A European Public Investment Outlook

Cerniglia, Floriana (Ed.); Saraceno, Francesco (Ed.) Book — Published Version A European Public Investment Outlook Open Reports Series, No. 9 Provided in Cooperation with: Open Book Publishers Suggested Citation: Cerniglia, Floriana (Ed.); Saraceno, Francesco (Ed.) (2020) : A European Public Investment Outlook, Open Reports Series, No. 9, ISBN 978-1-80064-013-9, Open Book Publishers, Cambridge, UK, https://doi.org/10.11647/OBP.0222 This Version is available at: https://hdl.handle.net/10419/270836 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ EDITED BY FLORIANA CERNIGLIA AND FRANCESCO SARACENO A European Public Investment Outlook A European Public Investment Outlook EDITED BY FLORIANA CERNIGLIA AND FRANCESCO SARACENO OBP CERNIGLIA AND SARACENO (EDS) A EUROPEAN PUBLIC INVESTMENT OUTLOOK This outlook provides a focused assessment of the state of public capital in the major European countries and iden� fi es areas where public investment could contribute more to stable and sustainable growth. A European Public Investment Outlook brings together contribu� ons from a range of interna� onal authors from diverse intellectual and professional backgrounds, providing a valuable resource for the policy-making community in Europe to feed their discussion on public investment. The volume both off ers sector-specifi c advice and highlights larger areas which should be priori� zed in the policy debate (from transport to social capital, R&D and the environment). The Outlook is structured into two parts: the chapters of Part I respec� vely explore public investment trends in France, Germany, Italy, Spain and Europe as a whole, and illuminate how the legacy of the 2008 Global Financial Crisis is one of insuffi cient public investment. Part II inves� gates some areas into which resources could be channelled to reverse the recent trend and provide European economies with an adequate public capital stock. The essays in this outlook collec� vely foster a broad approach to and defi ni� on of public investment, that is today more relevant than ever. Off ering up a � mely and clear case for the elimina� on of bias against investment in European fi scal rules, this outlook is a welcome contribu� on to the European debate, aimed both at policy makers and general readers. As with all Open Book publica� ons, this en� re book is available to read for free on the publisher’s website. Printed and digital edi� ons, together with supplementary digital material, can also be found at www.openbookpublishers.com Cover Image: Photo by Dominik Bednarz on Unsplash. Available from: htt ps://unsplash.com/photos/luzUMbVUVRo Cover Design by Anna Gatti e book ebook and OA edi� ons also available To access digital resources including: blog posts videos online appendices and to purchase copies of this book in: hardback paperback ebook editions Go to: https://www.openbookpublishers.com/product/1227 Open Book Publishers is a non-profit independent initiative. We rely on sales and donations to continue publishing high-quality academic works. A EUROPEAN PUBLIC INVESTMENT OUTLOOK A European Public Investment Outlook Edited by FlorianaCerniglia and FrancescoSaraceno https://www.openbookpublishers.com © 2020 Francesco Saraceno and Floriana Cerniglia. Copyright of individual chapters is maintained by the chapters’ authors. This work is licensed under a Creative Commons Attribution 4.0 International license (CC BY 4.0). This license allows you to share, copy, distribute and transmit the text; to adapt the text and to make commercial use of the text providing attribution is made to the authors (but not in any way that suggests that they endorse you or your use of the work). Attribution should include the following information: Francesco Saraceno and Floriana Cerniglia (eds), A European Public Investment Outlook. Cambridge, UK: Open Book Publishers, 2020, https://doi.org/10.11647/OBP.0222 In order to access detailed and updated information on the license, please visit https://doi.org/10.11647/ OBP.0222#copyright Further details about CC BY licenses are available at https://creativecommons.org/licenses/by/4.0/ All external links were active at the time of publication unless otherwise stated and have been archived via the Internet Archive Wayback Machine at https://archive.org/web Updated digital material and resources associated with this volume are available at https://doi.org/10.11647/ OBP.0222#resources Every effort has been made to identify and contact copyright holders and any omission or error will be corrected if notification is made to the publisher. This is the ninth volume of our Open Reports Series ISSN (print): 2399-6668 ISSN (digital): 2399-6676 ISBN Paperback: 978-1-80064-011-5 ISBN Hardback: 978-1-80064-012-2 ISBN Digital (PDF): 978-1-80064-013-9 ISBN Digital ebook (epub): 978-1-80064-014-6 ISBN Digital ebook (mobi): 978-1-80064-015-3 ISBN XML: 978-1-80064-016-0 DOI: 10.11647/OBP.0222 Cover image: Mural in Białystok, Poland. Photo by Dominik Bednarz on Unsplash, https://unsplash.com/ photos/luzUMbVUVRo Cover design: Anna Gatti. Contents Preface ix Franco Bassanini, Alberto Quadrio Curzio, and Xavier Ragot Acknowledgements xiii Author Biographies xv Introduction 1 Floriana Cerniglia and Francesco Saraceno References 12 Part I—Outlook 15 1. Europe Needs More Public Investment 17 RoccoLuigiBubbico, Philipp-BastianBrutscher andDeboraRevoltella 1.1. Recent Public Investment Trends in Europe 18 1.2. Infrastructure Has Declined Substantially 22 1.3. How to Support More Infrastructure Investment 28 1.4. Policy Implications 28 References 30 2. Public Investment and Capital in France 33 Mathieu Plane and Francesco Saraceno Introduction 33 2.1. The Net Wealth of Public Administrations 35 2.2. Evolution of Public Non-Financial Assets 36 2.2.1. The value of fixed assets remained constant 38 2.3. The Dynamics of Gross Investment 39 2.4. Net Flows of Fixed Assets Give Another (and Different) Picture 40 2.4.1. Since 2009, debt has not been used to finance an accumulation of assets 42 2.5. Assessing the Impact of an Investment Push in France 44 2.5.1. A quantification of investment needs for France 44 2.5.2. The macroeconomic impact of an investment shock 45 2.6 Conclusion 46 References 48 A European Public Investment Outlook vi 3. Public Investment in Germany: The Need for a Big Push 49 SebastianDullien, EkaterinaJürgens andSebastianWatzka Introduction 49 3.1. The German Public Capital Stock 49 3.2. Quantifying Investment Needs 53 3.3. Macroeconomic Implications of a Public Investment Program in Germany 57 Conclusion 60 References 60 4. Public Investment Trends across Levels of Government in Italy 63 Floriana Cerniglia and Federica Rossi Introduction 63 4.1. Public Investment in Italy 65 4.1.1. Public investments across regions 72 4.2. 2018, 2019 and 2020 Budgets: The Financial Resources for Public Investments 75 4.3. Conclusions and Some Policy Prescriptions 77 References 79 5. Trends and Patterns in Public Investment in Spain: A Mediumand Long-Run Perspective 83 José Villaverde and Adolfo Maza Introduction 83 5.1. Trends and Patterns of Public Investment in Spain in the EU Context, 2000–2017 84 5.2. Public Investment and Public Capital in Spain: A Long-Term Perspective 88 5.3. Conclusions 93 References 95 Part II—Challenges 97 6. In Search of a Strategy for Public Investment in Research and Innovation 99 DanielaPalma, AlbertoSilvani andAlessandraMariaStilo Introduction and Main Points at Issue 99 6.1. The EU in Depth 101 6.2. Public Investment 105 6.3. Final Remarks and Policy Considerations 109 References 112 7. Social Investment and Infrastructure 115 AntonHemerijck, MarianaMazzucato andEdoardoReviglio Introduction: The Welfare Lesson from the Great Recession 115 7.1. The Social Investment Life-Course Multiplier Effect 117 Acknowledgements As this Report goes to press, we want to express our gratitude to those who made our work possible. First, and foremost, to our respective institutions. Franco Bassanini, President of Fondazione Astrid, Alberto Quadrio Curzio, President of CRANEC and Xavier Ragot, President of OFCE-Sciences Po. Their support and encouragement are the reasons why this Report exists. They helped us in defining the scope and the form of the Report, in contacting some of the authors, and of course in guaranteeing financial and logistical support. But they did much more than this: they have put the issue of public investment at the centre of the respective institutions’ scientific project, carrying the weight of our endeavour. We also thank all the chapter authors, who in general respected the deadlines despite exogenous shocks, interacted with us and with the referees, and exchanged on the different chapters at an informal workshop. The result is a collective volume that, despite the heterogeneity of backgrounds, has a consistent message throughout. Organizing the different chapters into a whole was a relatively easy task, and we are deeply grateful to the authors for this. We also thank Giovanni Barbieri from CRANEC for his efficient editing of the volume. Last, but not least, we thank Rupert Gatti and Alessandra Tosi, of Open Book Publishers, who smoothly managed the refereeing process of the Report, and adapted to the new constraints posed by the COVID crisis. Floriana Cerniglia Francesco Saraceno Author Biographies Philipp-Bastian Brutscher is Senior Economist in the Economics Department of the European Investment Bank (EIB) where he is principally responsible for the EIB Investment Survey, a large-scale survey of corporate investment activities. Philipp acts as the focal point for the Department’s analytical work on business and infrastructure investment activities. He holds a Master’s and PhD degree from the University of Cambridge. Rocco Luigi Bubbico is Policy Advisor in the EIB Permanent Representative’s Office in Brussels. His research interests are in public investment, regional and urban development and transition to a zero-carbon economy. Previously he worked in the Directorate-General for Regional and Urban Policy of the European Commission. He holds a PhD from the University of Manchester and a Master’s degree from the University of Bologna. Mauro Bux (MSc in Economics of Public Policy, Barcelona Graduate School of Economics; PhD in Economics, University of Salento) is a research fellow at the Regione Puglia and teaching assistant in public finance at the Department of Economics of the University of Salento (Italy). His scientific research experience, both theoretical and applied, has so far focused on issues related to the evaluation of public policies, optimal taxation and the impact of EU-funded public investments. Roberto Cardinale is a Visiting Lecturer at the Bartlett School of Construction and Project Management where he recently completed his PhD with Professor D’Maris Coffman on the governance of transnational energy infrastructure projects, including the unbundling of transnational supply chains, the partial privatization of state-owned enterprises, energy market de-regulation under the European Union’s competition policy. His research has been published in Energy Policy and Structural Change and Economic Dynamics. During his postgraduate study at Università Cattolica del Sacro Cuore, he visited Sungkyunkwan University (Korea) and Galatasary University (Turkey) to gain an international perspective on state-owned enterprise, which was deepened by a further visit to Renmin University China during his doctoral education. Floriana Cerniglia is Full Professor of Economics at Università Cattolica del Sacro Cuore (Milan) and Director of CRANEC (Centro di Ricerche in Analisi economica e sviluppo economico internazionale) She is the Co-Editor-in-Chief of Economia A European Public Investment Outlook xvi Politica, Journal of Analytical and Institutional Economics. She received her PhD from the University of Warwick (UK) and her research interests are in Public Economics, mainly tax and spending assignment across government levels. She has published in leading international journals and she has coordinated and participated in a number of peer-reviewed research projects. D’Maris Coffman is the Head of Department at the Bartlett School of Construction and Project Management at University College London (UCL). Her interests span infrastructure, construction, real estate and climate change. She is the Managing Editor of Structural Change and Economic Dynamics and is on the advisory board of Economia Politica. Before joining UCL, she spent six years as a fellow of Newnham College, University of Cambridge, where she variously held a junior research fellowship (Mary Bateson Research Fellowship), a post as a college lecturer and teaching fellow, and a Leverhulme ECF. In July 2009, she started the Centre for Financial History, which she directed through December 2014. She did her undergraduate training at the Wharton School in managerial and financial economics and her PhD in the School of Arts & Sciences at the University of Pennsylvania. Paolo Costa is Contract Professor of Transport and Logistic Economics at the Ca’ Foscari University of Venice. He is also currently Chairman of the Board of Directors of SPEA Engineering s.p.a., Member of the Supervisory Board of Nice and Cote d’Azur Airport of Nice, Member of the General Council of Fondazione di Venezia, editorialist at Corriere del Veneto and Founding Partner of C+3C Systems & Strategies s.r.l. Between 1980 and 2003 he was Full Professor of Economics, Economic Planning, Transport and Regional Economics, Tourism Economics at the Universities of Venice (IUAV and Ca’ Foscari); he also taught at the Universities of Padua, Reading and at New York University. Rector of the University of Venice Ca’ Foscari (1992–1996). In his past career he was Vice President of the University of the United Nations in Tokyo (1995–1999). He served as Italian Minister of Public Works and Urban Areas (1996–1998), Mayor of Venice (2000–2005), Member of the European Parliament (1999–2009) and Chairman of the European Parliament Committee on Transport and Tourism (2003–2009). He had been President of the Venice Port Authority (2008–2017). As an International consultant, he served at the OECD, the International Transport Forum at OECD, the European Commission, Italian Ministry of Infrastructure and Transportation. Sebastian Dullien is Research Director at the IMK—Macroeconomic Policy Institute and professor for international economics at HTW Berlin—University of Applied Sciences. He has worked extensively on macroeconomic imbalances in the euro area and especially Germany’s contributions to these imbalances. Prior to being appointed at HTW Berlin in 2007, he has worked as an economics editor at the Financial Times Deutschland, the German language edition of the FT. Author Biographies xvii Hercules Haralambides is Professor in Maritime Economics and Logistics since 1992, having taught at eight universities (and in six different countries), the most prominent of which being Erasmus University Rotterdam and the National University of Singapore. Currently he is Distinguished Chair Professor at Dalian Maritime University in China and Adjunct Professor at Texas A&M University. Hercules is the founder of the Erasmus Center for Maritime Economics and Logistics (MEL, www. maritimeeconomics.com) and also the founding Editor-in-Chief of the quarterly journal Maritime Economics & Logistics (MEL), published by Palgrave-Macmillan (www.palgrave.com/41278). He has written and published over 300 scientific papers, books, reports and articles in the wider area of ports, maritime transport and logistics and has consulted governments, international organizations and private companies all over the world including, for a series of years, the European Commission. In the period 2011–2015, he was President of the Italian port of Brindisi and at the end of that period (2015) he established “Haralambides & Associates”: a global maritime think-tank engaged in executive education and strategic policy analysis. In 2008, he was decorated with the Golden Cross of the Order of the Phoenix by the President of the Greek Republic. Anton Hemerijck is Professor of Political Science and Sociology at the European University Institute (EUI) in Florence. Having trained as an economist and political scientist, he obtained his doctorate from the University of Oxford in 1993. Between 2001 and 2009, he directed the Scientific Council for Government Policy (WRR), the principle think tank in the Netherlands, while holding a professorship in Comparative European Social Policy at Erasmus University Rotterdam. Before that, he served as a senior researcher at the Max Planck Institute for the Study of Societies in Cologne. Over the past two decades he advised the European Commission and several EU Presidencies on European social policy developments. Important book publications include A Dutch Miracle with Jelle Visser (1997) and Why We Need a New Welfare State with Gosta Esping-Andersen, Duncan Gallie and John Myles (2002), and the monograph Changing Welfare States (2013). His most recent book publication is the edited volume The Uses of Social Investment (2017). Ekaterina Jürgens studied International Business at the HTW Berlin and Economics at the University of Cologne, and currently works as a research assistant at the Macroeconomic Policy Institute (IMK). Adolfo Maza is Associate Professor of Economics at the University of Cantabria. Adolfo received his PhD degree in Economics from the University of Cantabria in 2002. Later on, he completed a postdoctoral stay at the University of Berkeley. His main areas of research include regional economics, economic integration and globalization, labour market, migration and energy economics. He has published more than fifty papers in various international scientific journals included in the Journal Citation A European Public Investment Outlook xviii Report (JCR) databases. He has also participated in numerous international congresses and meetings, was awarded the “Young Researchers Prize” by the Spanish Regional Science Association. He has also acted as a reviewer for numerous scientific journals, as well as a reviewer for international funding agencies such as the National Science Foundation (USA) and the Austrian Science Fund. Marianna Mazzucato (PhD) is Professor in the Economics of Innovation and Public Value at University College London (UCL), where she is Founding Director of the UCL Institute for Innovation & Public Purpose (IIPP). IIPP is dedicated to rethinking the role of public policy in shaping both the rate of economic growth and its direction—and training the next generation of global leaders to build partnerships that can address mission-oriented societal goals. She is winner of the 2014 New Statesman SPERI Prize in Political Economy, the 2015 Hans-Matthöfer-Preis, the 2018 Leontief Prize for Advancing the Frontiers of Economic Thought and the 2019 All European Academies Madame de Staël Prize for Cultural Values. She was named as one of the “3 most important thinkers about innovation” by The New Republic, and is on The Bloomberg 50 list of “Ones to Watch” for 2019. Her highly-acclaimed book The Entrepreneurial State: Debunking Public vs. Private Sector Myths (2013) investigates the role of public organizations in playing the “investor of first resort” role in the history of technological change, and asks fundamental questions about how to share both risks and rewards. Her 2018 book The Value of Everything: Making and Taking in the Global Economy (2018) brings value theory back to the centre of economics in order to reward value creation over value extraction. It was a 2018 Strategy & Business Book of the Year and was shortlisted for the 2018 Financial Times and McKinsey Business Book of the Year prize. She advises policy makers around the world on innovation-led inclusive and sustainable growth. Her current roles include being a member of the Scottish Government’s Council of Economic Advisors; the South African President’s Economic Advisory Council; the OECD Secretary General’s Advisory Group on a New Growth Narrative; the UN’s Committee for Development Policy (CDP), SITRA’s Advisory Panel in Finland, and Norway’s Research Council. Through her role as Special Advisor for the EC Commissioner for Research, Science and Innovation, she authored the high impact report on Mission-Oriented Research & Innovation in the European Union, turning “missions” into a crucial new instrument in the European Commission’s innovation programme (Horizon). Jing Meng is a Lecturer in Economics and Finance at Bartlett School of Construction and Project Management at University College London. She works on the nexus of climate change and air pollution policies: environmental economics, energy innovation and sustainable consumption and trade policies. Jing’s recent research focuses on the impact of international trade on the distribution, climate and health impacts of black carbon. Jing received her PhD degree in Environmental Geography from Peking University, and holds a BA degree in Building Environment and Energy Engineering Author Biographies xix from Huazhong University of Science and Technology. Jing is a Guest Editor of the Journal of Environmental Management, and an editorial board member of the Journal of Cleaner Production and Global Transitions. She is also a fellow of the Cambridge Centre for Environment, Energy and Natural Resource Governance at the University of Cambridge. She has published over sixty papers in peer-reviewed journals, such as Nature Climate Change, Science Advances, Nature Geoscience, Nature Plants, and Nature Communications. She was awarded the “2018 Top 50 Earth and Planetary Sciences Articles” in Nature Communications and “2017 Best Early Career Articles” in Environmental Research Letters. Zhifu Mi is a Lecturer in Economics and Finance at the Bartlett School of Construction and Project Management at UCL. He has published over fifty papers in peer-reviewed journals, such as Science Advances, Nature Energy, Nature Geoscience, and Nature Communications. He is the Executive Editor of the Journal of Cleaner Production. He currently leads the project on Uncertainty Analysis of Carbon Capture, Utilization and Storage (CCUS) funded by The Royal Society (IEC\NSFC\181115), and co-leads the Finance & Economics Working Group for “The Lancet Countdown: Tracking Progress on Health and Climate Change”. He was awarded the 2018 World Sustainability Award for his leading research in the methodological developments and applications of carbon footprint. He was also honoured on the Forbes 30 Under 30 Europe in recognition of his innovative research in the economics of climate change. His research was awarded the “2018 Top 50 Earth and Planetary Sciences Articles” in Nature Communications, “2017 Best Early Career Articles” in Environmental Research Letters, and “2016 Highly Cited Original Papers” in Applied Energy. Daniela Palma is a Senior Researcher at ENEA (the Italian National Agency for New Technologies, Energy and Sustainable Economic Development) in the areas of Economy of Innovation and Sustainable Economic Development, including themes of Regional Analysis. She graduated with honours in Statistics and Economics on issues of International Economics at the Sapienza University of Rome, and holds a PhD in Applied Economic Analysis from the same university. She was Visiting Research Fellow at the National Center for Geographic Information and Analysis of the United States National Science Foundation at the University of California at Santa Barbara. Since 1999 she has been coordinating the activities of the ENEA Observatory on Italy in the International Technological Competition. Mathieu Plane is Deputy Director of Analysis and Forecasting Department at OFCE, the Research Center in Economics of Sciences Po Paris. He is in charge of economic forecasts for the French economy and works on economic policy issues. He has written several articles in scientific journals and has participated in a number of reports for public institutions. He teaches at Sciences Po Paris and at the University of Paris Pantheon-Sorbonne. In 2013–2014 he was economic advisor to the Minister of Economy, A European Public Investment Outlook xx Industry and Digital sector. He contributes regularly to media and newspapers. He has recently published, in collaboration with other authors of OFCE, “Budget 2019: Purchasing Power but Deficit”, “Saving(s) Growth. Economic Outlook for the French Economy 2019–2021 “ and “French Economy 2020” by Editions La découverte, Reperes collection. Francesco Prota (PhD in Agricultural and Environmental Economics, University of Naples “Parthenope”; MPhil in Environmental and Sustainable Development, University of Glasgow) is Associate Professor in Economics at the University of Bari “Aldo Moro” (Italy). His research interests include regional economics and international economic integration; development economics; public policy evaluation; innovation economics. Francesco is the author of several articles in economics journals, including World Development, Regional Studies, Papers in Regional Science, Journal of International Development, Development Policy Review, Economics Letters, European Planning Studies and Economia Politica, Journal of Analytical and Institutional Economics. Besides serving as referee for international journals, he is Associate Editor for Regional Studies, Regional Science and for L’Industria, Review of Industrial Economics and Policy. Debora Revoltella is Director of the Economics Department of the European Investment Bank since April 2011. The department comprises thirty economists and provides economic analysis and studies to support the bank in defining its policies and strategies. Before joining the EIB, Debora worked for many years on CESEE, first in the research department in COMIT, later as Chief Economist for CESEE in UniCredit. Debora holds a PhD in Economics and worked as adjunct Professor at Bocconi University. She is member of the Steering Committees of the Vienna Initiative and the CompNet, an alternate member of the Board of the Joint Vienna Institute and a member of the Boards of the SUERF and the Euro 50 Group. Edoardo Reviglio is Head of International and European Projects at “Cassa depositi e prestiti” (CDP), Rome. He is Adjunct Professor of Economics at LUISS Guido Carli in Rome and President and faculty member of International University College of Turin. He has been a member of the Council of Economic Advisers of the Italian Ministry of Economy and Finance. He is one of the co-authors and chairman of the Working Group on finance of the Prodi report on investing in social infrastructure. He has a considerable and recognized experience in academic and policy research and has been representing CDP in international institutions (UN, G20, G7, OECD, EU) and worked extensively with them. He is on the Board and Scientific Committee of several think tanks at national and international level. He received his BA, Summa Cum Laude, from Yale College; was Senior Fellow at Department of Mathematics of Yale University; and Research Associate at the Department of Mathematics of Imperial College, University of London. He is the author of many scientific and policy publications. His fields Author Biographies xxi of interest include: public finance, banking and finance, law and economics, and economic history. Roberto Roson is Associated Professor in Economic Policy at Ca’Foscari University Venice, Full Professor at Loyola Andalusia University and GREEN Senior Research Fellow, Bocconi University Milan. He is the author of several articles published in international scientific journals and books. He has coordinated several applied research projects, and acted as consultant for many organizations, such