Local  Public  Finance  and  Public  Investment  during  the  economic  crisis    

Giuseppe  F.  Gori,  Patrizia  La<arulo    

Workshop  AISRE-­‐ABC  La  fronGera  del  dibaHto  in  Economia  Regionale  e  Urbana  

Politecnico  di  Milano,  6  March  2015      

 

Factsheet 1 WHY DOES THE EU NEED AN INVESTMENT PLAN?

Since the global economic and financial crisis, the EU has been suffering from low levels of investment. Collective and coordinated efforts at European level are needed to reverse this downward trend and put Europe firmly on the path of economic recovery.

What is the current investment situation?

The European Commission's most recent economic forecasts showed that weak investment has led to a fragile recovery from the economic crisis in the EU and even more so in the euro area. While Gross Domestic Product (GDP) and private consumption in the EU were in the second quarter of 2014 roughly at the same level as in 2007, total investment was about 15% below 2007 figures. In certain Member States, the decline in investment has been even more dramatic.

Compared to the 2007 peak, investments have dropped by around € 430 billion. Five Member States (France, the United Kingdom, Greece, Italy and Spain) account for around 75% of the drop, owing to the size of their economy or the sheer magnitude of the investment drop, or both.

Real gross fixed capital formation by Member State Index 2007=100

Prolonged deep decline

Member States with biggest drop in investmentE.g., Greece, Ireland, Italy, Portugal, Spain

Shallower double dip (except UK)

Other selected Member States E.g., Belgium, Finland, Germany, Netherlands, UK

Real gross fixed capital formation EU-28, in 2013 prices, € bn

Share of total drop by country EU-28, in percentage*

Share of total drop by sector EU-26, in percentage*

Machinery and equipment (32%) and other (-9%)

Real estate – Non-residential

Real estate – Residential

Factsheet 1 WHY DOES THE EU NEED AN INVESTMENT PLAN?

Since the global economic and financial crisis, the EU has been suffering from low levels of investment. Collective and coordinated efforts at European level are needed to reverse this downward trend and put Europe firmly on the path of economic recovery.

What is the current investment situation?

The European Commission's most recent economic forecasts showed that weak investment has led to a fragile recovery from the economic crisis in the EU and even more so in the euro area. While Gross Domestic Product (GDP) and private consumption in the EU were in the second quarter of 2014 roughly at the same level as in 2007, total investment was about 15% below 2007 figures. In certain Member States, the decline in investment has been even more dramatic.

Compared to the 2007 peak, investments have dropped by around € 430 billion. Five Member States (France, the United Kingdom, Greece, Italy and Spain) account for around 75% of the drop, owing to the size of their economy or the sheer magnitude of the investment drop, or both.

Real gross fixed capital formation by Member State Index 2007=100

Prolonged deep decline

Member States with biggest drop in investmentE.g., Greece, Ireland, Italy, Portugal, Spain

Shallower double dip (except UK)

Other selected Member States E.g., Belgium, Finland, Germany, Netherlands, UK

Real gross fixed capital formation EU-28, in 2013 prices, € bn

Share of total drop by country EU-28, in percentage*

Share of total drop by sector EU-26, in percentage*

Machinery and equipment (32%) and other (-9%)

Real estate – Non-residential

Real estate – Residential

Gross  Fixed  Capital  Forma1on  (Private  and  General  Government),  %  of  GDP  

0"

5"

10"

15"

20"

25"

Germany" Spain" France" Italy" UK"

Private"200092007"

Private"200892013"

General"Government"200092007"

General"Government"200892013"

11%# 16%# 18%# 15%# 19%#

89%# 84%# 82%# 85%# 81%#

Germany# Spain# France# Italy# UK#

Private#

General#Gov#

Gross  Fixed  Capital  Forma1on  (General  Government),  %  of  GDP  

 

1.8$

2.3$

2.8$

3.3$

3.8$

4.3$

4.8$

5.3$

2000$ 2001$2002$ 2003$ 2004$ 2005$2006$ 2007$ 2008$ 2009$2010$ 2011$2012$ 2013$

Germany$ Spain$ France$ Italy$ UK$

 

GFCF,  Share  of  Local  Government  Investment  

42%$

27%$

57%$

65%$

36%$

26%$

57%$55%$

Germany$ Spain$ France$ Italy$

200092007$

200892013$

Local  municipali1es  have  been  par1cularly  involved  in  the  aggregate  debt  recovery  process  

Local  MunicipaliGes,  revenues  and  expenditures.  Mln  Euro.  

Current  Exp.  

Capital  Exp.  

CG  Transfers  

Local  Taxes  

0  

60  

120  

180  

240  

2008   2009   2010   2011   2012   2013  

-­‐15  

-­‐10  

-­‐5  

0  

5  

Stato   EnG  previdenziali  

Regioni   Province   Comuni   EnG  sanitari  locali  

2010   2011   2012  

Fiscal  balances  by  government  type.  2010-­‐102.  %.  

