The European funds are called to be a particular ‘manna’ for the large telecommunications operators. But faced with a potential delay, companies are looking to hedge against investors. This is the case of Telefónica, which has announced in a report before the US SEC that this delay in implementation could limit its effect. This is a derivative of the concern in the group chaired by José María Álvarez-Pallete, who had previously announced about the negative influence that political fragmentation had on the necessary reforms to be able to receive that public money from Europe.
In February 2021, it was the first time that Telefónica put on the table the importance of European recovery funds after the outbreak of Covid. The CEO, Ángel Vilá, highlighted the opportunities in the 140,000 million initially budgeted, of which a relevant part was going to be allocated to digitization. At that time they already presented their first proposals, with the so-called ‘Digital Kit’ of direct aid for SMEs as one of the most prominent weapons. But the months have passed and the implementation is being much slower than expected.
This has forced the operator to heal in the face of a potential delay that could cause problems or reduce its potential. That is why in the update of the annual report (known in slang as the 20-K) presented to the US SEC it has included this as a real risk within the Spanish market. “European funds and the reforms necessary to continue accessing them could increase the country’s potential growth, although delays in their implementation could limit their effect,” he says in said document dated October but registered several weeks ago.
At that point, he has eliminated one of the risks that he repeated in previous versions of the report: that of political fragmentation. He understood that there was uncertainty regarding the funds and the necessary reforms (labor and pensions among the most important) to continue accessing them. “One of the risks derived from the high degree of parliamentary fragmentation and the lack of agreement on key issues,” he assured. Both reforms have been approved and put on the European table by the Spanish Executive. This has allowed two disbursements, the last of them last June with 12,000 million.
Even so, from Brussels they warned two weeks ago that they will analyze the sustainability of pensions to propose the next disbursement. The Executive announced at the beginning of November that they were going to request another 6,000 million euros of payment. The Minister of Economy trusted that there would be no problems in obtaining the money because, according to her, “the required reforms are being complied with.” The European Executive has two months to study the request before giving the ‘green light’. In the case of strategic projects for economic recovery and transformation (known as PERTE), a very small part of the budgeted money has been awarded.
Telefónica had planned to capture a total of 2,000 million euros by 2025, 10% of all that was planned in non-reimbursable aid for digitization
Telecommunications is a sector that is called to be one of the great beneficiaries of direct aid from European funds. The CEO of Telefónica himself put figures of what was at stake last July during the conference with analysts. He pointed out that they have already seen some results in his income statement in Spain. But above all he spoke of the opportunity in the future with “Our goal is to capture up to 2,000 million euros by 2025, around 10% of the total,” he pointed out.
The so-called ‘digital kit’, that is, direct aid for the digitization of small and medium-sized companies, has suffered several delays in the calls. Some delays that have also been alerted by the Vodafone leadership, which already alerted analysts of this expansion that was reaching its optimistic business forecasts in Spain. The then financial manager, Margherita Della Valle, assured: “They have been delayed for administrative reasons.” Telefónica has created, as Vilá commented, specific products and processes to gain part of the quota of these SMEs that obtain bonuses that they must later spend on digital services.
The risk of war for Telefónica
Apart from the risks linked to the management of European funds, Telefónica once again puts its finger on the sore spot, as it did in previous reports, about the “high levels of public debt” that can be a problem “in case of stress financial” and also about the effects on the supply chain of Covid and also the war in Ukraine. Precisely, this war is the new risk that it includes in terms of the European market in general. He insists that the effect has already been felt in a general drop in GDP growth in the euro zone. The economic impact by country resulted mainly from its commercial, financial and, above all, energy exposure, he concludes. “A sharp rise in world commodity prices, a product of the conflict, is already having a negative impact,” she adds. In this sense, from the operator they defend that the fiscal packages announced in Spain, Germany or the United Kingdom to compensate the increase in energy prices could only cushion part of the impact.
The Covid has lost relevance as a risk in his story and the accent is placed on the consequences of an “excessive tightening” of financing conditions, both public and private, with a negative impact on disposable income that could even “cause episodes of financial stress”. The relevant factor to reach this scenario, according to the teleco, could be global factors derived from the impact of the recent rise in inflation or domestic factors such as the financial fragmentation caused by the process of raising interest rates.
Regarding the other two specific markets in which they operate, Germany and the United Kingdom, introduce some ‘extra’ risks. Regarding the German country, he talks about energy supply problems (35% of what it consumes comes from Russia) and the “bottlenecks” in raw materials that would affect its exports, suppressing references to the new government and potential problems for short term. As for the British market, in addition to the consequences of Brexit, the company does focus on the political level, due to the “low popularity” of the current government together with the growing support obtained in the latest polls by the Labor Party. “This could restore political capital to the incoming executive, becoming another source of uncertainty,” he says.
