Proceedings of Annual Spain Business Research Conference
14 - 15 September 2015, Novotel Barcelona City Hotel, Barcelona, Spain
ISBN: 978-1-922069-84-9
The Effects on Territorial Economies of the Financial Collapse
of Local Bodies: The Case of the Municipality of Taranto
Mario Turco1
The present work aims to offer a contribute for the evaluation of the opportunity to adopt
strategies based on state support or, alternatively, on the managerial autonomy of local
bodies in financial trouble. The research, after analysing the main guidelines at European
level, presents the results of an empirical investigation on the economic effects produced on
the local economy by the default of the Municipality of Taranto. The choice of the city of
Taranto is due both to the significant magnitude of the ascertained debt, which was one of
the highest in the history of Italy, and to the considerable economic effects caused by the
recovery procedure. Specifically, with reference to the companies admitted to the passive
mass, have been determined the economic losses and the opportunity cost of the
companies involved in the insolvency procedure and located in the local area of reference.
JEL Codes: H83; M19; M41; M42.
1. Purpose and Methodology of the Research
The theme of the crisis of the local authorities has not been deepened, in its various
aspects, by the international and national doctrine, concerned mainly with analysing the
dysfunctions of enterprises.
Such a lack of interest is justified by the fact that, usually, the financial difficulties of local
authorities are solved with extraordinary funding by the central government aimed at
limiting the effects on citizens, local economies, and, indirectly, on the economy as whole.
In literature, however, particular attention on the crisis of the local public administration has
been reserved especially by Anglo-Saxon and north-European literature (from Sweden,
Norway, Germany), where the issue of the efficiency and effectiveness of the public
services management is a recognised, practiced and developed subject (Fink, 1986;
Weitzel, Jhonson, 1989).
The most relevant doctrinal studies were directed mainly to investigate the causes of the
crisis and its geographical and time distribution (Carmeli, Cohen, 2001).
That said, the aim of this research is to evaluate the opportunity to adopt strategies of
state support or, alternatively, to leave to the local managerial autonomy the adoption of
regeneration policies for local bodies in financial trouble.
In order to usefully contribute to the discussion on the topic of state support vs. managerial
autonomy, in this study, after analysing the main guidelines at European level, are
presented the results of an empirical investigation on the economic effects produced on
the local economy by the collapse of the Municipality of Taranto.
The choice of the city of Taranto is due to both the significant magnitude of the ascertained
debt, which was one of the highest in the history of Italy, and the significant economic
effects caused by the lengthy rationalisation procedure, not yet concluded after about ten
years.
In this regard, with reference to the companies admitted to the passive mass, has been
determined the economic losses suffered by the companies involved in the insolvency
procedure and resident in the local area of reference.
1
Prof. Mario Turco, Department of Science of Economics, University of Salento, Italy,
Email: mario.turco@libero.it;
Proceedings of Annual Spain Business Research Conference
14 - 15 September 2015, Novotel Barcelona City Hotel, Barcelona, Spain
ISBN: 978-1-922069-84-9
In particular, this study aims to answer the following main research questions:
- which strategies are most suitable for solving the financial crisis of the municipal
administrations?
- what are the economic effects that the failure of a local authority can produce on the local
economic actors?
In terms of methodology, this study is characterized by a multiple approach (Simon, 1977).
The first part of the work is descriptive-informative (Franceschi Ferraris, 1978) on the main
institutional and doctrinal guidelines on State support vs autonomy in the management
rationalisation of local authorities; the second part is experimental-inductive, with cognitiveinterpretative purposes of the multi-faceted economic causal effects related to the
phenomenon of financial collapse (Aron, 1972; Kuhn, 1970; Yin, 1984).
The research results allow both to evaluate the convenience of the extraordinary financial
support to relieve local economies in financial troubles, and to justify the introduction of
new legal institutions that allows full autonomy to the local bodies for the management of
the restructuring process, such as the new legal institution of the multi-annual rebalancing,
introduced in Italy by Law 213/2012, as an alternative to the insolvency procedure.
Additional contributions of the study are the opportunity to encourage a responsible
behaviour based on the efficiency of public administrations, and the quantification of the
economic damage caused by the default of a public administration.
Looking ahead, further research is under way which aims to provide the results of an
empirical study designed to assess the economic effects produced by the collapse in
question on the relevant local economies. In this context, we mean determine the
economic losses and the survival status of enterprises resident in the territory of reference
involved in the insolvency procedure.
2. The European Management of the Financial Collapse of Local Bodies:
State Support or Managerial Autonomy?
