How the IRI (Institute for Industrial Reconstruction) changed Italy

22 April 20242 weeks ago babelfish

We publish the text of the report by the economist Ugo Arrigo given today at the conference of the University of Milan-Bicocca “State intervention and Italy's economic growth. From Beneduce's IRI to the Net-Zero Industry”

Between the 1930s and up until the 1990s, IRI was the owner and manager of large state enterprises outside the energy, railway and postal sectors. In this role it was also the main direct instrument of public policies in industry. With Eni and Enel it constituted the largest entrepreneurial state outside the socialist economies and outside the entrepreneurial state there were only four large private industrial groups of significant size, a poker consisting of Fiat, Montedison, Pirelli and Olivetti.

These large groups, public and private, added to the universe of medium and small businesses, made the Italian economic miracle possible after the Second World War and brought Italy to second place among the manufacturing countries of Europe, generating widespread well-being for the first time in the nation's history. The dream come true of the economic boom, however, was interrupted by the oil crises of the 1970s but economic growth continued, albeit at a decreasing speed, for the rest of the century. In 2000, IRI was placed into liquidation and in the quarter of a century that has passed since then, economic growth has generally disappeared from our country.
Even though Italy quickly recovered the real fall caused by Covid, the current GDP is still lower in real terms than the maximum reached in the first quarter of 2008, sixteen years ago. What was the role of IRI in Italy's economic growth and why did we choose to give it up?

With the IRI the figure of the State as market entrepreneur was born

Before the IRI, public companies had already arisen in the experience of the Unitary State but they fell into two different types of public intervention. The oldest, already present in the Kingdom of Sardinia, is that of the self-producing State: the State organizes companies to produce 'in house' goods or services for itself, be they armaments, military or civil infrastructures (bridges, roads, aqueducts) or the simple management of the Crown's properties. Postal and telegraph services, as well as the Cassa Depositi e Prestiti and the postal savings banks, fully fall into this model, however adding the original satisfaction of the needs of the State with the growing satisfaction of the needs of citizens.

The second model, which developed between the end of the 19th century and the first decades of the 20th century, is that of the State producing essential public services alongside or replacing the market. Examples of this at a local level are the initiatives of large municipalities in local transport (tram services) and in the extension of electricity networks to the suburbs, and at a national level the transition from the railway concession regime to direct public management with the establishment of the State Railways and, two decades later, with the establishment of the ASST for national telephony. In all these cases the market form was the monopoly, even legal, and the legal form that of the autonomous company, under public law, strictly based on the Ministry of the sector (and at the local level the municipal company).

It is only with the IRI that the third model was born, that of the State as a market entrepreneur, manager of companies often with mixed capital and which operate in competition with private companies. The model was born out of necessity since the great crisis of the early 1930s had made the previous private model of a large mixed bank that owns and controls large industrial companies unsustainable. The objective of the new body and the new model, whose characteristics must be attributed to the brilliant personality of its founder and creator Alberto Beneduce, was twofold: on the one hand to avoid major crises of companies and their transformation into crises of the shareholder banks, on the on the other hand, preserve the country's productive capacity and related employment levels. It was necessary to secure the substantial industrial holdings in the fields of mechanics, steel, telecommunications and maritime transport services of the three large Italian mixed banks, Credito Italiano, Banca Commerciale Italiane and Banco di Roma, as well as the banks themselves .

For this reason, the IRI was founded as a public economic body of a temporary nature in 1933, a sort of temporary field hospital for the treatment of ailing market enterprises which, once restored, could later be dismissed and return to the private economy. . But it was soon realized that a return to the private economy was not possible, due to the absence of entrepreneurs and sufficient capital, also considering that the banking law of 1936 completely abandoned the mixed banking model. In 1937, therefore, the IRI from a temporary body became a permanent body and the State confirmed itself as the main entrepreneur and at the same time also the main Italian banker, making Italy the most important example of a Western country with a mixed economy.

From 1933 until its closure in 2000, the organizational model adopted in the IRI by the 'market entrepreneur state' is the following:

the strategic direction, control and financing function of the IRI is exercised by governments, who appoint its leaders (since 1956 through the Ministry of State Participations);
governments and ministries, however, do not have any management role in the investee companies, which is instead delegated to the body;
the public body Iri controls a series of financial holding companies, divided into homogeneous sectors, which in turn control the actual production companies;
sectoral holding companies and the companies they invest in retain the pre-existing corporate form, typical of market companies, with which they were initially acquired by the private sector, or adopted by analogy in the case of companies created from scratch, as happened in 1946-47 for the two airlines Alitalia and Lai.