as European Commission (JRC), United Nations and FAO, the World Bank. He is Scientific Director of the “CF Applied Economics” Centre for applied research and analysis. His research interests deal primarily with environmental economics, computational models for simulation of economic policies, and industrial organization in the services. Federica Rossi is currently post-doctoral research fellow in Economics at Politecnico di Milano and she collaborates with Università Cattolica del Sacro Cuore in Milan (Italy). Federica received her PhD in Economics from Università della Svizzera italiana (Lugano, Switzerland) in 2018. Her research interests include topics in the area of regional economics and public investment. Francesco Saraceno is Deputy Department Director at OFCE, the Research Center in Economics of Sciences Po Paris. He holds PhDs in Economics from Columbia University and the Sapienza University of Rome. His research focuses on the relationship between inequality and macroeconomic performance and European macroeconomic policies. He has published in several international journals. In 2000–2002 he was member of the Council of Economic Advisors for the Italian Prime Minister’s Office. He teaches international and European macroeconomics at Sciences Po, where he manages the Economics concentration of the Master of European Affairs and in Rome (Luiss). He is Academic Director of the SciencesPo-Northwestern European Affairs Program. He is member of Confindustria`s Scientific Committee, and of the Scientific Board for the LUISS School of European Political Economy. He is active in the institutional dialogue, and in the public debate, on the EU. He advises the International Labour Organization (ILO) on macroeconomic policies for employment. Alberto Silvani is a science policy analyst in the field of innovation, technology transfer, assessment and evaluation. He spent his professional life mainly at the National Research Council of Italy (CNR), acting as research director, with both research and management responsibilities. His academic teaching career includes University of Cassino (Management of Innovation) and University of Milan (Technology Transfer and Evaluation). He was national expert at the European Commission in Brussels for four years. He is national delegate in the European Network of Research Evaluation (EvalNet) and a member of the scientific committee of CRANEC at the Catholic University of Milan. He works with the Monitoraggio Economia Territorio (MET), a consulting company providing studies and analyses on industrial policy. A European Public Investment Outlook xxii Alessandra Maria Stilo has a degree in Business Economics and has worked for the National Research Council of Italy (CNR) since 2007. Her work focuses on research project management, technology transfer, research policies and science policies at the national, European and international levels. She is a PhD candidate at the University of Urbino Carlo Bo; for her research project on researcher’s mobility and migration she spent ten months as visiting scientist at the European Commission—Joint Research Centre (JRC) in Seville (Spain). Gianfranco Viesti is Full Professor of Applied Economics in the Department of Political Sciences of the University of Bari. His main research interests cover local and regional development and policies, industrial and innovation economics and policy, international trade, European economic policies. His latest book is Verso la secessione dei ricchi? Autonomie regionali e unità nazionale (2019). José Villaverde is Full Professor of Economics at the University of Cantabria. He received his PhD degree in Economics from the University of País Vasco. He has been visiting Professor at many universities in Denmark, England, Taiwan, China, United States, Belgium, Chile, Poland, Czech Republic, Ecuador and Argentina. His current research interests revolve around international and regional economics, economic integration and globalization and labour market. He has authored several books and published more than 150 papers in refereed journals. He has also participated in many international congresses and meetings, has acted as a consultant of the World Bank and the European Commission and has served as a reviewer for numerous scientific journals in Economics. Sebastian Watzka heads the unit “European Macroeconomic Developments” of the Macroeconomic Policy Institute (IMK—Institut für Makroökonomie und Konjunkturforschung) in the Hans-Böckler Foundation. He studied economics at the University of Cambridge and received his PhD in economics from the European University Institute (EUI) in 2007. Before joining the IMK he was working as Assistant Professor at the Seminar for Macroeconomics at Ludwig Maximilian University (LMU) Munich. Introduction 7 of changes in prices. The stock of fixed assets, which represents the accumulation of public productive capital, has been much more stable, and it is owned mostly by local governments. The authors then focus on flows (investment), to conclude that, with the exception of intellectual property rights, all components of public investment are today at historic lows and it is “civil engineering works” that have experienced the greatest decline. For the last three years, public net investment was negative, meaning that France does not accumulate public capital anymore. In fact, since 2009 the increase of debt has not been used to finance new investment but mostly current expenditure. Finally, the chapter analyses, by means of a multi-sector macroeconomic model, the impact on growth in different macro sectors, of a permanent increase of public investment. Based on this analysis, the chapter concludes with an assessment of the public investment needs of the French economy, and, like other chapters of the Report, pleads for the introduction of a Golden Rule of public finances aimed at preserving capital expenditure. Chapter 3, by Sebastian Dullien, Ekaterina Jürgens and Sebastian Watzka, reports on German debates about public investment. As with France, underinvestment by the public sector over the past two decades has led to a severe deterioration of the public capital stock. Moreover, demographic change, decarbonization and digitalization pose significant challenges for the German economy which imply additional public investment needs. A detailed sector-by-sector overview of investment requirements concludes that investment requirements add up to at least €450 bn over the next decade. Through a macroeconomic simulation, it is shown that a debt-financed increase of public expenditure of this magnitude would be compatible with keeping the debt-toGDP-ratio below 60% and would have a positive impact on potential growth. Chapter 4, by Floriana Cerniglia and Federica Rossi, addresses the case of Italy. They start from the premise that this country, over the last decade, has experienced the worst economic crisis, which has had a huge impact on the already weak public finance conditions. Italy had to implement extraordinary actions to contain and reduce its public debt. Public investments have been curtailed the most, with respect to other functional areas of expenditure. The chapter provides an overview of major trends in public capital expenditure, including local and national public companies, which in Italy are significant contributors to public investment. The chapter considers also the breakdown of public investment by levels of government. Since the reform of the Italian Constitution in 2001, the interactions between levels of government in Italy have become increasingly challenging. Coordination issues between the central government and sub-national governments in running current and capital expenditures as well as the financing of local expenditures (both current and capital) remain unsolved problems, which most obviously impact the time required to make an investment. Moreover, Italy’s regional divide remains large, and sadly, it continues to grow. The issue of having shares of public investments in North-Central Italy and the Mezzogiorno, that proportionally reflect the population in those areas, A European Public Investment Outlook 8 has been a serious political concern these last years. Finally, the chapter discusses some legislative and bureaucratic factors that keep investments in Italy from taking off and hinder the transformation of resources into actual construction sites. The authors conclude by an assessment of some policy prescriptions for the relaunch of Italian public investment. In chapter 5, José Villaverde and Adolfo Maza discuss the case of Spain, which, like Italy, has experienced the most acute economic crisis since the end of the Second World War. Because of that, the country had to face some important constraints in its public finances and public investment experienced a severe blow after the outbreak of the crisis. Before the 2008 Global Financial Crisis—namely during the period 2000– 2007—Spain was the country that registered the second highest increase in public gross fixed capital formation among the five biggest European countries (France, Germany, Spain, Italy and the UK), a rate (6.8% per year) that was also much higher than that of the EU (2.3%) and the euro area (2.6%). However, over the next period, 2008–2013, the situation changed completely: public investment dropped on an annual basis at a rate close to 11%; thus, Spain suffered the most acute decline in public investment by far among the among the big five. It also emerges that public investment in Spain has been very volatile and pro-cyclical over time (with large increase periods during boom times and huge falls during recessions); investment in infrastructures always represents the main component of public investment. This implies a policy agenda towards a more anti-cyclical stance and a rebalancing of types of investments, for instance the necessity to increase the share devoted to information and communications technology (ICT). A common theme that emerges from the first part is that in Europe, and specifically in its largest economies, the legacy of the Global Financial Crisis is one of insufficient public investment. The chapters were written before the COVID outbreak, and the reader can easily imagine how current events will make the need for public capital, broadly defined, even more stringent. The second part of the Report investigates some possible areas into which resources could be channelled to reverse the recent trend and provide the European economies with an adequate public capital stock. Recently, economic literature has not only focused its attentions on the growth of physical infrastructures, as such. Economic analysis has sought to analyse more carefully types of investments which are very favourable to economic growth (OECD 2015). For instance: public R&D research investments, social investments, public infrastructure targeted to support private spending and business investments that may take advantage of location, and investments that may be necessary to respond to global climate emergencies. Understanding the challenges and opportunities of these types of investment could lead to improved infrastructural policy in Europe. In this respect, it is strongly recommended to have an assessment also on types of investments in the EU Cohesion Policy, to date the main investment policy in EU. The second part of the Outlook offers some ideas for the policy debate on these themes. Introduction 9 Chapter 6, by Daniela Palma, Alberto Silvani and Alessandra Maria Stilo, analyses the role of research and innovation as key drivers of economic growth, and as an object of renewed concern in the European policy agenda. In this regard, however, special attention has been paid to the role played by public funding with respect to the now more than ever complex evolution of technological innovation and the need for the productive structure to be supported to continuously capture the potential of new technologies. Starting from a well-established ground of most recent analyses carried out on main R&D indicators by major institutional organizations, the authors present a work aimed at bringing out the nature of “system infrastructure” of European research activity, calling for the need to assess to what extent the resources dedicated to R&D and the relative spending modes are able to turn into an effective development lever, starting from the structural characteristics of the entire research and innovation system. They claim that, in order to overcome the existing differential between EU countries in research and innovation performances, rebalancing public funding, while orienting intervention towards common initiatives, is not enough. The implementation of a new course of public investment research policies should instead envisage a renewed orientation of the strategies consistent with the new course of missions/objectives formulated at the European level and, at the same time, point to a coordination with policies aimed at increasing the innovative potential of the economic system, in relation to the characteristics of the productive specialization of each country. Anton Hemerijck, Mariana Mazzucato and Edoardo Reviglio, in chapter 7, offer an original perspective: the most competitive economies in the EU spend more on social policy and public services than the less successful ones. However, the twentyfirst century knowledge economies are ageing societies and require European welfare states to focus as much — if not more — on ex-ante social investment capacitation than on ex-post social security compensation. The growing needs for social services will require new and updated social infrastructure. According to a report on social infrastructure in Europe coordinated by former President of the European Commission Romano Prodi in 2018, the minimal gap is estimated at €100–150 bn per annum and represents a total gap of over 1.5 tn in 2018–2030. Long-term, flexible and efficient investment in education, health and affordable housing is considered essential for the economic growth of the EU, the well-being of its people and a successful move towards upward convergence in the EU. But how do we finance the great new needs with such a pressure on public finances? The chapter suggests innovative financial solutions using institutional and community resources to lower to cost of funding of social infrastructure. One such solution is the creation of a large European Fund for Social Infrastructure, owned by State Investment Banks (SIBs) and institutional longterm investors, which would fund its operations by issuing a European Social Bond. In this endeavour, a central role must be played by the EIB and by State Investment Banks. The authors discuss the potential role of these “mission-oriented” SIBs in social innovation by changing their mission. They should not simply “compensate market A European Public Investment Outlook 10 failures” but also become institutions that “shape the market” and become major providers of sustainable long-term and patient finance to deliver public value. Paolo Costa, Hercules Haralambides and Roberto Roson, in chapter 8, look back at the genesis — in Europe — of the transnational transport infrastructure which has long coincided with the Ten-T network, developed — sometimes as a weak Keynesian stimulus — as a tool for strengthening the cohesiveness and economic efficiency of the internal market. Following the enlargement of the EU, Ten-T has been evolving from 1996 to 2013, and has been encouraging modal shifts from road and air to rail, inland navigation and short-sea shipping, in order to achieve higher environmental sustainability and combat climate change. However, during these notable efforts, little attention has been paid to the external dimension of European connectivity. Along with addressing a number of technical disruptions affecting transport and its infrastructure, the new wave of Ten-T revision — due by December 2023 — must depart from what has thus far been an introverted view of Europe as a single market (something that has often penalized European competitiveness) to an extroverted orientation of the Union as a key player in a global market. The growing economic centrality of Asia since China’s accession to the World Trade Organization (WTO); China’s strong interest in the Mediterranean Basin as the “super-hub” that connects four continents; and the eastward shift of the European economic barycentre: all of these developments indicate possible solutions for addressing the “geographical obsolescence” of the current Ten-T. In parallel, innovation-driven disruption of the worldwide maritime freight transport network and its infrastructure necessitates the streamlining of port nodes and rail networks around the world, in a way that at the same time addresses efficiently the current “technological obsolescence” of big parts of European infrastructure, predominantly of ports. The authors argue that new Ten-T network evolving into a Twn-T (Trans-Global) one ought to no longer be the product solely of European decisions: dovetailing Ten-T with China’s “Belt and Road Initiative — BRI” will not only be unavoidable but also, rather, a most welcome development. The global climate emergency is the main concern of chapter 9, by D’Maris Coffman, Roberto Cardinale, Jing Meng and Zhifu Mi. Anthropogenic climate change is widely understood to be the greatest existential threat to human societies in the coming centuries. The Intergovernmental Panel on Climate Change (IPCC) was established in 1988 to coordinate a global response to the coming crisis. The IPCC’s publication of the Special Report on Global Warming of 1.5 °C (SR15) in October 2018 has helped to galvanize public opinion and has given rise to unprecedented climate activism. State actors now recognise a need for immediate action. Broadly speaking, possible responses to climate change fall into three categories: mitigation, adaptation and remediation. Mitigation means measures to reduce carbon and methane emissions or to enhance carbon sinks; adaptation means measures that ameliorate the effects of climate change on human populations; and remediation means intentional measures to counteract Introduction 11 the effects of greenhouse gas (GHG) emissions, including global warming and ocean acidification. There are inevitable trade-offs between the costs of mitigation and those of adaptation over decadal time horizons. Nevertheless, with all three responses, large-scale infrastructure investment is required, with varying degrees of involvement by state actors, multilateral organizations, other non-governmental organizations (including religious groups) and, most significantly, private capital markets. In the current climate, multilateral development banks (MDBs) have taken a leading role. The EIB particularly is in the process of rebranding itself as a Climate Bank for Europe following Emmanuel Macron’s call. The authors then explore the investment opportunities that arise as a result of the growing urgency of the low carbon transition. As mentioned, the Cohesion Policy is the EU’s main investment policy and—in the wake of the 2008 Global Financial Crisis—the European Regional Development Fund and the Cohesion Fund became the major sources of finance for investment in many countries. Francesco Prota, Gianfranco Viesti and Mauro Bux, in chapter 10, review how this policy has evolved over time in terms of financial size and geographical coverage. Firstly, in the programming period 2000–2006, the centre of gravity in Structural Funds allocation shifted from the Southern regions too the Eastern regions of Europe. What is interesting is that, looking at the expenditure composition by types, ‘transport infrastructure’ and ‘environmental infrastructure’ are the main expenditure items. The investments in transport infrastructure financed by the Cohesion Policy have changed the accessibility of EU regions. In particular, many regions in Eastern Europe have significantly benefitted from the Cohesion Policy financed transport infrastructure investments in terms of improved accessibility. Also, as result of the 2008 crisis, the Cohesion Policy has been the major source of finance for public investment for many Member States of the European Union. In 2015–2017 it represents around 14% of the total; this figure is larger than 50% in some small Central and Eastern European countries, in Portugal and Croatia; larger than 40% in Poland; larger than 30% in most of the other Central and Eastern European countries. In the EU-15, the figure is lower in most Member States (7% for Spain, 4.4% for Italy and 2.5 % for Germany). However, it has reached 20% of total capital expenditures in Convergence regions in Spain, 15% in Italy and 10% in Germany. The authors of the different chapters of this Outlook come from different countries, and from different intellectual and professional backgrounds. The diversity of the topics they tackle and of their approaches, nevertheless, does not prevent a strong message from emerging throughout the volume; a message that in the current health and economic crisis is more relevant than ever: Without an increased role for public investment, without a less myopic approach to costs and benefits of fiscal policy, without embedding a long-term horizon into the trade-offs that inevitably characterize public policy, none of the challenges facing European economies will be properly dealt with. While the policy prescriptions of the Report are varied and sector-specific, many of the chapters share the idea that European fiscal rules should be revised to A European Public Investment Outlook 12 eliminate the bias against investment. This is an idea that is now consensual even among European policy makers. We already cited the assessment by the European Fiscal Board (2019), highlighting the existence of the bias especially during the 2010–2015 fiscal consolidation phase. The same diagnosis motivates the consultation process recently (February 2020) launched by the Commission on the reform of the Stability and Growth Pact. While that consultation has been put on hold during the COVID emergency, it is likely that it will resume sometime in the future, and that the emergency itself will have pushed towards a rewriting of the rules with the aim of preserving public investment. The old idea of a Golden Rule is now making headway again in policy circles; such a rule would allow debt financing of investment expenditure, requiring countries to balance current expenditure and revenues. In light of the discussions of the Report, the challenge would be to abandon a mere accounting approach, and to define investment in a functional way, so as to encompass all the sectors discussed here (Dervis and Saraceno 2014). But this is only part of the solution. The discussions on the 2021–2027 European Union budget stalled until very recently: held hostage by countries’ defence of their positions around decimals of a point of GDP. The COVID-19 crisis is reshuffling the cards: a substantial increase of the EU budget, together with a more pervasive role to be played by the EIB, is one of the options on the table to end the stalemate on debt mutualization. It is a vaste programme3 indeed, that we face. The management of the emergency cannot be disentangled from a long-term rethinking of our growth model, of the role of the welfare state, of the best policies to preserve the social capital of the economy. As if this were not enough, in Europe this also forces us to ask the question of the appropriate institutions for macroeconomic governance. This Report provides a state of the art of these issues and starts by investigating some of the answers. References Aschauer, D. A. (1989) “Is Public Expenditure Productive?”, Journal of Monetary Economics 23(2): 177–200, https://doi.org/10.1016/0304-3932(89)90047-0 Berg, T. O. (2015) “Time Varying Fiscal Multipliers in Germany”, Review of Economics 66(1): 13–46. Blanchard, O. J. and D. Leigh (2013) “Growth Forecast Errors and Fiscal Multipliers”, American Economic Review 103(3): 117–20, https://doi.org/10.1257/aer.103.3.117 Bom, P. R. D. and J. E. Ligthart (2014) “What Have We Learned from Three Decades of Research on the Productivity of Public Capital?”, Journal of Economic Surveys 28(5): 889–916, https:// doi.org/10.1111/joes.12037 3 To borrow the phrase used by General De Gaulle, which translates as “wide-ranging agenda”, in his famous response to a Minister who asserted that it was time for the government to start dealing with problems posed by idiots. Introduction 13 Creel, J., E. Heyer, and M. Plane (2011) “Petit Précis de Politique Budgétaire Par Tous Les Temps: Les Multiplicateurs Budgétaires Au Cours Du Cycle”, Revue de l’OFCE 116: 61–88, https:// doi.org/10.3917/reof.116.0061 Dervis, K. and F. Saraceno (2014) “An Investment New Deal for Europe”, Brookings Blogs—Up Front, September 3, https://www.brookings.edu/blog/up-front/2014/09/03/ an-investment-new-deal-for-europe/ Draghi, M. (2020) “We Face a War against Coronavirus and Must Mobilise Accordingly”, The Financial Times, March 25, https://www.ft.com/content/c6d2de3a-6ec5-11ea-89df-41bea055 720b European Fiscal Board (2019) “Assessment of EU Fiscal Rules”, August, https://ec.europa.eu/ info/sites/info/files/2019-09-10-assessment-of-eu-fiscal-rules_en.pdf Gechert, S. (2015) “What Fiscal Policy is Most Effective? A Meta-Regression Analysis”, Oxford Economic Papers 67(3): 553–80, https://doi.org/10.1093/oep/gpv027 Gechert, S. and H. Will (2012) “Fiscal Multipliers: A Meta Regression Analysis”, IMK Working Paper 97. Glocker, C., G. Sestieri and P. Towbin (2017) “Time-Varying Fiscal Spending Multipliers in the UK”, Banque de France Working Paper 643, https://doi.org/10.2139/ssrn.3046453 IMF (2014) “Legacies, Clouds, Uncertainties”, World Economic Outlook, October, https://www. imf.org/en/Publications/WEO/Issues/2016/12/31/Legacies-Clouds-Uncertainties Izquierdo, A., R. Lama, J. Medina, J. Puig, D. Riera-Crichton, C. Vegh, et al. (2019) “Is the Public Investment Multiplier Higher in Developing Countries? An Empirical Exploration”, IMF Working Papers 19(289), https://doi.org/10.5089/9781513521114.001 Jordà, Ò. and A. M. Taylor (2016) “The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy”, Economic Journal 126(590): 219–55, https://doi.org/10.1111/ecoj.12332 Kamps, C. (2006) “New Estimates of Government Net Capital Stocks for 22 OECD Countries 1960–2001”, IMF Staff Papers 53(1): 120–50. PART I — OUTLOOK 1. Europe Needs More Public Investment 23 a. Infrastructure investment (% of GDP)—by institutional sector 0.0 0.5 1.0 1.5 2.0 2.5 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Infrastructure Investment (% of GDP) Non-PPP Project PPP Corporate Government b. Infrastructure investment (% of GDP)—by sector of economic activity 0.0 0.5 1.0 1.5 2.0 2.5 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Infrastructure Investment (% of GDP) Health Education Utilities Communication Transport Fig. 6 Infrastructure investment by sector and promoter Note: based on EIB Infrastructure Database. Data are missing for Belgium, Croatia, Lithuania, Poland, Romania and the UK. PPP: public-private partnership. Source of data: Eurostat, Projectware, EPEC. Figure created by the authors. A European Public Investment Outlook 24 Government infrastructure investment includes fewer sectors and asset types than overall public investment. While public investment spans all sectors of economic activities including, for example, defence, security and recreational activities, infrastructure investment is limited to a narrower set of activities. Notably, for this paper it includes transport, energy, water, ICT, health and education. In addition, whereas public investment does not differentiate between investments in different