Recovery fund: why it matters and what changes

A roundup of questions and answers on the Recovery Fund: the most topical topic in European funding.

[Aggiornamento articolo 21 aprile 2021]

Recovery Fund where we are and new sources of updates

Discussions are going on regarding the formulation of the National Recovery and Resilience Plan (NRP), which is due to be submitted to the European Commission by April 30. The PNRR, a national declination of the Recovery Fund, regulates most of our country’s entitlement funds.

To supplement what has already been published, we update below the main sources on which “first-hand” information can be gathered. As has been evident from the first statements of the new government, the governance of the NRP has shifted to the Ministry of Economy and Finance (MEF), in collaboration with the relevant ministries and with constant information to Parliament. We therefore recommend the respective official links to gather information and updates: MEF | House | Senate

As a further update, we offer two documents referring to the ongoing debate at the governmental and parliamentary levels:

• The Analytical Technical Notes sur PNRR (extremely detailed) sent by the Ministry of Economy and Finance to Parliament (March 11)
• A summary of them made by the House Study Service (March 15)
• Minister Hon. Franco’s memo to the joint committees of the House and Senate on the PNRR (March 8)
• The summary of the hearings held with various political representatives, social partners, and civil society organizations on the NRP (March 24)
• Ananalysis of the relationship between European Commission’s Country-Recommendations and NRP measures (February)

However, the documents are not yet in their final form. We will have more established versions in the coming days to which we will devote more space.

Article 1 March 2021

Recovery Fund, an topical issue

NGEU, Next Generation EU, the Instrument (or Program) for Recovery and Resilience or (as it is more often abbreviated) the Recovery Fund is a topic that increasingly occupies the pages of national and international newspapers and our Guide. Even in the continuous flow of news, some aspects may still be unclear. Let’s look together, very quickly, at a roundup of possible questions and answers.

Is the Recovery Fund really important?

Yes, for several reasons:

• The amount of funds available: about 208 billion euros NGEU funds are planned for Italy, including about 81 billion euros in grants: to be committed by 2023 and spent by 2026. To give a comparative idea, the Structural Funds available to Italy for the period 2021-2027 amount to about 43 billion euros (to which will be added the share of national co-financing). The “Recovery Fund” accounts for about twice as much structural funds as a seven-year period in about half the time;
• Significance for the EU: NGEU represents a grand gesture of solidarity among European countries at a difficult time and a watershed in the history of EU funds. For the first time, albeit on an exceptional basis, the concepts of “European public debt” and “European public expenditure” are introduced; the amount and variety of “own resources” available to the EU are also increased and a process for their further extension launched;
• The significance for Italy: Italy is among the largest beneficiaries of NGEU (27.8 percent of total funds) and this great opportunity puts pressure on its political class. The World Economic Forum’s analysis of the “readiness” of countries and their administrations to accompany major transformations is interesting in this regard(section 5 of the paper). Effective use (and even just, full use) of funds is one of the weaknesses that can emerge in full force with NGEU (lots of funds, little time). NGEU also requires, in addition to individual interventions, specific conditions and a “vision” effort in their organization.

Who really pays for the Recovery Fund?

The great novelty of NGEU is that these are resources borrowed by the EU from the financial markets through the issuance of securities. So NGEU does not “burden” the budgets of member statesor their public debt, because the funds are raised independently by the European Commission. However, the loans must be repaid: funds to repay the debts incurred will be raised by community institutions in two main ways, corresponding to the two main types of support provided by NGEU.

Part of the support is provided in the form of loans to the member states: for this part of the support, the states will therefore have to repay the EU in turn, on terms similar to those the EU will have vis-à-vis the holders of its bonds. What benefits will the member states have derived from this operation? First, the availability of funds without an immediate burden on their public debt; second, potentially better terms than they themselves could get, as the EU’s rating is better than that of many member states.

Some of the support, on the other hand, is provided in the form of grants: for this part of the support, the question of increasing own resources arises, as the EU itself will have to find the resources to repay the debt. The new decision on own resources of the EU in fact provides for the introduction of a new resource, based on the amount of non-recycled plastic packaging waste in each member state; and a temporary increase in the ceiling of existing own resources- It also confirms the start of the process of introducing new resources, which may be based on digital transactions, financial transactions, a “carbon tax” levied on goods arriving in the EU, CO₂ or more.

What are the conditions of the Recovery Fund?

We devoted a recent post to an analysis of the European Recovery and Resilience Facility (the largest part of NGEU) regulation and the different conditions involved in its use. We summarize the main points here, which are based on the reasonable and supportable principle of virtuous use of funds:

• Timeline: all funds must be committed by the end of 2023 and all payments made by the end of 2026. Timelines and targets set in individual national plans should be met and documented;
• Thematically, the use of funds will need to enable (and demonstrate) lasting impact in social, economic, environmental terms and include comprehensive reforms and a solid investment package. It should focus on green transition (minimum 37 percent of the budget), digital transformation (minimum 20 percent), smart, sustainable and inclusive growth, social and territorial cohesion, crisis resilience and preparedness, and policies for the younger generation, education and skills;

Monitoring: the use of funds should ensure sustainability of expenditures, adherence to EU values and conditions similar to those of EU programs: relevance, effectiveness, efficiency, coherence, sustainability, monitoring and reporting.

