BANCA D’ITALIA

E U R O S I S T E M A

The effectiveness of cohesion policy:

what lessons from Italy?

Daniele Franco

New indicators – measuring progress in cohesion policy

Perugia (Umbria, Italia) - 29 Aprile 2011

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Italy’s Regional Policy in the past decade

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Italy’s New Regional Policy (NRP): an extensive information system

The NRP - started in the late 1990s - aimed at spurring growth and creating social capital

It gave special attention to the involvement of local communities in the policy design (exploiting local knowledge; bottom up approach)

It made a great effort to develop an extensive information system on local economies, which can also be used to measure policy performance

The database “Indicatori di contesto chiave e variabili di rottura” was a joint effort of Istat and the Ministry of the Economic Development to serve as a quantitative support for the Objective 1 2000-2006 programming period. It has become an important tool for the analysis of regional imbalances

The database includes about 170 indicators for all regions on Environment, Energy, Competitiveness, International trade, Crime, Social capital, R&D, etc.

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Some indicators were used in an outcome-based financing scheme: Obiettivi di servizio

Obiettivi di servizio - adopted for the programming period 2007-2013 - is an outcomes-based financing scheme

Public funds are disbursed on the basis of the results obtained by local governments in four areas: education, child- and elderly-care, waste disposal, water provision. The incentive scheme is based on 11 quantitative indicators

Recent assessments show some positive results (e.g. improving the quality of administrative procedures) and some critical aspects. Two aspects deserve further scrutiny:

- the achievement of the target can be influenced by external factors that are out of the control of local governments

- very specific objectives are easily measurable but can encourage opportunistic behaviour (e.g. a local government may concentrate all its efforts on reaching the objectives subject to conditionality disregarding other important services)

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The shortcomings of the New Regional Policy

● Shortcomings:

- There were problems with setting priorities (too many), overlapping responsibilities, etc.

- Not enough attention was paid to the effects of ordinary policies in the South. The quality of public services (justice, education, etc. ) is generally worse than in the Centre North. Capital spending is less efficient.

Regional policies cannot offset these effects: additional capital expenditure in the South is about ½ of total capital expenditure in the area. It is about 5% of total public spending in the South

(Source: Cannari, Magnani and Pellegrini, 2010)

- Incentive schemes were largely ineffective

(Source: De Blasio e Lotti, 2008)

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The catching-up process did not really resume

Ratio of the per capita GDP of the South to that of the Centre and North

(Percentage values, current values)

40.0

45.0

50.0

55.0

60.0

65.0

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51

19

63

19

70

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75

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80

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81

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82

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83

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84

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85

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86

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87

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88

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89

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90

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91

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92

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93

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94

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95

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96

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97

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98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

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Inadequate public services

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There are gaps in the quantity of education (school attendance ratios)

There are gaps in the quality of education, increasing with the age of pupils

Infrastructures are in worse conditions

Education: gaps with respect to the Centre-North

Dark colours identify better learning performance (source: Cipollone, Montanaro and Sestito, 2009)

Students’ performance in Maths (InValSI*)(secondary school; quartiles; 2005-06)

* National Institute for the Evaluation of the Education System

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Health: patients move to the Centre-North,current per capita spending is higher in the South

(but the capital stock is lower)

Dark colours identify inflows of patients and lower per capita (age-adjusted) public spending on hospital care

Net flows of patients Public spending on hospital care(national average 2004-06=100)

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Hospital care: large gaps in the quality perceived by patients between rich and poor regions

Satisfaction with hospital care for residents in some European cities(index 0-100)

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Justice and waste disposal: worse services in the South (all local services are usually worse)

Dark colours identify faster civil justice procedures and a higher incidence of garbage recycling

Civil justice: lenght of ordinary trials(quartiles; days; 2006)

Separate waste collection(quartiles; percentage values; 2007)

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Doing business: more difficult in the South

● Average of 5 indicators concerning:

- starting a company- getting a construction licence- transferring a property- enforcing contracts- closing down a company

Dark colours identify contexts in which doing business is easier.(Source: Bianco and Bripi, 2009)

Cost and time of doing business(indexes; 2008)

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The role of public infrastructures

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Poorer infrastructure endowments in the Mezzogiorno

Index: Italy=100; data refer to 2009. (Source: Istituto Tagliacarne)

0

20

40

60

80

100

120

Road

s

Prots

Aero

ports

Railw

ays

Telec

omm

unicat

ios

Bank

s

Enviro

nmen

tal ne

twor

ks

Scho

ols

Hosp

itals

Cultu

ral am

enities

Tota

l eco

nom

ic

infras

truc

ture

s

Tota

l soc

ial i

nfra

stru

ctur

es

Tota

l inf

rastru

ctur

es

Mezzogiorno Italia

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Education: more buildings with technical deficiencies in the Mezzogiorno

Percentage points, data refer to 2000. (Source: Ministero della Pubblica Istruzione)

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Public investment spending vs physical measures of infrastructural endowments: infrastructures seem more

costly in the South

Percentage values; physical measures are scaled on population size and land area(Sources: Istituto Tagliacarne and Di Giacinto, Micucci and Montanaro, 2009)

0

20

40

60

80

100

120

140N

ort

h W

est

Nort

h E

ast

Cen

tre

Sou

th a

nd

Isl

ands

Public capital/GDP Indexes based on physical measures

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Technical and administrative time needed to plan and assign public works