asset classes, infrastructure investment activities are limited to gross fixed capital formation in ‘other buildings and structures’; therefore excluding investments in machinery, equipment, vehicles and intellectual property. To the extent that infrastructure investment activities are often much more bulky than non-infrastructure public investment, they lend themselves more easily to delays and/or cuts (EIB 2017). The decline in government infrastructure investment has affected primarily the transport sector and educational sector. Government infrastructure investment accounts for the biggest share of total infrastructure investment in the transport and education sector (with 80% and 90% of total infrastructure investment, respectively). The share of government investment is lower in other sectors (55% in health; 30% in the utilities sector; and 10% in ICT). If we compare the evolution of infrastructure investment across the various economic sectors, it is, therefore, not surprising to find that—on the back of the strong contraction of government investment in these sectors—it is in particular transport and education that saw the strongest declines in overall investment activities. Sub-national governments reduced their infrastructure investment activities disproportionately. Subnational investment accounts for more than half of overall government infrastructure investment (Figure 7). If we compare the fall in overall government infrastructure investment and the change in sub-national infrastructure investment, we find that changes in overall government infrastructure investment often came with disproportionate changes at the subnational level in the same direction. This is true in particular in regions with little fiscal autonomy (EIB 2017). The fall in government infrastructure investment does not reflect a saturation effect. The fall in infrastructure investment activities was particularly pronounced in regions which had a poor infrastructure quality to start with (EIB 2018). However, were the drop infrastructure investment driven by diminishing returns to the construction of new infrastructure, the opposite would be the case. In addition, the EIB Municipalities Survey shows that about one in three municipalities report that infrastructure investment activities in the last five years were below needs (Figure 8). Finally, and again in contrast with the view of a saturation-driven decline in infrastructure investment activities, there is evidence that the construction of new infrastructure continues to produce large positive economic spillover effects (EIB 2018). Fig. 7 Change in subnational investment share by overall government investment trend Note: blue bars in Panel b refer to countries in which regions have relatively high fiscal autonomy, red bars to countries in which fiscal autonomy is relatively low. The change in subnational investment share by fiscal autonomy is based on a relatively small number of observations and should therefore be taken as indicative. Source of data: Eurostat, Projectware, EPEC (for infrastructure investment) and Eurostat for subnational government investment in infrastructure sectors. Fiscal autonomy data comes from Hooghe et al. (2018). Figure created by the authors. a. Change in subnational investment share -12 -10 -8 -6 -4 -2 0 2 4 Increased or stayed the same Decreased Government Investment Change in subnational investment share b. Change in subnational investment share by fiscal autonomy -30 -20 -10 0 10 Autonomous Not-Autonomous Autonomous Not-Autonomous Government Investment Increased or Stayed the same Government Investment Decreased Change in subnational investment share A European Public Investment Outlook 26 Weak infrastructure investment has led to substantial investment gaps. A bottom-up estimation suggests an annual “investment gap” of roughly €155 bn for the EU27 (i.e. all Member States except the United Kingdom) until 2030. This corresponds to 1.2% of the current EU27 GDP and 5.8% of Gross Fixed Capital Formation (Table 1). The investment gap is defined as the difference between investment needs and current investment levels. The infrastructure investment gap of €155 bn per year is only one part of the estimated overall investment gap of €403 bn, as investment needs in innovation and energy efficiency are also substantial. If dynamics in infrastructure investment do not reverse, this gap is likely to increase. Fig. 8 Underprovision of infrastructure by Country and Sector Note: the Figure plots the net balance of municipalities that report underinvestment by country/ region and sector. A green circle signifies a share of mentions below the median; a red circle above the median. The number inside each circle states the net balance of municipalities that report underinvestment vis-à-vis over-investment for a particular area in a country/country grouping. Source of data: EIB Municipality Survey. Figure created by the authors. Question: for each of the following, would you say that, overall, past investment in your municipality has ensured the right amount of infrastructure, or led to an underprovision or overprovision of infrastructure capacity? EU France Germany Italy Spain Poland United Kingdom Other Northern Europe Other Southern Europe Other Central Europe South East Europe Baltics Benelux Urban Transport Health Education Housing Enviroment ICT Total 28% 23% 29% 33% 19% 19% 6% 22% 14% 22% 17% 13% 27% 13% 23% 17% 30% 13% 29% 18% 18% 14% 33% 11% 25% 20% 27% 21% 25% 12% 28% 31% 27% 22% 16% 14% 23% 26% 33% 6% 11% 1% 22% 28% 13% 35% 44% 34% 37% 53% 40% 36% 50% 37% 37% 47% 47% 47% 47% 37% 37% 37% 43% 33% 47% 38% 43% 40% 35% 43% 43% 69% 37% 37% 40% 33% 39% 36% 48% 35% 36% 36% 41% 53% 54% 43% 58% 37% 40% 46% 42% Table 1 Annual infrastructure investment gaps for EU 27 Note: GDP and Gross Fixed Capital Formation (GFCF) refer to 2017. All numbers refer to EU27, i.e. all Member States except the UK. Estimates of infrastructure investment gaps are based on EU policy targets and EIB expert judgements. Notably, EU policy targets for broadband (European Gigabit Society targets), energy (EU 2030 climate and energy targets) and water and sanitation (compliance with EU Directives) are considered. For mobility and social infrastructure, investment needs reflect past investment backlogs combined with higher future needs to accommodate demographic trends, migration and other megatrends. Source of data: estimates by the EIB Projects Department. Fig. 9 Infrastructure financing and infrastructure quality Note: bottom (top) tercile refers to the third of municipalities reporting the lowest (highest) average infrastructure quality relative to country mean. Source of data: EIB Municipalities Survey 2017. Figure created by the authors. Questions: can you tell me approximately what proportion of your infrastructure investment activities were financed by each of the following? Thinking about all of the external finance you used for your infrastructure investment activities, how satisfied or dissatisfied are you with: the number of available external funding sources; amount of external funding available; interest rates offered; maturities available (i.e. the length of time over which the external finance has to be repaid); administration/documentation requirements associated with the external finance? 0 10 20 30 40 50 60 70 Budget Balance Debt Limit External Finance Share of municipalities Bottom Tercile Top Tercile A European Public Investment Outlook 28 1.3. How to Support More Infrastructure Investment Tight funding conditions are a key bottleneck to more infrastructure investment. This is true in particular for regions with low infrastructure quality. Cities with a low infrastructure quality (relative to the country average) perceive external finance, the budget balance and debt limits more often as major obstacles than municipalities with high infrastructure quality, according to the EIB Municipalities Survey 2017 (Figure 9). The Survey also shows that municipalities with low infrastructure quality fund their infrastructure more often through transfers and external financing. This may reflect that those municipalities more often face fiscal constraints. Besides overcoming funding constraints, careful project selection and implementation are key to ensure that the funding goes to where it is needed the most. Cities that report infrastructure gaps seem to suffer more often from technical deficiencies in selecting and implementing complex infrastructure projects. 43% of municipalities that report their infrastructure quality to be lower than their withincountry peers also report the technical capacity to implement infrastructure projects as being major obstacle, compared to 30% for within-country peers with high quality infrastructure. Moreover, municipalities with low infrastructure quality conduct independent assessments along different dimensions less often before going ahead with an infrastructure project. They also consider this kind of information to be important or highly important less often when taking decisions on individual projects (Figure 10). This is problematic as it suggests that, even if the necessary funding were available, municipalities may have difficulties in using it effectively to address gaps due to limited infrastructure governance. The need to increase infrastructure spending and building up technical capacity must be assessed in the context of other challenges (EIB 2018). Notably, geographical and socioeconomic obstacles can create spending pressures and hamper governments’ ability to invest more and better. The EIB Municipalities Survey suggests that low infrastructure quality is often associated with geographical challenges constraining the ability to upgrade infrastructure. For example, municipalities with low infrastructure quality tend to be more often characterised by a small population, a lower population density and are situated in border areas. Moreover, municipalities that assess the quality of their infrastructure to be low also face a number of socioeconomic challenges more often. They suffer more often from weaker safety conditions, lower income per capita, a lower share of fast-growing firms and employment ratios. 1.4. Policy Implications Public investment and government infrastructure investment activities have been exceptionally weak in recent years. Despite increased fiscal space in most parts of Europe, thus far we see, at best, a modest reversal in the negative trend in public investment. a. Area of assessment 0 10 20 30 40 50 60 70 80 Budget Economic CBA Environment Urban Strategy Percentage of municipalities Bottom third Top third b. Importance of assessment 0 10 20 30 40 50 60 70 80 Bottom third Top third Percentage of municipalities Fig. 10 Independent assessment of projects and infrastructure quality Note: bottom/top third refers to the third of municipalities reporting the lowest (highest) average infrastructure quality relative to the country mean. Panel a. reports the share of municipalities that respond “always” or “frequently” to the question “Before going ahead with an infrastructure project, do you carry out an independent assessment of …?”. Panel b. reports the share of municipalities that respond “critical” or “important” to the question “And how important would you say are the results of the independent assessment/s when deciding whether or not to go ahead with a project?” Source of data: EIB Municipalities Survey 2017. Figure created by the authors. A European Public Investment Outlook 30 The sluggish investment performance cannot be explained by saturation effects, but rather reflects underinvestment. Notably, spillovers to new infrastructure investment for the business sector continue to remain high. Moreover, one in three municipalities state that recent investment volumes have been below their needs. In some parts of Europe (particularly in weaker regions), this share is even higher. Sound project selection, preparation and implementation are key to addressing infrastructure gaps, in disadvantaged and leading regions. Evidence suggests that a key obstacle to more investment is access to funding. However, infrastructure investment is also often hampered by limited implementation and planning capacity (Oprisor et al. 2015). To ensure the efficient use of available funds, sound infrastructure governance is key. A comprehensive analysis of all economic and social costs and benefits should thus accompany any spending increase (Kline and Moretti 2014). Application procedures for EU funds can be used to promote the comprehensive use of cost-benefit analysis. The EU’s upcoming Multiannual Financial Framework provides an opportunity to address the identified infrastructure gaps through a coherent policy mix. The first proposal of the European Commission (EC) includes important steps in this direction (European Commission 2018). Notably a countercyclical investment support scheme is envisaged, to avoid a lasting decline in infrastructure investment after economic downturns. Moreover, the EC proposal aims to strengthen the link between EU funding and respect for the rule of law. It also includes proposals to expand the Reform Support Programme, which offers technical and financial support for reforms. Such initiatives can ensure that infrastructure planning, governance and funding go hand in hand. The EIB has traditionally worked towards delivering such coherent policy solutions. Notably, the EIB combines the financing of projects with high socioeconomic returns, including those with high risks, with technical assistance solutions. References Calderon, C. and Serven L. (2014) Infrastructure, Growth and Inequality: An Overview. Washington, DC: World Bank, http://documents.worldbank.org/curated/en/322761468183548075/pdf/ WPS7034.pdf EIB (2017) EIB Investment Report 2017/2018: From Recovery to sustainable growth. Luxembourg: European Investment Bank, https://www.eib.org/attachments/efs/economic_investment_ report_2017_en.pdf EIB (2018) EIB Investment Report 2018/2019: Retooling Europe’s Economy. Luxembourg: European Investment Bank, https://www.eib.org/attachments/efs/economic_investment_ report_2018_en.pdf EPEC/Eurostat (2016) “A Guide to the Statistical Treatment of PPPs”. Report. Eurostat and the European PPP Expertise Centre, https://www.eib.org/attachments/thematic/ epec_eurostat_statistical_guide_en.pdf 1. Europe Needs More Public Investment 31 European Commission (2017a) “Government Investment in the EU: The Role of Institutional Factors”. Report on Public Finances in EMU, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission, https://ec.europa.eu/info/sites/info/files/ economy-finance/ip069_iv_government_investment_in_the_eu.pdf European Commission (2017b) My Region, my Europe, our Future: Seventh Report on Economic, Social and Territorial Cohesion. Brussels: European Commission. European Commission (2018) A Modern Budget for a Union that Protects, Empowers and Defends the Multiannual Financial Framework for 2021–2027. Communication from the Commission, COM(2018), 2 May 2018. Brussels: European Commission, https://eur-lex.europa.eu/ legal-content/EN/TXT/?uri=COM%3A2018%3A321%3AFIN Kline, P. and E. Moretti (2014) “People, Places, and Public Policy: Some Simple Welfare Economics of Local Economic Development Programs”, Annual Review of Economics 6(1): 629–62. Oprisor, A., G. Hammerschmid, and L. Löffler (2015) The Hertie School—OECD Global Expert Survey on Public Infrastructure. Berlin: Hertie School of Governance. Revoltella, D. and P.-B. Brutscher (2018) “Infrastructure Investment in Europe: New Data, Market Dynamics, Policy Actions, and the Role of the European Investment Bank”, in Finance and Investment: The European Case, ed. by C. Meyer, S. Micossi, M. Onado, M. Pagano and A. Polo (Oxford: Oxford University Press), pp. 299–316. Revoltella, D., P.-B. Brutscher, A. Tsiotras and C. T. Weiss (2015) “Linking Local Business with Global Growth Opportunities: The Role of Infrastructure”, Oxford Review of Economic Policy, 32(3): 410–30, https://doi.org/10.1093/oxrep/grw019 World Economic Forum (2017a) World Economic Forum Global Competitiveness Indicators. Geneva: World Economic Forum. World Economic Forum (2017b) “Migration and its Impact on Cities”. Report in collaboration with PwC, October, http://www3.weforum.org/docs/Migration_Impact_ Cities_report_2017_HR.pdf 2. Public Investment and Capital in France 39 Fig. 4 Fixed assets by item (as a percentage of fixed assets) in 1978, 2007 and 2018 Source of data: Insee. Figure created by the authors. 2.3. The Dynamics of Gross Investment The previous section showed a substantial stability of the public capital stock, whose dynamics for most categories followed the long cycles of economic activity. The only exceptions were non-produced NFAs, whose increase in value was mostly driven by land prices. Nevertheless, stock analysis only gives a partial picture: while nonproduced NFAs account for 40% of the value of the total stock of capital, they account for less than 3% of NFA flows (i.e. gross public investment, in the terminology of national accounts). In fact, 97% of these flows are accounted for by fixed assets. And when we turn our attention to flows, valuation effects do not play any role. As we said above, the flow of fixed assets, i.e. gross investment, has declined sharply since 2011. It has stood between 3.3% and 3.5% of GDP since 2015, its lowest level since the early 1950s. In 2018, 29% of general government gross investment consisted of “non-residential buildings”, 29% of “other civil engineering works”, 27% of “intellectual property rights” (of which 22% are research and development and 5% are software and databases), 7% are “machines and equipment,” 3% are “weapon systems” and 2% is “housing”. Most of these items had similar dynamics over time, with peaks in the early 1990s, and since then either constant levels or a steady decline (especially since the global 4 26 53 4 7 7 5 25 57 3 3 7 5 28 54 3 3 8 Housing Non-residential buildings Civil engineering works Machines and equipments Weapon systems Intellectual property rights 1978 2007 2018 A European Public Investment Outlook 40 financial crisis). Two items nevertheless warrant further consideration. The first is investment in “intellectual property rights”, of which more than 80% is research and development expenditure. It increased significantly during the 1980s, from 0.7% of GDP in 1980 to 1% in 1990. Over the past thirty years, it averaged 0.9% of GDP, the value it had in 2018. Finally, investment in “other civil engineering works” was high in the 1980s through to the early 1990s, ranging from 1.3% to 1.5% of GDP. From the mid-1990s to 2013, it has swayed between 1.1% and 1.3% of GDP. But, since 2014, it has shrunk leading to a historically low level in 2015–2018 (1% of GDP). Overall, except for intellectual property rights, all components of public investment are at historic lows and it is “civil engineering works” that have experienced the greatest decline. 2.4. Net Flows of Fixed Assets Give Another (and Different) Picture The earlier description of investment (the fixed asset flow) by asset type captures gross investment. However, the most relevant measure must include capital depreciation. Indeed, considering the net flow of fixed assets (net investment) gives information on whether the stock of capital is expanding or shrinking, abstracting from the effects of revaluation of the existing stock. Thus, if gross investment is larger (smaller) than the depreciation of capital (consumption of fixed capital, CCF, in national accounts’ nomenclature), then net investment is positive (negative) and the stock of capital increases (decreases). Unlike fixed assets, non-produced NFAs (land) and inventories may experience changes in value but are not subject to consumption of fixed capital. CCF only applies to fixed assets. Historically, net flows of non-produced NFAs and inventories are relatively stable, with the sum of the two hovering between -0.1 and 0.2 % of GDP over the period 1979–2018. Changes in the net flow of non-financial assets are the result of the net flow of fixed assets. Over the period from the late 1970s to the first half of the 1990s, general government net investment was strong, averaging more than 1% of GDP per year (Figure 5). It even experienced a strong boom over the period 1987–1992, averaging above 1.4% of GDP per year. From 1993 to 1998, general government’s net investment declined sharply, reaching 0.5% of GDP in 1998, a decrease of 1% of GDP in the space of six years. Like in other European countries, this is mostly due to the effort to meet the Maastricht criteria in the run up to the Euro: the cyclically adjusted deficit for France decreased from 4.6% of GDP in 1993 to 1.8% in 1998. Past this phase, net investment recovered, then fluctuated between 0.7 and 0.9 % of GDP over the 2000–2010 period, without ever returning to the level observed during the 1980s and the first half of the 1990s. But it is mainly from 2011, following the global financial crisis that net investment experiences a break. Between 2010 and 2015, it dropped from 0.7% of GDP to zero, and has since remained at a very low 2. Public Investment and Capital in France 41 level (between 0 and 0.1% of GDP). It is the lowest level since the late 1970s when the wealth accounts were introduced. Fig. 5 Net General Government investment by component as a percentage of GDP Source of data: Insee. Figure created by the authors. Thus, since 2015, France has spent about 0.8 percentage points of GDP (about 19 billion in constant 2018 euros) less on net investment than it did during the period 2000–2010, and 1.5 points (approximately 35 billion in constant 2018 euros) less than during the period 1990–1992. Looking at the components, the main determinants of the net investment dynamics described above are “other civil engineering works” and, to a lesser extent, “nonresidential buildings”. Net investment in “non-residential buildings” has gone through various cycles since the late 1970s; over the past decade has declined sharply (like most other government expenditures) and has reached historically low levels: since 2015 it has averaged -0.1% of GDP, meaning that since 2015 the stock of “nonresidential buildings” decreased. Overall, “other civil engineering works” has been the main determinant of fluctuations in the net flow of fixed assets. For these investments we can distinguish three periods: the first—from the late 1970s to the first half of the 1990s—is characterized by a high level of net investment, close to or above 0.6% of GDP for almost every year and with peaks in 1991–1992 (0.8% of GDP). The second period—from 1995 to 2008—is characterized by an intermediate level ranging from 0.4% to 0.5% of GDP per year. Finally, from 2010, net investment in “other civil engineering works” has constantly decreased, reaching 0.1% of GDP since 2014. -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 Civil engineering works Non residential buildings Housing Machines and equipments Intellectual property rights Weapon Sytems A European Public Investment Outlook 42 If we look at the evolution of net investment by level of government, we can learn four lessons. The first is that the net investment in “other civil engineering works” of Other Governments Agencies (OGA) is low and relatively stable over the period 1979– 2015. Secondly, while the central government contributed positively, albeit weakly, to net investment, during the period ranging from 1987 to 1992, it gradually reduced its engagement. From 1995 to 2004, the investments made by the central government barely offset the depreciation of existing capital and, since 2005, the central government net investment has moved into negative territory, with the exception of 2010 (when, as a part of the stimulus plan following the 2008 Global Financial Crisis, significant investments in weapons systems were made). Thus, since 2005, the stock of fixed capital owned by the central government has decreased. It is in fact very clear, and this is the third remark, that local governments have historically been the main contributors to net government investment. However, since 2007—on the one hand, with the Global Financial Crisis that reduced own resources levied by local governments, and, on the other hand, with the reduction of endowments to local governments that followed fiscal consolidation—net investment by local governments has collapsed from 0.8% of GDP in 2007 to 0% in 2016. In 2017 and 2018, it recovered slightly respectively to 0.1% and 0.2% of GDP, a level that barely offsets the destruction of capital by the central government and by social security administrations. Finally, social security administrations (SSA), that historically are not a major investor, but which posted a positive net investment over the period 1978–2014 (0.1% of GDP on average) have been destroying fixed capital for the past four years, with negative net investment for the first time in four decades. The picture that emerges from the analysis of stocks and flows is rather consistent and gives two main messages: the first is that public investment and the stock of capital hve been largely affected by the macroeconomic cycle. In the two significant phases of consolidation, the run-up to the euro in the 1990s and the aftermath of the sovereign debt crisis, investment was strongly reduced. Especially in the latter case, net investment turned negative of zero for all levels of government, thus reducing the stock of capital that is today at an all-time low. The second message, that emerges in particular from the analysis of stocks, is that in spite of these trends in investment, the capital stock in France is still significant (and larger than in other countries, as the other chapters of the Outlook show). One might ask then if the effort of consolidation, and the disproportionate burden that it has laid on public investment, at least led to more sustainable public finances. 