State aid, Italian style MONEY

JOCK BRUCE-GARDYNE

The most important and controversial piece of economic legislation in the parliamentary ses-

sion which began this week is going to be the

so-called Industrial Expansion Bill to authorise the Government to buy its way into individual firms in the private sector. An invitation to in- spect the operations of nu—the Italian Insti- tute for Industrial Reorganisation — seemed therefore too good to miss. For IRI is un- doubtedly one of the models which the Labonr government has had in mind framing its new legislation. Controlling a very wide range of commercial and manufacturing operations, including the leading Italian steel company, the airline Alitalia, the state broadcasting network, shipbuilding and shipping lines, manufacturers of telephones and machine tools, and a number of banks, IRI draws the bulk of its finance from the market, both through bonds and through equity shares, while it is subsidised and con- trolled by the state.

Two years ago nu invited a group of Labour ws to visit it, and no doubt enjoyed an admir- ing audience. This time, taking the courage of its convictions in both hands, it extended a similar invitation to a group of Tories. I have

no doubt our hosts found us a good deal more sceptical. We saw much to admire; but when Professor Petrilli, the brilliant and persuasive chairman of IRI, told us that the nu formula was 'not for export,' we agreed with blau,,:

Ix' emerged from the collapse of the Italian banking system in the 1930s. It was established by the fascist regime to salvage not only some of the banks themselves, but also the many actually or potentially viable manufacturing concerns which were controlled by the banks and which were in danger of foundering with them. Then, after the war, in addition to the responsibility for industrial salvage operations —for instance, in the shipbuilding industry in recent years—which it continued to discharge, it was given responsibility for the injection of industry into the backward south.

IRI is reckoned by its critics to enjoy a preferential position vis-à-vis private industry on two counts. First, it has its endowment fund, provided by the state, and on which it is not required to pay any interest. Secondly, special tax concessions apply to its borrowing opera- tions. MI disputes that there are any specal favours here. It argues that the interest on its endowment fund from which it is absolved corresponds to the 'social obligations' it is required to fulfil: the obligation, in particular, to place 60 per cent of its new investment in the south, and to retain superfluous labour in such industries as shipbuilding.

A more fundamental uncertainty arises over the real profitability of IRI'S subsidiaries. We were reminded that they regularly pay divi-

dends to their minority shareholders (and to tat itself); but all our attempts to obtain a figure for the return on capital employed, or a target return which ml's subsidiaries are required' to meet, were unavailing.

What does emerge from tin's own consoli- dated aceounts is that in 1965 (admittedly a bad year for the Italian economy) the return to the parent company from those subsidiaries which were profitable (and leaving out of account the shipbuilding and engineering sec- tors, which were not) fell substantially short of the rate which nu itself was obliged to pay for its finance in the bond market.

There are, however, special features of the Italian economy which provide a convincing justification (at any rate for those who are not dedicated to the recovery of an imaginary, nineteenth century style 'golden age' of laissez- faire) for IRI'S socially orientated investment programme. One is the yawning gap between the highly industrialised and modernised north of the peninsula and the predominantly agri- cultural south, with its eighteen million inhabi- tants still struggling out of the early nineteenth century. Another is the rudimentary nature of the Italian capital market, which (as in other continental countries) inevitably increases in- dustrial reliance on the bond market and restricts the scope for equity finance of long- term investment. A third is the persistent high level of unemployment, currently around 4 per cent, and running as high as 8 per cent in the 1950s. A fourth (arguably) is the existence of the strongest Communist party in Western Europe.

The dedicated men who run IRI lay great emphasis on their pursuit of strictly commer- cial objectives: and whether or not there could ever be a commercial justification for the siting of the Italsider integrated steel plant at Taranto, there is no disputing that it is already one of the most efficient large-scale steel opera- tions in Western Europe. It is also fair to recognise that the existence of IRI with its ten- tacles stretching throughout the Italian eco- nomy (and of its counterpart ENI in the oil and gas sector) has not prevented Italy achiev- ing the highest sustained rate of industrial advance in Western Europe, with only one serious setback over the past decade.

But it by no means follows from this that we in this country should copy IRI'S example. The heartlands of the industrial revolution— Scotland, the North-East, South Wales—present us still with huge problems of reconversion. But they are different in kind from those of southern Italy. In our underprivileged areas we have an industrial tradition many generations deep. They have to take men from the ox- plough and turn them into skilled fitters. We have the most sophisticated capital market in Western Europe, and far from there being evi- dence to support the contention that we cannot obtain funds for ventures which offer only a long-term prospect of return to shareholders,

our troubles often seem to spring from the absence of any concern for the return to shareholders, short term or long term. The imagination boggles at the damage which could be done in this country by a Labour government equipped with an nu-type corpora- tion which could be required to retain its entire labour force in subsidiaries manufactur- ing unsaleable mousetraps.

IRI has some very impressive achievements to its credit. But I agree wholeheartedly with Professor Petrilli. The export of its particular formula should not be one of them.