Bernardo Bini Smaghi: the Italian Development Cooperation secures funding

14 October Oct 2016 1034 14 October 2016

The head of Management and Support of Development Policies Department at Cassa depositi e Prestiti S.p.A. (CDO) outlines his plans for the Italian public-sector financial institution and the historic step which is set to bring the CDP into the world of Italian development aid and international cooperation.

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Cassa Depositi E Prestiti
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The head of Management and Support of Development Policies Department at Cassa depositi e Prestiti S.p.A. (CDO) outlines his plans for the Italian public-sector financial institution and the historic step which is set to bring the CDP into the world of Italian development aid and international cooperation.

For the first time since the convention between the Cassa depositi e prestiti , the Italian Ministry of Foreign Affairs and Development Cooperation (MAECI) and the Agenzia per la cooperazione allo sviluppo (Italian Development Aid Agency – AICS) was signed in July, Bernardo Bini Smaghi, Head of Business Development at the CDP had decided to share his views. In this exclusive interview initally published on he discusses his ambitions for the prestigious Italian public-sector financial institution and the historic step which is set to bring the CDP into the world of Italian development aid and international cooperation.
- This interview was published within an editorial project that gathers VITA and Afronline with 25 African independent media.

The signing of the convention is being described as a historical moment in Italian development aid. Is this the case, and if so why?

For the first time, Italian development aid will be able to draw on not only an agency (AICS) but also the contributions of a public-sector financial institution, recognised by the European Union as the national institution for the promotion of Italian investments, and use the funding for international development aid. We are now doing what the French and Germans have been doing for over 40 years.

What are the aims of this agreement?

The convention sets out relations between the CDP and the stakeholders in Italian development aid, MAECI and AICS. In particular, it provides for the preparatory activities for assessing, formalising and managing financial instruments for development aid. The agreements are in keeping with the Law on development cooperation adopted in 2014, with a clear separation of roles and responsibilities. MAECI is responsible for developing strategic policies and planning operations, while AICS is the management instrument for grants projects and the technical instrument for development aid. Lastly, the CDP will manage the financial instruments.

As regards the financial instruments, it is often believed that the CDP works solely in support of the private sector. However, in reality, both the products financed directly by the CDP and the management of third-party financial resources will be instruments used primarily for the public sectors of development-aid partner countries.

Which instruments are you referring to?

There are various kinds – grants, loans, concessionary and/or easy-term loans. The buzz word used at international level is “blending”. The ingredients for blending are public resources, institutional finance from the CDP and private finance, grants and loans. These “blends” enable more effective management of the various instruments available. When financing public works for infrastructure, such as dams or roads, the initial planning phase of the work is crucial, delicate and costly, and it is unfair for a partner government to incur debts vis-à-vis a donor country like Italy.

This is why we use blending – limiting grants for the initial phase and using loans for the technical implementation of the project. As regards private interventions, as per article 27 of Law no. 125, which, I quote, provides for “granting easy-term credit to public or private investors or to international organisations so they might finance the establishment of mixed companies in Partner Countries or provide other forms of subsidies singled out by the CICS (Inter-ministerial Committee for Development Aid) in order to promote the development of Partner Countries, with particular reference to small and medium-sized enterprises”. In order to address such issues, we participate in various working groups with AICS and the National Development Cooperation Council (CNCS) to define the criteria and objectives, according to the guidelines set at international level by the Sustainable Development Goals (SDGs).

Have you already prepared a strategy for credit assistance programmes (blending), both in public and private sectors?

This is the responsibility of MAECI, with the support of the Italian Development Cooperation Agency and Cassa Depositi e Prestiti as advisors for defining and structuring innovative financial instruments that may boost the operating scope of Italian international development aid as a whole. Indeed, this is exactly what the convention calls for.

What resources do you intend to assign to international development aid?

Bini Smaghi

Bernardo Bini Smaghi

Italian public resources are defined by various stability laws. They are supplemented by grants and concessional loans, or the revolving fund for development aid, managed since 1 January 2016 by the CDP. This fund has stock worth over €5 billion and an annual financial flows capacity of between €100 and €400 million. We must then add the external financial resources which will be mobilised at EU level, through the blending mechanism, which has thus far been little used by Italy, partly because of the lack of a financial development aid institution.

Finally, there are the CDP resources, which will be released by decree from the Ministry of Economy and Finance and which, as I am sure you can imagine, will constitute an important component of the national budget for development aid.

What are the CDP’s priorities in terms of solvency of countries, sectors and Italian interests?

There are two main international intervention structures within the CPD. On one hand, we have SACE and SIMEST, which have been supporting the internationalisation of Italian enterprises in 192 countries, including some developing nations. On the other, there is the development cooperation, which acts independently of SACE and SIMEST in support of Italian foreign policy, alongside MAECI and AICS, and through the newly signed convention. Indeed, all CDP initiatives must be approved by the Comitato congiunto della Cooperazione allo sviluppo (Joint Committee on Development Cooperation). It is no coincidence that our objectives have been included and described in the three-year planning document currently being drawn up.

We will certainly intervene in the traditional Italian development-aid sectors, to support countries in carrying out infrastructure projects, through assistance for local small and medium-sized enterprises, strengthening agricultural industries and fighting climate change. Naturally, we use loans and not grants instruments, which means that, if the beneficiary of the intervention is a public organisation, we finance the public debt of a country. If it is a private one, however, we grant a loan to a private actor that operates in accordance with the Italian development aid objectives.

Are the bilateral agreements with the partner countries set to change?

