projects is likely to challenge the government’s expectation of increasing Italy’s public investment ratio to 3.7% of GDP by 2025 from 2.5% of GDP over 2010-20 compared with an EU average of 3.1%.

Slow progress in deploying approved EU funds could also jeopardise future EU disbursements as these will increasingly depend on the government’s ability to deliver on investment projects (mostly ‘targets’) rather than on implementing reforms (mostly ‘milestones’) (Figure 1).

Figure 1: Distribution of recovery plan milestones and targets for Italy, 2021-26

Source: Italia Domani, Scope Ratings

To be sure, low disbursement of received EU funds to date is common among some of the largest beneficiaries of RRF funds, including Greece, Portugal, Spain and Croatia, given the energy crisis, higher raw material costs, and supply-chain disruptions. This may result in the EU granting additional flexibility regarding the timing and project selection for recovery plans across EU member states.

Still, in Italy, spending delays are common, as captured in Italy having the third lowest absorption rate of the European Structural and Investment funds at 60% per 2022 for funds allocated over 2014-20, only ahead of Slovakia (59%) and Spain (54%) and well below the EU average of 75%. This reflects the lack of technical expertise in public administrations, together with slow adaptation to fast-tracking procedures to plan and tender projects.

The risk of under-delivering has led the Italian government to call for a postponement of the 2026 deadline of spending RRF funds. Infrastructure projects worth around EUR 40bn are at risk of not being implemented by 2026 and funds not spent over 2020-22 have been reallocated over 2023-26, further increasing likelihood of delays.

Local authorities play a crucial role in next phase of recovery plan

The problem looks particularly acute at the local level. Italy’s regions, provinces, municipalities, metropolitan cities and other local entities have a crucial role to play in implementing the wide-ranging investments planned under the recovery funds, managing around EUR 66bn in total. More than half of these resources (EUR 40bn) will be assigned to and directly managed by municipalities, making them the primary “implementing bodies” for the plan’s projects.

A comprehensive overview on the implementation status of individual investment projects in Italy or the EU as whole is not yet available, though preliminary data shows that Italy’s municipalities have presented about 70,000 projects as of end-2022, valued at EUR 29.5bn, out of the total EUR 40bn assigned to them (Figure 2).

Figure 2: Reported projects and share of Recovery and Resilience funds for Italian local authorities
Number of projects (LHS), % of Recovery and Resilience funds so far assigned to municipalities (RHS)

Source: Ministry of Finance, IFEL, Scope Ratings

However, local authorities, particularly in the southern regions which are set to receive at least 40% of the funds, are facing significant challenges in executing tenders and receiving third-party authorisations. Cost savings in the past decade have resulted in personnel cuts of almost 30% in the municipal sector and contributed to an ageing workforce of civil servants – average age above 50 – constraining local administrations’ ability to adapt to new technologies and procedures.

These challenges are at the heart of Italy’s decade-long governance and productivity bottlenecks. The government is thus trying to strengthen local administrative capacity by simplifying bureaucratic and hiring procedures and encouraging the recruitment of external firms and consultants for technical assistance among other initiatives.

Sustaining these efforts is indispensable for the successful implementation and future maintenance of investment projects over the coming years to ensure a lasting contribution to Italy’s economic growth and debt sustainability. Moreover, the successful delivery of Italy’s sizeable recovery plan is important to foster trust among EU member states for any future discussions on EU-wide fiscal policies and frameworks.