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Insight

The Italian Recovery and resilience plan. Impact on sustainability

10/10/2022

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Italy

Tiziano Treu for Fieldfisher Italy

 
1. Sustainability a new paradigme of growth. The challenge for Italy
Many international analysis remind us that we are still in the middle of the most serious crisis in centuries, a true planetary drama.
While the awareness of the stakes seems to be growing, the implications and remedies are far from universally accepted, as shown by the controversies and uncertainties which slow down decisions in recent international meetings of G20 and Cop 26.
The time available for action is increasingly short: the UN warns us that this is the “decade of action”.
According to a recent report of the IPBES, if the pace of human impact and of present economic models were to continue unmodified in the next decades ,90% of the landmass will be significantly modified leaving to mankind only 10% of land still natural to some extent.
At the same time social problems are worsening: increase of extreme poverty, even in advanced countries, food insecurity, inequalities and conflicts between countries and within counties, millions of migrant people.
Minor incremental changes in private and public policies, as practiced in the past, are not sufficient to reverse these trends and to meet the present challenges.
In response to these challenges the United Nation have held necessary a change of paradigm and approved the 2030 agenda for sustainable development whose purpose “aimed at transforming our world “, could not be more ambitious.
The European Union has launched an unprecedented Recovery and resilience plan (Next generation Eu) to be followed by members states, with the view of promoting two transitions, digital and green, which should be the basis of a new economic and social model.
This decision has been taken forcing to some extent the institutional powers of the Union, particularly concerning the commitment of common European resources for financing the national Plans.
For this reason the framing and application of the plans are subject to stringent conditions and strictly controlled by the Union presidency. Consequently the effective allocation of these resources and their delivery to the various programs (counted by the thousands) will depend on the respect of the results (output and outcome) and of the timing fixed in the plans.
This is a major test particularly for Italy for at least two reasons: because our country is the main beneficiary of the NGEU and has used the available resources mainly in the form of loans, and because our past performance in the use of European funds has been far from satisfactory.
Moreover Italy has to catch up on many economic and social areas decisive for the future.
Investments. In particular public investments, have been dramatically insufficient: in the last 20 years half of the euro zone (66% versus 118% of growth).
Lack of reforms in the fields of justice, public administration, competition law, labor market regulations, has contributed to hinder our growth potential.
The progresses of Italy towards the SDG targets of the UN 2030 agenda are limited. Between 2019 and 2020 signs of improvement are present only in three goals, energy system, (goal 7) climate action (goal 13), peace justice institutions (goal 16).
Nine indicators have deteriorated: those for poverty, health, decent work and growth, education, gender equality, sustainable cities and communities, life on land.
The Eu report on environmental implementation indicates that Italy has made limited progress and has still major shortcomings in many relevant areas: waste management, air quality, water management, environmental investments.
 

2. Major investments and reforms for the green and digital transitions: problems of implementation.
The structure and the framing of the Italian PNRR have been promptly approved by the EU Commission as being in line with the main European guidelines.
Not only the individual projects and missions of the Plan but its general approach is inspired by the purpose to promote a new direction of sustainable development.
The strongest stimulus has come from the urgency to react to the global environmental crisis and to make economic growth compatible with the protection of the planet (after decades of disregard).
In fact the programs directed to support and to implement the transition toward a new green economy have received the largest share of resources, 37% of the total (equal to 59,45 billion euro), on the assumption that the green transition is the basis for a new development strategy compatible and possible conducive to positive climate change.
The second largest share of resources (20%, 40,70 billion) is devoted to digitalisation which is considered the main instrument for guaranteeing the competitiveness of the future industrial and service economy.
Considerable resources are also devoted to strengthening the health system, to promote employment and welfare policies, and education, which correspond to the social aspect of sustainability, i.e. to the purpose of improving the quality of life and the social conditions of the population.
The new course of development proposed by the Plan is intended to be not only environmentally and socially sustainable but also economically stable and resilient.
Accordingly the whole process of monitoring and impact evaluation of the Plan will have to be based on the sustainability indicators defined in the 2030 UN agenda (SDG); which have been endorsed by the EU authorities.


3. Most resources allocated
The first months after the approval of the plan (June 2021) have been devoted by the Draghi government to preparing the many legal and administrative acts necessary for the implementation of the plan.
The last report of the premier office (September 1, 2022) mentions 1260 provisions approved (679 coming from past governments) and 55 still to be completed.
Some reforms required by the Eu have been approved in full or in part (justice, education, public administration). Important aspects (e.g. tax law, competition law) are still open and will be decided by the future government.
In the first semester of 2022 the central and local administrations in charge of the programs have started the allocation of resources, by way of public tenders by direct payment of funds or tax credit. According to the last available data (September 1, 2022) the number of procedures measures of this kind approved amount to over 290; the total of resources allocated are 90 billion euro. The trendis being accelerate in order to allocate most of the remainingresources withinthe year.
 