Specific chapters concerning the CDP’s intervention will be incorporated into each bilateral agreement.

What degree of independence does the CDP have in terms of Italian development aid?

We are independent with regard to the economic/financial analysis of investments and we would certainly refuse aid if the beneficiary of a potential intervention, whether public or private, presented a risk that was too great for our institution. Therefore, we have total autonomy as regards risk-taking, compliance and satisfying legal requirements, as well as the admissibility phase before the Joint Committee for issues linked to development aid.

What are the priority countries?

We have drawn up a list of countries using concentric circles. The first concerns priority countries for Italian development aid, some of which may not benefit from CDP support because they are too risky. The second circle is closer to middle-income countries where there are opportunities for the economic development of the Italian system, especially in the private sector. I am thinking of Morocco, with whom we have developed strong bilateral relations. Another example is Mexico, where the Italian embassy currently has no financial instruments for tackling climate change. Soon they will have such instruments, with companies able to conduct sustainable interventions on projects which need diverse and complementary support. This means doing what French and German ambassadors are already doing.

In terms of priorities, nothing has been decided yet. We are discussing our mandate. When I consider the private sector, it seems clear to me that the priority countries will be those in the second and third circles. As for the first circle, which is also extremely varied, there is one extraordinarily important country for Italian development aid, namely Tunisia.

How do you see the role of civil society in this new Italian development aid?

We cannot forget the fundamental role played by NGOs in the most difficult period for Italian development aid. There is now a great deal of alignment with non-profit organisations when it comes to understanding and responding to the needs of partner countries as an Italian system. The non-profit sector will help us to support the private sector in fulfilling social and environmental requirements and meeting the needs of the partner countries.

In civil society, there are some who fear that, with the advent of the CDP, the presumed contribution of the private sector to the fight against poverty may actually be transformed into covert assistance for promoting Italian companies in the partner countries. How can you address this fear?

This issue is seen as a taboo and it frightens people. In actual fact, it refers to a company assuming a risk in a Third country. In order to transform ‘internationalisation’ into investment in development aid, we need to understand whether companies are complying with the development policies in the country where they are intervening, what type of relations they have with Italian and local non-profit bodies, what type of policies they are implementing, whether they adhere to the main SDGs, what type of support they may need to transform what we may describe as speculative internationalisation (in the positive sense) into partnership internationalisation with institutions, local communities and the non-profit sector, through long-term operations whose impacts may be measured.

What is under discussion is the need for the North to invest in the South without causing the damage that it has previously caused in the North. Therefore, nowadays, rather than an internationalisation of companies, I would describe it as sustainable investment in the private sector in the form of a partnership, with a strong focus on the fight against poverty and social inequalities through the support of sustainable, long-lasting and inclusive development, which promotes, above all, job creation.

Which of the French, Spanish and German models is the right one to follow in terms of a ‘country system’?

The CDP is the only financial institution in the world which includes an ‘internationalisation’ hub (with SACE and SIMEST) and a development-aid hub. The CDP will report to two ministries – the Ministry for Economic Development (MISE) and the Ministry of Foreign Affairs and Development Cooperation. Other countries are looking at our model with great interest, but we also need to consider what others are doing. The French model is ideal in terms of efficiency, with a development bank with an internal agency, and one which uses both donations and assistance loans as well as private resources. It is important to note that although the French system is well established, they are watching the new Italian system with great interest as a model to follow. As for Germany, it is difficult to make a comparison, since the German system is extremely powerful, especially in Africa, with financial donations being much larger than in the Italian system, even if the German and Italian models are very similar. Indeed, the German system does not finance high-risk third countries with the resources of KfW, but uses public resources managed by KfW. Like Italy, Germany has a public revolving fund managed by KfW through which the high-risk partner countries are financed.

With regard to blending, Italy seems to have kept a very low profile so far in Brussels…

That’s true, mainly because until recently Italy did not possess a financial institution for development. Now the situation has changed and, with the new role played by the CDP, we intend to become a key player in Brussels. Our operations have already begun, with rural road infrastructure projects in Niger in partnership with AICS, the agency, alongside IFAD and with Spanish cooperation.

How can an institution like the African Development Bank (AfDB) become a CDP partner?

Our Ministry of Economy and Finance has invested in the AfDB, just as it has with the World Bank and other regional banks, such as the European Investment Bank and the Development Bank of Latin America. Until now, relations between Italy and these banks have been limited to an annual, non-refundable grant. From now on, in addition to this instrument, we will be able to co-finance projects with triple A ‘sister institutions’ which focus intently on risk management and, therefore, represent a guarantee for the CDP and Italian development aid.

What is the added value of the CDP compared with ‘sister institutions’, such as the World Bank or the AfDB?

The CDP is part of the large group of funds for deposits and loans. Unlike development banks, the funds also manage public savings. In the case of the CDP, the savings instruments are extremely simple, created in the second half of the 19th century and 100% guaranteed by the Italian government. Today, over 26 million Italian citizens and other citizens residing in Italy own a postal savings book, 900,000 of whom are immigrants with resources at CDP totalling around €1.5 billion. In the development plans created by Italy and in Europe to intervene in the countries of origin of African migrants, financial inclusion will play a major role. Financial inclusion means ensuring that we create financial conditions in these countries that encourage savings and the creation of micro-businesses. The CDP played a crucial role in Italy’s reconstruction after the Second World War and may become a model that could contribute to the economic revival of a continent such as Africa, starting with savings, by channelling remittances towards savings and, therefore, investments.