The reasons that led public decision makers to adopt this model are easily identifiable. At the moment in which the State found itself in the early 1930s, in order to face the consequences of the serious economic crisis in progress, having to renounce the post-unification liberal tradition of non-intervention in the markets and to wear the shoes of the entrepreneur, it became aware of being able to directly assume only part of these functions, those of shareholder promoter and financier of public companies but not also those of shareholder manager. Consequently, in the Iri model, later also adopted by Eni, these functions will be attributed by the founding rules to the bodies managing state shareholdings, built according to the model of the public economic body, and delegated by them pro tempore to state managers, selected , but often internally trained, for their skills, ability and aptitude to pursue the public interest. Italian public companies thus become, and remain for a long time, managerial market companies with state ownership, much closer to the managerially controlled companies of capitalism across the Atlantic than to the private owner-operated companies that have historically characterized Italian private capitalism .

This model can be traced back to Alberto Beneduce who, already during his previous militancy as a socialist reformer, was convinced that public intervention in the economy was necessary but had to be indirect and limited to supplying and directing financial resources for development without no need, as supported by the most radical socialist positions, for collective ownership and direct management of the means of production. Using the double bridle of regulations on the one hand and financial resources on the other, the State could intervene in the market economy without the need to directly manage businesses, an activity that was not (nor is) its own. When, after the crisis of 1929, he found himself forced to do so, with the IRI a clear separation was introduced between the promoter and financier shareholder, the State, and the actual managers, the trusted technocrats to whom the State delegated the function and entrusted the means of production, becoming a silent shareholder in a manner not very different from the widespread shareholders of managerial companies across the Atlantic.

With the IRI, a managerial technostructure was created in the 1930s in an organizational environment protected from the intrusions of politics, in which the rules and practices of the market must not be influenced, interfered with or derogated from the rules and practices of politics. And the words on the IRI of the president of Alitalia Carandini, reported in the commemorative volume published on the twentieth anniversary of the foundation, confirm precisely this: "The IRI has constantly supported us within the framework of a policy that has ensured us the full possibility of governing ourselves according to the free principles of a healthy industrial and commercial economy". In other words: we have governed ourselves according to the principles of the industrial and commercial economy, the IRI has supported us and supported us but has neither directed nor influenced us.

The IRI represents an innovative model for a variety of aspects. It was born three years before the publication of Keynes' General Theory and represents an economic policy initiative on the supply side, aimed at safeguarding the country's productive capacity, unlike the Keynesian indications of policies to support demand. It is therefore a much more complex project than the well-known example of 'Keynesian holes'. If production is safeguarded, the same happens for employment and income and there is less need for pure welfare policies. Furthermore, the interpretation of the IRI as a collective Shumpeterian entrepreneur, therefore an innovator, given by the historian Prof. Amatori is fascinating and acceptable: "In one of his last writings, Joseph A. Schumpeter (1883-1950) recognizes that the entrepreneur it goes beyond the single personality: the entrepreneur and his initiatives can belong to a collective entity. Schumpeter gives the example of the American Ministry of Agriculture, with its work of restoring the territory after the great crisis (R. Swedberg, Joseph A. Schumpeter. His life and work, 1991, trans. it. 1998, p. 189 ). The Institute for Industrial Reconstruction (IRI) has appeared in this guise since its origins."

The Beneduce model of clear separation between the management of public companies and strategic direction entered into crisis in the 1970s, when the two oil crises put many production sectors in difficulty and sent public companies into prolonged deficit. Already in the second half of the 1950s, politics had shone a spotlight on management bodies, establishing the Ministry of State Holdings. However, as long as companies maintained economic balance and were able to finance investment programs on the markets, they were able to maintain managerial independence. But in the 1970s this balance disappeared, loss-making companies needed capital injections and management bodies needed growing endowment funds. And the possibility for politics to directly interfere in the management choices of companies also penetrates from the same gap through which the necessary public money enters.

The decline in the difficult 70s and 80s

The seventies are the first decade of transition. With them, from the dream we land on the harsh reality of the oil crises which steal wealth from the West in favor of the Arab oil-producing countries and spread the virus of high inflation in our economies. And with them the union hot autumn of 1969 turns into the winter of "salary as an independent variable", guaranteed by the escalator and the strength of the unions, a contractual but not intellectual force if it fails to understand the inseparable link between the wage mass and the overall economic value generated by the production system, which must be able to regenerate, renew and innovate.