The current economic crisis that hit the economies of many Western countries, including
Italy, inevitably affected the policies of state budget and public spending of the various
local governments, with significant consequences on their already precarious financial
conditions (Kettl, 2000; Borgonovi 2004; Grubnic, Woods, 2009; Scorsone, 2010; Mussari,
2011).
In many UE and non-EU countries, including Italy, in order to promote a greater
accountability of the local governments in the management of public resources, as well as
a more efficient and effective administrative action, were introduced new systems of
economic and management governance, typical of companies (Van Wart, Cayer, 1990;
Hood, 1995; Parker and Gould, 1999; Crook, Sverisson 1999; Mussari, 1999; Crook,
Manor, 2000; Anselmi, 2003; Pavan, Reginato, 2004; Borgonovi, 2005).
The introduction of such instruments oriented to an effective management required the
adoption of complex reporting and performance measurements, in terms of accountability
and management control (Parker, Gould, 1999; Bac, 2010; Brusca, Montesinos, 2010;
Turco, 2011).
In order to support the decision making processes of local administrations through a
proper information structure, we moved from a cash basis accounting system to an accrual
basis accounting system, suitable for monitoring the economic, financial and capital effects
of management action (Guthrie, 1998; Bac, Vesper 2002; Stanley et al., 2008; Mack,
Ryan, 2007; Bac, 2010; Brusca, Montesinos, 2010; Tooley et al., 2010).
In this new scenario, the survival of local public bodies depends largely on the
management administrative abilities to maintain, over time, the conditions of economic and
financial balance, essential to ensure the continuity and the autonomy of the public
Proceedings of Annual Spain Business Research Conference
14 - 15 September 2015, Novotel Barcelona City Hotel, Barcelona, Spain
ISBN: 978-1-922069-84-9
administration (Beaver, 1966; Altman, 1968; Wilcox, 1971; Coda, 1975 and 1983; Drucker,
1981; Manes Rossi, 2002).
The maintenance of the different equilibrium conditions requires, of course, that the
management of the public body is able to conjugate the efficiency and effectiveness of the
services offered (suggested value) with the users’ expectations and needs (recognized
value) (Borgonovi, Mussari, 2011).
The introduction of this cultural "revolution", inspired by the concept of "corporatization"
and implemented in different ways in various EU countries, has led to a fiscal
decentralization and to increased administrative autonomy (Council of Europe, 2010).
Jointly to mentioned implemented change, and in order to rationalize public spending, in
the EU area has been introduced the "stability pact" (Council of Europe, 2000, 2002, 2007
and 2010), which resulted in progressive restrictions of state contributions and
decentralization of many public functions (Kettl, 2000; Wollmann, 2004).
The measures introduced, together with the inability of many local governments to direct
the changes implemented, have, unfortunately, led to an impoverishment of the financial
resources of local bodies and helped to produce, in severe cases, structural imbalances
and even default situations (Carmeli and Cohen, 2001).
In Italy, this critical situation is unfolding in its whole severity, as evidenced by the 479
cases of financial ruin declared until May 2013, as well as by the 25 municipalities having
their financial difficulty stated since 2012 until April 2013 (Court of Accounts, 2013).
The Council of Europe, during the updating of the European Charter of Local Autonomies,
established the principle of protection of the financially weakest local bodies, which must
be supported through state funds for fiscal equalization (Council of Europe, 2010, art. 9).
This provision has been transposed in Italy with the approval, in 2010, of the Charter of
Local Autonomies.
In doctrine, several studies have been made on this subject with the purpose of identifying
the best mechanisms for the distribution of public resources to local governments (Shah,
1994), as it was assumed that any government intervention in support of the local
governments in difficulty breaches the principle of autonomy and weakens the liability of
public administrators (Mirrless, 1971; McConnell, Picker, 1993; Kimhi, 2008).
It is clear that the decision for the intervention in favour of local bodies in critical situations
is complex. The financial rescue of local governments in financial distress poses, indeed, a
strategic dilemma, both for central government and for the local bodies as well (Handler,
1986). So, if in a governmental context the decision for the extraordinary intervention and
rescue clashes with the need to have real information on the financial condition of the local
body in financial trouble (Herold, 2009; Boadway, 2006; Rodden, 2002), it must be taken
into account that the benefits that the local community gets from public intervention can be
considered a special and individual interest, damaging the interests of the national
community (Horst, Douglas, 1997).
Of course, at local level can be found two opposed needs, namely, on the one hand are
required more state resources to fund public services without burdening local economies
with more taxes; on the other hand, there is the claim for a greater decision-making
autonomy favouring a better management efficiency.
