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«Rome, 25th June 2013 This paper was drafted by a working group, chaired by Prof. Rainer Masera (Università degli Studi Guglielmo Marconi), with the ...»

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Very often, corruption, waste, inefficiencies, deficiencies in the work of the so-called trias politica (legislative, executive and judicial power) destroy or distort the link between public spending on investment and the accumulation of productive (tangible and human) capital. Also for these reasons, it is not easy to obtain empirical evidence of the fact that the gaps in public infrastructures constrain or reduce the prospects of sustainable growth.

Quality and efficiency in spending require constant monitoring in the quality and efficiency of financed projects: if there are not rigorous and effective mechanisms of selection, construction, management and financing of infrastructures, investment does not translate into capital accumulation [Masera, 2012].

The infrastructural policy in Europe should be revised, (i) by intervening on planning, financing and management methods and procedures and (ii) by entrusting the monitoring to an independent authority with high technical skills, not subjected to political influence, which may ensure quality control on projects, based on the model of the American Infrastructure Bank and the Australian Infrastructure. The institution of a European authority would significantly limit the instability and uncertainty of rules and thus reduce the regulatory and administrative risk of the investment projects. As has happened in other sectors, it could be useful to define common methods and procedures for developing infrastructure projects, that would be applied to all Member States. Transparent criteria of selection must be provided to identify and support concrete opportunities of co-investments, especially for large scale projects.

In Europe, this task could be undertaken by the EIB: through its significant operational experience, the Bank could ensure an effective monitoring of the efficiency of public investments and press for “the investment in the investment process”. It could provide an ex ante evaluation of the proposed projects and select them on the basis of technical feasibility assessment and economic/financial return on investment. It could also ensure an ex post evaluation.

The role of the EIB and national authorities should be strengthened in relation to the ability to offer guarantees to the market, to protect operators against certain risk types in projects: this would favor a greater involvement of insurance companies and other institutional investors.

especially of the quality of the services given. Under this profile, the indexes within the Mezzogiorno (South Italy) area appear to be low.

17 Furthermore, multilateral development banks should widen – in a coordinated way – the plafond funding made available by domestic banks in order to finance businesses. This funding should have a long-term maturity. The access to the plafond should be simplified in order to favor the channeling of resources to the entrepreneurial system.

The operation of the multilateral development banks could also be oriented to favor the connection of financial debt tools directly emitted by enterprises through the release of specific guarantees in favor of institutional investors.

Lastly, specific initiatives should be promoted with the coordination of national and local authorities for: the improvement and the full exploitation of the financial possibilities offered by the EU Structural Funds; the improvement in the access to finance of SMEs; the support for public and private infrastructure investment, and the support of policies favoring youth employment.

Question 5: Are there other public policy tools and frameworks that can support the financing of long-term investment?

Good institutions and compliance with laws are an essential premise for public and private investment policies. Specific consideration should be given to the issue of promptness, essentiality and the certainty of the rules and the relative sanction mechanisms: a clear regulatory framework is required for stability and continuity of the rules, especially in reference to incentives and investment support (direct and indirect). This aspect is particularly critical in Italy, where not infrequently the rules have been modified during the operational phase of a project, thereby determining conditions of uncertainty in investors and operators and fuelling litigations and prolonging the time for completing the works, and thus giving a disincentive to the investment3.

The rules must be coherent and harmonized among the different sectors (competing among each other in attracting private capital) and the procedures must be transparent to favor effective decision processes in adequate times. Simplified procedures could be particularly useful: a fast track model for the smaller projects (with less than €5 million of funding), which today represent about 80% of projects, may facilitate the realization of public works.

3 In Italy, in particular, the majority of fund resources invested in brownfield works, i.e. to companies which manage works already constructed and active or even in shares of listed companies or privatizations of management infrastructure companies: greenfield investments represent a minority.

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Furthermore, a wider vision and an enlarged development strategy should be adopted: the attention in selection must be placed not only on a single work or a single subject, but also on the infrastructural system as a whole.

The importance of the “effective” accumulation of public productive capital, highlighted in the previous answers, should be recognized in the European economic governance. This also refers to the rigid budget rules introduced by the Fiscal Compact, which does not distinguish between current public expenditure and investment spending and which are subject to the same accounting treatment. Criticism has been made, notably by the IMF and the last G8, in regards to the excesses in terms of timing, frontloading and generalizations of fiscal austerity to all countries, which can be counterproductive for growth and fiscal consolidation.

Current public expenditure, as a component of aggregate demand, may help to raise the GDP level, but it could have negative effects in the medium term. On the other hand, infrastructure expenditure - if efficient - contributes to productive capital stock formation and determines a lasting increase in aggregate production.

As already indicated, in the field of investment expenditure, a fundamental role is played by the financing of research and development, innovation and knowledge capital: they belong to productive capital and, thus, positively impact on total factor productivity, by increasing GDP growth and the competitiveness of economic system.

We fully share the need for the sustainability of public finances in Europe, but - in order to revitalize the European economy through investment in productive capital, we believe that infrastructure expenditures should have a different treatment in the Fiscal Compact.