What does it contain and what might change with the Recovery Fund?

We published in January the available elements regarding the National Recovery and Resilience Plan (NRP), which defines at the national level the content and mode of execution of NGEU. We resume here the six thematic areas or missions:

1. Digitalization, innovation competitiveness and culture (45 bn €)
2. Green revolution and ecological transition (68 bn €)
3. Infrastructure for sustainable mobility (30 bn €)
4. Education and research (25 bn €)
5. Gender equality, social and territorial cohesion (€19 bn)
6. Health (15 bn €)

The amounts are a purely rough estimate based on the latest documents from December and January. Our January post provided a summary of the main interventions described in the NRP. The political changes that have occurred in recent weeks imply a change in the Plan, its priorities and interventions, which are still difficult to predict with certainty. However, President Draghi’s recent programmatic statements to the Senate provide a very interesting key. We quote some significant excerpts:

• Focus on the “grants” component and careful use of the “loans” component, which will ultimately lead to increased government spending:“The share of additional loans we will request through the main component of the program, the Recovery and Resilience Facility, will have to be modulated according to public finance targets.”
• Maintaining the current major thematic areas of the NRP (mentioned above):“The previous government has already done a great deal of work on the Program for Recovery and Resilience (PNRR) […] The Missions of the Program may be reshaped and reincorporated, but will remain those enunciated in the previous documents of the outgoing government.”
• Increased attention to the environmental and infrastructure component of the NRP:“In the coming weeks we will strengthen the strategic dimension of the Program, particularly with regard to the goals concerning renewable energy production, air and water pollution, fast rail network, power distribution networks for electric-powered vehicles, hydrogen production and distribution, digitalization, broadband and 5G communication networks.”
• Focus on reforms, an essential component of the “spirit” of the Recovery Fund:“We will have to strengthen the Program first in terms of the strategic goals and the reforms that accompany them […] It will not be enough to list projects that we want to complete in the next few years. We will have to say where we want to be in 2026 and what we are aiming for in 2030 and 2050 […] The Next Generation EU includes reforms. Some concern problems that have been open for decades […] Among them are certainty of regulations and public investment plans […] the tax system […] The other reform that cannot be procrastinated is that of public administration […] increasing the efficiency of the civil justice system.”
• Cooperation with the third sector, private sector, and use of funds as “leverage.” “The role of the state and the perimeter of its interventions will have to be carefully evaluated. The state’s task is to use the levers of research and development spending, education and training, regulation, incentives and taxation. […] We will clarify the role of the third sector and private sector contribution to the National Recovery and Resilience Program through leveraged financing mechanisms (fund of funds).”
• A change on governance aspects: “The governance of the Recovery and Resilience Program is hinged in the Ministry of Economy and Finance with the very close collaboration of the relevant ministries that define sector policies and projects. Parliament will be kept constantly informed of both the overall framework and sector policies.”

Is there room for calls and projects with the Recovery Fund?

Yes, there is definitely room for calls that stimulate private and third sector planning and initiatives, as clarified in the previous question. Moreover, this is evident from the analysis of the January draft of the NRP, which will be the basis for the elaboration of the subsequent versions: some of the mentioned interventions will not be able to be implemented except through calls for proposals that will involve businesses, associations and organizations in our country and our territories. The word “projects/projects” occurs 229 times in the 179 pages of the January draft NRP.

However, it is still difficult to predict the proportion of such calls and projects by thematic area, because by its nature, the NRP will also provide for other types of interventions, such as in particular initiatives, expenditures and investments carried out directly by the public sector (especially by component ministries, but also Local Authorities), specific grants and incentives aimed at certain sectors, activities and categories, guarantee funds, financial instruments and “funds of funds” aimed at financing certain productive sectors.

It is also difficult to predict, at this stage, how any calls for proposals will be launched and awarded, but in the broad outlines, one can expect mechanisms similar to those of the current National Operational Programs (NOPs )-with which, by the way, the NRP is, by its very nature, in full synergy.

Who manages the funds?

A comparison of the above with our previous post in January identifies the main changes in terms of governance of the Recovery and Resilience Program.

The previous draft envisioned a leading role for an Executive Committee (Prime Minister, Minister of Economy and Minister of Economic Development), the Minister for European Affairs and the Interministerial Committee on European Affairs (CIAE)-as well as a controversial interministerial “Task Force.” Instead, the current vision seems to lead toward a more classical structure, although still to be defined in its operational aspects: a leading role of the Ministry of Economy and Finance, with the very close cooperation of the relevant ministries and with constant information towards Parliament.

This vision of governance seems to lead to operational arrangements not too dissimilar from those of the NOPs, with a possible role for regions and municipalities and other local and area authorities, which call for involvement in the management of funds.

What will be the impact of the Recovery Fund?

This is the big question that everyone, from individual citizens to the highest levels of national and European institutions, is seeking an answer to today. We – obviously – do not have one.

However, we can take up the concluding words of the Prime Minister’s speech to the Senate, which points to “on the spirit of sacrifice with which women and men have faced the past year, on their vibrant desire to be reborn, to come back stronger, and on the enthusiasm of young people who want a country capable of realizing their dreams.”

In addition to associating ourselves with this wish, we will continue to offer new ideas, tools and information to those throughout Italy who are enthusiastically working to make opportunities arise through europlanning and European funds.