Local bodies are favourable to State support, though studies carried out on this matter
show that where public intervention is operative, unsustainable and uncontrolled spending
policies are encouraged (Bordignon et al., 2001; Von Hagen et al., 2000; Breuillè, GaryBobo, 2007).
The negative effects produced on the national economy by the widespread and
generalized state public interventions in support of local authorities in difficulty have been
proven empirically, thanks to case studies in Norway, Sweden and Germany and reported
Proceedings of Annual Spain Business Research Conference
14 - 15 September 2015, Novotel Barcelona City Hotel, Barcelona, Spain
ISBN: 978-1-922069-84-9
as proof at the Council of Europe (Council of Europe, 2002; Herold, 2009; R. Singh, 2005;
Von Hagen et al., 2000; Seitz, 1999; Shefter, 1992).
Moreover, in these countries the institutionalization of extraordinary state funding in favour
of local governments in financial trouble have prompted many municipalities, also not in
difficulty, to declare a state of financial collapse, with serious consequences for the
national economy.
The improper use of state aid has ended up causing serious financial difficulties to such an
extent that the same governments were forced to eliminate or limit the financial support
measures. In most European countries, however, there are specific regulations concerning
support to local bodies in financial difficulty and, in most cases, these actions are
conditioned by the occurrence of certain conditions affecting local bodies to access the aid
(Council of Europe, 2002, p. 37).
The parameters generally used to ascertain the financial condition of local bodies are
linked to the ratio between debt and their own resources, or to the relationship between
debt extent and working capital (Council of Europe, 2002, p. 37).
Infrequent are the instructions about the methods for determining the contributions to be
paid, the quantification of which is left, in most cases, to the discretion of the central
government (Council of Europe, 2002, p. 37).
Ultimately, Europe has welcomed the direction of the management autonomy of local
bodies to manage their own financial difficulties, including administrative instability,
although, there are exceptions, as demonstrated by the ad hoc interventions granted in
favour of local bodies in financial difficulty using financing channels other than the specific
ones (Council of Europe, 2002, p. 37).
The issue in question, for its economic, political and social implications, is still open, as
shown by the different solutions adopted by individual European States.
3. The Empirical Research: Methodological References and Subject of
Investigation
The empirical research based on an empirical-inductive methodological approach, typical
of the economic and social studies, is designed both to the interpretation of the effects
produced by the collapse of local bodies on the territorial economies local, both to
contributing to the resolution of the decisional dilemma between state support policies and
managerial autonomy of the local bodies in financial difficulty (Yin, 1984).
The local authority in collapse status under investigation is the Municipality of Taranto,
which started its restoring procedure on October 2006 (with Commissioner's Decision nr
234/2006) which results still pending till today, despite nine years are passed since its
beginning.
The analysis units of the research are the economic actors eligible for admission to the
liabilities of the financial collapse of the Municipality of Taranto.
The area of interest consisted of the behaviours that these economic actors assumed in
the time interval between the date of the insolvency declaration of the Municipality
(October 2006) and the start of this analysis (September 2013).
The analysis had a bottom-up approach: firstly have been examined the information
derived data obtained from the official documentation, and subsequently the same have
been observed and reprocessed to better describe and summarize the complexity of the
economic phenomenon under investigation (Corbetta 1999).
At the operational level, in order to achieve the goal of assessing the economic effects
produced by the financial collapse on economic operators, a series of activities were
planned, organized and coordinated.
Proceedings of Annual Spain Business Research Conference
14 - 15 September 2015, Novotel Barcelona City Hotel, Barcelona, Spain
ISBN: 978-1-922069-84-9
As first stage, have been acquired the resolutions of ascertainment of debts admitted to
the insolvency procedure. This documentation, provided by the Extraordinary Liquidation
Board (OSL) through the Chambers of Commerce of Taranto, dated from the beginning of
the insolvency procedure (October 2006) to 30 September 2013.
Subsequently, the applications for the admission to the passive mass have been grouped
by number and amount, and separated into rejected applications, applications opened but
not yet carried out, applications settled and unsettled due to rejected offerings.
This procedure was intended to ensure, on a certain date, the total amount of liabilities and
to define the number of already settled instances and the number of those still to be
settled.
Through the examination of applications eligible for the admission to the passive mass it
was possible to determine the universe of investigation, which consisted of the holders of
claims considered either eligible or ineligible by the OSL.
Once defined the composition and the ownership of liabilities, thanks to information
support offered mainly by the Chambers of Commerce of Taranto, the type of creditor
(businesses, professionals, credit institutions, employees, etc.) and their economic sector
of activity (services, trade, finance, leasing, transport, etc.) have been detected.