Higher  fiscal  autonomy  and  Gghter  top-­‐down  spending  constraints  have  improved  

local  governments  balances.  

Local  municipaliGes  and  social  security  insGtuGons  have  posiGvely  contributed  to  the  

naGonal  debt  recovery  process  

ISP,  Rules    

Target  =  Rcurrent  +  Rcap  –  Ecurrent  –  Ecurr          -­‐  This  is  calculated  by  using  a  hybrid  criterion:      

-­‐  Cash-­‐basis  accoun1ng  principle  for  capital  expenditure  -­‐  Accrual  accoun1ng  principle  for  current  expenditure    

-­‐  Debt  contracted  in  order  to  finance  public  works  is  not  accounted  between  revenues.  -­‐  MunicipaliGes  usually  already  have  large  financial  commitments  on  the  current  side.  -­‐  MunicipaliGes  cannot  pay  for  planned  public  works  even  if  they  have  enough  resources.  

Financial  contribuGon  of  MunicipaliGes  (Euro  Mlns).  2010-­‐2013.  

    2010   2011   2012   2013  Target   340   2025   3242   4600  DL  35/2013  “sblocca  pagamenG“   -­‐3721  VerGcal  Pact   -­‐1195  Transfer  cuts  (ex  D.L.  78/2010)   0   1.500   2.500   2.500  Transfer  cuts  (ex  D.L.  201/2011)   0   0   1.450   1.450  Spending  Review   0   0   90   2.250  Total  financial  contribute   340   3.525   7.282   5.884  %  on  2010  current  expenditure   0,6   6,6   13,6   11  

ISP,  the  crisis  and  public  investment  

Capital  expenditure,  payments  and  financial  commitments.  2005-­‐2013.      

150  

200  

250  

300  

350  

400  

450  

500  

2007   2008   2009   2010   2011   2012   2013   2014  

Impegni  

PagamenG    

-­‐  ISP  largely  contributes  to  the  investment  drop.  -­‐  It  acts  on  payments  but  also  on  financial  commitments.    -­‐  The   crisis   reduces   capital   revenues:   hard   to   profitably   dismiss   public   buidings,   lower   revenues   from  

urbanisaGon  taxes  and  construcGon  permits.  -­‐  The  2015  Italian  Stability  Law:  heavy  spending  cuts  and  Gghter  constraints  for  local  governments    

 100    

 101      103    

 110      113      115      115      114    

 125    

 100    

 95      97    

 76      69    

 56    

 55      51      48    

 40    

 50    

 60    

 70    

 80    

 90    

 100    

 110    

 120    

 130    

2005   2006   2007   2008   2009   2010   2011   2012   2013  

Current  Exp.  

Capital  Exp.  

Current  and  capital  expenditure.  Index  2005=100.  

Capital  expenditure  by  urban  size  

Public  investment  and  urban  size  U-­‐shaped  investment  curve  

0  

100  

200  

300  

400  

500  

600  

700  

800  

900  

0-­‐5.000   5.000-­‐60.000   oltre  60.000  

2007  

2008  

2009  

2010  

2011  

2012  

2013   0  

100  

200  

300  

400  

500  

600  

700  

800  

900  

2007   2008   2009   2010   2011   2012   2013  

Titolo  dell'asse  

0-­‐5.000   5.000-­‐60.000   oltre  60.000  

New  urban  spaces;  Florence  metropolitan  area,  commu1ng  flows  

Montespertoli

Barberino Scarperia

S.Piero S. Borgo SL

Vicchio

Vernio

Figline

Reggello Incisa

Rignano

CALENZANO

SESTO CAMPI

SCANDICCI BAGNO a R.

Fiesole Rufina

Pontassieve FI

PO

PT

Impruneta

S.Casciano VP

Greve

EMPOLI

VAIANO

Cantagallo

MONTEMURLO

QUARRATA

Dicomano

Pelago

Tavarnelle

Montelupo

MONTALE

AGLIANA

UNIDIRECTIONAL BIDIRECTIONAL

> 10.000

5.000-10.000

2.000-5.000

1.000-2.000

500-1.000

100-500

Inefficient  planning  areas  

The  “real  city”  has  different  borders  with  respect  to  the  exisGng  administraGve  ones  and  with  respect  to  the  new  ones:  the  new  Florence  metropolitan  area  has  been  defined  as  perfeclty  overlapping  the  former  Florence  province  area.    Defining  homogeneous  administraGve  areas  would  entail  more  effecGve  infrastructural  policies.    

