(April 21st, 2023)
By (Barbato Emmanuela Gioia, Equity Analyst)
Edited by (Ascanio Cicogna, Head of Research)
Introduction: Let’s take a closer look
After the UE directive 2018/844 of the European Parliament and the European council about energetic efficiency applied to the construction industry, the previous Italian government led by Giuseppe Conte (on his second proxy), on the 19th May of 2020, decided to abrogate the Superbonus 110%, which was intended as an incentivizing method to boost technological innovation together with the construction industry, that experienced a major crisis during the COVID-19 pandemic. Nonetheless, the government strategy is broadly criticized, because of its turnover as a strongly distortive and inflationist measure. Let’s see why.
Overview: What is the Superbonus?
As was stated above, the Recovery Decree approved by the government envisaged a 110% deduction of all expenses incurred for the individuals who were eager to improve not only the structural part of their property, but also the energetic one. The tax deduction was applicable to works initiated from July 1st, 2020, all the way to June 30th of 2022; however, the 110% tax deduction was only achieved by those who completed 60% of the work before June 30th of 2022.
Moreover, the bonus is mostly issued among natural persons, with some restrictions, but also by condos, the “Autonomous Institutes of Popular Houses”, few third sector entities, and amateur sports associations and societies. It, indeed, envisages some substantial changes; among others, the switch of two classes of energy of magnitude. Consequently, it is often referred to as the “eco-bonus”.
Were any of the requirements missed or less than 60% of the work finished by the deadline stated above, the bonus would no longer be applicable. In particular, the reimbursement of the expenses incurred can be obtained in 5 years as a tax credit that could be transferred to the company which took charge of caring out the work, then the latter could obtain an immediate discount on the invoice or to a bank or a financial intermediary to liquidate it immediately, of course subject to the fees by the transferee.
Hence, one might imagine all roses and violets, basically a win-win situation where citizens could improve their properties, reduce energy waste and increase their patrimonial wealth, while companies could increase their in-flows, and at the same time increase employment opportunities, and increments of the GDP.
Not quite so.
What were the difficulties?
The subject matter of the article was therefore seen by the collective imagination that was not involved in the sector, as the mythical instrument to renovate one’s house without cost; however, the costs faced after the introduction of the eco-bonus were more than expected.
First, as soon as the measure was taken into practice, there was an increase in demand for materials and labor force to perform the necessary energy improvements, which caused scarcity and higher prices of both. Not to mention the fact that, as stated above, the financial requirements were financed with debt. That is why I would dare to make comparisons between the Italian current scenario and the American pre-crisis period of 2008.
It is true that a higher demand could lead to the spread of costs among the whole production chain; however, the taxes imposed are generally paid on profits, thus it is not certain that these, even if they include the VAT collection, are sufficient to cover the payment of the bonus, as is happening. As a matter of fact, the response of the current government was the suspension of the credit until 31st December 2023 (still subject to change of date).
Second, the bureaucratic tier that one must undergo to get the credit is hideous. The idea behind Conte’s maneuver was just to give a little push to the industry, so that a natural increase would have followed; hence, he “engineered” this tortuous procedure that almost made the request impossible to pursue. Given a later slimming down of that matter, Italy was subject to plenty of fiscal frauds, and that is why nowadays it is only possible to pass the credit just once; however, the loss that the Italian government still bear in terms of monetary funds are not to be taken lightly.
Is it only a disastrous measure?
Differently from what was stated above, the idea behind the Superbonus was not to condemn, and that is why after Giuseppe Conte’s end of proxy, his follower Mario Draghi decided not to abolish it, since it would have brought more costs than keeping it alive. Rather, he changed some of its features.
There is hope for Italy: after the Pandemic, it has become one of the leading EU countries in terms of development, thanks to the construction sector of the economy which accounted for over a third of the +6.5% GDP growth in 2021.
Throughout that year, the much-discussed industry reached 22% of Italian GDP; the investments have increased by +16.4%, which was influenced by an increase in production by +24.3%, employment rate by +11.8% and worked hours by +26.7%. Still, more needs to be improved to regain the loss of -28.8% with respect to 2007 (60 billion less). There is an undeniable correlation between the two phenomena: the turnover connected to tax incentives in the first eleven months of 2021 increased by 43.4% and the Superbonus 110% registered 107,588 interventions that amount to 18.3 billion euros.
Figure 1: Investments in construction industry by branch in 2022
Source: Ance
Figure 2: Investments in construction (estimates for 2023)
Source: Ance
Figure 3: Unemployment rate 2022 (July)
Source: Istat.
Figure 3: Public expense expectations
Source: Italia DEF 2022 (Apr. 22) and NADEF 2022 (Sept.22)
Conclusion: Summary
Although there has been an increasing number of investments in the construction industry, Italian banks still consider it high-risk sector, given the high demand and cost of material, together with the risk of frauds and the difficulty to increase the government deficit. Moreover, the fundings that were required in order to proceed with the practical work still won’t arrive. The reasons are many, but mainly it is because no one is eager to buy bonds anymore: the damage that was evoked by debtor’s frauds burdens creditors with property mortgage; trust is the key word missing. Nonetheless, some banks that are starting to re-open their credit assignment with limitations, such as payments not greater than 600,000 euros per project. In addition, the Italian government was one of the few that asked and was accepted for the third installment of the RSI (European recovery fund), which increased Italian debt.
Today, the Italian chamber has approved the decree law for the reopen of the credit assignments; hence, Italian engineers and entrepreneurs are currently waiting for their destiny to be decided by the Senate (yes, Italian procedures take that long).
Potential Investment: Should we say yes or no?
Finally, the hottest reason why the reader has clicked on the link and read this article: what is the investment opportunity that derives from the eco-bonus analysis? Against all odds, the current financial situation carried out by the general inflation has slowed down the investment domino. As a matter of fact, there’s a tense atmosphere given by the uncertainty regarding the Italian capacity to handle the high number of debts not only towards individual creditors, but also the ECB for the Italian PNRR (National Recovery and Resilience Plan).
After careful consideration, the suggestion is to wait for a better understanding of future movements of Italian governors, even though there is not a large negative expectation for the construction sector.
Citations:
La Nota di Aggiornamento del Def (NADEF) 2022 - Politica Economica e finanza pubblica (2022) Documentazione parlamentare. Camera dei deputati. Available at: https://temi.camera.it/leg19/temi/la-nota-di-aggiornamento-al-def-nadef-2021_d.htmlReference, (Accessed: April 21, 2023).
Bollettino di Legislazione Tecnica, Legislazionetecnica. Available at: https://www.legislazionetecnica.it/ (Accessed: April 21, 2023).
Ansa - ance ANSA. agenzie_Osservatorio. Available at: https://ance.it/wp-content/uploads/allegati/agenzie_Osservatorio.pdf (Accessed: April 21, 2023).
Il settore delle Costruzioni nel 2021: Investimenti, produzione e occupazione. I Dati dell'ance (2022) Ingenio. ANCE Associazione nazionale costruttori. Available at: https://www.ingenio-web.it/articoli/il-settore-delle-costruzioni-nel-2021-investimenti-produzione-e-occupazione-i-dati-dell-ance/ (Accessed: April 21, 2023).
Legal disclosure:
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