At a later stage, the companies admitted to the passive mass have been extracted from
the universe of interested parties.
In reference to mentioned companies were determined the economic effects produced by
the financial collapse of the municipal body, by assessing the extent of the economic
losses, their territorial and sectorial distribution as well as the opportunity cost of credits
not yet settled.
Empirical research suffers from some limitations, due, primarily, to the fact that the
analysis derives from the observation perspective of an external analyst, so the results
achieved do not consider such information owned only by those responsible for the
governance of the local body.
From this arise a further limitation consisting in the lack of analyses on the whole spectrum
of the economic actors other than enterprises (families, associations, religious bodies, etc.)
directly and / or indirectly involved in the collapse of the Local Body.
4. The Economic-Territorial Effects of the Financial Collapse of the
Municipality of Taranto: Economic Losses and Opportunity Cost
The subject of analysis consisted of the economic players (companies, professionals,
credit institutions, employees, etc.) eligible for admission to the passive mass of the
financial collapse of the Municipality of Taranto.
The provisional par value of the applications eligible for admission to the liabilities of the
collapse, by 30 June 2012, has been estimated at EUR 901.90 million, of which EUR
711.30 million eligible, 22.10 still to be examined and EUR 168.50 million already rejected
or in course of rejection (table 1).
Proceedings of Annual Spain Business Research Conference
14 - 15 September 2015, Novotel Barcelona City Hotel, Barcelona, Spain
ISBN: 978-1-922069-84-9
Table 1
PAR VALUE OF APPLICATIONS FOR ADMISSIONTO THE PASSIVE MASS
(VALUES IN MILLION EUR)
PAR VALUE OF SUBMITTED APPLICATIONS:
901,90
a) Value of eligible applications (of which):
711.30
- value of settled applications (required payments);
312.20
- value of unsettled applications because of rejected offer;
274.60
- value of applications waiting for settlement rejection / acceptance;
27.00
-value of applications undergoing settlement because of unavailable money;
96.00
b) Value of applications still to be opened
22.10
c) value of applications rejected or under rejection
168.50
Source: Our elaboration on data taken from OSL report no. XII/30.06.2012
Surprising was the amount of the instances rejected or being rejected, which enabled to
establish a first negative economic effect, represented by the lack of a coverage
amounting to EUR 168.5 million.
The causes of rejection, in most cases, were attributable to credit claims supported by
missed or incomplete documentation certifying the origin of the credit claimed or by the
absence of evidence for the existence of such a credit in the administrative records of the
municipal administration. The annual reports prepared by the Extraordinary Liquidation
Board could not determine whether there were ongoing pending litigations, due to the lack
of information about this. In reference to the credits admitted to passive mass of the
financial collapse has been operated a dual investigation, oriented both to the
determination of the possible negative economic impacts resulting from transactions made
and those deriving from transactions not yet defined due to rejected offering.
4.1 Structure and Composition of the Economic Losses on Settled Credits
Regarding the credits that have defined in transaction their claims by 28 February 2012, it
was possible to ascertain their geographic distribution and precisely EUR 191.80 million
par value concerned economic actors residing in the Province of Taranto, while EUR
113.20 million concerned actors residents outside the provincial territory.
The payments performed as settlement of credits defined with transaction and related to
actors residing in the provincial territory of Taranto were about EUR 90.80 million (47.3%
of the par value of all the eligible credits), while those performed in favour of actors
residing outside the province of Taranto were approximately EUR 51.60 million (equivalent
to 45.8% of the par value of all the eligible credits).
Given the values of the transactions concluded, the economic actors of the Province of
Taranto had a settlement of their claims increased by 1.5% compared to those outside the
Province.
Table 2
TERRITORIAL DISTRIBUTION OF THE PAYMENTS IN FAVOUR OF SETTLED CREDITS
(VALUES IN EUR)
Settled credits in the Province of Taranto
Settled credits outside the Province of
Taranto
Aggregate amount
PAR VALUE
PAID VALUE
% PAID CREDIT
191,840,121.43
90,840,211.75
47.36%
113,246,312.71
51,599,323.12
45.49%
305,086,434.14
142,439,534.87
46.69%
Source: Our elaboration on data taken from OSL report, on 28 February 2012. Survey on the
Registry of Businesses, hold by the Chamber of Commerce, Industry, Craft and Agriculture
(C.C.I.A.A.) of Taranto, carried out on 30,09.2014.
