The following OECD assessment and recommendations summarise chapter 3 of the Economic Survey of Italy 2005 published 18 May 2005. It covers one of the main challenges identified in chapter 1.
Is the economy competitive enough?
OECD measures of competition and performance in product markets show that although Italy has made undeniable progress in reducing administrative burdens and strengthening competition, its recorded progress is not better on average than in other countries, and it therefore remains a relatively poor performer. The service sector in particular lacks competitive pressure to resist cost increases and to innovate, in part because of remaining direct public-sector involvement in some sub-sectors, especially transport and energy. Pervasive price controls in freight transport are hard to justify, and political influence on road infrastructure is damaging and inefficient. Professional services mostly fall outside antitrust jurisdiction, and opening up of retail trade to supermarket chains is resisted by local authorities, often captured by local business interests. The retail sector issue needs to be discussed and resolved at the national level. A consequence of protected high cost services is that input costs for the traded sector are higher than they need to be, and rise faster than in major trading partners. Although benefiting from a boost of recent reforms, there is a specific problem with the electricity sector, which remains dominated by the incumbent, while new generating capacity additions are hampered by local opposition and administrative barriers, as are interconnections with foreign producers. This and other structural factors result in electricity prices that are significantly higher than in surrounding EU countries, and overall generating capacity constraints could prove a bottleneck to growth in the near future. Recently decided separation of the generation and transmission network as well as ways of augmenting generation capacity in response to market signals should not be delayed. This is an issue that, like retail trade, requires concerted action on a national scale. Consideration should also be given to fully privatising the electricity and gas transmission networks, subject to safeguards for third party access.
Prices in electricity trading markets
Euro per MWh Moving average over 7 days
Source: Association of European Power Exchanges (EuroPEX); Gestore Mercato Elettrico database.
Should corporate governance and financial supervision be strengthened?
As noted in previous Surveys, the Italian corporate sector is characterised by a large number of small firms, often family-controlled, and a small number of very large firms, also often family-controlled even when publicly quoted. A recent series of bond defaults, including those of the Argentinean government, Cirio and Parmalat highlights the need for improvement in the system of corporate governance and oversight provided by the market. These episodes might have contributed to falling consumer confidence in the past few years, and underline the need to strengthen protection of minority shareholders as stressed by the OECD Principles of Corporate Governance, to establish more effective supervision of the market, and to update a bankruptcy legislation which does not ensure to either protect creditors or allow companies’ owners to start a new business. Re establishing confidence in the financial system will enhance the development of a private funded pension pillar with the diversion of worker severance fund flows into privately managed plans. This in turn would have further beneficial effects on domestic capital market development. A poorly performing financial sector represents a brake to an efficient allocation of capital with negative consequences on the growth of profitable firms, on R&D and innovation, and finally, on aggregate performance.
The first policy response to serious corporate mismanagement was prompt, with a justifiable trade-off between the need to act swiftly to restore confidence and conserve assets, and the goal of creating optimal policies to deal with such situations, but a number of desirable measures have yet to be implemented. Originally, a bipartisan bill was submitted to the Parliament in May 2004, concerning corporate governance and financial supervision. Some of the proposed measures progressively lost support and the bill was not approved. A new version of the bill under discussion in Parliament still aims to strengthen minority shareholders’ rights and improve the financial supervisory structure. Approval of these measures should remain a priority in order to enhance confidence in the Italian financial market. Bankruptcy law should also ideally encourage the maintenance of still-productive assets in order to help pay off creditors, and the reallocation or dissolution of unproductive assets. The new emergency bankruptcy procedures for large companies protect corporate assets more effectively than before, by speeding up the process. Under these procedures, a commission, appointed by the Ministry, supervises the restructuring exercise, while complying with normal judicial and market regulations. Nevertheless, comprehensive bankruptcy reform remains an urgent matter.
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