(In)Efficiency  in  Public  Procurement  

 

14# 13# 14# 14#

69#75#

66#71#

0"

10"

20"

30"

40"

50"

60"

70"

80"

58%"

60%"

62%"

64%"

66%"

68%"

70%"

72%"

150k+250k# 250k+500k# 500k+1mln# Total#

Incidenza"Delay" Incidenza"Cost"Overrun" Media"Cost"Overrun" Media"Delay"

•  65%  of  public  works  show  both  delays  and  cost  increases  •  80%  of  savings  due  to  aucGon  rebates  is  lost  at  the  end  of  the  execuGon  phase  

•  Inefficient  procedures  •  Low  planning  skills  of  small  public  buyers  •  Inefficient  courts    •  Limited  short-­‐run  economic  effects  of  public  works  •  Possible  pro-­‐cyclical  effects  of  investment  expenditure  •  CollecGve  demand  for  public  infrastructures  is  met  with  significant  delay  -­‐>  slow  economic  recovery  

Public  works.  Delays  and  Cost  overruns  by  financial  dimension.  Tuscany,  2013.    

(In)Efficiency  in  the  Market  of  Public  Procurement.  

 Public  works,  actual  and  on-­‐1me  expenditure.  Tuscany,  2009-­‐2014.  

Fase 1 Fase 2 Fase 3

0

20

40

60

80

Milio

ni di

Euro

corre

nti

Feb0

7

Jan0

8

Jan0

9

Jan1

0

Jan1

1Se

p11

Jan1

3

Dec1

3

Jan1

5

Jan1

6

Jan1

7

Jan1

8

Jan1

9

Jan2

0

Mese

Spesa effettiva (certificata)Spesa prevista

(In)Efficiency  in  the  Market  of  Public  Procurement.  

 Public  works  by  awarding  procedure.  Tuscany,  2009-­‐2014.  %.  

47%$65%$ 69%$ 72%$ 77%$ 84%$

53%$35%$ 31%$ 28%$ 23%$ 16%$

2009$ 2010$ 2011$ 2012$ 2013$ 2014$

Nego1a1ons$ Auc1ons$

Monitoring  of  public  works.  Tuscany’s  Regional  Law  35/2011  

 

Es1mated  survival  func1ons  for  monitored  and  non  monitored  public  works  

0.2

.4.6

.81

Pro

babi

lità

di s

opra

vviv

enza

del

pro

getto

0 500 1000 1500 2000Tempo (giorni trascorsi dall'inizio esecuzione)

Non Monitorati Monitorati

Progetti monitorati

050

010

0015

0020

00F

inan

zam

ento

tota

le (

Mig

liaia

di e

uro)

0 .2 .4 .6 .8 1Quota Regionale (%)

Dis1bu1on  of  public  work  projects  along  the  financial  dimension  (Y)  and  regional  financial  contribu1on  dimension  (X).  

•  The  acGve  monitoring  result  in  an  overall  higher  probability  of  conclusion  for  public  works  •  For  a  “standard”  project  this  increase  in  probability  amounts  to  43%  

Conclusions  

-­‐  Investment  has  significantly  fallen  during  the  economic  crisis    -­‐  Empirical   literature   is   sGll   not   conclusive   on   whether   public   investment  increases   producGvity   and   medium   run   growth.   However,   the   current  economic  agenda  in  Europe  is  firmly  poinGng  at  investment  as  a  way  to  kick-­‐start  growth  and  sustain  it  over  Gme.  

-­‐  Mainly  due  to  the  exisGng  budget  constraints,  this  is  intended  as  a  measure  aiming   at   strengthening   the   economic   system’s   risk-­‐bearing   capacity   in  order  to  re-­‐launch  private  investment  

 -­‐  Whether   or   not   the   Junker   Investment   Plan   will   be   successful,   in   Italy,   a  comparaGvely   large   part   of   public   investment   is   undertaken   by   local  governments  

-­‐  This   investment,  made  by  small  and  medium  size  projects,   is  essenGals  for  maintaining   the   appropriate   level   of   infrastructural   capital   stock   at   the  territorial  level  and  are  unlikely  to  be  the  target  of  the  Junker  Plan  

-­‐  This  investment  has  sharply  decreased  during  the  crisis  

 

 

Conclusions  

-­‐  The   financial   constraints   deriving   from   the   Internal   Stability   Pact   have  played   a   predominant   role   in   this   process,   and   the   lowest   level   of  government  have  carried  a   large  part  of   the  burden  of  aggregate  naGonal  debt  recovery  

-­‐  This  trend  is  likely  to  be  confirmed  in  the  next  future  -­‐  This  is  not  necessarily  bad  news,  since,  in  principle,  

-­‐  may  discourage  the  selecGon  of  low-­‐impact  projects  -­‐  may  push  LGs  to  find  new  financial  sources  in  the  private  market,  thereby  also  

improving   efficiency   in   the   construcGon   and   management   of   the   new  infrastructures  

-­‐  may  foster  horizontal  insGtuGonal  cooperaGon  

-­‐  Apart   from   financial   constraints,   structural   inefficiencies   have   played   a  significant  role:    -­‐  a   fragmented   insGtuGonal   framework   accompanied   by   fuzzy   and   to-­‐date   largely  

uneffecGve   insGtuGonal   reforms   have   reduced   the   LGs   ability   to   plan   and   implement  cross-­‐boundary  infrastructures  

-­‐  An  ineffecient  public  procurement  market  (also  favouring  inefficient  (and  relaGvely  small)  firms)