Proceedings of Annual Spain Business Research Conference
14 - 15 September 2015, Novotel Barcelona City Hotel, Barcelona, Spain
ISBN: 978-1-922069-84-9
By comparing the par value of the credits admitted to the passive mass with the amount
they received as settlement, it was possible to determine that the total economic losses
were equal to EUR 162.65 million, of which EUR 100.9 million were suffered by economic
actors residing in the province of Taranto and EUR 61.65 million by those residing outside
the province (see table 3).
Table 3
ECONOMIC LOSSES ON SETTLED CREDITS
(VALUES IN EUR)
Settled credits in the
Province of Taranto
Settled credits outside the
Province of Taranto
Aggregate amount
PAR VALUE
PAID VALUE
ECONOMIC LOSS
ON CREDITS
% LOSS ON
CREDITS
191,840,121.43
90,840,211.75
100,999,909.68
52.64%
113,246,312.71
51,599,323.12
61,646,989.59
54.51%
305,086,434.14
142,439,534.87
162,646,899.27
53.31%
Source: Our elaboration on data taken from OSL report, on 28 February 2012. Survey on the Registry
of Businesses, Hold by the Chamber of Commerce, Industry, Craft and Agriculture (C.C.I.A.A.) of
Taranto, carried out on 30.09.2014.
By focusing to the economic actors residing in the Province of Taranto arise that the
credits settled under transaction concerned mainly businesses for EUR 155.3 million,
individuals (usually employees) for EUR 19.8 million, professionals for EUR 11.2 million,
as well as other local entities (National Social Insurance Agency, national Institute
accidents, Income Revenue Authority, municipally-owned companies, etc.) for EUR 5.16
million.
In reference to the credits with transaction accepted by the different types of creditors, it
appears that credit losses suffered by the actors resident in the Province of Taranto were
distributed as follows: EUR 77.98 million by enterprises, EUR 13,08 million by individuals,
EUR 7.47 million by professionals; EUR 2.46 million by other creditors (see table 4).
Table 4
ECONOMIC LOSSES ON CREDITS SETTLED UNDER TRANSACTION IN THE PROVINCE
OF TARANTO ACCORDING TO TYPE OF CREDITOR
(VALUES IN EUR)
TYPE OF CREDITOR
Businesses
Professionals
Individuals
Public bodies or
publicly-owned
companies
Others
TOTAL
77,347,766.31
3,749,507.90
ECONOMIC
LOSS ON
CREDITS
77,980,305.87
7,471,666.72
%
Paid
credit
49.77%
33.03%
19,814,223.71
6,727,942.57
13,086,281.14
33.84%
84
5,168,033.32
2,882,643.26
2,285,390.06
54.90%
84
308,617.60
132,351.71
176,265.89
42.87%
2,588
191,840,121.43
90,840,211.75
100,999,909.68
47.34%
ELIGIBLE
NUMBERS
PAR VALUE
PAID VALUE
317
370
155,328,072.18
11,221,174.62
1,733
Source: Our elaboration on data taken from OSL report, on 28 February 2012; Survey on the
Registry of Businesses Hold by Chamber of Commerce, Industry, Craft and Agriculture (C.C.I.A.A.)
of Taranto, carried out on 30.09.2014.
It was possible to observe that businesses and public authorities received payments
exceeding the minimum threshold of 40% of the amount claimed, as provided by Art. 258
of TUEL, while other categories received even lower liquidations (professionals 33%,
individuals 33.8%).
Proceedings of Annual Spain Business Research Conference
14 - 15 September 2015, Novotel Barcelona City Hotel, Barcelona, Spain
ISBN: 978-1-922069-84-9
With reference to the companies settled by transaction, the stratification by economic
activity of creditors has highlighted the economic sector that has suffered the greatest
losses on credit. In particular, economic actors operating in the financial sector, real estate
and professional were those that suffered the more negative effects, with economic losses
of around EUR 33.90 million, followed by the transport sector (EUR 8.76 million), supplies
(€ 7.97 million) and buildings (EUR 7.89 million) (ref. table 5).
