Focus on - Are we born or do we become explorers? Risks and opportunities in the portfolio strategy of Italian construction companies
Executive summary
The percentage of turnover generated abroad by Italian contractors has increased considerably in recent years, rising from 3 billion euro in 2004 (31% of the total) to 14 billion euro in 2016 (73% of the total). Besides intercepting an unprecedented and perhaps unrepeatable increase in demand by new markets (in a phase of crisis on the domestic side), the works portfolio of these companies has expanded above all in areas with high-risk opportunities and medium-high risk showing significant margins, as well as on contracts of considerable amount.
Italian companies have traditionally positioned themselves in markets that are often peripheral, but yet to be explored, partly overlooking the opportunities for growth offered by investments and infrastructures planned in developed and nearby countries. The top 15 countries for global construction investments, equal to 75% of the market, represent in fact less than 20% of the works portfolio of Italian companies.
We have classified Italian companies in this sector into three categories, based on the characteristics of their operations abroad: the “Christopher Columbus” that intervene in high-risk contexts, the “Amerigo Vespucci” that operate in medium-risk geographic areas and, finally, the “John Cabot” that compete in developed and more reliable markets. The latter are certainly a minority, while the Italian presence in countries which are strongly exposed to the volatility of international investment flows and still dependent on raw materials, remains high. Also geographic areas characterised by a relatively stable regulatory framework, credible public-private investment plans and good growth prospects remain unexplored and require, in some cases, system support to reduce entry barriers.
These considerations become even more significant if we consider that in 2017 construction investments showed a recovery also in developed markets, with a reversal of the growth trend of emerging markets, which went back below 60% of global demand. Within the framework of investment optimisation in these geographic areas, infrastructures show a higher resilience than other sectors. In this sector we often see the direct intervention of public entities and, to access the necessary financing, the sovereign guarantee of the country in which the work is carried out is needed. Therefore, it will be essential to keep the focus on the country risk of the geographic areas concerned, using the most appropriate protections.