2.4.1. Since 2009, debt has not been used to finance an accumulation of assets If we compare the evolution over the last twenty years of non-financial assets net flows in relation to the primary net financial flow (financial assets— financial 2. Public Investment and Capital in France 43 liabilities—interest expenses) which we consider here as a proxy of the net worth, two sub-periods emerge clearly (Figure 6). The first, which runs from 1996 to 2008, can be seen as a period in which the additional public net financial debt (excluding interest expense) was more than offset by the net accumulation of non-financial assets, leading to a positive net value on this period, which means that the general government stock of wealth has increased in value over this period, even abstracting from price effects. The second period, which runs from 2009 to 2018, describes a new pattern in which the net debt increase is no longer offset by an increase in public non-financial capital, generating a sharp deterioration in government net worth. The economic and financial crisis led to a sharp increase in public debt. In 2011, France embarked on a process of fiscal consolidation: while on one side it has partly reduced new financial commitments, on the other side it has been more than offset by a reduction in the net accumulation of non-financial assets. This is further proof of the fact that the burden of fiscal consolidation was disproportionately laid on the shoulders of public investment. The sharp reduction in net worth therefore casts doubts on the effectiveness of fiscal consolidation in strengthening the public finances outlook for France. Fig. 6 Net flow of non-financial assets and primary net financial flows as a percentage of GDP Source of data: Insee. Figure created by the authors. -5.0 -4.5 -4.0 -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Net flow of non financial assets (a) Primary net financial flows (b) Proxi Net Value Change (a + b) A European Public Investment Outlook 44 2.5. Assessing the Impact of an Investment Push in France 2.5.1. A quantification of investment needs for France According to a report of the French entrepreneurial association MEDEF (2015), which, as of today, represents the most comprehensive attempt to assess the French public capital gap, the network infrastructure needs for France would be €50 bn per year for five years, half of which would be financed by the general government, the rest being shared between public and private companies (Table 2). Transportation is an important part of the network infrastructure, and its needs are estimated as €28 bn per year, almost two thirds of which are funded by the general government. More than half of that (€15 bn) would be absorbed by the extensive road network. The maintenance of the rail network and the construction of a high-speed line would represent €7 bn. The rest corresponds to infrastructures related to other public transportation: airports, ports and fluvial works. Table 2 Network infrastructure needs per year for France for five years General government: 25.1 Public companies: 13.8 Private companies: 11.2 Transports: 17.7 Transports: 8.1 Transports: 2.0 Water: 4.0 Energy: 5.7 Water: 5.0 Energy: 2.3 Digital: 2.0 Digital: 1.0 Gas: 2.2 Electric charging stations: 0.1 Note: values in euro bn. Source of data: MEDEF (2015). Power distribution networks are also high on the agenda, representing €8 bn, with funding from the public electric company (ERDF) and from the general government. These figures would take into account the introduction of Linky smart meters and the adaptation of the network-connected objects and new technologies. A special effort should be made for water, estimated to cost €9 bn each year (funded in equal parts by the general government and private companies) according to the association “Canalisateurs de France”. The maintenance of pipelines is particularly urgent: in France, more than 20% of the potable water introduced into the network is lost, causing an important economic cost. In total, notes the MEDEF, costs (economic, among others) of non-action could exceed those of investment. Finally, the coverage of the entire French territory with ultra-high-speed internet would require €3 bn a year; in this case, two thirds of funding would have to come from private companies and one third from the general government. The report numbers are most probably underestimated, as stated by the authors themselves, to the extent that they do not integrate the totality of the investments necessary to carry out the ecological transition or prevent natural or climatic hazards 2. Public Investment and Capital in France 45 (rising waters, storms, floods etc.). Investment needs for the digital transition are also most probably underestimated. Thus, these figures are to be seen as a lower bound. 2.5.2. The macroeconomic impact of an investment shock Based on the OFCE’s Three-Me macro-sector model (OFCE 2016), we simulated a permanent increase of 1 point of GDP (approximately €23 bn) in public investment. This amount roughly corresponds to the infrastructure investment needs to be funded out of the general government, that have been put forward in the MEDEF report. Three-ME (Multi-sector Macroeconomic Model for the Evaluation of Environmental and Energy policy) is a macroeconomic model. It has been built on a calibration of the French economy. Its main purpose is to evaluate the mediumand long-term impact of public choices on the economy at the macroeconomic and sectoral levels. Three-Me exhibits the main features of neo-Keynesian models: a slow adjustment of effective quantities and prices to their notional level; an endogenous money supply; a Taylor rule and a Phillips curve. Compared to standard multi-sector CGEs, this has the advantage to allow for the existence of suboptimal equilibria, characterized by the presence of involuntary unemployment. Furthermore, production and consumption structures are represented with a generalized CES function which allows for the elasticity of substitution to differ between each couple of inputs or goods. In the medium term, i.e. over a five-year horizon, an increase in public investment of 1% of GDP would generate a gain of 1.2% of GDP (a value of the multiplier that is in the same ball park as the consensus in the literature, see Gechert’s 2015 metaanalyis) and would create or safeguard 290,000 jobs (Table 3); this would reduce the unemployment rate in France by 1 point. Table 3 Impact of a 1% of GDP increase in public investment on GDP and employment in France 1 year 2 years 3 years 4 years 5 years GDP 0.9 1.0 1.1 1.2 1.2 Value Added 0.9 1.0 1.1 1.1 1.1 Employment (in ’000s) 120.5 213.7 269.4 290.8 286.5 Source of data: Modèle Three-Me, OFCE. Quite logically, the first sector to benefit from an increase in public investment would be construction, with 46% of the jobs created (Table 4). The increase in activity in that sector would also have a crowding-in effect on all other sectors that are experiencing an increase in their added value and job creation. Note that these effects are particularly pronounced in sectors with low import content and little chances of delocalization (construction and services). A European Public Investment Outlook 46 Table 4 Sectoral impact of a 1% of GDP increase in public investment Domestic employment (in full-time equivalents) Added value (in %, volume) 1 year 5 years 1 year 5 years Agriculture, forestry and fishing + 760 + 1 010 + 0.3 + 0.3 Manufacture of food products, beverages and tobacco + 530 + 2 480 + 0.2 + 0.5 Other manufacturing + 12 970 +21 480 + 0.9 + 0.7 Construction + 63 500 +132 180 + 7,5 + 7.8 Transport + 2 000 + 1 960 + 0.3 + 0.2 Mainly market services + 40 430 + 106 050 + 0.6 + 0.9 Source of data: Modèle Three-Me, OFCE. 2.6 Conclusion This chapter showed that France did not escape the recent trend of most European countries, towards a drastic downsizing of its public capital stock. In spite of the rhetoric of the time, national accounts data show that the 2008 Global Financial Crisis was not countered with a public investment push: the sharp increase of debt between 2007 and 2017 did not correspond to an accumulation of public capital. On the contrary, investment paid the heaviest toll in the subsequent consolidation phase, when both expenditure reduction by the central government, and cuts in transfers to local administrations (the largest owner of non-financial assets) resulted in a significant loss of public capital. Thus, in the space of a decade, the French general government saw its net investment drop to negative levels, and its net worth decrease by 50 points of GDP, to an all-time low in 2018. An even greater source of concern is that the previous increase of the net worth, in the years 2000s, is mostly attributed to a price effect of non-produced non-financial assets (land and real estate). Investment needs in network infrastructure are important (transport, energy, water, digital etc.) and public investment deficiencies of course have important macroeconomic consequences both in the short and in the long run. We highlighted the results from OFCE (2016) that state how a 1% public investment push would have important growth effects (with a multiplier above 1) in the short and medium run. Yet, it is in the long run that the multiplier associated with public investment is larger than the overall expenditure multiplier. Stabilizing the flow of investment is crucial to 2. Public Investment and Capital in France 47 maintain a public capital stock that is a necessary complement to private investment (Creel et al. 2015). The European institutional setting has played a role in the widespread reduction of investment expenditure. The exclusive focus on structural deficit built into European rules has introduced a strong bias against capital spending, since investment is easier to cut than current expenditure. We documented how, already in the run up to the introduction of the euro, in the 1990s, the drop of structural government deficit in France went through a drastic cut of net investment. The same happened in the past decade. The bias against public investment leads to a chronic deficiency of public capital, barely compensated by government action in good times. Thus, France makes no exception to the general trend documented in this Report, even if in levels its capital stock remains relatively high with respect to its partners. This leads to an obvious conclusion: the introduction of a Golden Rule excluding public investment from the deficit limits, similar to the one implemented in the UK by Chancellor of the Exchequer Gordon Brown in the 1990s (for details, see Creel et al., 2009), would certainly help fill the investment gap. The new rule would require countries to balance their current budget, while financing public capital accumulation with debt. Investment expenditure, in other words, would be excluded from deficit calculation, a principle that timidly emerges also in the current Commission practices. Such a rule would stabilize the ratio of debt to GDP, it would focus efforts of public consolidation on less productive items of public spending, and would ensure intergenerational equity (future generations would be called to partially finance the stock of public capital bequeathed to them). Last, but not least, especially in the current situation, putting in place such a rule would not require treaty changes, and it is already discussed, albeit timidly, in EU policy circles. Furthermore, a broad definition of investment would allow to coordinate the policies of Member States towards growth enhancing items, and could even be an important piece of a renewed European industrial policy (Saraceno 2017, Ducoudré et al. 2019). The current environment of low interest rates, that is bound to persist into the medium term (Summers 2014) is an additional reason to try to fill the public investment gap that was progressively dug in the past decades. In a recent issue of the World Economic Outlook, the International Monetary Fund (IMF 2014) went as far as defining a public investment boost, in the current environment of scarce public capital and low interest rates, as self-financing (a ‘free lunch’). Furthermore, the preceding pages show the importance of properly measuring capital. Thus, it seems increasingly crucial to be able to distinguish, within the balance sheet, between the capital account and the operating account (in which it seems sensible to add a structural/cyclical division), to understand the past dynamics of debt and its use. We are pursuing this work. A European Public Investment Outlook 48 References Callonnec, G., G. Landa, P. Malliet, F. Reynès and Y. Yeddir-Tamsamani (2013) “A Full Description of the Three-ME Model: Multi-Sector Macroeconomic Model for the Evaluation of Environmental and Energy Policy”. OFCE Working Paper Report, https://www.ofce. sciences-po.fr/pdf/documents/threeme/doc1.pdf Callonnec, G., G. Landa Rivera, P. Malliet, F. Reyns and A. Saussay (2016) “Les propriétés dynamiques et de long terme du modèle Three-ME: Un cahier de variantes”, Revue de l’OFCE 149(5): 47–99, https://doi.org/10.3917/reof.149.0047 Creel, J., P. Hubert and F. Saraceno (2015) “Une analyse empirique du lien entre investissement public et privé”, Revue de l’OFCE 144(8): 331–56, https://doi.org/10.3917/reof.144.0331 Creel, J., P. Monperrus-Veroni and F. Saraceno (2009) “Fiscal Policy Is Back in France and the United Kingdom!”, Journal of Post Keynesian Economics 31(4): 645–67, https://doi. org/10.2753/pke0160-3477310407 Ducoudré, B., M. Plane, X. Ragot, R. Sampognaro, F. Saraceno and X. Timbeau (2019) “Refonte Des Règles Budgétaires Européennes”, Revue de l’OFCE 158(4): 307–30, https://doi. org/10.3917/reof.158.0307 Gechert, S. (2015) “What Fiscal Policy Is Most Effective? A Meta-Regression Analysis”, Oxford Economic Papers 67(3): 553–80, https://doi.org/10.1093/oep/gpv027 IMF (2014) “Legacies, Clouds, Uncertainties”, World Economic Outlook, October, https://www. imf.org/en/Publications/WEO/Issues/2016/12/31/Legacies-Clouds-Uncertainties Levasseur, S. (2013) “ Éléments de réflexion sur le foncier et sa contribution au prix de l’immobilier”, Revue de l’OFCE 128(2): 365–94, https://doi.org/10.3917/reof.128.0365 MEDEF (2015) “Les infrastructures de réseau au service de la croissance”. Report by MEDEF, December, https://www.fntp.fr/sites/default/files/content/publication/vf_rapport_ infrastructures_-_25_11_15.pdf OFCE (2016) “Investissement public, capital public et croissance”. Report edited by X. Ragot and F. Saraceno, https://www.ofce.sciences-po.fr/pdf-articles/actu/Rapport-FNTP-01-12. pdf Saraceno, F. (2017) “When Keynes Goes to Brussels: A New Fiscal Rule for the EMU?”, Annals of the Fondazione Luigi Einaudi 51(2): 131–58. Summers, L. H. (2014) “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound”, Business Economics 49(2): 65–73, https://doi.org/10.1057/be.2014.13 3. Public Investment in Germany: The Need for a Big Push 55 5G network expansion some €60 bn more. Much of these expenses are likely to come from private telecom operators. Still, public funding is crucial to mend the patches in digital infrastructure. We assume that a government spending of €20 bn will be necessary in the coming ten years. • The decarbonization of the German economy poses a particular challenge. Current studies show that, in sum, between €1700 bn (Dena 2018) and €2300 bn (Gerbert and others 2018) will be required to reduce the German economy’s carbon emissions by 95% until 2050. If one takes the lower limit of the estimated cost and distributes the total expenditure over the entire period up to 2050, further assuming that the state bears approximately 15% of the costs, then a public investment need of approximately €7.5 bn per year results. Table 1 summarizes the above calculation. All in all, public investment needs sum up to a volume of at least €450 bn over the next ten years. The required financing is thus not excessively large in relation to the German economic output. Spread over the years, this would average an annual additional expenditure of around €45 bn, which corresponds to approximately to 1.3% of GDP. There is no good economic reason why the type of investments listed above should be paid from the current year’s budget. On the contrary, as the investments benefit many generations to come, it is reasonable to spread also the cost over several generations. For example, decarbonization will lead to a massive reduction in Germany’s energy import bill. Today’s expenditure will thus be offset by saved costs in the future. Similarly, improvements in early childhood education today are expected to translate into higher employment, higher productivity and higher incomes in the future. Moreover, current financing conditions for Germany are extremely favourable, such that long-term bond (with maturity of at least ten years) yields are negative. In other words, Germany would not have to pay back the full amount of debts taken on today. At the same time, the German government debt-to-GDP ratio has been steadily decreasing in the recent years and is about to fall below the 60% benchmark. Combined with the long-term productivity effects of the above described public investment, it is advisable to enable debt-financing of the investment program. It would be inefficient and unfair to burden the current generation with the entire cost of the restructuring of the economy. Much worse, it would be greatly dangerous to forgo current and future opportunities because of fear of an increase in public borrowing. The actual fiscal policy framework—including the debt brake, the Stability and Growth Pact and the Fiscal Compact—should therefore be used (and, if necessary, modified) in a way that the financing of investment requirements becomes possible through new borrowing. From the economic point of view, it makes sense to follow a Golden Rule which exempts investment—at least up to a fixed amount—from the deficit limit, as in Truger (2016). A European Public Investment Outlook 56 Table 1 Public investment requirements in Germany Sum over 10 years, base year prices (bn €) Infrastructure investment on municipal level Updating of existing local infrastructure 138 Public transport 20 Education Early childhood education 50 Development of full-day schooling 9 Operation of full-day schooling 25 Funding of universities and R&D 25 Housing investment Public sector share 15 Interregional infrastructure Broadband internet/5G 20 Railway 60 Highways 20 Decarbonization Public sector share 75 Total 457 Source of data: Bardt et al. (2019). There are two possibilities for the technical implementation of such a Golden Rule. Firstly, it would be conceivable to change the German constitution. Secondly, one could use the room for flexibility built in the debt brake so that debt financing of new investment becomes feasible. For example, a separate legal entity (fully owned by the federal government) could be established as a federal investment fund for development goals, responsible of precisely defined investment tasks. This entity could be allowed to borrow while its debt is not counted under the German debt brake. The local authorities could then lease the corresponding capital goods from this fund against payment of the financing costs and depreciation. In this way, an amendment of the constitution would not be necessary. The European budget rules would count such an entity to the public sector, but since Germany’s public debt is expected to fall under the 60% benchmark, the usual fiscal rules will be relaxed, so that the limit for the medium-term structural deficit rises from 0.5% to 1% of GDP. Moreover, Germany could (and should) lobby at the European level for an exemption from new borrowing for certain types of growth enhancing green investment. 3. Public Investment in Germany: The Need for a Big Push 57 3.3. Macroeconomic Implications of a Public Investment Program in Germany It is important to consider the potential macroeconomic effects of such a large investment program for Germany, and its spillover effects for the rest of the euro area. In this section, we use a modified version of the NiGEM model developed by the National Institute of Economic and Social Research (NIESR)7 to come up with some first evaluations. In line with current market-based EONIA forecasts (European Central Bank 2019), our baseline forecast assumes that the ECB’s monetary policy stance will remain accommodative for a prolonged period of time. Specifically, we assume ECB interest rates to remain zero well into the 2020s and thereafter slowly rise to 1%. From a fiscal policy perspective, our baseline forecast fully adheres to the German debt brake, so that budget deficits are ruled out. This restriction is removed for the shock scenario. The scenario for our proposed €450 bn debt-financed public investment program is modelled as follows: quarterly public investment is assumed to be €11.25 bn (about 1.5% of GDP) higher vis-à-vis our baseline forecast starting in the first quarter of 2020 and remaining so over a period of ten years. Importantly, we model this additional public spending as entirely debt-financed. In addition, we assume the ECB’s policy rate to remain constant at the baseline rate. The government investment program triggers an increase in accumulation of both public and private capital. The capital build-up acceleration peaks at the end of the investment program with the overall capital stock being 4% higher than in the baseline. The simulated investment program results in a significant boost to the German economy with GDP initially increasing slightly above 1% vis-à-vis the baseline and about 0.9% (again vis-à-vis the baseline) on average during the public investment program span (Figure 4). Importantly, GDP remains persistently higher, also after the end of the investment program. Due to the increased overall capital stock, potential output increases and remains sustainably higher even beyond 2029, reaching a level of about 1.5% above the baseline in 2029. 7 NiGEM is a comprehensive multi-country simulation and forecasting model for the global economy with detailed country models for all OECD countries as well as numerous emerging nations. See also nimodel.niesr.ac.uk/. We use a slightly modified version with re-estimated import equations for Germany, France, Italy and Spain (see Behrend et al. 2019). As mentioned above, the investment program is assumed to be completely debtfinanced with tax rates kept constant. The evolution of the government debt ratio under the debt-financed public investment program together with the debt ratio of our baseline forecast is shown in Figure 5. Relative to the baseline, the reduction of the debt-to-GDP ratio slows significantly. However, despite the additional borrowing, the ratio continues to fall and constantly stays on the modest level of just above 50% A European Public Investment Outlook 58 Fig. 4 German GDP and potential output increase, level difference in % Source of data: NiGEM. Figure created by the authors. 0,0 0,5 1,0 1,5 2,0 GDP Potential Output of GDP (Figure 5). Hence, the simulation shows that it is possible to implement a comprehensive public investment program without jeopardizing debt sustainability. Another important result of our simulation is that the program in fact leads to a reduction in the German current account surplus which falls by almost 1.3 percentage points. The rebalancing is possible through a stark increase in imports, whereas exports essentially remain unchanged. Last but not least, the investment expenditure triggers positive spillover effects on other euro countries. The main beneficiaries of the German fiscal expansion seem to be the nearest small open economies, such as Belgium, Netherlands and Austria (Figure 6). These countries experience a substantial boost to GDP which increases by 0.2 to 0.45% vis-à-vis baseline GDP over the duration of the investment program. GDP in the euro area in total will be positively affected by around 0.4%, again vis-à-vis the baseline. All in all, the proposed debt-financed public investment plan has the potential to bring about substantial and continuous boost to economic activity in Germany, stimulating domestic demand in the short run and increasing the country’s public and private capital stock in the long run. In addition, our results indicate that such an investment program would considerably rebalance the German current account bringing it in line with levels agreed on under the European Commission’s Macroeconomic Imbalance Procedure. Moreover, positive spillover effects are likely to 3. Public Investment in Germany: The Need for a Big Push 59 Fig. 5 Government debt, in percentage of GDP Source of data: NiGEM. Figure created by the authors. 30 35 40 45 50 55 60 65 Investment Shock Base Fig. 6 GDP of selected countries and euro area, deviation from baseline, level difference in percent Source of data: NiGEM. Figure created by the authors. 0,00 0,05 0,10 0,15 0,20 0,25 0,30 0,35 0,40 0,45 Euro area Netherlands Belgium Italy A European Public Investment Outlook 60 Conclusion This chapter has argued that the stagnating German public capital stock poses significant risks for future economic growth of the country. Various indicators point at severe and persistent underinvestment, a significant part of which can be traced back to lack of funding. Additional investment needs have been estimated to be roughly €450 bn over the coming decade. As simulations show, such a program could be entirely debtfinanced while keeping the German debt-to-GDP ratio below the Maastricht threshold of 60% of GDP. Moreover, it would significantly lift both German potential and actual GDP. It would also contribute to bring Germany’s current account surplus from its currently very high levels of 7–8% to below 4%, bringing it in line with the levels set by the European Commission’s Macroeconomic Imbalances Procedures. Whilst the spillover effect to other European economies would be limited, they will nevertheless be felt positively and might even be reinforced if other European governments follow the German example and also start modernizing their public capital stocks. A potential obstacle might be existing fiscal rules such as the German debt brake, but at least for a significant part of the investments needed, technical solutions such as public entities devoted to investments could allow some sort of debt-financing. Beyond what is possible under current fiscal rules, a reform of the legal framework should be considered, given that it has been designed under the assumption of persistently much higher interest rates compared to what we have been observing in the past years, and given that sticking to current fiscal rules while neglecting much needed public investment might carry high welfare costs. References Baldenius, T., S. Kohl and M. Schularick (2019) Die neue Wohnungsfrage: Gewinner und Verlierer des deutschen Immobilienbooms. Bonn: Macrofinance Lab, https://pure.mpg.de/rest/items/ item_3070687_1/component/file_3070688/content Bardt, H., S. Dullien, M. Hüther and K. Rietzler (2019) “Für eine solide Finanzpolitik: Investitionen ermöglichen!”, IMK-Report 152. Baxter, M. and R. G. King (1993) “Fiscal Policy in General Equilibrium”, American Economic Review, 83(3): 315–34. Behrend, A., K. Gehr, C. Paetz, T. Theobald and S. Watzka (2019) Europa kann es besser: Wirtschaftspolitische Szenarien für stabileres Wachstum und mehr Wohlstand. Bonn: FriedrichEbert-Stiftung, http://library.fes.de/pdf-files/fes/15862.pdf Blanchard, O. (2019) “Public Debt and Low Interest Rates”, American Economic Review, 109(4): 1197–229, https://doi.org/10.1257/aer.109.4.1197 follow in the rest of the euro area. Crucially, the investment program does not have to impede the soundness of the German public finance. 3. Public Investment in Germany: The Need for a Big Push 61 Bundesministerium für Verkehr und digitale Infrastruktur (2016) “Stand der Ertüchtigung von Straßenbrücken der Bundesfernstraßen”, https://www.bmvi.de/SharedDocs/DE/ Anlage/StB/bericht-stand-der-modernisierung-von-strassenbruecken-2016.pdf?__ blob=publicationFile Clemens, M., M. Goerge and C. Michelsen (2019) “Öffentliche Investitionen sind wichtige Voraussetzung für privatwirtschaftliche Aktivität”, DIW-Wochenbericht 31: 537–43, https:// www.diw.de/documents/publikationen/73/diw_01.c.670904.de/19-31-3.pdf Dena (2018) dena-Leitstudie Integrierte Energiewende: Impulse für die Gestaltung des Energiesystems bis 2050. Berlin: Deutsche Energie-Agenture GmbH (dena), https://www.dena.de/fileadmin/ dena/Dokumente/Pdf/9261_dena-Leitstudie_Integrierte_Energiewende_lang.pdf Destatis (2018) “Anlagevermögen nach Sektoren ab 1991 bis 2017—Stand: August 2018”, https:// www.destatis.de/DE/Themen/Wirtschaft/Volkswirtschaftliche-GesamtrechnungenInlandsprodukt/Publikationen/Downloads-Vermoegensrechnung/anlagevermoegensektoren-5816101187004.html Destatis (2019) “Investitionen—2. Vierteljahr 2019”, https://www.destatis.de/DE/Themen/ Wirtschaft/Volkswirtschaftliche-Gesamtrechnungen-Inlandsprodukt/Publikationen/ Downloads-Inlandsprodukt/investitionen-pdf-5811108.html Dullien, S. (2017) A New “Magic Square” for Inclusive and Sustainable Economic Growth: A Policy Framework for Germany to Move Beyond GDP. Bonn: Friedrich-Ebert-Stiftung. Dullien, S. and K. Rietzler (2019) “Verzehrt Deutschland seinen staatlichen Kapitalstock? — Replik”, Wirtschaftsdienst 99(4): 286–91, https://doi.org/10.1007/s10273-019-2445-5 Earthman, G. I. (2017) “The Relationship between School Building Condition and Student Achievement: A Critical Examination of the Literature”, Journal of Ethical Educational Leadership, 4(3): 1–16. European Central Bank (2019) “Economic Bulletin 06/2019”, https://www.ecb.europa.eu/pub/ economic-bulletin/html/eb201906.en.html Expertenkommission (2015) Stärkung von Investitionen in Deutschland: Abschlussbericht. Berlin: Bundesministerium für Wirtschaft und Energie, https://www.bmwi.de/ Redaktion/DE/Publikationen/Studien/staerkung-von-investitionen-in-deutschland. pdf?