Table 5
ECONOMIC LOSSES ON SETTLED CREDITS IN THE PROVINCE OF TARANTO
PER ECONOMIC SECTOR
AGRICULTURE
9
€ 2,366,084.62
€ 1,399,322.26
ECONOMIC
LOSSES ON
CREDITS
€ 966,762.36
MANIFACTURING
33
€ 2,562,051.97
€ 1,326,472.09
€ 1,235,579.88
SUPPLIES
3
€ 18,339,655.93
€ 10,359,755.65
€ 7,979,900.28
BUILDING
73
€ 14,234,098.64
€ 6,335,509.56
€ 7,898,589.08
COMMERCE
58
€ 5,018,682.82
€ 2,618,737.47
€ 2,399,945.35
TRANSPORT
15
€ 24,619,918.89
€ 15,858,690.59
€ 8,761,228.83
SERVICES
FINANCE, REAL ESTATE,
PROFESSIONALS
RENTAL
6
€ 3,784,171.97
€ 1,855,941.78
€ 1,928,230.19
33
€ 57,959,713.15
€ 24,050,619.96
€ 33,909,093.19
27
€ 9,084,253.12
€ 5,143,213.17
€ 3,941,039.95
3
€ 474,539.26
€ 228,622.76
€ 245,916.50
21
€ 866,954.74
€ 464,915.65
€ 402,039.09
15
€ 4,804,882.92
€ 1,564,833.46
€ 3,240,049.46
6
€ 3,906,298.31
€ 2,127,757.79
€ 1,778,540.52
ECONOMIC SECTOR
EDUCATION
HEALTH SERVICES AND
SOCIAL SECURITY
ARTS AND SPORTS
ACCOMMODATION AND
CATERING
OTHER SERVICES
NUMBER
CREDIT CLAIM
SETTLED CREDIT
12
€ 624,246.14
€ 320,686.12
€ 303,560.02
MINING
3
€ 6,682,519.69
€ 3,056,209.15
TOTAL
317
€ 3,626,310.54
€
77,347,766.85
€ 155,328,072.18
€ 77,980,305.87
Source: Our elaboration on data taken from OSL report, on 28 February 2012; Survey on the Registry of
Businesses, hold by the Chamber of Commerce, Industry, Craft and Agriculture (C.C.I.A.A.) of Taranto,
carried out on 30.09.2014.
4.2 Structure and Composition of the "Opportunity Cost" on Unsettled Credits
A further relevant aspect of the analysis concerned the economic effects relating to
unsettled credits because of rejected offers. Their territorial distribution, by 30 June 2013,
showed that EUR 10.6 million was related to economic players of the Province of Taranto,
while EUR 233.8 million concerned operators residing outside the provincial territory (see
table 6).
Proceedings of Annual Spain Business Research Conference
14 - 15 September 2015, Novotel Barcelona City Hotel, Barcelona, Spain
ISBN: 978-1-922069-84-9
Table 6
TERRITORIAL DISTRIBUTION OF UNSETTLED CREDITS
BECAUSE OF REJECTED OFFER
(VALUES IN EUR)
Unsettled credits in the
Province of Taranto
Unsettled credits outside the
Province of Taranto
Aggregate amount
CREDIT CLAIMS
AMOUNTS SET ASIDE
BECAUSE OF REJECTED
OFFERS
10,669,591.29
………
233,896,354.31
………
244,565,946.00
75,500,000
(see OSL report no. 12/2012)
Source: Our elaboration on data taken from OSL report, on 30 June 2013. Survey on
the Registry of Businesses, hold by the Chamber of Commerce, Industry, Craft and
Agriculture (C.C.I.A.A.) of Taranto, carried out on 30.09.2014.
Regarding the territorial distribution of unsettled credits by type of creditor, the unsettled
credits referable to economic actors residing outside the Province of Taranto belonged to
three credit institutions for a total par value of EUR 214.4 million, while those belonging to
the territory of Taranto concerned 106 economic actors, holders of credit rights for a par
value of EUR 19.4 million.
The unsettled credits of the Province of Taranto, distributed by type of economic actor,
concerned: 60 companies, representing claims for a par value of EUR 6.2 million; 53
professionals, with claims of EUR 2.0 million par value; 111 individuals for EUR 2.3 million
par value (see table 7).
Table 7
DISTRIBUTION PER ECONOMIC OPERATOR
OF UNSETTLED CREDITS BECAUSE OF REJECTED OFFER
(VALUES IN EUR)
Number
a) Unsettled creditors in the Province of Taranto:
- Businesses
- Professionals
- Individuals
-Others
b) Unsettled creditors outside the Province of Taranto
-Credit institutions
-Others
TOTAL
Monetary value
60
53
111
2
6,230,162.44
101.00
2,380,806.15
4,410.78
3
106
335
214,416,746.58
19,479,607.73
244,565,946.00
Source: Our elaboration on data taken from OSL report, on 30 June 2013. Survey on the Registry
of Businesses, hold by the Chamber of Commerce, Industry, Craft and Agriculture (C.C.I.A.A.) of
Taranto, Carried out on 30.09.2014.
With reference to the companies of the Province of Taranto, the economic sector to which
belonged the most part of the unsettled credits was that of rental with a par value of EUR
2.5 million, followed by that of services with a credit of EUR 1.2 million. The economic
sector to which belonged the greater number of companies holding unsettled credits was
that of trade with 16 companies, followed by that of building with 10 companies (see table
8).