 
4. The role and the limits of publicadministrations. More PPP
Public administrations (central and mostly local) have the main responsibility for all major decisions concerning the allocation of the funds: preparing the tenders and the basic aspects of the various projects.
For this reason great efforts are being made for supporting the technical and planning capacity of these administrations, particularly in the weak areas of the South where the PNRR is committed to devote 40% of total Eu resources.
The continuity and the success of these efforts will be one important condition for the effective Implementation of the PNRR in the years to come the final term is fixed in 2026).
Procedural innovations and simplifications have been introduced since the early months of the Plan, in order to facilitate and accelerate the decision making process of the multiplicity of projects in place, first of all the decisions on investments in renewable energies.
Most recently the Italian government has exercised powers of substitution of local authorities, particularly in the decisions on plants for renewable energy and on waste management.
The success of the efforts to reduce bureaucracy and to accelerate decision processes is another important condition for the effective implementation of the Plan.
It is essential not only for increasing the efficiency and the responsiveness of public administrations, but also for facilitating the use of various forms of public- private participation in the implementation of many projects of the Plan.
These forms of PPP have met various legal and administrative obstacles in the past, but are an important instrument to implement many types of investments decided by the Plan.
A recentdecisionof Anac (432/2022) hasabolished the limit of 49% to private participationto PPP projects.
Whatever the effective use of this instrument, the Public administrations will not be the only responsible for the implementation of the PNRR.
All the private actors, individual companies, national and international, will be involved and called into question in different ways.
According to a recent OECD document (OECD blended finance, guidance for clean energy) the scale of the challenge of meeting the Paris agreement goals is such that all sources of finance, public, private, domestic and international, need to be mobilised rapidly towards clean energy.
 

5. Impact and stress onproductive activities. Promoting  innovation and supporting transitions 
In fact the major sectors of the economy will be called to renovate the productive activities financed by the Recovery Plan, in particular those relating to the material and immaterial infrastructures which so far have been badly lacking in Italy: from new railways to roads maintenance, to public and private buildings restructuring, to alternative energy plants, to urban renewal and hydro geological conservation.
A special European project named industry 4.0 (now transition 4.0) has been launched a few years ago and is refinanced by the Plan (1,4 billion euro) providing incentives for the digital and green renovation of industrial enterprises.
The green and digital transitions will require major innovations in the organisation of the entire productive system with massive reallocation of resources and investments from declining sectors to new emerging activities.
This reallocation will have to be accompanied by a parallel change in the strategies of the firms and in their organisation,in line with the new objectives of development.
The new digital and green economy will also require profound changes in the quality of work and professional skills. The European  Action Plan  implementing  the Pillar  of social  rights  set ambitious tragets:  80% of the adult  population  should  acquire  basic digital skills; 60%  of active  workforce  should yearly  undergo processes of reskilling.
Many industrial sectors, particularly those energy intensive, (automobile, steel, glass, paper, ceramic) are under a troublesome process of reorganisation and restructuring, which is now made even more difficult by the energy crisis provoked by the Ukraine war.
To respond to this crisis the government has accelerated the procedures and the investments particularly in renewable energy (solar, wind and biomasses); it has also decided subsidies and reduction in the price of energy for the most affected sectors (in the last three months 36,6 billion euro).
The last report of the premier’s office has announced that in the first 8 months renewable energy plants have been completed for an amount of power generated four times the amount of the years 2020 and 2021.
Tenders for public works in the first 5 months of 2022 have doubled with respect to 2021 (from 14,9 to 28 billion euro).
Digitalisation is proceeding rapidly: 43% of the Italian population has acquired a digital identity and the country has substantially improved its score in the DESI index.
The impact on the economy has been considerable, as proved by the (still) relatively good performance of Italian growth expected  in 2022. But  the prospects for 2023 are  of stagnation or possibily recession.
In any event the process of industrial restructuring will require time and difficult choices in order to reduce the damages on the traditional sectors affected by the green transition whitout putting at risk the results and the timing of the green transition (fit for 55).
Anyhow sustaining this transition will demand public support even beyond the initial financial forecasts, using not only the European funds, including Repower EU, but also ordinary resources of the Italian budget.
In fact considerable public resources are demanded and have already been delivered in more than one direction. Most urgently to mitigate the rising cost of energy for enterprises and families, and then to finance both the investments of enterprises needed for the restructuring and the income of the employees involved in the process. Millions of employees have needed and will still need to be supported with welfare indemnities during the periods of layoff and through intensive programs of reskilling and upskilling.
 