__blob=publicationFile&v=11 Gerbert, P., P. Herhold, J. Burchardt, S. Schönberger, F. Rechenmacher, A. Kirchner, A. Kemmler and M. Wünsch (2018) “Klimapfade für Deutschland”, https://www.zvei.org/fileadmin/ user_upload/Presse_und_Medien/Publikationen/2018/Januar/Klimapfade_fuer_ Deutschland_BDI-Studie_/Klimapfade-fuer-Deutschland-BDI-Studie-12-01-2018.pdf Grömling, M. and T. Puls (2018) “Infrastrukturmängel in Deutschland: Belastungsgrade nach Branchen und Regionen auf Basis einer Unternehmensbefragung”, IW-Trends 45(2): 89–105. Henger, R. and M. Voigtländer (2019) “Ist der Wohnungsbau auf dem richtigen Weg?: Aktuelle Ergebnisse des IW-Wohnungsbedarfsmodells”, IW-Report 28. Hüther, M., “10 Jahre Schuldenbremse: Ein Konzept mit Zukunft?”, IW Policy Paper 3 IMF (2018) “Germany: Staff Concluding Statement of the 2018 Article IV Mission”, https:// www.imf.org/en/News/Articles/2018/05/14/Germany-Staff-Concluding-Statement-of-the2018-Article-IV-Mission Krebs, T. and M. Scheffel (2017) “Öffentliche Investitionen und inklusives Wachstum in Deutschland”, Bertelsmann Stiftung, Inklusives Wachstum für Deutschland, https://www. A European Public Investment Outlook 62 bertelsmann-stiftung.de/fileadmin/files/BSt/Publikationen/GrauePublikationen/NW_ OEffentliche_Investitionen_und_inklusives_Wachstum.pdf Kreditanstalt für Wiederaufbau (2019) “KfW-Kommunalpanel 2019”, https://www. kfw.de/PDF/Download-Center/Konzernthemen/Research/PDF-Dokumente-KfWKommunalpanel/KfW-Kommunalpanel-2019.pdf OECD (2016) OECD Economic Surveys: Germany 2016. Paris: OECD Publishing. Rachel, L. and L. Summers (2019) “On Secular Stagnation in the Industrialized World”, NBER Working Paper w26198, https://doi.org/10.3386/w26198 Truger, A. (2016) “The Golden Rule of Public Investment—a Necessary and Sufficient Reform of the EU Fiscal Framework?”, IMK Working Paper 168. Verband Deutscher Verkehrsunternehmen (2017) “Deutschland mobil: Handlungsempfehlungen für die 19. Legislaturperiode des Deutschen Bundestages”, https://www.vdv.de/neuemobilitaet-fuer-ein-mobiles-land.pdfx World Bank (2019) “Gross Fixed Capital Formation in % of GDP, Years 1970 to 2018”, https://data.worldbank.org/indicator/NE.GDI.FTOT.ZS?end=2017&most_recent_value_ desc=true&start=1970 4. Public Investment Trends across Levels of Government in Italy Floriana Cerniglia1 and Federica Rossi2 Introduction Italy, over this last decade, has experienced the worst economic crisis in its history. A double recession, during which GDP contracted by approximately 9%, was followed by weak and stunted expansion: from 2013 to the present day, less than half of the ground lost has been regained. As a result of the crisis, Italy has seen a real slump in investments. In this context, there is mounting pressure for greater public investment to stimulate economic activity in the short run and to impact the potential for longterm economic growth. As a result of the severe economic and financial crisis, Italy has had to implement extraordinary actions to contain and reduce its public debt. Public investment has been curtailed the most, with respect to other categories of expenditure. Sub-national governments (Regions, Provinces and Municipalities) have been forced to implement quite stringent containment measures. According to the Parliamentary Budget Office (Ufficio Parlamentare di Bilancio (UPB)), from 2009 to 2016 the primary expenditure of central government increased by 5.7%, while the primary expenditure of subnational governments decreased by 7.2%. It has not been easy for Italian sub-national governments to implement the necessary fiscal adjustments since they have been subject to continuously changing fiscal rules and regulations. From 2010–2015, Italian sub-national governments were subject to the so-called Internal Stability Pact. According to this law, sub-national administrations were only allowed to spend revenues collected during the fiscal year, while savings accumulated over the previous years were “frozen” at the Central Treasury in Rome. This created the need for a budget surplus. However, since the existing, immediately available, public revenues were just enough to cover the current expenditure, public 1 Director of CRANEC—Facoltà di Scienze Politiche e Sociali, Università Cattolica, Milano 2 CRANEC—Università Cattolica, Milano. © Floriana Cerniglia and Federica Rossi, CC BY 4.0 https://doi.org/10.11647/OBP.0222.04 A European Public Investment Outlook 64 investments collapsed. And unfortunately, sub-national investments account for more than half of overall public investments. Moreover, in 2016, the Internal Stability Pact was substituted by a new fiscal rule (law 164/2016) which requires a non-negative budget. Under this new framework, the control of debt once again prevails over the aim of relaunching investments, since debt (the main source for financing public investment) and the use of surpluses are excluded from calculating the “final budget” (Giorgiantonio et al. 2018). Another change was the introduction of vertical/horizontal National Agreements and Regional Agreements (also known as Solidarity Agreements). These measures do not allocate new financial resources for investment, but only increase the sub-governments’ budget-margins. This does allow for greater public capital expenditure in specific strategic sectors (i.e., school buildings, the prevention of hydro-geological risk, post-earthquake reconstruction). Moreover, the National Agreements support the development policies of disadvantaged local governments (e.g. small municipalities), while Regional Agreements aim to optimize the use of budget-margins at multiple levels of government, consolidated at the regional level. Unfortunately, the Solidarity Agreements in general have had little success, with the exception of Lombardy and Emilia Romagna (Sciancalepore 2017; Ferretti et al. 2018). This chapter aims to provide a run-through of the public investment trends across levels of government in Italy from 2000 to 2017. We consider the breakdown of public investment by levels of government as quite important. Since the reform of the Italian Constitution in 2001, the interactions between levels of government in Italy has become increasingly challenging. Coordination challenges between the central government and sub-national governments in running current and capital expenditures as well as the financing of local expenditures (both current and capital) remain unsolved problems, which most obviously impact the time required to make an investment. As stressed by Lee Mizell and Dorothée Allain-Duprè (2013), since sub-national governments are important actors when it comes to implementing public investment strategies for economic growth, it is important to develop good practices in terms of institutional arrangements. For instance, it must be clearly established “who is responsible for what.” An effort in this direction has been pursued over the last years, as just mentioned above; and these types of interventions have ensured that, at least for some municipalities, investment resources stopped declining (Ferretti et al. 2019). The chapter is organized as follows: section 4.1. provides an overview of major trends in public capital expenditure, including local and national public companies, which in Italy are significant contributors to public investment. We focus in particular on investment data on infrastructure, machinery and equipment funded by public expenditure. The focus is on both the central government and sub-national governments and on investments made by public companies at the national and local levels. This overview is possible considering the “Conti Pubblici Territoriali” dataset (hereafter CPT), 4. Public Investment Trends across Levels of Government in Italy 71 Fig. 8 Investment by public companies by sector (%) Source of data: Conti Pubblici Territoriali. Figure created by the authors. Fig. 9 PA investment by sector (%) Source of data: Conti Pubblici Territoriali. Figure created by the authors. First, we can highlight that public companies and the PA invest in different sectors.12 Indeed, the majority of investments by public companies were in transports13 (30%, or on average €7.2 bn per year), energy (28%, or on average €6.9 bn per year), others in 12 . The Global Infrastructure Outlook (Global Infrastructure Hub (2017)) calculated the annual infrastructure investment needs for Italy, for the 2016–2040 period. The annual estimates for the seven sectors are as follows: 15$ bn for electric energy, 12.3$ bn for roads, 19.6$ bn for railroads, 8.1$ billion for telecommunication, 3.5$ bn for water, 4.6$ bn for ports and 1.1$ bn for airports. 13 The building, running and maintenance costs of the following transportation infrastructures: rail, maritime, aviation, lake, river, including ports, airports, stations and freight villages. 0% 5% 10% 15% 20% 25% 30% Waste disposal Residential and urban building Manufacturing and craftsmanship Water Others Telecomunications Others in the economic field Energy Transports (e.g. railroads, airports, ports, etc.) 0% 5% 10% 15% 20% 25% Public safety Transports (e.g. railroads, airports, ports, etc.) Culture Environment Residential and urban building Health Education General public administration Others Roads, highways and motorways A European Public Investment Outlook 72 the economic field (10%, or on average €2.5 bn per year), telecommunications (8%, or on average €1.9 bn per year) and water (6%, or on average €1.4 bn per year). While the majority of investments by the PA went to roads, highways and motorways (24%, or on average €6.9 bn per year), general public administration (13%, or on average €3.9 bn per year), education (9%, or on average €2.6 bn per year), health (8%, or on average €2.4 bn per year) and residential and urban buildings (7%, or on average €1.9 bn per year). Other somewhat relevant sectors include the environment (6%), other transports (5%), culture (5%) and public safety (5%). 4.1.1. Public investments across regions Italy’s regional divide remains large, and sadly, it continues to grow. The population in the southern regions (or “Mezzogiorno”) is almost 34% of the total population, but in 2018, its share of GDP amounted to almost 22.3%,14 in 2000 it was 24.7%. In the last decade, public expenditure has decreased in the southern regions.15 Since public investment is a powerful instrument to promote convergence across regions, it is fundamental to consider its territorial distribution. We do so in the present section. It should be noted that data include both ordinary and additional resources (i.e., from the European Union Funds). This explains the positive trend for some of the years in the Mezzogiorno. Table 1 shows the shares of public investment and public capital expenditure (without shareholdings and provision of loans) in the Mezzogiorno, considering both the Enlarged PA and PA. In 2017 only 30% of the public investment by the Enlarged PA was devoted to the Mezzogiorno (€11.6 bn—in constant 2010 euros), overall, during the period considered (2000–2017), the share was always below 34% (with the exception of 2015). On the other hand, in 2017, 36.4% of the public investment made by the PA were devoted to the Mezzogiorno (€6.04 bn—in constant 2010 euros). The largest share (44.5%) of public investment made by PA in the Mezzogiorno in 2015 can be exclusively ascribed to the expenditure reporting of the 2007–2013 European Structural Funds programme. 14 See SVIMEZ (2019). Notice also that per capita GDP (2010 price) in 2018 was €31.498 in the CentralNorthern area and €17.436 in the Mezzogiorno. North-Central Italy includes the following Italian regions: Piemonte, Lombardia, Liguria, Valle d’Aosta, Emilia Romagna, Trentino Alto Adige, Veneto, Friuli-Venezia Giulia, Lazio, Marche, Toscana and Umbria. The Mezzogiorno consists of: Abruzzo, Basilicata, Calabria, Campania, Molise, Puglia, Sardegna and Sicilia. 15 See SVIMEZ (2019); Ufficio Parlamentare di Bilancio (2017); and Conti Pubblici Territoriali (2019, p. 17). Disparities across regions still emerge if we look at per capita investments. Figure 10 shows the relation between per capita GDP in euro and per-capita public investment by the PA in 2016. In the bottom-left part of the graph, we see that the Mezzogiorno area is characterized by low per capita GDP and low per capita public investment, while the upper-right part shows the three Northern regions with the highest GDP and per capita investments in Italy. Table 1 Public investment and public capital expenditure shares in Mezzogiorno by the PA and Enlarged PA Public investment Public capital expenditure Year % Mezzogiorno Enlarged PA % Mezzogiorno PA % Mezzogiorno Enlarged PA % Mezzogiorno PA 2000 31.5 34.1 35.9 39.2 2001 30.8 35.1 36 40.8 2002 29.3 33.6 34.6 39.7 2003 26.8 30.4 32.2 37 2004 27 31.6 31.7 36.7 2005 27.7 32.8 31.5 36.7 2006 27.8 33.7 32.2 36.3 2007 27.4 32.4 29.9 33.9 2008 29.2 35.4 30.3 33.6 2009 27.6 33.8 30.1 34.8 2010 30 35 30.9 32.6 2011 30.1 34.5 33.1 35.7 2012 31.3 36.4 32.4 34.1 2013 30.4 35.4 32.8 34.1 2014 30.5 37.5 33 35.8 2015 35.9 44.5 36.9 40.9 2016 32.4 38.6 34 34.1 2017 30 36.4 31.8 31.9 Source of data: Conti Pubblici Territoriali. Fig. 10 Per capita public investment by the PA, and per capita GDP by Italian regions in 2016 Source of data: Conti Pubblici Territoriali. Figure created by the authors. Calabria Sicilia Campania Puglia Molise Sardegna Basilicata Umbria Abruzzo Marche Piemonte Toscana Friuli-Venezia Giulia Liguria Veneto Lazio Valle d'Aosta Emilia-Romagna Provincia Autonoma Trento Lombardia Provincia Autonoma Bolzano 0 200 400 600 800 1000 1200 1400 05000 10000 15000 20000 25000 30000 35000 40000 45000 Per capita public investment in euro Per capita GDP in euro A European Public Investment Outlook 74 Figure 11 shows the distribution of public investment by the PA and by public companies, GDP and population for each Italian Region in 2017: Lombardia is the region with the highest population concentration (17%), GDP (22%) and investments by the PA (12%). If we look at investments made by public companies, the main beneficiary is Lazio (21%), followed by Lombardia (16%), Emilia Romagna (9%) and Veneto (8%). In all of the Mezzogiorno area, the shares of investment by the PA are higher than the shares of investment by public companies.16 Fig. 11 Population, GDP and public investment by PA and public companies shares by Italian regions in 2017 (%) Source of data: Conti Pubblici Territoriali. Figure created by the authors. The issue of having shares of public investments in North-Central Italy and the Mezzogiorno that proportionally reflect the population in those areas, has been a serious political concern these last years. Two aspects are at stake: i) investments by public companies have been incredibly low in the Mezzogiorno, with few exceptions;17 ii) if we exclude resources coming from EU funds, the proportion of public investment 16 For an overall picture of annual data see Cerniglia and Rossi (2020). Moreover, SVIMEZ (2019, pp. 483–84) provides indexes on transportation infrastructure (highways, roads etc.) in relation to the population by region. For example, the Italian infrastructure index for 2015 was 116.0 overall, but 156.5 for the North Central regions, and barely 38.6 for the Mezzogiorno. In other words, the Mezzogiorno has seen a constant decrease in investments in public works from 1970 to 2018. This means that while the nation-wide decrease was 2%, the Mezzogiorno had a whopping 4.6% cut, but investments for the Central Northern regions contracted by only 0.9% (SVIMEZ 2019, p. 488). 17 See CPT (2019, p. 46). For instance, the Ferrovie dello Stato (the Italian Railway Network) reduced the shares of expenditure in the Mezzogiorno in 2017 from 34.7% to 29.1%; in 2013, the share was 14.3%. 0% 5% 10% 15% 20% 25% Investment by public companies Investment by PA Population GDP 4. Public Investment Trends across Levels of Government in Italy 75 in the Mezzogiorno is much lower that 34%.18 Indeed, when analysing the breakdown of public capital expenditure between North-Central Italy and the Mezzogiorno, it is important to distinguish between ordinary and additional resources. The CPT data presents the so-called Single Financial Framework (“Quadro Finanziario Unico (QFU)”), which estimates the shares of both ordinary and additional resources attributed to the two macro-areas. For instance, CPT data show that in 2017 the public capital expenditure of the PA was around €32.548 bn.19 However, only €27.600 bn were ordinary resources and of this amount about €6.04 bn went to the Mezzogiorno. Therefore, the Decree-Law n.243/2016 and Law n.18/2017 introduced the “34% clause”, meaning that this proportion (net of additional resources) is the amount of capital expenditure that should be allocated to the Mezzogiorno since the population in this area is around 34%. The 2019 Budget (Law n.145/2018) modifies the aforementioned Law n.18/2017 extending the “34% clause” also to public companies (Anas and the Italian Railway Network). Very recently, an appreciable emphasis on the regional divide, caused also by a lack of public investments by the government, was highlighted in “Piano Sud 2030”.20 According to this document, in order to allow the Mezzogiorno to reach its 34% benchmark, €5.600 bn in ordinary capital expenditure need to be given from 2000 to 2022. 4.2. 2018, 2019 and 2020 Budgets: The Financial Resources for Public Investments Additional funds for public investment were allocated in the 2018, 2019 and 2020 Budget Laws.21 The main instrument for managing public investments in the 2017 and 2018 Budgets was the Fund for Investment, Financing and Infrastructural Development (Investment Fund, from here on). The 2017 Budget (Law n.232/2016) established this Fund with an initial endowment of €47.55 bn spread over fifteen years: €1.9 bn in 2017, €3.15 bn in 2018, €3.5 bn in 2019 and €3 bn for each following year from 2020 to 2032. The 2018 Budget (Law n.205/2017) added €36.1 bn to the Investment Fund for the period from 2018 to 2033. Therefore, the Fund’s financial endowment rose to €83.7 billion spread over the 2017–2033 period. Also, both the 2017 and 2018 Budgets allowed local governments, in good financial conditions, to use budget surpluses and take out new loans (limiting the allocation of the resources for investments). The Investment Fund should have become the cornerstone of the Italian infrastructure policy, but it accumulated numerous setbacks, which deeply limited the impact of the investments, as compared to the Government’s forecasts. Other negative aspects are the extremely 18 See Tortorella (2019). 19 Of this amount €10.402 (30.9%) goes to the Mezzogiorno. 20 Ministro per il Sud e la Coesione territoriale (2020). 21 Further details on these budget laws can be found in Cerniglia and Rossi (2020). A European Public Investment Outlook 76 long time-lags for the actual allocation of funds, and the uncertainty derived from the Constitutional Court case (n.74/2018), which found certain constitutional-related problems in the law establishing the Fund. Notwithstanding, the Fund does contain effective and policy measures, for example: bridging the technical-organizational gap of public administrations in planning and evaluating public investments and simplifying the regulatory framework (in particular, the Public Procurement Code and the fiscal rules for local authorities). The 2019 Budget (Law n.145/2018) establishes a new Fund with the aim of relaunching the central governments’ investments and the country’s economic development. The total budget package is €43.6 bn for the 2019–2033 period (broken down as follows: €740 mn in 2019, €1.26 bn in 2020, €1.6 bn in 2021, and €40 bn spread over the 2022–2033 period). In addition, the 2019 Budget has established a Fund for re-launching local government infrastructure investments: €2.78 bn for 2019, €3.18 bn for 2020, €1.255 bn for 2021 and €27.88 billion spread over the 2022–2033 period (for a total of €35.095 bn). Furthermore, the Government has decided to consider small public works (for ordinary and extraordinary maintenance) a priority. In order to address the problem of an existing technical-organizational gap between public administrations in planning and evaluating public investments, the Government has planned to create various agencies. A new temporary agency, InvestItalia, has the aim of supporting the initiatives of the Prime Minister in the political and administrative management of public and private investments. In particular, InvestItalia analyses and evaluates investment programmes for tangible and intangible infrastructures; determines the feasibility of investment projects; and supports public administrations in implementing investment plans and programmes. Finally, it also identifies obstacles and critical issues related to the implementation of investments and implements the appropriate solutions to overcome them. InvestItalia should work alongside the Centrale per la progettazione delle opere pubbliche, which is supposed to support central and local governments in the following fields: designing the proposal for the public work, managing the procurement procedures, and providing economic and financial evaluations of the works and technical assistance to the administrations involved in public/private partnerships. These two new temporary agencies should cooperate with “Strategia Italia”, an economic control room instituted by the so-called “Genova Decree” (d.l. n.109/2018). Strategia Italia verifies the state of implementation of infrastructure investment plans and programmes, in particular those related to hydrogeological instability, and the seismic vulnerability of public buildings and environmental degradation. Moreover, it proposes suitable solutions to overcome obstacles or delays. The Government has also prepared two sets of measures to support investments. The first is the so-called “Growth Decree-Law” (n.34, 30 April 2019), has introduced measures to stimulate capital accumulation and private investments. The second instrument, “Sblocca Cantieri” (d.l. n.32/2019, converted into Law n.55/2019), aims to speed up procurements, especially in the field of public works, by overcoming some weaknesses of the Public Procurement Code. Sub-contracting procedures 4. Public Investment Trends across Levels of Government in Italy 77 have also been simplified, for instance the threshold for the sub-contracts have been increased to 40% of the total amount of the procurement, and the requirement to indicate the list of sub-contractors in the tender has been eliminated till 31 December 2020. Finally, one of the most significant measures in the 2020 Budget (Law n.160/2019) is the establishment of the Fund for relaunching central government investments: around €110 mn in the first year, €400 mn in the second year and €770 mn in the third year. The 2020 Budget will provide resources up to 2034, with a budget of €22 bn for the 2020–2034 period. In particular, the Fund aims to finance investments which improve environmental sustainability (e.g. reduction of emissions, increase of energy efficiency) and, more generally, innovation. This Fund has the same characteristics as the one (with the same name) established by the 2019 Budget. The 2020 Budget also allocates some resources for investments by local administrations, especially for municipalities. Indeed, the Budget assigns resources to every municipality, based on its population (from €5,000 for the municipalities with up to 5,000 inhabitants, to €250,000 for municipalities with at least 250,000 inhabitants), for an overall total of €235 mn in 2020, €400 mn in 2021 and €500 mn in 2022. These resources aim to support small investments in the fields of energy efficiency and sustainable territorial development. Another new aspect of the 2020 Budget which is worth mentioning is the so-called Green New Deal, with an endowment of €470 mn for 2020, €930 mn for 2021 and €1.4 bn euro to be distributed over the 2022–2023 period. Moreover, the 2020 Budget has strengthened the 34% clause in favour of the Mezzogiorno: according to this budget, the additional resources are excluded from the computation of the 34%.22 4.3. Conclusions and Some Policy Prescriptions As underlined throughout the chapter, there has been a dramatic decline in public investment in Italy since 2009, implying a substantial investment gap. This decrease has mainly been driven by the decrease in investments by local governments, which have historically accounted for roughly 60% of the country’s overall public investments. However, Italy is not only facing a strained situation, where smaller and smaller amounts of financial resources are allocated to public investment. Indeed, one of its main obstacles is transforming the allocated financial resources into actual construction sites: a gap between the planned expenditure for investment and the results exists. The situation is particularly critical regarding suspended public works. Since April 2018, Associazione Nazionale Costruttori Edili (ANCE) has monitored (through www. sbloccacantieri.it) the infrastructure works throughout the country, which are delayed or suspended, due to complex procedures, suffocating bureaucracy, impediments linked to the application of the Public Procurement Code or lack of financial resources, as well as political vetoes, which call into question the start and/or continuation of already planned works. 