It appears even more opportune to stress the issue of subtracting, at the European level, in the next three years, the investment expenditures in the above mentioned sectors from the constraints of the Fiscal Compact. These expenditures could be co-financed by the EIB, also through the recent increase in capital. The EIB co-financing would also contribute in a decisive manner to the appropriate monitoring of quality, efficiency and the profitability of public/private investments, as indicated in the answer to question no. 4.

The prolonged and very high youth unemployment corrodes and destroys human capital, by seriously affecting the competitiveness of the economy. Even the expenditure for the lasting recovery of youth employment should, therefore, temporarily be taken out of the constraints of

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Furthermore, in order to support investment in infrastructures, a broader diffusion and adoption – also through adequate fiscal incentives – of project and corporate bonds is necessary4.

In addition, technical skills in the subject of project financing need to be strengthened at the national level, through an effective support to local authorities, that are often unprepared in launching and monitoring project financing initiatives.

A fundamental incentive to the participation of institutional investors also derives from the implementation of public guarantee mechanisms. They are already provided at the European level, but should be better developed and promoted. An example is the Loan Guarantee Instrument for Trans-European Transport (LGTT) provided by the EIB for projects within the TransEuropean transport network, which supports market operators to face initial risks of a project, on the basis of its long-term financial feasibility. Along these lines, the Euro Project Bonds have also been introduced aiming, in particular, at financing European infrastructure projects, which cannot be realized exclusively on the basis of market conditions, but are strategically important for Europe. In regards to this, the initiative of the UK government should be pointed out: it -introduced – within the National Infrastructure Plan 2011 – a scheme of public guarantees to support the main infrastructure projects, which may be incurred in difficult financing conditions.

Finally, the evolution of the current macroeconomic context, characterized by low interest rates should also be taken into account: they benefit the economy, by encouraging long-term investments; but - if the low level is maintained for a long period, they may also have negative effects, by reducing the propensity to save and creating distortions on the allocation of savings.

On the other hand, in the presence of very low interest rates, consumers must save much more.

Question 6: To what extent and how can institutional investors play a greater role in the changing landscape of long-term financing?

The Green Paper recognizes the fundamental role of the institutional investors in long-term investment, also on the basis of their specific functions.

4 See, for instance, Gilibert (2012) and OECD (2013a).

20 Insurance companies are typically considered “natural” long-term investors, in relation to the nature of the liabilities they hold. They carry out “matching” policies within the usual practices of asset-liability management, in line with their business model. Today, in Europe, insurers represent the most important transmission channel for long-term investors, with assets equal to about 50% of the GDP within the Euro Area and managed stocks of around 9 trillion Euros.

The role of investors and the investment strategies of insurance companies generate important benefits both for those insured and for the economy in general. These institutions can offer an important contribution to the solution of the funding gap problem, historically largely provided by the banking sector, which characterizes the current European economic situation.

Long-term investment strategies, therefore, bring about benefits for savers, because they give access to a wider choice of investment opportunities, often with better performances compared to those obtained by single individuals: a greater level of diversification and the use of more illiquid securities allow for high returns, lower transaction costs and reduce short term volatility.

The combination of these benefits allow the insurers to offer products of long-term saving and retirement at acceptable costs, both for insured customers and for those who supply capital to cover the risk. Furthermore, they represent a valid support for the public pension system, also thanks to the ability of offering complementary guarantees linked to longevity (among which long-term care policies).

More generally, as previously discussed, the benefits deriving from these strategies reside mainly in the stabilizing role that can be exercised. Insurance companies are naturally attracted by long-term investment horizons, given the nature of their business; they do not have the exploitation of short-term volatility on the returns of the financial products as their primary goal, but the maintenance of securities up to their maturity, dictated by the need of having sufficient resources available, in order to maintain commitments towards those insured. In this way, they reduce the pressures of procyclicality and give stability to financial markets.

Insurance companies invest in a large spectrum of security types, according to the duration and the type of securities that they hold (generally illiquid) and the type of product offered.

Normally, they invest in bonds issued by governments, corporate and covered bonds (about 60%) and in equity (15%), but also undertake securitization operations, direct loans to the SMEs, and investment in infrastructures, mortgages, real estate market, private equity and venture capital, based on the desired risk-return profile.

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«Fixing regulatory bugs would favor long-term investments. Many observers are surprised how little long-term investment risk insurers assume. For insiders, this is hardly a mystery. The reason often boils down to regulation: when pro-cyclical elements of regulation “force” insurers to sell risky assets at the worst possible moment, one should not wonder why insurers avoid such risky assets. (Similar issues can arise in relation to accounting standards.) Also, state-enforced, asymmetric profit-participating schemes (life policy holders share in profits but losses have to be absorbed by shareholder capital) are clearly disincentivising insurers to take investment risk. Another problem is the double taxation of equity capital, which disincentivises the holding of equity capital. This reduces risk appetite in general, and for long-term investments, in particular».

Alongside the insurance companies and pension funds, the Green Paper identifies the private equity funds as potential suppliers of long-term capital.

At the European level5, insurance companies and pension funds are considered the main sources of collection for private equity funds, with 34% of the total contribution, shared respectively as follows: 8% from insurance companies and 26% from pension funds6.

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