The decade also marks the end of the independence of public company managers from politics. With budgets going into the red due to the economic situation, it is necessary to resort to the money of the public shareholder which, however, is not free and is not comparable to that of the private shareholder, who only desires a return to profitability. We therefore move from a model of profitable public enterprise, which can also afford to use politics, as Enrico Mattei himself used to say, to a model of needy and subordinate public enterprise, in which it is politics that uses the enterprise, to in order to achieve its objectives (hiring employees, appointing managers, saving companies according to non-market logic).

The interference of politics in the management of companies adds to the more typically corporate aspects, the growing costs of energy and labor in the seventies, to which is added in the following decade the high cost of money, a disruptive factor in company budgets. management bodies, given the high historical ratio in their choices between debt capital and equity capital. The outcome is the decline and unsustainability of state holdings. There were only two possible remedies:

Restoring Beneduce and Mattei's original model of efficient and independent management, a solution that however required time, substantial capital for a transitional period that the increasingly problematic state finance would struggle to find, and above all high-level managers who perhaps were no longer In circulation. The high public debt, the financial crisis of 1992, the need to link the single currency and the State's lack of confidence in its management capabilities led to the exclusion of this hypothesis.
The alternative was to give up public enterprise through vast privatization programs. In essence, Beneduce and Mattei on one side, Margaret Thatcher on the other.

However, the growing losses of public companies went against the hypothesis of the reformability and preservability of the model. Let's limit ourselves to some IRI numbers, leaving aside the much worse cases of Efim and Egam. In the mid-1970s, at the beginning of the critical phase, IRI had a net worth of around 2,500 billion lire, made up of 1,800 billion in endowment funds and around 700 in reserves deriving from profits set aside over the years, up until that moment predominantly favorable. From then until the emergency corporate transformation carried out by the Amato government in the summer of 1992, there was a continuous occurrence of losses which required increasing adjustments to the endowment fund to cover. Between 1976 and 1992 the IRI lost a total of 27 thousand billion lire and the endowment fund was increased in stages for a total of 24 thousand billion, not enough, so much so that at the time of incorporation a further 5,700 billion had to be added in order to avoid that the new SpA starts with a negative net worth. This framework was incompatible with European rules on state aid and inconsistent with the signing of the Maastricht Treaty in 1992, the foundation for the creation of the single currency and the start of an indispensable process of adjusting public finances.

The choice to privatize in the 1990s

It is therefore reasonable that the path of privatization was chosen but the problems concern how the privatizations were carried out (and on this topic I refer to the very recent book by Marco Onado and Pietro Modiani 'The lost illusions') and also the rules with which they were accompanied. Furthermore, the awareness of the unsustainability of the then structure of public companies came late, with the economic and political crisis (of the Second Republic) underway, and the choices adopted to change were hasty, poorly thought out and fragmented, without the adoption of a organic design. By choosing to privatise, it was appropriate to adopt the British model in its entirety, which was based on four pillars:

the liberalization of the markets, and a new competitive structure of the same, even before privatizing large public companies;
the establishment of independent regulation for utilities, given that the competition that could be achieved on these markets would not be enough;
the adoption for privatized companies of a managerially managed public company model (antithetical to the model prevalent in Italy of closed, family-run capitalism);
the creation of a widespread and popular shareholding through privatizations.

The combination of these four conditions has allowed the total exit of the State from company capital in Great Britain. In Italy, however, none of the four were adopted in a clear manner and at the right times that were necessary: liberalization was done little and preferably later, it was regulated but without haste, with the independent authorities diluted over time, and it was preferred to entrust many companies to private, familial or familial capitalism, which had already proven insufficient for the country's economic development needs.

At the origins of privatizations, two different models and two different projects collided in 1992:

on the one hand, the proposal of the Minister of Industry and State Participations Guarino for the creation of two superholdings of public participations and their partial privatization through the issue of convertible bonds; the privatization would therefore have taken place at this level and would not have affected the individual investee companies;
on the other hand, Treasury Minister Barucci's proposal, supported by the DGT, for the incorporation of the management bodies with subsequent transfer of the individual investee companies.