22 For further details see Ufficio Parlamentare di Bilancio (2020). A European Public Investment Outlook 78 Between April 2018 and January 2019, ANCE identified 574 suspended works worth approximately €39 bn (ANCE 2019). Looking at their territorial distribution, 380 works (66% of the total, worth about €25 bn) were located in the Northern regions; 62 works (accounting for €9 bn) were in Central Italy and 132 works (the remaining €5 bn) were in the Mezzogiorno. Regarding the size of the suspended sites, 544 are small-medium sized, worth €2.6 bn; 30 are above the €100 mn threshold (for a total value of €36.4 bn) and mainly concern the construction of new transport infrastructures or the modernization of existing ones, aimed at improving the territory’s competitiveness. In addition, there are relevant works underway to improve citizens’ health and safety, such as hospitals and projects which limit hydro-geological instability. Projects greater than €100 mn are mainly concentrated in Northern Italy (17 works account for €24 bn), five works (€8.2 bn) are in Central Italy and eight projects (€3.5 bn) are in the South. Concerning unfinished work, “Anagrafe delle opere incompiute” (managed by the Ministry of Infrastructure and Transport, according to Law 214/2011) identified 647 public works, which were started, but not completed, for a total value of almost €4 bn at the end of 2017. Among the causes of the stalemates, a lack of funds is indicated in more than half of the cases (a phenomenon that includes slowdowns in the supply of resources). In conclusion, the limited effectiveness of relaunching economic growth policies is not ascribable to a single factor, but rather lies in the coexistence of several elements. Certainly, the accounting harmonization process has introduced innovations in the management of resources, which have not been completely transposed by administrations, and thus influence their spending capacity. Indeed, the changes to fiscal rules require time to be assimilated by the institutions, especially since their investment capacity, after years of inactivity, has been further weakened by employment turnover (ANCE 2019). Another element to consider is the implementation of the new Public Procurement Code, and more generally, the excessive bureaucracy and the complex institutional and regulatory framework, which together lead to innumerable obstacles for the actual creation of public infrastructure. To sum up, policy prescriptions, coming from the main findings of our analysis are as follows: • Since one of the main causes reported by Anagrafe delle opere incompiute is the lack of funds, an appropriate management of time mismatches in the availability of resources, which come from different sources, is necessary. • Addressing greater public investments in the Mezzogiorno area, in order to reduce the infrastructure gap. In particular, it is important to avoid the substitution effect between ordinary and additional resources. Indeed, additional resources have often replaced ordinary ones in recent years, rather than being added to them. 4. Public Investment Trends across Levels of Government in Italy 79 • Unlocking the turnover of PA personnel and the resources dedicated to professional training, in order to rebuild the technical skills within the administration. • Establishing a precise and clear governance framework, which excludes overlaps and conflicts of competences between institutions and levels of government. • Improving the quality of infrastructure projects. • The reconstitution of a complete and reliable regulatory framework (interventions on Public Procurement Code, the role of the Italian Anticorruption Authority (ANAC) and of Corte dei Conti). • Rationalizing the entire process of public procurement, in particular by eliminating the inefficiencies creating long ‘idle times’. • Paying attention to the maintenance of public infrastructures: the available empirical evidence suggests that, in Italy, the provision of infrastructure is inadequate, or is at risk of becoming so, due to a lack of maintenance. For Italy, implementing a massive investment program over the next years is a key challenge that needs to be addressed in order to improve GDP growth. But, how might it be financed, given the current concerns regarding Italy’s public finances? As stated by other authors in the above report, the obvious and necessary conclusion is the introduction of a Golden Rule, which excludes public investments from the deficit limits. References ANCE (2019) Osservatorio congiunturale sull’industria delle costruzioni. Gennaio 2019. Rome: EDILSTAMPA Srl, https://www.ance.it/docs/docDownload.aspx?id=48610 Assonime (2018) Politica delle infrastrutture e degli investimenti: come migliorare il contesto italiano, Note e Studi 6/2018. Milan: Assonime, http://www.assonime.it/Stampa/Documents/ rapporto%20assonime.pdf Banca d’Italia (2019) “Relazione annuale. Anno 2018”, https://www.bancaditalia.it/ pubblicazioni/relazione-annuale/2018/index.html Boitani, A., and G. Mele (2019) “Investimenti pubblici e bassa crescita”, in Inclusione, produttività, crescita. Un’agenda per l’Italia, ed. by Carlo Dell’Arringa and Paolo Guerrieri (Rome: AREL, Il Mulino, 2019), pp. 201–33. Busetti, F., C. Giorgiantonio, G. Ivaldi, S. Mocetti, A. Notarpietro and P. Tommasino (2019) “Capitale e investimenti pubblici in Italia: misurazione, effetti macroeconomici, criticità procedurali”, Questioni di economia e finanza 520, https://www.bancaditalia.it/pubblicazioni/ qef/2019-0520/QEF_520_19.pdf A European Public Investment Outlook 80 Cerniglia, F., R. Longaretti and A. Michelangeli (2017) “Decentralization of Public Spending and Growth in Italy. Does the Composition Matter?”, CRANEC Working Paper 4, https:// ideas.repec.org/p/crn/wpaper/crn1704.html Cerniglia, F. and F. Rossi (2020) “The Slump of Public Investment in Italy and the Role of the Different Levels of Government. An Analysis on the Last Two Decades”, CRANEC Working Paper 2. Conti Pubblici Territoriali (2007) “Unità di valutazione degli investimenti pubblici—‘Guida ai Conti Pubblici Territoriali (CPT). Aspetti metodologici e operativi per la costruzione di conti consolidati di finanza pubblica a livello regionale’”, http://old2018.agenziacoesione.gov.it/ it/cpt/ Conti Pubblici Territoriali (2018) Relazione annuale CPT 2018. Politiche nazionali e politiche di sviluppo a livello territoriale. Temi CPT 7. Rome: Agenzia per la Coesione Territoriale, http:// old2018.agenziacoesione.gov.it/opencms/export/sites/dps/it/documentazione/CPT/ Temi/RapportoCPT_2018.pdf Conti Pubblici Territoriali (2019) Relazione annuale CPT 2019 Politiche nazionali e politiche di sviluppo a livello territoriale. Temi CPT 11. Rome: Agenzia per la Coesione Territoriale, https:// www.agenziacoesione.gov.it/wp-content/uploads/2019/11/Temi_11_RapportoCPT_2019. pdf EIB (2017) EIB Investment Report 2017/2018: From Recovery to Sustainable Growth. Luxembourg: European Investment Bank, https://www.eib.org/attachments/efs/economic_investment_ report_2017_en.pdf European Commission (2020) “Country Report Italy 2020, Brussels, 26.2.2020, SWD(2020) 511 Final”, https://ec.europa.eu/info/sites/info/files/2020-european_semester_country-reportitaly_en.pdf Ferretti, C., G. F. Gori and P. Lattarulo (2018) “Finanza locale e investimenti negli anni della crisi”, in La finanza territoriale. Rapporto 2018, ed. by IRES Piemonte, IRPET, SRM, PoliS Lombardia, IPRES and Liguria Richerche (Soveria Mannelli: Rubbettino), pp. 43–59, https:// www.sipotra.it/wp-content/uploads/2019/03/La-finanza-territoriale-Rapporto-2018.pdf Ferretti, C., G. F. Gori and P. Lattarulo (2019) “Il superamento del patto di stabilità e la disponibilità dell’avanzo favoriranno gli investimenti dei comuni?”, in La finanza territoriale. Rapporto 2019, ed. by IRES Piemonte, IRPET, SRM, PoliS Lombardia, IPRES and Liguria Richerche (Soveria Mannelli: Rubbettino), pp. 15–37, http://www.irpet.it/wp-content/ uploads/2019/11/pubblicazione_finanza_2019.pdf Giorgiantonio, C., A. Pasetto and Z. Rotondi (2018) “La dotazione infrastrutturale: i nodi da affrontare nella nuova legislature”, in La finanza pubblica italiana, ed. by Giampaolo Arachi and Massimo Baldini (Bologna: Il Mulino), pp. 211–35. Global Infrastructure Hub (2017) “Global Infrastructure Outlook. Infrastructure Investment Needs. 50 Countries, 7 Sectors to 2040”, https://cdn.gihub.org/outlook/live/methodology/ Global+Infrastructure+Outlook+-+July+2017.pdf Ministro per il Sud e la Coesione terriotriale (2020) “Piano Sud 2030, Sviluppo e coesione per l’Italia”, http://www.ministroperilsud.gov.it/media/1997/pianosud2030_documento.pdf Mizell, L. and D. Allain-Duprè (2013) “Creating Conditions for Effective Public Investment: Sub-National Capacities in a Multi-Level Governance Context”, OECD Regional Development Working Papers 2013(04), https://doi.org/10.1787/5k49j2cjv5mq-en Montanaro, P. (2011) “La spesa per infrastrutture in Italia: dinamica recente, confronto internazionale e divari regionali”, in Le infrastrutture in Italia: dotazione, programmazione, 5. Trends and Patterns in Public Investment in Spain 87 contribute the most to the aggregate productivity of the economy. In this respect, it is convenient to remember that, as stressed by the OECD, “investment spending has a high multiplier, while quality infrastructure projects would help to support future growth, making up for the shortfall in investment following the cuts imposed across advanced countries in recent years” (OECD 2016, p. 6). Therefore, it is always appropriate to ask in which areas or activities does the Spanish Government invest?5 To answer this question it is convenient to make use of the Classification of the Functions of Government (COFOG), which distinguishes between ten categories: General public services (01), Defence (02), Public order and safety (03), Economic Affairs (04), Environmental protection (05), Housing and community amenities (06), Health (07), Recreation, culture and religion (08), Education (09) and Social protection (10). Considering this classification, it can be seen (Figure 2) that in Spain, and indeed everywhere else, public investment in Economic affairs—which mainly refers to infrastructure—gets, on average for the whole sample period, the 5 Although here we do not pay attention to the distribution of public investment by different levels of government, it is worth remembering that, in Spain, the shares of the central, state and local governments were, on average for the period 2000–2017, 31.1%, 42.3% and 26.6%. Fig. 2 Distribution of public investment by type of asset: average for the period 2000–2017 (%) Note: EA = euro area; EU = European Union; F = France; G = Germany; I = Italy; S = Spain; UK = United Kingdom. 01 = General public services; 02 = Defence; 03 = Public order and safety; 04 = Economic affairs; 05 = Environmental protection; 06 = Housing and community amenities; 07 = Health; 08 = Recreation, culture and religion; 09 = Education; 10 = Social protection. Source of data: Eurostat database. Figure created the by authors. 0 5 10 15 20 25 30 35 40 45 50 EA EU F G I S UK 01 02 03 04 05 06 07 08 09 10 A European Public Investment Outlook 88 highest share: specifically, in Spain it accounts for around 43% of total public investment. Additionally, it should also be appreciated that Spain is the country in which this item is the most important; while in the EU and the EA, the average share of it was 33.8 and 35%, respectively, in all the other four countries of reference the share was even lower, with the UK registering the lowest value (25.3%). This notwithstanding, public investment in Economic Affairs was, after Housing, Social protection and Recreation, culture and religion, in Spain the item that suffered the largest fall in the aftermath of the Great Recession; on average, it declined by 8.9% per year between 2008–2017. Because of this, the share of Economic affairs in total public investment lost about ten percentage points in the last years of the sample period, from a maximum of 48.6% in 2011 to a minimum of 38.8% in 2017. 5.2. Public Investment and Public Capital in Spain: A Long-Term Perspective Having examined in the previous section the dynamics and main characteristics of public investment in Spain relative to that of the whole EU, the EA and the four largest economies in the EU, over the period 2000–2017, we change our focus in this section in two respects. First, we now pay attention not only to public investment but also to the public capital stock in the country; and second, we adopt a much longer time perspective, as the sample covers a period of some fifty years, from 1964 to 2014. All data used in this section are taken from the Valencian Institute of Economic Research (IVIE) dataset on public capital.6 According to Figure 3, two main characteristics concerning investment have to be stressed. First, both total and public investment roughly followed the same pattern over time. They grew moderately until the mid-1980s, they accelerated their rate of growth from then on to the second half of the 2000s (in particular public investment), and they experienced an abrupt decline since then up to 2014. Second, the share of public investment in total investment experienced many ups and downs around an average of 11.2%. Here several sub-periods are clearly noted. From 1964 to 1980, the ratio, although very volatile, stood around 9%. The arrival of democracy in Spain, the integration of the country into the EU, and the sharing of power between the central and regional governments brought about a huge increase in the ratio to the point that it reached maximum values in the neighbourhood of 17% at the beginning of the 1990s. Afterwards, the ratio declined for a period of about five years to stabilize approximately at 11% for the whole next decade, between 1996 and 2006. Finally, it experienced a huge rise after the crisis outbreak to reach, in 2009, a near maximum of around 16%. Unfortunately, and once again as a result of the fiscal consolidation 6 Specifically, the database used is ‘Stock and Capital Services’ (https://www.ivie.es/en_US/ bases-de-datos/capitalizacion-y-crecimiento/el-stock-y-los-servicios-de-capital/). 5. Trends and Patterns in Public Investment in Spain 89 efforts previously mentioned, it decreased markedly from then on to a level close to the minimum of the 1970s; in fact, between 2008 and 2014 public investment in Spain fell by nearly 60%, which implies a negative rate of growth of 13.8% per year. Fig. 3 Investment (1964 = 100): total and public Note: the ratio P/T is measured (in percentage points) in the right-hand axis. Source of data: IVIE database. Figure created by the authors. This last point is confirmed (Figure 4) if we consider the evolution of the public investment effort, as measured once again by the “public investment/GDP” ratio, over time. This ratio, being between 2 and 2.5% for over the first twenty years of the sample period, increased very rapidly in the second half of the mid-1980s to reach a maximum above 4%. Afterwards, it declined also very sharply until the mid-1990s to keep a level around 3% up to the 2008 Global Financial Crisis, when it increased to achieve, once more, a level of 4%; this, however, was only a very transitory increase as in 2010 it began to decrease to reach a level of just 1.5% in 2014. On average, the public investment effort in Spain has been 2.8%. 6 8 10 12 14 16 18 100 200 300 400 500 600 700 800 900 1000 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Total (T) Public (P) P/T Figure 5 shows the distribution of public investment by type of assets. Although IVIE offers a very rich classification, we have reduced it to just five types for reasons of simplicity: Dwellings, Non-residential structures (Infrastructures), Transport equipment, Machinery and other equipment,7 and Intangible assets (Information and 7 Considering its limited relevance, we have included “Biological property assets” within the “Machinery and other equipment”. Fig. 4 Public investment effort: public investment over GDP (%) Source of data: IVIE database. Figure created by the authors. 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Fig. 5 Distribution of public investment by type of asset (%) Source of data: IVIE database. Figure created by the authors. 0 10 20 30 40 50 60 70 80 90 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Dwellings Infrastructures Transport Machinery ICT 5. Trends and Patterns in Public Investment in Spain 91 communication technology, ICT). As can be seen, the lion’s share of public investment corresponds to one single asset, Infrastructures, to which roughly between 60 and 80% of total public investment is devoted. Additionally, Machinery and other equipment is also relevant, as it contributes to around 20% of total public investment. Albeit still very low in relative terms, it is important to note that the share of public investment in Intangible assets grew slowly but steadily until the beginning of the nineties but that, since then, it has grown more rapidly, reaching levels of around 8% in the last final years. In fact, investment in Intangible assets grew much more rapidly than any other type of public investment; it is also true, however, that this investment is the one that was most negatively affected by the outbreak of the crisis (its annual average rate of growth between 2008 and 2014 was -12.9%). As is well known, the stock of capital of an economy is the result of investment accumulation and de-accumulation over time. As mentioned before, in addition to offering information about investment, IVIE also provides information about the stock of capital (both net and productive) in the economy. Net capital is the result of net investment accumulation while productive capital is equal to net capital minus the loss of capital efficiency due to the ageing of capital assets. As the estimation of the loss of efficiency always implies making some arguable assumptions and, additionally, the evolution of net and productive capital has moved along very similar paths, here we decided to focus exclusively on net capital (referred to henceforth in short, as simply “capital”). Total and public capital in Spain increased a lot over time. Initially and until the mid-1980s, both grew steadily at a similar rate, but afterwards public capital rose much faster. Consequently, the share of public over total capital was very stable over the first twenty years of the sample period at a level of 8%; afterwards, however, it increased sharply to up a maximum of around 12% in the mid-1990s, to remain stable since then at a level between 11 and 12%. Regardless, this performance cannot obviate the fact that public capital suffered a little decrease during the crisis years: while, taking 1964 as the base year with a value of 100, the index rose from 100 to 804.5 until 2011, it declined from 2011 to 2014 to a level of 764.3. When we consider the ratio public capital/GDP (Figure 6), the most salient trait is that, after long periods of relative stability (1964–1980 and 1994–2008), it increased very markedly. That is to say, the two most expansionary phases took place, roughly, between 1980 and 1995; and immediately after the burst of the Great Recession. Consequently, the ratio rose from slightly more than 20% of GDP in 1980 to around 36/37% at the end of the sample period. Regarding public capital per inhabitant, its evolution differs from that of net capital over GDP in that now, with the exception of the first fifteen years of the sample, the ratio increased almost continuously over time. In any case, its evolution mimics that of public capital/GDP in that the average for the second half of the period (close to €8,000 per inhabitant) was much higher than that for the first (€3,500). Fig. 6 Public capital ratios: over GDP (%) and population (thousand euros per inhabitant) Note: the ratio public capital/population (in thousand euros) is measured on the right-hand axis. Source of data: IVIE database. Figure created by the authors. 1 2 3 4 5 6 7 8 9 15 20 25 30 35 40 45 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 GDP Population Fig. 7 Distribution of public capital by type of asset (%) Source of data: IVIE database. Figure created by the authors. 0 10 20 30 40 50 60 70 80 90 100 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Dwellings Infrastructures Transport Machinery ICT 5. Trends and Patterns in Public Investment in Spain 93 Regarding the distribution of the public capital stock by type of asset (Figure 7), it is important to stress that, naturally, it is much in line with that of the public investment previously mentioned. Once again, it happens that Infrastructures is, by far, the most important type of capital asset of the five here considered; it represents, on average, nearly 84% of public capital. As is obvious, this implies that the other types of capital assets contribute with very low percentages to the total; in particular, these contributions were of some 8% for Machinery, 6.3% for Dwellings, 1.3% for ICT, and 0.6% for Transport equipment. What cannot be seen in Figure 7, is that there are three additional relevant characteristics related to this distribution. First, as expected, all types of capital assets increased in net terms over time. Second, ICT is the type of capital asset that grew more rapidly since the early 1990s (between 1990 and 2007/2008 it grew at an average yearly rate of 8.9%). Third, capital for all types of assets declines (in three out of the five cases very abruptly) from the outbreak of the financial crisis. 5.3. Conclusions Like some other European countries, namely Greece, Spain was hit badly by the 2008 Global Financial Crisis. Because of this, the country faced some important constraints in its public finances; namely, public investment experienced a severe blow after the outbreak of the crisis. In fact, during the period 2000–2007, Spain was the country that registered the second highest increase in public gross fixed capital formation among the five biggest European countries, a rate (6.8% per year) that was also much higher than that of the EU (2.3%) and the euro area (2.6%). However, over the next period, 2008–1013, the situation changed completely: public investment dropped, on an annual basis, at a rate close to 11%. Thus, Spain became the country that suffered the most acute decline in public investment among the big five. In relative terms, the situation did not improve. Although Spanish GDP also registered a large drop in the aftermath of the recession, public investment decline was even larger. Therefore, the ratio “public investment/GDP”, that had been among the highest of the EU, also recorded an intense fall to the point of becoming one of the lowest of the EU. In fact, from being at a level closer to or over 4% between 2000 and 2009 (when it reached a maximum over 5%), the ratio decreased to a minimum of around 2% in 2016 and 2017. From the point of view of the asset composition of public investment, two results are worth mentioning. On the one hand, the Economic affairs category is clearly the most important category, even to a much higher extent than in any of the reference areas: it represents, on average, around 43% for Spain against less than 35% in both the EU, the euro area and the other four big countries. On the other hand, the share of this category of investment declined, because of the crisis, from 2007/2008 onwards. However, a longer, although less updated, time perspective (1964–2014) offers a somewhat different picture of the evolution of public investment in Spain. After A European Public Investment Outlook 94 having experienced a more or less stable increase between 1964 and 1980 (it rose from an index of 100 to one of 200), this type of investment scored an impressive increase in the next decade, to reach an index level over 600. The first half of the 1990s was more turbulent (the index declined below 500), but afterwards and up until 2008 it achieved another impressive increase, registering an index value close to 1000. Unfortunately, and as mentioned before, the Great Recession very negatively affected Spanish public investment, to the point that the index fell to a minimum of less than 400 in 2014. Regarding the public investment effort, there are three results, somewhat in tune with the evolution previously mentioned, that should be highlighted: first, its continuous ups and downs, reflecting a high volatility; second, the huge increase recorded in the 1980s; third, the even stronger decline underwent from 2008 to 2014. As for the composition of public investment, there are also two important facts that should be stressed: on the one hand, the huge (albeit declining) share of public investment devoted to infrastructure, and, on the other, the low but increasing share devoted to ICT. The results for (net) public capital roughly mimic those of public investment. The main difference is that, as expected, public capital has been growing constantly over time (from an index of 100 in 1964 to one of more than 750 in 2008); the only exception to this positive evolution took place in the last few years, in which the index declined to around 720 in 2014. A very similar evolution was registered by the ratios “public investment/GDP” and “public investment/population”. To sum up, the following points should be stressed: 1. Public investment in Spain has been very volatile and pro-cyclical over time. It has experienced large increase periods during boom times and huge fall periods during recessions. 2. Public capital has been increasing fairly constantly (but not always at the same rate) over time, with the only exception being developments during the most acute phase of the financial crisis. 3. Investment in infrastructures always represents the main component of public investment, but the most expansive item has been investment in ICT. This is also true regarding public capital. Considering all of this, it seems that the agenda for public investment in Spain in the future should have three main goals: 1. To reduce the level of volatility, for which the development of long-run investment strategies would be an important instrument. 2. To adopt a more anti-cyclical stance. As part of the aforementioned strategies, public investment should be considered as an anti-cyclical policy tool, in particular to smooth future drops in the business cycle. 5. Trends and Patterns in Public Investment in Spain 95 3. To increase the share devoted to ICT. Without forgetting the importance of physical infrastructure, it is clear that improving access to ICT infrastructure should become a priority for policy makers, since ICT may act as a remarkable enabler of economic development. In other words, the growing trend in this type of public spending should be consolidated and, if possible, expanded in the coming years. Although there is no doubt that this is a hard agenda to accomplish, it should obviously be pursued. The fate of public investment and public capital in Spain (and, for that matter, of economic growth) is, to a great extent, in the hands of policy makers, as it ever has been. References Abiad, A., D. Furceri and P. Topalova (2015) “The Macroeconomic Effects of Public Investment: Evidence from Advanced Countries”, IMF Working Paper 15(95), https://doi. org/10.5089/9781475578874.001 Aschauer, D. A. (1989) “Is Public Expenditure Productive?”, Journal of Monetary Economics 23(2): 177–200, https://doi.org/10.1016/0304-3932(89)90047-0 de Jong, J., M. Ferdinandusse, J. Funda and I. Vetlov (2017) “The Effect of Public Investment in Europe: A Model-Based Assessment”, ECB Working Paper 2021, https://www.ecb.europa. eu/pub/pdf/scpwps/ecbwp2021.en.pdf OECD (2016) OECD Economic Outlook. Paris: OECD Publishing. Perez, J. J. and I. Sotera (2017) “Developments in Public Investment during the Crisis and the Recovery”, Bank of Spain, Economic Bulletin 4: 1–11, https://www.bde.es/f/webbde/SES/ Secciones/Publicaciones/InformesBoletinesRevistas/NotasEconomicas/T4/files/bene1704nec10e.pdf 6. In Search of a Strategy for Public Investment in Research and Innovation 103 declined between 2010 and 2012 up to 1.36%, shows a very slight increase after 2012, staying between 1.37% and 1.39% with an adjustment to 1.4% only in 2017. By and large, it is interesting to note that over the past decade (2007–2017) the EU’s total of national government budgets for R&D has increased by 16.5% and that the share of public budget allocated to R&D in 2017 is only -5% lower than the peak percentage of 1.48% in 2009. The present dynamics of public R&D investment in the EU is the result of large divergences among the Member States in the pattern of change of the share of public budget allocated to R&D. A first divide with respect to the EU global trend can be observed between countries that increased their investment in R&D as a share of public budget and those that went in the opposite direction. But deeper insights into the behaviour of public R&D budgets in the EU can be gained by looking at the differences among the Member States with regard to the share of total R&D expenditure on GDP (GERD/GDP) (Figure 3), especially within the EU15 aggregate. Increasing shares of the public budget allocated to R&D are observed for most of the northern EU15 countries, characterized by the highest shares of total R&D expenditure on GDP (Figure 4), including Germany, Austria, Sweden, Denmark and Belgium; another two countries, Finland and the Netherlands, still rank well above the EU average in 2017 but show a contraction of the R&D share of the public budget. On the other side, EU15 Member States with the lowest share of total R&D expenditure on GDP, notably the southern countries (Greece, Italy, Portugal and Spain) and Ireland, show sharp contractions of the share of public budget allocated to R&D during the central years of the international crisis, with only partial adjustments to higher levels at the end of the period (2016–2017) in the case of Portugal and Greece. Compared to the other EU15 countries, and with the exception of Belgium and France, these countries still have the lowest shares of the public budget allocated to R&D, well below the EU average. This is clearly a point of concern as, among the core Member States, and unlike Belgium and France, southern European countries and Ireland still have the lowest shares of R&D intensity. A different case is that of the United Kingdom, where the R&D intensity on GDP is well above that of southern countries but slightly below the EU average and where the share of public budget allocated to R&D declined sharply over the past decade (although with some upward adjustments between 2013 and 2017). The dynamics of public R&D investment as a share of government spending is somewhat more erratic in the case of the Eastern EU countries; with the exception of Estonia and the Czech Republic, the use of public budgets to finance R&D expenditure is much more limited here than in the EU15 countries. Fig. 5 GERD financed by sector (%), 2015 Notes: Sweden, Israel: 2013; France: 2014; Greece, Austria, Iceland, Serbia: 2016; United States: R&D expenditure does not include most, or all capital expenditure; Israel: Defence (all or mostly) is not included. Source: DG Research and Innovation—Unit for the Analysis and Monitoring of National Research and Innovation Policies—Science, Research and Innovation performance of the EU 2018. Source of data: Eurostat, OECD, UNESCO. 