Proceedings of Annual Spain Business Research Conference
14 - 15 September 2015, Novotel Barcelona City Hotel, Barcelona, Spain
ISBN: 978-1-922069-84-9
Table 8
CLASSIFICATION OF UNSETTLED CREDITS BECAUSE OF
REJECTED OFFER PER TYPE OF ECONOMIC ACTIVITY
(VALUES IN EUR)
ECONOMIC SECTORS
NUMBER
ACKNOWLEDGED
CREDITS
€ 357,091.20
AGRICULTURE
1
MANUFACTURING
2
€ 29,777.91
SUPPLIES
1
€ 106,976.96
BUILDING
10
€ 287,051.62
COMMERCE
16
€ 489,291.40
TRANSPORT
3
€ 7,659.72
SERVICES
3
€ 1,277,226.72
FINANCE, REAL ESTATE, PROFESSIONALS
4
€ 551,979.81
RENTAL
8
€ 2,560,712.10
EDUCATION
1
€ 22,854.32
HEALTH SERVICES AND SOCIAL SECURITY
5
€ 508,864.81
ARTS AND SPORTS
1
€ 5,821.60
CATERING
1
€ 7,900.00
OTHERS
4
€ 16,954.27
TOTAL
60
€ 6,230,162.44
Source: Our elaboration on data taken from OSL report, on 30 June 2013. Survey on
the Registry of Businesses, hold by the Chamber of Commerce, Industry, Craft and
Agriculture (C.C.I.A.A.) of Taranto, carried out on 30.09.2014.
The possible economic effects on unsettled credits because of rejected offer can be
determined as a function of the "Opportunity cost" due to the failure to collect the par value
of the credits admitted to the passive mass, amounting to EUR 244.5 million (by 30 June
2013 - see table 6).
The Opportunity Cost was determined as function of the weighted average cost of capital
or WACC (Weighted Average Cost of Capital), intended as the cost that the economic
actors must incur to collect from shareholders and other third party financiers the capital
needed to in order to provide for the uncollected financial resources.
It is a weighted average between the cost of equity and the cost of debt, with "weights"
represented by equity and aggregate financial debts considered equally. The formula is as
follows:
E
D
WACC = Ke ------- + Kd (1-t) ------(D+E)
(D+E)
Where:
WACC= Weighted Average Cost of Capital
Ke = Cost of equity
E = Equity
D = Debt
Kd = Cost of debts
t = income tax rates
The estimated cost of capital, calculated on half of the unsettled credits, was determined
according to the method of the capital asset pricing model (CAPM), which takes into
consideration the return on an alternative risk-free investment (usually medium/long term
Proceedings of Annual Spain Business Research Conference
14 - 15 September 2015, Novotel Barcelona City Hotel, Barcelona, Spain
ISBN: 978-1-922069-84-9
government bonds) and a premium for the business risk (Lintner, 1965; Mossin, 1966;
Sharpe,1964).
The cost of debt, calculated on the remaining half of the unsettled credits, was defined
considering the average interest rate of medium-to-long term financing.
The related Opportunity cost considered for the purpose of the analysis was equal to
9.27%, and was determined according to the following variables: a rate of 6% as return on
debt; a risk on equity of 3.20; a premium for the business risk of 7%; an actual return on
alternative risk-free investments (30 year Treasury Bonds) of 2.14%.
It follows that the negative economic effects of the credits unsettled because of rejected
offer, amounting to EUR 244.5 million, were estimated at an approximate minimum value
of EUR 22.67 million, chargeable, in a weighted way, for EUR 0.98 million to the Province
of Taranto and for EUR 21.68 million outside the provincial territory (see table 9).
Table 9
OPPORTUNITY COST OF UNSETTLED CREDITS
BECAUSE OF REJECTED OFFER
(VALUES IN EUR)
Unsettled credits in the Province of Taranto
Unsettled credits outside the Province of
Taranto
Aggregate amount
CREDIT CLAIMS
OPPORTUNITY COST
10,669,591.29
989,071.11
233,896,354.31
21,682,192.07
244,565,946.00
22,671,263.19
Source: Our elaboration on data taken from OSL report, on 30 June 2013.