The first proposal can be considered as an attempt to make privatizations compatible with the maintenance of an interventionist model in the economy, therefore an adaptation of the historical model of industrial shareholdings. If it had been accepted, the perspective would have remained industrial and public management under the Ministry of Industry. Instead, the second proposal prevailed, the perspective became financial and management passed entirely to the Treasury. It was the outcome of a clash between ministers and perhaps also between ministerial bureaucracies.

In this way the Beneduce model was definitively set aside but the privatisations, among the most significant in terms of revenue in the Western world, perhaps even greater than in the United Kingdom, did not in many cases lead to the exit of the State from shareholding, in fact around two thirds some revenues were actually achieved by maintaining public control of the companies. However, the entrepreneur State was set aside and gave way to the (only) shareholder State given that the prevailing perspective remained the financial one of the management of shares, in the MEF or CdP context, instead of the industrial management of companies by the old participating bodies.

The abandonment of the Beneduce model: from the entrepreneur state to the (only) shareholder state

The IRI Beneduce model was definitively set aside with three government choices in the early 1990s, decided in emergency conditions and without full awareness of the consequences. The first of these is the transformation of IRI into a joint-stock company, together with Eni, Enel and Ina, through Legislative Decree no. 11 July 1992. 333 (art. 15, paragraph 1) of the Amato government. In Beneduce's original plan, IRI did not need significant own resources (endowment fund) as it could easily finance itself on the markets through bond issues with the State guarantee. At the time of the transformation, the ratio between debt and equity capital is very high, with the latter eroded by accumulated losses and generally made unsustainable by those in progress.

The corporateisation of IRI was also a rash choice as on the one hand it was not useful for any privatization processes, not feasible on the body's shares, and on the other it was such as to expose it to the risks deriving from the application of civil law rules (excessive losses capable of running out of capital in a short time, the need to recapitalize and consequent activation of the European spotlight on state aid harmful to competition).

With the incorporation of IRI, on the one hand, it is directed into a dead end and on the other, the conditions are created for increasing interference by the designated shareholder, the Ministry of the Treasury, which is entrusted by the 1992 law with the exercise of the rights owners. The provision has the effect of reviving "the figure of the shareholder state" ( ) which had faintly emerged in the 1920s with the establishment of Agip SpA but was quickly set aside with the prevalence of Beneduce's point of view:

“…It was thought that the State should entrust its actions to public bodies. Consequently, … with a specific law of 1956, the shareholdings were all 'framed' into management bodies. The few direct shareholdings that the State retained were entrusted under 'trust management' to the same management bodies (…). The public management bodies equipped themselves to carry out the holding activity, equipping themselves with special offices, suitable for preparing consolidated financial statements, for carrying out the role of shareholders (for example, inspectorates), etc.". ( ) We add: and to evaluate, approve, finance and monitor the industrial plans of the subsidiaries.

The State, which had become a direct shareholder through the Treasury, was not, however, organized to carry out this role with the same capabilities and skills that the Beneduce model had attributed to public management bodies. Legislative Decree 333 of 1992 was entitled "Urgent measures for the recovery of public finances" and transformed public economic bodies to sell shares, not to manage them from an industrial perspective. In this way the issue of adequate industrial management, which was Beneduce's key objective, took a back seat even though it was the key key issue. In fact, a public company can be privatized only if it is reorganized or can be reorganized in a short time by the buyer, given that no private individual buys disastrous companies for charity, and the industrial management of a subsidiary is very different from the purely financial management of its shares. The hasty government of 1992 gave birth to blind reforms.

The next provision that strengthens the role of the Treasury is the assignment to its General Directorate of the role of director of privatization processes. The art. 12 of the 1994 privatization law, n. 474, attributes to the DGT the functions of: (i) financial management of shares owned by the State; (ii) representation of the shareholder in the company meeting, (iii) investigation of the divestiture operations. Also in this case there is no reference to the direction and control function of the industrial management of the subsidiaries. Furthermore, the function of representing the shareholder in the meeting is exercised in all cases, not only in relation to share disposal operations, which was the specific object regulated by law 474. The changes of that period were such as to guarantee " … the Minister of the Treasury the possibility of influencing the management of the new companies to an even greater extent than that which the law and other regulatory provisions guaranteed to the Ministry of State Holdings with regard to management bodies", as the Service had the opportunity to write studies of the Chamber of Deputies.

The third decision, the final one, is the liquidation of IRI, started with the Andreatta-Van Miert agreement of July 1993, even if not explicitly foreseen in it, and carried out in June 2000 during the second Amato government. With the suppression of IRI in 2000, the Treasury became a direct shareholder of the investee companies and in exchange for directing the privatization processes, it definitively renounced the role of filter, monitoring and guidance that IRI had played since its foundation towards the investee companies . But in this way the State which has become a shareholder ceases to be an entrepreneur.