6. In Search of a Strategy for Public Investment in Research and Innovation 105 6.2. Public Investment Looking at the extent to which R&D public funding contributes to the whole of R&D expenditure, another remarkable fact is that the share of total R&D (GERD) financed by government in the EU has declined all the time, although, at 31.1% it is still higher than comparable shares of the US, China, Japan and South Korea (Figure 5), while the share of government financed GERD on GDP is still below that of the US. This trend is reflected in all Member States, but large differences can be observed across countries. In the EU15 Member States, the share of R&D public funding is generally higher in southern countries (Italy, Greece, Portugal, Spain), mainly as a result of less research carried out by the business sector. This is true only in part for the eastern Member States; they show an even smaller share of total research expenditure financed by the business sector, but, as the result of the much higher incidence (largely well above the EU average) that contribution from abroad has on the smaller total R&D expenditure of these countries. At the same time, it should be observed that the decline of the share of GERD financed by government is also the effect of the fall of direct government contributions to business research, which have dropped sharply in all countries since the beginning of the financial crisis (OECD 2018). Instead, the decrease of public funding of R&D involved public research only to a more limited extent, both as a share of GDP and in terms of total government expenditure (OECD 2018). This latter trend is mostly in line with the dynamics already observed for the EU share of the public budget allocated to R&D and is well reflected in the higher education (HERD) and government (GOVERD) components of public R&D expenditure on GDP (Figure 6). Thus, given the remarkable divergences among the Member States recorded for all public R&D spending, this suggests a more in-depth analysis of the main patterns of public R&D expenditure emerging at the country level. The attempt is also that of unveiling the possible main direction of public R&D spending (and hence the direction of public R&D investment) while accounting for the whole of the R&D funding structure. The aim is twofold: to overcome important drawbacks that characterize the allocation of R&D funds in the public budget with respect to specific socio-economic objectives, and to assess to what extent the need for public R&D investment is consistent with broad R&D country strategies that are supposed to be followed. In fact, given the still substantial lack of information necessary for analyzing the real content of governmental appropriations and the structure of public R&D outlays, crossing data on R&D spending with those on actual R&D expenditure would be of little help in understanding R&D investment strategy by government, especially from the perspective of a comparative analysis between countries. Looking then at the patterns of public R&D expenditure, it is first of all relevant to compare, in terms of GDP and at the EU level, the steep decline of GOVERD expenditures with the upward trend found for both HERD expenditures and BERD (business) expenditures (Figure 6). A European Public Investment Outlook 106 Fig. 6 BERD, HERD and GOVERD % of GDP per country, 2007, 2012, 2017 Source of data: Eurostat. Figure created by the authors. This appears to indicate the increasing importance of research and innovation as a driver of economic activity, with the consequent need to adequately support the growth of human capital. However, the patterns of R&D expenditure at the country level are generally consistent with the EU trend only for the higher education and the business sectors, while both the dynamics and the intensity of the government expenditure are more country-specific. Furthermore, it should be noted that increasing intensities of R&D expenditure on GDP in the higher education’s sector are widely observed with the highest and/or increasing intensities of R&D expenditure in the business sector, although there are some remarkable exceptions in countries where the intensity of R&D expenditure in the business sector is still well below the EU average. Trend reversals to lower intensities of the higher education expenditure are common instead in countries still boasting the lowest business R&D intensities (such as southern countries among the EU15 members) and to countries with the highest business R&D intensities (such as the Netherlands and the UK), although, excepting the UK, the latter still stand well above the EU average of higher education expenditure intensity. All in all, the growth of R&D in the business sector appears to be an important driver of the total R&D expenditure in the EU as a whole. This is a result of remarkable differences in the R&D business intensities among countries, which were in part reflected in the growth of the higher education expenditure. This is a point of concern 6. In Search of a Strategy for Public Investment in Research and Innovation 107 especially for Member States with the lowest business R&D intensity, as, in most cases, they have very low growth rates for the higher education expenditure and still show a large gap with respect to the EU average. Moreover, and most importantly, it should be noted that, despite the increase in R&D business expenditure, the EU R&D business intensity still lags well behind that of the US, Japan, Korea and China. However, there does not seem to be enough evidence to conclude that this is a consequence of the decrease of direct government support for business R&D. As has been widely observed (OECD 2018; European Commission 2018b), this decrease has, in fact, been largely compensated for by an increase in indirect support through tax incentives, the growth of which has been much higher in the EU than in the US, Japan, Korea and China, and which are now higher than they have ever been. It has also been pointed out that, among the Member States with the highest business R&D intensities, Germany and Finland did not adopt tax incentives, while more generally it has been observed that the use of tax incentives can hardly turn into expenditure additionality unless it becomes part of a more comprehensive strategy involving direct investment activity by government within a more targeted “mission-oriented” investment view (Mazzucato 2013). Indeed, significant evidence has emerged about additionality effects on R&D business expenditure, pointing out that greater benefits arise for high-tech sectors that already boast a higher R&D orientation (Freitas et al. 2017). As the entire amount of the R&D business expenditure is consistent with the industry specialization (Moncada 2016), this should also call for a closer consideration of the structure of the economy where tax incentives are to be implemented. Additional R&D financing from abroad has also played an increasing role in all EU countries (European Commission 2018b) and, as mentioned above, has become a key component of total R&D investment, especially in eastern countries. However, when looking at the main public sources of R&D financing as represented by the European Commission Structural Funds and the Horizon 2020 program, we cannot help but notice that they hide major infrastructural divergences among the Member States. With regard to the Structural Funds, also bearing in mind that in many more developed countries they cover a limited portion of the territory, it is quite clear that the share of funding explicitly allocated to R&I (research and innovation) projects is marginal among eastern countries (Figure 7), with only a few exceptions slightly above the EU average (16%). Moreover, in these last countries, the extent to which R&I funds contribute to innovation in the business sector is well below the EU average in most cases, while shares well above the average are noticed mostly for countries that also hold the lowest shares of Structural Funds allocated to R&I projects. This could suggest that the initial development lag of these countries was such that funds were first used for the macroeconomic context as a whole, including support for the activity of research centres. The explicit contribution of R&I funds to innovation in the business sector is instead much higher among the EU15 Member states, although a remarkable variability A European Public Investment Outlook 108 Fig. 7 Structural Funds: share of funding allocated to R&I (devoted to small and medium-sized enterprise (SME) and to research); total per country Source of data: 2007–2013 database of the cumulative allocations (European Regional Development Fund (ERDF) and Cohesion Fund (CF)) to selected projects and expenditure at NUTS2 (https:// ec.europa.eu/regional_policy/sources/docgener/evaluation/pdf/expost2013/wp13_3_db_nuts2_ ae.xlsx). Figure created by the authors. Fig. 8 Horizon 2020: average of European contribution per project and per country Source of data: Horizon 2020 country profiles, May 2019. Figure created by the authors. 6. In Search of a Strategy for Public Investment in Research and Innovation 109 is observed across countries. In particular, the share of research and innovation funds allocated to innovation projects is quite specific for each country and, most importantly, does not show any relationship with the R&D intensity in the business sector. With regard to the Horizon 2020 program, the latest figures show (Figure 8) that the average EU contribution per project is higher, the higher the countries’ total R&D is as a share of GDP, although a further difference emerges between EU15 countries and the eastern Member States. Southern EU15 countries lag behind northern ones, but eastern countries lag almost always (excepting Portugal) behind southern EU15 countries, even when these are countries in which the total R&D expenditure makes up a similar share of GDP. 6.3. Final Remarks and Policy Considerations The first paragraph of the Joint Statement on “New Economic Growth: The Role of Sciences, Technology, Innovation and Infrastructure” of the G7 of Academies of Science, which met in Rome in 2017, states: Science, technology and innovation have long been important drivers of economic growth and human development. Growth relies on the integration of basic and applied research, at both public and private levels, on an international scale. The challenge is to ensure that, even during phases of economic slowdown, science and technology continue to support the objectives of sustainability and improved living standards in all countries. Institutional arrangements are needed to make sure that the potential of science and technology is aligned with the paths and strategies of economic development, social inclusion and environmental sustainability, as argued by the United Nations report “Transforming our world: the 2030 Agenda for Sustainable Development.” (G7 Academies of Science 2017) This implies an increasing investment in infrastructures—both tangible and intangible—that contribute to inclusive development and to progress in science and technology, as mentioned in policy recommendations of the statement. In this respect, the quantity (intensity of the R&D effort and the number of researchers) and the quality of the research produced, measured by the scientific impact and the ability to transfer it as innovation in the economy and society, determine measurable rankings that place the different scientific and innovative systems and their aggregations on a supranational scale, according to criteria and indicators that we have examined and compared in this chapter. All the most recent comparative analyses based on statistical data and their processing as quoted in the bibliography agree in registering a worldwide growth of these indicators (the effort in R&I), marked, however, by strong differentials between countries. The positioning of individual countries is confirmed, combining a strong economic dynamic with a corresponding commitment in R&D. Within this general framework, different groupings of countries are outlined on the basis of the industrial structure, the importance of the commitment A European Public Investment Outlook 110 to research by companies, and the ability of the public actor not only to compensate for weaknesses and “market failure” but also to stimulate the propensity to research and innovation with planned and targeted initiatives and not simply contextual policies and interventions. The existence of differentials between countries in research and innovation performance, and within them between areas and regions, cannot, however, be tackled simply by rebalancing the resources used and/or orienting them towards common initiatives. Likewise, higher efficiency cannot be derived from strategies based on a reduction of public funding or on forcing public/private interaction, without the corresponding guidelines, or delegating the motivation for public funding of companies to the tax incentives and the choice of contents and objectives to a generic “demand-pull force” (Mazzucato 2013, 2019). In fact, it is necessary to assess to what extent the resources dedicated to R&D, and the relative spending modes are able to turn into an effective development lever, starting from the structural characteristics of the entire research and innovation system (Wirkierman et al. 2018). Moving from this last consideration, the present chapter, therefore, aims to underscore the “system infrastructure” nature of the research activity. It does so by highlighting, through the main results of the analyses and the most recent data on the subject, that the investment in research cannot be separated from policies and/or strategies that take into account the strengths and weaknesses of the productive fabric of each country. In this context, the public actor is committed to playing a key role in orienting processes, both with respect to triple or quadruple helix models and to the construction of a strategy that is able to face the challenges of new technologies as well as of the behaviour of companies at the global level. To this is added, in particular for Europe, the dimension of supranational cooperation and the supporting role exercised by Structural Funds, which, beyond the purpose of overcoming structural imbalances among countries, highlight different propensities with respect to their use in support of research and innovation. Partnership and subsidiarity are, therefore, two particular elements of the strategy in support of research and innovation that must be integrated into the evaluation of the public budget allocation for research spending. The lines of analysis followed in our work focused in particular on public investment, both direct and in support of companies, including the infrastructural endowment. Some trends have emerged that have already been highlighted by the various institutional organizations, from the OECD to the European Commission. As far as Europe is concerned, there are clear distinctions in the country profiles that, with considerable simplification, can be characterized with respect to two “geographical” directions: from north to south and from west to east, where a strong correlation seems to emerge between a substantial and growing public intervention and the presence of a significant business system with a strong propensity for R&I. By contrast, in less developed countries (which are characterized by a poor effort in R&D in the business sector) it is difficult for the public actor to exercise a leverage function with respect 6. In Search of a Strategy for Public Investment in Research and Innovation 111 to the role of the companies. This turns to “contextual” infrastructural interventions, both in the technological field and as related to the overall infrastructural country endowment, by means of a “targeted” use of Structural Funds. Also, in this regard, even the examination of technological infrastructures as such and those aimed at research, despite the specificity of individual cases, indicates the presence of country-specific models. It was therefore considered useful, as analogous to what the OECD already does, to examine the vertical relations between public financing to beneficiaries and the executors, i.e. subjects in charge of performing R&D (in most cases public bodies), by analyzing the relationship between direct funding and the role exercised by support through tax incentives. As an example, Germany and Finland, which are high-tech countries, have not implemented tax credit policies that means giving priority to direct financing. With respect to the use of Structural Funds, the attractiveness of funds “from abroad,” or the propensity to participate and win on competitive funds, the differences among countries make it clear that we are not in the presence of a single “winning model” to follow. A careful analysis of the Community Scoreboard (European Commission 2019b) presents the double advantage of a reading over time and a spatial representation, according to the indicators used, of the positioning of individual countries. The report, while confirming the nature and characteristics of this positioning, points out that there are specific features of the countries that the indicators are hardly able to represent and that could offer the possibility of targeted interventions to be calibrated with respect to the desired objectives without requiring substantial resources. However, it seems clear that the confirmation of a polarization of “cases of excellence” does not help the realignment process called for by the cooperation, particularly with respect to the ability of weaker countries to use research results. This effect appears to be even more negative the more one considers the advance of newly industrialized countries and the potential reduction of interactions at the international level linked to new protectionist trade policies. In the European context there is an attempt to tackle the above-mentioned polarization and the related growth of disparities between countries with, essentially, two instruments: (1) strengthening the infrastructural endowment, according to a logic of subsidiarity that uses different means such as Structural Funds and more generally other EU policies, and (2) promoting at the same time scientific excellence, cooperation and innovative capacity with the framework program instrument. In this regard, the choices made in Horizon Europe, both on method and merit of the “missions,” and in general the policy to promote innovation and to build up and use technological and research infrastructures, even with limited resources, seem to provide a response to the role of guidance and support of the public actor coordinated at a supranational level. It remains to be seen how this translates into concrete contextual actions, in a correct balance between direct intervention and fiscal incentives and in not confining research to a “subsidiary” and “ancillary” role with respect to the more explicit industrial and commercial policies. A European Public Investment Outlook 112 Our analysis has made use of a harmonized system of data that, born in the OECD context almost sixty years ago, has developed and established itself as the dominant data system, and has given rise to “supporting tools” both in the form of the production of manuals and through the promotion of committees to settle and elaborate proposals. This is a precious reality that has directed not only the collection phase, but also the use of data by analysts, scholars and decision-makers. However, on the whole, analysis of the data underlines the need to overcome some deficiencies that make difficult a better use of available information. In fact, it is difficult to interpret the strategy that guides investment processes, also considering the logic of the so-called “black box” of research that links decisions to results and their use, through implementation. This is due to the inherent limits of the GBARD (Government Budget Allocation for R&D) set-up and its classification (OECD 2015) and to the difficulty of establishing a link with the decision-making processes exercised by the beneficiaries of the resources. Also, the ex-post reading on the expenses does not help with respect to additionality, directionality and, above all, determination of the mix of resources needed to guide choices. We respond today to a growing demand for measurability of the impact of public R&D investment (in particular to facilitate the choices and the optimal allocation of resources) in a way that is not fully coordinated and without a fully equipped “toolbox” at our disposal. It follows that better knowledge tools are required, starting from a structured evaluation of the policies, the related information, and the knowledge baggage that enables the establishment of relationships between the different interventions and the promotion of an impact assessment that is not related to merely a single intervention. The experience gained concretely and in several exercises at the European level within the Framework Program, although not unique and always successful, constitutes an undoubted point of reference from which to start. Given this framework, the implementation of a new course of public investment research policies should, therefore, envisage a renewed orientation of the strategies consistent with the new course of missions/objectives formulated at the European level and, at the same time, point to a coordination with policies aimed at increasing the innovative potential of the economic system, in relation to the characteristics of the productive specialization of each country. References Bodas Freitas, I., F. Castellacci, R. Fontana, F. Malerba and A. Vezzulli (2017) “Sectors and the Additionality Effects of R&D Tax Credits: A Cross Country Microeconomic Analysis”, Research Policy 46: 57–72, https://doi.org/10.1016/j.respol.2016.10.002 European Commission (2018a) “Horizon Europe Impact Assessment—Staff Working Document, June 2018”, https://ec.europa.eu/info/publications/horizon-europe-impactassessment-staff-working-document_en 7. Social Investment and Infrastructure 119 in the belief that all public spending, especially social spending, is wasteful. As such, the rule book of the SGP disqualifies public investments in lifelong education and training in the knowledge economy as wasteful consumptive expenditures. There is no justification for this ideological short-sightedness anymore. Today, the evidence for social investment returns is stronger than ever before. Moreover, structurally low interest rates present us with a post-crisis opportunity not to be wasted. Not least, European publics expect pro-EU political forces to put their money where their mouth is in terms of enabling citizens to live dignified, secure lives. We must ratchet up domestic social investment with EMU support by exempting human capital “stock” investments from the rules of the SGP. The post-crisis collapse in interest rates should be used to establish, consolidate and expand social investments that benefit future generations and consolidate fiscal health, especially in the face of adverse demographic trends. We therefore propose a “Golden Rule” of exempting human capital stock spending from the euro area fiscal rule book for 1.5% of GDP for about one decade, as a flagship initiative of the new European Commission. A viable division of responsibilities between the EU and the Member States is possible without trespassing on treasured national welfare state jealousies. Social security “buffers,” the core prerogative of the national welfare state, should remain in the remit of national welfare provision. The “flow” function—which concerns labour market regulation and collective bargaining in synchronization with work-life balance, gender equality and family-friendly employment relations—is best served by mutual learning and monitoring processes of open coordination at national and EU level, engaging national governments with relevant experts and the social partners in sharing good practices. What we are left with is guaranteeing social investment in lifelong human capital “stock”. Here the EU needs to change the fiscal rules in the SGP regarding social investment. Citizens all over the EU are craving support for social investments, and the financial costs are minimal given the shortand long-term profitability of the economic and social returns. 