Numbers of days (Source: Autorità per la vigilanza sui contratti pubblici)

0

100

200

300

400

500

600

700

800

900

1.000

1.100

1.200

1.300

1.400

1.500

2000 2004 2007 2000 2004 2007 2000 2004 2007 2000 2004 2007 2000 2004 2007

days

External planning Design approval Notice announcement Offer submission Adjugement

North West North East

Centre

SouthSouth

Islands

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Composition of capital expenditure: ordinary resources are greater in the Centre-North

Per capita expenditure in real terms. Base year: 2000. Averages 1998-2007(Source: DPS-Conti pubblici territoriali)

0

100

200

300

400

500

600

700

800

900

1000

South and Islands Centre and North

Ordinary resources FAS and European funds

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Per capita capital spending: the South is losing its advantage

Per capita expenditure in real terms. Base year: 2000. (Source: DPS-Conti pubblici territoriali and Quadro unico finanziario)

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Ineffective incentive schemes

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Empirical work on incentives to firms points to modest effects

● Incentives (Law 488, Law 388) have mostly subsidised investments that would have been carried out anyway or cause changes in the timing of the projects (anticipation effect)

● Bank of Italy’s 2008 survey of 4000 companies: additional investment amounted to 30% of subsidies (but only 6% excluding changes in timing of projects)

● “Patti territoriali”: dynamics of employment and plants in municipalities within the Pacts not different from those of similar municipalities outside the Pacts

● Ineffectiveness may reflect lengthy procedures, uncertainty about funding and policies, etc.

(Source: de Blasio and Lotti, 2009)

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EU and Italian reforms: common ground

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The reform of EU cohesion policy

Reforms aim at:

(i) strengthening ex-post evaluation

(ii) introducing conditionality

Other important objectives are:

(iii) enhancing strategic programming (in line with the strategy Europe 2020)

(iv) increasing concentration of interventions on specific objectives

(v) creating a closer interaction between different levels of government (European, national, regional, local)

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The reform of Italy’s funds for regional development policies

The new legislation under discussion for reforming Italy’s cohesion funds (within the fiscal decentralisation process) is consistent with the new European guidelines

Key features will be the focus on some relevant projects, program evaluation, conditionality

It would be useful:

- to add a set of targets at the regional level, to complement those at the national level envisaged in Europe 2020

- to closely coordinate cohesion objectives with the fiscal decentralisation process underway (which is setting uniform - minimal - standards for the quality of public services across the country). E.g. improving education & health services may require better infrastructures in some regions

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Indicators for moving towards an outcome-based mechanism in the

delivery of cohesion policy

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Indicators can be further improved

The quality of public services in the Mezzogiorno is worse than in the rest of the country. There is a need for indicators measuring the performance of all entities producing public services (the level of students’ achievement, the performance of hospitals, the duration of judiciary procedures, etc.)

The inadequate quality of public services also depends on infrastructural endowments. Capital expenditure is also less efficient in theMezzogiorno. Indicators evaluating infrastructural adequacy (quality of services, potential demand, economic impact) are needed. The monitoring of costs and time of realisation should be improved

The separation between ordinary and additional expenditures is useful for accounting reasons. However, the two components should be considered jointly

Improving standardized data collection for all European regions concerning cohesion spending (components, beneficiaries, etc.) and its effectiveness could be extremely useful to evaluate interventions

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Indicators should be used to improve policies

The creation of a close link between economic indicators (easily measurable by independent institutions and available to external researchers) and the mechanisms for rewards/sanctions may reinforce the effectiveness of policy actions

Within the Italian decentralisation process, the central government will retain the power to intervene in case the quality of regional & local services is not adequate

Public resources should be directed towards interventions that - through ex-post evaluation - have proved to be effective. Ineffective programs should be discontinued

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Conditionality should be well-designed

One should be aware that the impact of cohesion policy can be limited by different obstacles for economic growth. Indicators on the difficulties of doing business at local level highlight some of these obstacles

Some obstacles may concern areas of regional responsibility:

- for example, entry barriers for new firms in the service sector

Other obstacles may concern areas in which regions have no major role:

- wage levels in Italy do not fully reflect local labour market conditions

conditionality should reflect the scope for action of each government

there is a need for close policy coordination across levels of government and sectors

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More effective incentive schemes are needed (I)

The design of the schemes and their implementation should ensure:

Fast implementation of procedures: market competition requires fast decisions that are usually incompatible with the sluggishness of bureaucracy

Simplicity: complex rules discourage companies, increase costs, increase legal conflicts

Stability: firms’ investments are based on medium-long term plans; if rules change over time, incentives are less effective and benefit only the firms

which would have carried out the investments anyway

=> Increase efforts to measure the quality of incentive schemes

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More effective incentive schemes are needed (II)

Transparency and accountability are crucial

The objectives of a program should be explicitly stated

Ex post evaluation should not be based on the observation of changes over time, which can be influenced by many factors, but on the estimate of the most likely scenario without the policy action (counterfactual analysis)

Two aspects are crucial:

(i) policy makers should collect and disclose the information that make ex post evaluation possible. E.g., data should be collected also for those

who applied for the subsidy but did not receive it

(ii) policy trials should be introduced for statistically significant groups. This would allow policy makers to close down ineffective programs

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