The strait of Messina bridge: A bridge too far

Date: 22/11/03

The questionable economics of a grand Italian construction project

CLASSICAL mythology had it that monsters named Scylla and Charybdis lay in wait either side of the narrow stretch of water now known as the Strait of Messina. Soon, if Italian planners have their way, a modern monster will rise above the waves: a bridge linking Sicily to Calabria, the toe of mainland Italy's boot. With a span of 3.3km (2.1 miles), it will be by far the world's longest suspension bridge. Its supporting towers will be 383m high and the bridge will have to be more than 60m wide to be stable. The cost of building it is also gargantuan: €4.8 billion ($5.7 billion). The government expects work to begin in spring 2005.

Such an enormous bridge will need solid physical foundations: an earthquake razed Messina in 1908 and fears of seismic catastrophe persist. And its economic underpinnings? According to Marco Ponti, an appropriately named professor of transport economics at Milan's Polytechnic university, these are decidedly shaky.

Mr Ponti thinks that the cost of the bridge has been underestimated: international experience points to average overruns of around 30% on such schemes, which tend to be driven by politics not economic logic. Even by these standards, most schemes are sounder than the Strait of Messina bridge. The bridge between southern Sweden and Denmark at least creates an extra link from a biggish economy to the main body of Europe. “Sicily is at the end of the line and its economy is small,” Mr Ponti notes. Even in 50 years' time, he thinks, there will not be enough traffic to make the bridge pay.

Long-distance passengers to and from Sicily travel by air and will doubtless keep doing so. For other traffic - goods and short-haul passengers - ferries will continue to provide stiff competition. Every day ferries carry about 5,000 road vehicles each way across the two-mile strait between Messina in Sicily and Villa San Giovanni on the mainland. Those operated by the Italian state railways carry trains as well. Vincenzo Franza, managing director of Caronte & Tourist, a Messina company which takes 80% of the vehicle traffic, says that his firm's revenues from this are about €60m a year, out of a total market he estimates at €140m.

The firm will lose traffic when the bridge is built, says Mr Franza, but its 500 employees are unlikely to lose their jobs. Trains will use the bridge; but he thinks that the ferries will keep a large slice of the car and lorry traffic, partly because local traffic will not make the long journey out of Messina to the bridge and partly because Caronte & Tourist could cut fares and still make a profit. In any case, the ferry will have to stay because strong winds are expected to cause the bridge's closure on at least 15 days a year.

Ferries between Messina and Villa San Giovanni will be only part of the competition. About 60% of goods leaving Sicily head for destinations north of Naples, 500km by road from Villa San Giovanni. Ferry services from Palermo to points north already flourish. Two years ago, Caronte & Tourist began fast services from Messina to Salerno, just south of Naples. In September it launched services from Catania to Leghorn, well north of Rome. These ferries are popular with hauliers who face tighter controls on both lorry speeds and drivers' hours.

Some supporters claim that the bridge will accelerate the development of the backward economies of Calabria and Sicily. Critics counter that the bridge will be of little use unless road and rail infrastructure on both sides of the water are improved; but, despite the billions being poured into the bridge, there is no public money for that. The private sector, presumably knowing a dud when it sees one, will not put up money for the bridge. In all, estimates Mr Ponti's team, the project will cost the public purse €1.4 billion over the next 30 years. A price worth paying to link Sicily to the mainland? Italy's governing coalition, which won all 61 of the island's first-past-the-post seats in the 2001 election, certainly thinks so.

22 November 2003, FN.p.3

A bug's life; Gold

The price of gold is on the up. For how much longer?

LONG derided as an investment for those with a sense of history but little financial nous, gold this week broke through $400 an ounce, its highest level in seven years. A falling dollar and trade spats were the proximate causes of this latest rally. But gold is up some 55% from its low three years ago. Whether it approaches $850, its 1980 peak, depends on whether the recent rise reflects temporary factors or deep concerns about the world economy.

Gold is a commodity with resonance. For centuries it was used as currency, and it still holds an appeal for those who yearn for the days when big currencies were backed by gold. Enthusiasm for the gold standard ended in the early 1930s. A watered-down version was adopted after the second world war, with only the dollar backed by gold. Since Richard Nixon took the dollar off gold in 1971, the value of money has depended on central bankers' promises not to allow their currencies to be debauched.

For a long time these promises were not worth much. As inflation soared in the 1970s, so did gold. Only when Paul Volcker, the then chairman of the Federal Reserve, clamped down on inflation in 1979 did central banks start to be believed, and the price of gold fell.

It has popped up since on occasion, but the trend has mostly been downwards. The likes of Andy Smith, an analyst at Mitsui Global Precious Metals, a subsidiary of a Japanese trading company, thinks this latest rise will also be short-lived. In effect, he says, much of it reflects purchases by gold-mining companies of their own product. The rest he ascribes to hedge funds leaping on the bandwagon.

Because of the long downward trend in gold, mining companies hedged production by selling forward. Thanks to high interest rates, the forward price of gold was greater than the current, or spot, price. But as interest rates have dropped, selling forward has seemed less attractive. Moreover, shareholders, who wanted a purer play on gold, have become shirty about gold companies hedging production. Producers have been buying back gold they had previously sold. Hedge funds have jumped in, too. Outstanding positions on Comex, the American exchange that accounts for most of the derivatives trading in gold, are four times last year's level: more than a year's supply seems to be in the hands of speculators.

The interest of big long-term investors, in contrast, seems to have been falling. For historical reasons, the biggest by far are central banks, who still hold 30,000 tonnes of gold in their reserves and want to be rid of some of it: they have a lot and it pays no interest. Among others, the Bank of England sold some of its gold in cack-handed auctions a few years ago. But so much did the threat of central-bank selling weigh on the gold price that 15 European central banks organised a “selling agreement” (more properly, cartel) to limit sales until next September.

But central banks have long been adept at buying their gold high and selling it low. Some think the rise in the gold price reflects growing concern about the worth of central bankers' promises, not least those of America's Federal Reserve. Really? The recent rise in gold is unusual because inflation, which eats away the value of paper promises, has been quiescent: the biggest fear lately has been deflation.

Only for now, perhaps. Among other things, gold bulls reckon that the excesses of recent years, in particular the huge debts run up by America, are unsustainable. Getting rid of that debt might mean default or, more likely, the same thing by another name: inflation. At the margin, this is worrying investors and even central banks, especially the Asian ones that now hold $1.3 trillion-worth of US treasury bonds.

They could buy other currencies; but Japan's government is more indebted than America's and governments in the euro area seem content to break their promises to each other not to become too indebted. As durable stores of value, in other words, the yen and euro look less than secure.

The questionable economics of a grand Italian construction project.