7.3. A New Deal for Social Europe: Boosting Social Infrastructure Lifelong human capital “stock” includes investment in social infrastructure. In the EU, since 2007 investments, both public and private, have fallen by 20%. In public investments, as much as 75% of the reduction is due to the collapse of the works carried out by local administrations which, in the European average, represent around two thirds of the total public investment (European Commission 2016; Fransen, del Bufalo and Reviglio 2018; EIB 2019). Investment in social infrastructure—infrastructure that pertains to social services—has been especially weakened. This is the case for three A European Public Investment Outlook 120 sectors that are crucial for the future well-being of European citizens: health, education and housing.4 Current investment in social infrastructure in the EU has been estimated at approximately €170 bn per year.5 The minimum infrastructure investment gap in these sectors is estimated at €100–150 bn, representing a total gap of at least €1.5 tn for the period between 2018 and 2030 (Fransen, del Bufalo and Reviglio 2018). Social infrastructures are important because they shape the nature of our society. High-quality large-scale investments in social infrastructure are especially important for the EU given demographic projections, radical structural changes in the labour market and innovation. The question is, however, how to find financing to close such an enormous gap at a time of high public debt in many regions with a long-term perspective for only moderate economic growth rates? This challenge is at the heart of former European Commission President Romano Prodi’s call for a New Deal for Social Europe and contained in the recently presented Report of the High-Level Task Force on Investing in Social Infrastructure in Europe, promoted by the European Long-Term Investors Association (ELTI) and the European Commission (Fransen, del Bufalo and Reviglio 2018). Europe’s future demographics pose daunting challenges for the coming decades. Europe today already has one of the lowest proportions in the world of working population to non-working population (children and pensioners). In 2060, one in three European citizens will be over sixty-five (of whom one in three will be more than eighty years old), while only 57% of the population will be of working age (fifteen to sixty-four). This aging of the population will have significant effects, particularly on the cost of health care and pension systems. In addition, substantial investments will need to be made in prenatal, scholastic and university structures. All this will need to happen at the same time as demand for affordable housing for new families, students and young workers continues to grow. Incentives for procreation and well-targeted immigration policies should become an integral part of the new European social and economic agenda. If the European demography is not revived, the risk of a progressive decline of the European civilization 4 “Fiscal consolidation during the crisis has, in fact, strongly reduced fiscal space for public investments in some regions. For economic infrastructure (transport, energy and telecoms) which is mostly done at the central level, and for that done by the corporate sector and by local utilities (which is mostly outside the perimeter of the public sector) the reduction has been less pronounced. Some EU countries, where investments in small and medium-sized public works in social infrastructure are made at sub-national level, have seen a dramatic decrease in spending on social infrastructure. Because sub-national governments carry out two-thirds of total public-sector investments on average in the EU […] and these investments are of a small and medium size, we have a major challenge here that is different from general infrastructure investments” (European Commission 2016, p. 101). 5 According to estimates of the Prodi Report (Fransen, del Bufalo and Reviglio 2018), current p.a. spending in Education and Life Learning is estimated at €65 bn, and the annual investment gap at €15 bn; for Health and Long-term care current p.a. spending is estimated at €75 bn, and the annual investment gap at €70 bn; and current p.a. spending in Affordable Housing is estimated at €28 bn, and the annual investment gap at €57 bn. 7. Social Investment and Infrastructure 121 becomes dramatically real. The speed of globalization requires us to act rapidly and to be ambitious. Among the High-Level Task Force’s recommendations are many addressed to the European Union and the Commission, including: stepping up the use of innovative financial products; providing more assistance in project development at the local level; implementing regulatory improvements; European Semester reporting; suggestions for the next Multiannual Financial Framework; proposals to move towards upward convergence; and a call to establish a far-reaching European public-private fund for social infrastructure. It should be noted that although the High-Level Task Force promotes a European approach, it is careful to respect the principle of subsidiarity. This call for action seeks the greatest social investment ever undertaken in Europe. We must not, however, be afraid of this initiative. In a time of political disaffection and distrust, an ambitious, broad and effective effort will send a strong message to European citizens that their institutions and governments want to bring people and society back to the centre of the European project. 7.4. How to Invest in Social Infrastructure to Fill the Gap? The Creation of a European Fund for Social Infrastructure The Prodi Report proposes innovative solutions to finance health, education and social housing at a sustainable cost for European public finances. Social infrastructure is mostly funded through public budgets, since they barely produce cash flows on their own. Most of the time, direct contracts are financed by long-term loans. Thanks to quantitative easing, the spreads between Member States have been reduced significantly. But this will not last forever, and local authorities’ debt offers little room for manoeuvre (Prodi and Reviglio 2019). Two issues therefore arise. The first concerns the possibility of investments that do not weigh on public debt. The second is to ensure that the weakest countries and those most in need of social infrastructure can finance it at a lower cost. Suppose a municipality or region needs to invest in social infrastructure but has no fiscal space. It can decide to implement it through innovative forms of institutional public-private-community-not profit partnerships (Foster and Iaione 2016, 2019). If the construction risk is transferred to the private individual it will not weigh on public debt (Fransen, del Bufalo and Reviglio 2018; EPEC 2016). The local administration will pay for the work through an “availability fee” which will affect expenditures year after year, but not its debt. Costs can be kept down by a national or European grant, public guarantees or tax incentives. Fiscal space can be provided through a “special clause for social investments”. Contributions in kind can be made using local public heritage assets (land or buildings, for example). An institutional “technical assistance” system can ensure that risks and profits are well distributed between the public and the private sectors. This solution, known as “blending”, helps contain debt and, at A European Public Investment Outlook 122 the same time, may represent an incentive to reduce waste in current expenditures. Firstand second-generation PPP in the UK and elsewhere have not been always very successful. But this does not mean that new, more advanced and innovative schemes may be structured today. More of these “urban regeneration initiatives” should be supported. Time is of the essence. Aging society and support to the younger generation must become a priority in EU policy agenda. If we don’t act bravely, Europe is destined for an inexorable decline. This means, as we shall argue in the last part of this chapter, building mutualistic partnerships. There are many publics in ‘the public.’ In the public value framework, contestation of actual value production and evaluation systems is a critical success factor. Involving civil society organizations in framing public policy goals (missions) is a central part of the co-creation process. Producing public value requires collaboration and co-creation; public value cannot be created from the top down. Missions present an opportunity to put citizen participation at the heart of social innovation policy. Some EU countries are desperately in need of infrastructure and growth, but are penalized by their credit rating. The creation of a European Fund for Social Infrastructure would address this.6 It would issue European Social Bonds to all Member States. The bonds would have a high rating and mitigate the risks associated with certain projects. This would largely solve the problem of sovereign spreads. The Fund would have a technical assistance network (the European Investment Bank (EIB) and State Investment Banks (SIBs) may be the best candidates for this endeavour) to assist administrations in building “European” quality economic and financial plans. Long-term investors, infrastructure Funds and SIBs would contribute to its capital through shares and investing in a liquid market of European Social Bonds issued by the Fund.7 This would help meet the investors’ demand for infrastructural longterm finance instruments. In 1993, then-European Commission President Jacques Delors introduced Eurobonds. There are two main differences between these and the Euro Social Bonds proposed in the Prodi Report. First, the Fund does not require a guarantee from Member States. It manages uncertainty by “tranching” securities according to their riskiness. Second, the Fund would limit itself to social infrastructure and specialize in sectors with specific characteristics. The markets, along with the EIB and the SIBs, would remain in charge of economic infrastructure. 6 The High-Level Task Force (HLTF) produced a paper with a proposal to set up a New European Fund for Social Infrastructure as part of a potential EU Social Infrastructure Agenda within the Juncker Plan. The paper has been discussed by internal and external experts and found consensus both on technical and political ground. However, it was decided not to include the paper in the Report (Fransen, del Bufalo and Reviglio 2018), but rather mention the work done with the hope that it may be re-discussed within the new Commission. 7 Social infrastructure investments, as a sub-class of infrastructure investment, have some distinctive features: small average size of capital expenditure (capex); high level of operating expenses related to capex; great opportunities for portfolio diversification; bundling of projects; low volatility of returns; low correlation to other assets; potential attractiveness for large long-term investors (see EDHEC-Risk Institute 2012). 7. Social Investment and Infrastructure 123 7.5. Firms or Markets in Infrastructure Financing This section argues that it would make economic sense to analyses the possible establishment of a large European public-private fund for financing social infrastructure (Fransen, del Bufalo and Reviglio 2018; Prodi and Reviglio 2019). From an economic perspective a large fund is like a firm and as such, could have a long-term stabilizing role within the European financial market for infrastructure financing. We will make the point using a well-known debate in economic theory that started with Ronald Coase’s paper on “The Nature of the Firm” (Coase 1937). Equity for project financing at the global level is worth over $350 bn (Inderst 2017). There is a small market today which, according to most experts, will experience great growth rates in the coming decades. It is difficult to predict when and how fast. Usually, when the financial industry is moving with such strong determination, as it has been doing in recent years, then it may become a game changer. Policy makers and regulators are pressed to move fast to create the right conditions for expanding these markets. It is difficult to predict how the process will unfold (Bassanini and Reviglio 2011; Bassanini 2012; Ehlers 2014; Bassanini and Reviglio 2015; Arezki et al. 2016). We will try to understand the main determinants of this paradigm shift. When we talk about public-private initiatives, we mean a variety of schemes. We may envisage a project finance market composed of single projects, which have a life of their own. A highway or an offshore wind plant may rely mostly on the cash flows it produces. A project finance initiative, which involves many parties for a very long time (up to fifty years), consists of a “bundle or web of external contracts”. The necessary involvement of such a wide range of parties in infrastructure projects — construction companies, operators, government authorities, private investors, insurers and those citizens most directly affected — makes designing an efficient set of contracts a complex but essential task. The nature of contingencies and the proper sharing of risks among the different agents are pivotal. The quality of institutions and the rule of law are often determining factors in providing finance for infrastructure, even when a project by itself appears to be financially viable. Special purpose vehicles (SPV) engage external firms to plan, construct and manage the infrastructure. If the projects are smaller—as in most social infrastructure sectors—the contracts are standardized and numerous projects bundled together to increase the size of the financial instruments issued for private investors. Such arrangements are doomed to face the typical complexities of the “principal-agent theory of contracts”. The point we wish to make is that firms may be preferred to markets in building and financing infrastructure. In economic theory, this is a question, which goes back to the Coase’s paper on “The Nature of the Firm” (1937), in which he tries to explain why some activities are directed by market forces and others by firms. The answer, at the time, was that firms are a response to the high cost of using markets. It is often A European Public Investment Outlook 124 cheaper to direct tasks by fiat than to negotiate and enforce separate contracts for every transaction. This is easier and cheaper within the firm itself. For example, I switch an employee from one function to another without having to go through negotiations or the setting up of new contracts. For many business arrangements, it is difficult to set down all that is required of each party in all circumstances. Therefore, a formal contract is by necessity “incomplete” and sustained largely on trust. Coase defined a firm as “a nexus of contracts”. Most of these contracts, we have argued, are internal to the firm; this means that the firm has more power to change them if needed and it also means that they have lower transaction costs than external contracts. This is a competitive advantage of firms versus markets. Moreover, the firm usually has a large balance sheet, so it may get better financing conditions, as well as more risk-absorbing capacity. The firm is also made up of a long-term community. Employees and their skills tend to remain within the firm, increasing the long-term base for human potential. Finally, a firm has lower general costs because of its scale. So, while we concentrate on a new “asset class” emerging, we should not forget the role of firms (including funds) in infrastructure building (including social infrastructure). Good examples are the European Investment Bank (EIB), The European Bank for Development and Reconstruction (EBRD), the Council of Europe Development Bank (CEB) and the large European national promotional banks (Bassanini and Reviglio 2012, 2015; Garonna and Reviglio 2015). What makes these institutions such successful cases? The answer is the typical features of a well-run firm, such as: highly skilled personnel and management who share a common mission and have long-term internal contracts with the bank; a large and well-capitalised balance sheet which ensures low funding costs, strong capacities to manage risks and operations in different sovereign risk environments; the capacity to reduce the cost of its co-financing by offering pricing and duration which are lower and longer than commercial banks, thus promoting the “crowding-in” of private/institutional money and, by doing so, the European process of economic and social convergence. 7.6. The Role of State Investment Banks (SIBs) in Financing Social Infrastructure in the European Union State Investment Banks (SIBs) in Europe include the European Investment Bank (EIB) and the Council of Europe Development Banks (CEB).8 They are designed to provide mediumand long-term capital for productive investment. They have historically played, among others, an important role in funding social infrastructure (Macfarlane and Mazzucato 2018; Luna-Martinez and Vicente 2012). The role of SIBs has grown during the crisis and will probably remain crucial for years. They have introduced a new philosophy in the European financial system. 8 National State Investment Banks (SIBs) in the EU are also known as National Promotional Banks and Institutions (NPBIs). 7. Social Investment and Infrastructure 125 They have created new financial instruments and new guarantee schemes; provided significant additional resources to support the economy during the Great Recession, by financing infrastructure and smalland medium-sized businesses, either through the banking system or directly; and set up new European and domestic long-term equity funds to invest in infrastructure projects and improve company capitalization. More generally, they continue to play an important role in financing the real economy (primarily in terms of long-term, patient, capital investment), by using their professional banking and investment skills and risk absorption capacity, and by acting as brokers of developmental/transformational financing. Moreover, they have expanded their role thanks to their credibility as intermediaries in financial flows. There are several reasons for this: they have a long history (track record); they behave in a predictable, non-volatile way; they remain untainted by financial crisis abuses; they are known to structure transactions carefully; they have in-depth local knowledge; they benefit from preferred creditor status; they have political weight; and they have provided returns that are consistent with the risk (and the market) concerned (Bassanini, Pennisi and Reviglio 2015). Traditionally their role in the financial system is to intervene to fill market failures, to be complementary to the market (and not in competition with it) being careful not to “crowd-out” private capital. Today, as we shall argue, these missions need deep re-thinking. We shall try to explain how and why we need this “radical” conceptual transition. 7.7. The Concept of “Public Value” and the Role of Social Action Public value is value that is created collectively for a public purpose (Mazzucato and Ryan-Collins 2019; Macfarlane and Mazzucato 2018; Mazzucato and Penna 2016). This requires an understanding of how public institutions, such as mission-oriented public banks, can engage citizens in defining purpose (participatory structures), nurture organizational capabilities and capacity to shape new opportunities (organizational competencies); dynamically assess the value created (dynamic evaluation); and ensure that societal value is distributed equitably (inclusive growth). Purpose-driven capitalism requires more than just words and gestures of goodwill. It requires purpose to be put at the centre of how companies, public investment banks and governments are run and how they interact with civil society. This is especially true for social innovation which has a very tight relationship between the traditional mission of promotional banks and participatory democracy. Social infrastructure, in fact, shapes the nature of our society and as such needs direct participation from citizens. We consider “public value mapping” and “public value failure” as counterpoints to market failure theory, as a means of justifying government intervention and public policy. A European Public Investment Outlook 126 Public value results from the collective imagination, investments and pressure from social movements. To produce effective social movements, knowledge and capabilities are required in the planning, production, management and interactions among the different interest groups and citizens. The conventional view is that public goods are required to fill the gap created by a lack of investment by the private sector. This is another example of the state playing the market-fixing role. However, public value goes beyond public goods. Rather than asking what gap or failure public goods are filling and fixing, we should ask what are the outcomes that society desires, and how can we make these happen? To do this, it is useful to begin with an understanding of markets as outcomes of the interactions between different actors in the economy. The concept of public value enables us to overcome the dubious dichotomy between market and state. The market-failure justification also implies that pure private market goods can exist independently of public action. However, as illustrated by the seminal work of Karl Polanyi, The Great Transformation, there are very few examples of such phenomena. Most markets were forced into existence by collective action and policy. Many government actions enable markets to function or create and shape markets through investment, demand generation through procurement, legal codes, antitrust policies, university scientists and physical infrastructure. Markets are co-created by actors from all sectors, but economic theory does not view public actors as creators and shapers. This new role for governments as co-creators of markets would make it possible to shift not only the rate but also the direction of economic growth through collective action. Thus, the concept of public value is fundamental for guiding public action in shaping markets and co-creating the direction of economic growth. Public investment banks can have a crucial role in this change of paradigm. 7.8. How Social Investment and Social Infrastructure is Part of Public Value The search for value should not be limited to soul-searching inside the private sector. Public institutions must also carefully consider their role in creating public value. The most ambitious public organizations did more than just fix market failures. They had ambition, purpose and a mission that extended beyond day-to-day politics. We argue that public value should be understood as a way of measuring progress towards the achievement of broad and widely accepted societal goals that are agreed on by participatory processes. Creating a social space where citizenship rethinking public sector delivery and social infrastructure reshape the very nature of community. Participatory democracy in common value creating contributes to reshape capitalism. To get real about value we need to concentrate on purpose throughout governance and production, recognize that economic value is created collectively, and build more symbiotic partnerships among public institutions, private institutions and civil 7. Social Investment and Infrastructure 127 society. This is not about levelling the playing field but tilting it towards the direction of sustainable and inclusive growth. The concept of public value must be nested within a theory and practice of creating value within the public sector. From a policy perspective, it is essential to answer and operationalize the four following challenges: 1. What value is created: a purpose-driven approach engaged with civil society; 2. How to create it: capabilities within the public sector and dynamic partnerships; 3. How to assist it: dynamic metrics beyond cost benefit analysis; 4. How to share its benefits: risks and rewards for inclusive growth. 7.9. The Need for Mission-Oriented State Investment Banks Finance is not neutral; the type of finance available can affect both the investments made and the type of activity that occurs (O’Sullivan 2004; Mazzucato 2013). The types of financial institutions and markets that exist have a material impact on activity in the real economy. Financing social infrastructure requires not just any type of finance, but long-term patient strategic finance. Short-termism and risk-aversion means that the private sector will often not invest in higher-risk areas until future returns become more certain. Because the governance arrangements of SIBs typically do not create pressure to deliver short-term returns, they can provide patient financing over a longer time horizon, prioritize wider social and environmental objectives, and take a different approach to risk and reward. Although certain sectors might be more suited for sector-specific strategies, there is a growing consensus that SIBs that are “mission-oriented”, with investment activities guided by specific missions focused on overcoming key societal challenges, tend to be more effective than those which are focused on more neutral economic objectives, such as promoting “growth” or “competitiveness”, sometimes referred to as “grand challenges”. These include environmental threats, such as climate change, and demographic, health and well-being concerns, as well as the difficulties of generating sustainable and inclusive growth (Macfarlane and Mazzucato 2017). “Missionoriented” policy responds to these grand challenges by identifying and articulating concrete problems that can galvanize production, distribution and consumption patterns across various sectors. In doing so, it recognizes that: • economic growth has not only a rate but also a direction; • innovation requires investments and risk taking by both private and public actors; • the state has a role in not only fixing markets but also in co-creating and shaping them; A European Public Investment Outlook 128 • successful innovation policy combines the need to set directions from above with the ability to enable bottom-up experimentation and learning; and • missions may require consensus building in civil society. A mission-based approach can help to ensure that SIBs do not end up merely supporting a static list of sectors—a strategy that often gets criticized for its risk of “picking winners”. Rather, mission-oriented policies focus the vertical element not on sectors but on societal challenges, that require different sectors to invest and innovate. This involves picking the problems and helping any organization (across the public sector, private sector, third sector and across all manufacturing and services) that are willing to engage with the investments and activities that such challenges require. In other words, they require picking the “willing” not picking the “winners”. There is therefore an opportunity to tailor the mandates of Europe’s SIBs towards supporting a mission-oriented agenda. To fulfil a mission-oriented mandate, SIBs must have a wide range of instruments at its disposal, including both debt and equity, suited to different areas of the risk landscape. For example, equity investments may be suitable for radical innovation, while debt instruments, such as long-term loans, may be better for lower-risk activities. This will enable SIBs to invest across the innovation chain from the pre-R&D phase all the way through to providing long-term patient capital for established firms. In addition to lending operations, many SIBs offer advisory services such as strategic planning, capacity building, and training programs that help to create viable projects and catalyze investments that otherwise would not happen (Macfarlane and Mazzucato 2017). A key difference between mission-oriented NPBIs and private financial institutions is the breadth of expertise and capacities contained within staff. In many cases this includes not only financial expertise but significant in-house engineering and scientific knowledge about the sectors the bank is active in and the nature of the investments being made. This enables investment decisions to be based on a wider set of criteria rather than relying on market signals alone, meaning that they are better placed to appraise social and environmental considerations (Macfarlane and Mazzucato 2017). Acting as lead investor necessarily means absorbing a high degree of uncertainty and accepting failures when they happen. In making investments SIBs can use their balance sheet to structure investments across a risk-return spectrum so that lower risk investments help to cover higher risk ones. For this to work, it is important that SIBs are able to capture some of the reward (the “upside”) that is made possible by their risk-taking and investment in order to cover the inevitable losses. This can be done by employing mechanisms such as retaining equity in the innovative companies it supports, or co-owning intellectual property with innovative firms it invests in (Macfarlane and Mazzucato 2018). SIBs and other public financial institutions are often criticised on the basis of “picking winners”, “crowding-out” or funding large incumbent companies. While