The analysis of the credits under transaction, on the basis of the documentation collected
by February 2012, highlighted the economic losses on credits of EUR 162.6 million, of
which EUR 101 million suffered by the economic players of the Province of Taranto and
EUR 61.6 million by those outside the provincial territory (see table 3). Of these latter, the
economic losses related to the enterprises of the territory of reference amounted to EUR
77.9 million. To these economic losses must be added further negative economic effects
associated with both the loss of the extraordinary state contribution of euro 7,30 mln,
returned for non-use in within the terms provided by the regulation of grant (see paragraph
4 of this report), as well as to the opportunity cost on unsettled credits because of rejected
offer, estimated at EUR 22.67 million, chargeable, in a weighted way, for EUR 0.98 million
to the economic operators of the Province of Taranto and for EUR 21.68 million to the
operators outside the provincial area (see table 9).
The economic effects produced by the financial collapse and by its management are
summarily represented in the table 10 below.
Table 10
ECONOMIC EFFECTS OF THE FINANCIAL COLLAPSE
ACCORDING TO TYPE AND TERRITORIAL DISTRIBUTION OF THE ECONOMIC LOSSES
(Values in million EUR)
a) Losses on rejected credits (by 30.06.2012)
b) Losses on settled credits (by 28.02.2012):
- Province of Taranto (of which enterprises for 77,9 million)
- Outside Province of Taranto
c) Opportunity cost of unsettled credits per rejected offer (by 30 June 2013):
- Province of Taranto
- Outside Province of Taranto
d) Losses on extraordinary state contribution as per D.Lgs. 159/2007
TOTAL ECONOMIC LOSSES ON CREDITS
Source: Our elaboration on data from OSL reports
168.50
162.60
101.00
61.60
22.67
0.98
21.68
7.30
361.07
Proceedings of Annual Spain Business Research Conference
14 - 15 September 2015, Novotel Barcelona City Hotel, Barcelona, Spain
ISBN: 978-1-922069-84-9
5. Conclusions
The European local public bodies, as a result of the Treaty of Maastricht (Council of
Europe, 2007), were affected by a gradual process of administrative decentralization,
accompanied by significant cuts in government transfers, which led to the transition from a
centralised public hierarchical system to one based on the principle of vertical subsidiarity
(Pollitt, Bouchkaert, 2004; Kettl, 2000; Wollmann, 2004).
This decentralization process was experienced by local authorities, not without difficulty,
so much so that many Municipalities found themselves in severe financial crises.
On the issue of the possible consolidation strategies, the various European countries
adopted contradictory policies that went from extraordinary state contributions to allowing
an independent consolidation management.
On this point, the doctrine is unanimous in highlighting that any state intervention in
support of local bodies undermines their managerial autonomy and, at the same time,
leads to a weakening of the principle of governance responsibility (Handler, 1986; Carter,
1989; Von Maravic , 2008; Power, 2007; Grace, Martin, 2008; Beltrami, 2011).
In many European Countries, such Italy, the dilemma between State support and
managerial autonomy has not been completely resolved, given that, despite the
introduction of the financial collapse management procedure, conceived as an
autonomous process of recovery, there have been state funds intended for that purpose.
In order to contribute to the solution of the problem, the results of the present study were
particularly significant and significant reflections can be derived.
First of all, the analysis carried out has shown the inability of the local governance to
manage in autonomous and timely manner the administrative reorganization, as proven
nine years spent and 223.79 million euro of funding required for the settlement of the
residual passive mass.
The management inefficiencies of the insolvency procedure produced significant effects on
the local economy, as demonstrated by the empirical analysis performed on the economic
players residents and operating in the area in question).
Specifically, the above analysis of the credits of local players constituent the passive
mass of the local administration, highlights, among the effects of the financial collapse, the
economic losses on credits of various kinds.
In particular, the analysis of the credits rejected or likely in progress of rejection by 30 June
2012 and burdened by several pending litigation, showed contingent assets of EUR 168.5
million, as an effect of their rejection.
Therefore, the survey results highlight the dangers related to the inability of the local body
to plan and define the acquisition and the allocation of the resources necessary for its
financial recovery.
These problems, in our opinion, are due to the difficulty to manage simultaneously and to
put on the same level the current needs that the Municipality must perform with the needs
for recovery of the financial crisis.
We believe, therefore, that the choice for an autonomous management of the insolvency
procedure is correct, since it raises the governance responsibility toward a greater
efficiency, but at the same time the legislation is not effective enough about the
reorganization ways and the related timing.
In order to limit the economic impact on local economies, a greater control on the respect
of the forward plan for the coverage of the financial resources needed to extinguish the
collapse procedure would be desirable.
Proceedings of Annual Spain Business Research Conference
14 - 15 September 2015, Novotel Barcelona City Hotel, Barcelona, Spain
ISBN: 978-1-922069-84-9
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