Alitalia is an excellent example of the consequences of these bad choices: (i) four fifths of the public management losses between 1947 and 2008 appear from 2000 onwards, after the closure of IRI and under inadequate shareholder supervision Treasure; (ii) the inattention to industrial recovery has prevented sustainable privatisation, pursued in vain since 1998; (iii) between 2000 and 2001 there was an example of the confusion of roles generated by the new structures, when the CEO Cempella, disappointed by the abandonment of KLM, negotiated an alternative agreement with Swissair while at the same time the Prime Minister he does the same with Air France via his French counterpart and the DG of the Treasury in turn reopens with KLM without the CEO's knowledge, causing the latter's resignation.

Results and errors of privatizations

As already mentioned, the adoption of the British model would have required prioritizing privatizations with adequate liberalization processes, so as to replace the invisible hand of the market with adequate competition for the now paralytic one of the State. In this way we would have avoided transforming public monopolies into private ones, perhaps even more dangerous and incompatible with collective well-being. Markets with weak competition should also have been subjected to adequate economic regulation through specific bodies independent of politics.

On the contrary, we chose to privatize before liberalizing, liberalizing as little as possible and as late as possible, when forced by Europe, and even avoiding respecting the rules that we ourselves had set. Law 464 of 1994 on privatizations provided that share sales could not be initiated in utilities before the establishment of independent regulatory authorities in the relevant sectors. However, the subsequent law 481 of 1995 was limited to the establishment of the Electricity and Gas Authority, the current Arera, postponing the rest over time.

If before privatizing Telecom that rule was respected, preventively establishing the Communications Authority (Agcom), in the transport sector, at the end of the 1990s, the totalitarian transfer of natural monopolies such as Autostrade Iri and Airports of Rome without the creation of the Transport Regulatory Authority. It was established only at the end of 2011 and became operational in 2013, with 18 years of delay, among other things initially without competences on existing motorway concessions and major airport management, which have benefited for a decade from program contracts in exception. These were precisely the segments for which its competence and activity should have preceded, under the 1994 law, any transfer operation.

Privatizations have been an undoubted success from a revenue point of view. In the case of IRI alone, they generated revenues of 84 thousand billion lire between direct and second level privatizations, carried out by the controlled holding companies, which allowed a full repayment of the substantial debts that had led to the 1993 decision to close the institute. and they also allowed the payment to the shareholder Treasury of a total of 25 thousand billion between 1998 and 2001 by way of dividends and liquidation. To this figure is added a net asset value of over 9 thousand billion for the residual shareholdings which at the time of liquidation are transferred to the Treasury as property.

Adding the two values gives an order of magnitude similar to the capital contributions made by the State in the critical years of losses, so it can be argued that overall the Italian taxpayer has not lost over time as an involuntary shareholder of this industrial adventure. However, if the State as a shareholder of IRI has not lost over time and thanks to IRI it has created employment, growth, development for many decades and collected corporate taxes and substantial social contributions and taxes from employees, which reached a maximum in the 1980s of more than 550 thousand people, it can hardly be argued that its closure was a successful operation for economic growth.

In the 1990s we set out (or embarked, given the presumed role of the yacht Britannia) from the Italy of Beneduce and Mattei towards the Great Britain of M. Thatcher but we must have (unintentionally?) made a wrong turn, deviating towards the Russia of the oligarchs . The most successful privatizations are those that have not been carried out, in which public control has been maintained and adequate corporate management has been guaranteed by the listing on the stock exchange and the consequent supervisory role of the stock markets. These are completely market companies, even with the State as the main shareholder.

Instead, the major totalitarian privatisations, carried out with the intention of making the buyers win, turned out to be a failure and the related companies returned to the State like unexpected Australian boomerangs: not only Alitalia but after it also Ilva, Autostrade per l'Italia and finally the Tim network to be spun off.

And the State which, after the birth of IRI in the 1930s, controlled around 40% of the stock market capitalisation, now controls around a third… But then the public shareholdings had industrial and development policy purposes, precisely those that the choices adopted in the 90s they severed. The entrepreneurial state is now only a shareholder.

This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/italia-stato-imprenditore-iri-privatizzazioni/ on Mon, 22 Apr 2024 13:04:40 +0000.