6. Conditionality. The principle of DNSH 
The various kinds of public support to the enterprises - direct financing of the activities, preferential loans, tax credit -, are subject to specific conditions: a) the respect of the deadlines and targets fixed in the projects; b) positive contribution to employment creation, in particular for women and youngsters the most hit by unemployment (all public procurement activities financed with funds of the Plan must reserve 30% of new hirings to these categories; c) the respect of the general principle of DNSH as defined by European regulations.
This principle, which is based on the provisions of the “Taxonomy for sustainable finance“, states that the actions indicated in the NRRP may not cause any significant harm to the environment and must include actions which contribute to the ecological transition.
The definition and the application of this principle and of the connected taxonomy are rather controversial and quite difficult to implement in practice (see the  RGS guide of dec. 30/2021).  Equally difficult and uncertain is the system of monitoring (see the Scoreboard Mef ISTAT) and control of its application.
The administrations are supposed to control and to refuse the approval of the projects which do not respect the principle, while the European offices will operate random checks.
Another important set of requirements derives from the proposed Eu directive on Corporate sustainability reporting (which is due to revise the previous NFRD directive of 2014).

 
7. EU directive on corporate sustainability reporting 
The purpose of this regulation is to promote greater business transparency and accountability on social and environmental behaviour and initiatives, which is considered an important contribution to financing sustainable growth.
The guidelines of the proposed directive indicate a set of information to be provided by enterprises relating to environment,social and governance topics: business model and strategy finalised to assure compatibility with a sustainable economy, main risks ESG, governance and control linked to ESG issues, targets of business sustainability and progress made, due diligence ESG, etc.
These guidelines allow a margin of flexibility to the companies on how to select the indicators and the content of the reports most suitable to the specific business.
This selection is a most important policy choice of the company which will qualify its effective contribution to improving the disclosure of environmental trends and risks and to fighting climate change.
Two major caveat are appropriate in order to guarantee the appropriate implementation and communication of the ESG. First is the commitment to avoid practices of green washing and the like which have already harmed the reputation of some companies and which risk to delegitimate the very idea of CSR. Second In order to avoid vagueness and dispersion of efficacy It has been suggested that companies should concentrate their efforts on those initiatives which can contribute most directly to climate mitigation and at the same time which are at the disposal of management.
According to a survey of over one hundred of large Italian companies, most of them have given priority to two initiatives in this respect: reduction of greenhouse gases deriving from production and investments in training and retraining of employees in order to prepare them for the skills needed in the digital era: which touch on two types of interventions most relevant for addressing the challenges of the future transitions.
 
 
8. Emergency measures and the future of PNRR
The start up phase of the PNRR, after a year, has been completed. The first commitments and targets, in spite of being marked by a very tight schedule, have been met.
This has required an intense activity of the public administrations and of private actors involved, together with a wide participation of the social parties and of civic organisations. The institutional and legal framework has been established; a good part of the resources has been timely allocated and many projects of the Plan are under way.
But the test of its effective implementation (beginning with delivering the resources which have been allocated) has just begun. Moreover the implementation has to be pursued in difficult and uncertain economic conditions (national and international). Extracosts mainly of energy are putting at risk thousands of public and private works.
Quite a few important targets (55) fixed in the plan timetable have to be completed by the end of December: 32 investments projects and 23 reforms. But some of the reforms tax, competipon, are still controversial and not all procedural obstacles have been overcome.
The next legislature will have the great responsibility to continue and not abandon   the road set by the European guidelines.od the NGEU. Some contents of the Plan, may have to be adjourned  in order to better face the new challenges.
But allchanges of the PNRR must bejustifiedby objective reasons andapprovedby the Europeaninstitutions (Commission and Council).
The changes should notalter the basicobjectivesand structures of the PNRR, and not reducethe commitmentof the institutions and the social actors to its full implementation in line with the European guidelines.
The participantsto the Tableof partnership - establised by decree 77/2021 – whichrepresentsall these institutionsand whichhas followedcloselythe firstphase of activity of the Plan,havereaffirmedthe commonwill tocontinuetheir commitement and support to thePlan (alsobeyond 2026),becauseit is more than ever a major opportunity to transformthe italianeconomy and society.

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