Istituto per la Ricostruzione Industriale S.p.A.

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Istituto per la Ricostruzione Industriale S.p.A.

Via V. Veneto, 89
1-00187 Rome
Italy
06) 47271
Fax: (06) 47272308

State-Owned Company
Founded: 1933
Employees: 366,471
Sales: $50.48 billion

SICs: 6712 Bank Holding Companies; 6719 Holding
Companies Not Elsewhere Classified

Istituto per la Ricostruzione Industriale S.p.A. (IRI), once the largest non-oil producing company in the world outside the United States, was by the mid-1990s a company in decline. Established in 1933 as a prop for failing Italian banks, the state-owned holding company grew over the years to encompass over 1,000 businesses, employ over 500,000 people, and produce everything from highways to telephone equipment to ice cream. IRI is credited with spurring the phenomenal growth of the Italian economy that occurred in the late 1950s and early 1960s, but by the 1980s the company appeared hopelessly out of date in a Europe that was rushing to privatize formerly state-owned businesses. When the Italian government quit funding IRI’s debt in the early 1990s, the company instigated a wave of sell-offs and divestments; its future remained uncertain in 1994.

When the 1929 U.S. stock market crash initiated the worldwide depression of the 1930s, few countries were as adversely affected as Italy. Italian banks had a history of purchasing substantial interests in Italian industry, and when those industries began to fail it appeared that the nation’s banking system might well collapse. The Fascist government of Benito Mussolini created IRI in January 1933 to bail out Italy’s three largest banks—Banco di Roma, the Banca Commerciale, and the Credito Italiano. As a result, wrote Stuart Holland in The State as Entrepreneur; New Dimensions for Public Enterprise: The IRI State Shareholding Formula, “the new state holding company found itself responsible for major proportions of the main industrial and service sectors in the economy. These ranged from some half of iron and steel production, two thirds of telephone services, a quarter of electricity generation and distribution, four-fifths of shipbuilding, and just less than a sixth of other engineering production.”

IRI, created as a temporary solution to a problem, soon became the largest company in Italy and in 1937 was given a permanent legal structure. According to Ernesto Rossi, co-author of Nationalization in France and Italy, IRI became “an instrument for the furtherance of the industrial policy of the Fascist state” and “proceeded to invest in the industrial areas that were being developed by the Fascist policies of self-sufficiency (in cellulose, synthetic rubber, chemicals), as well as to expand the capacity of those industries that were specifically devoted to war production.” In the 1930s, IRI created several of its major subsidiaries by merging companies it controlled to create STET, a holding company for three telephone operations, in 1933; FINMARE, a holding company for four shipping interests, in 1936; and FINSIDER, a holding company to manage IRI’s steel holdings, in 1936.

World War II left IRI devastated, for its large industrial facilities had been the target of Allied bombers seeking to stem the flow of arms coming out of Italian factories. Consequently, steel production capacity was reduced by between 80 and 99 percent, shipyard capacity by 60 percent, and aircraft manufacturing capacity effectively destroyed. This destruction, and the lack of any coherent plan for IRI’s growth now that it was controlled by a democratic rather than the Fascist regime, left IRI floundering through the late 1940s. Despite these problems, however, IRI reorganized its engineering interests under the holding company FINMECCANICA in 1948 and came to contribute to Italy’s resurgent economy in the 1950s.

Once the ravages of wartime were overcome, Italy’s economy expanded dramatically. Italian Gross National Product (GNP) grew at an average yearly rate of between 5.6 and 5.8 percent between the years 1952 and 1970, faster in some years than the economies of West Germany and France. Though such growth was called an economic miracle, IRI’s growth was even more miraculous: while Italian GNP rose 130 percent between 1948 and 1962, IRI output rose by nearly 350 percent, according to M. V. Posner and S. J. Woolf, authors of Italian Public Enterprise. By 1962, IRI alone accounted for nearly four percent of Italian GNP. For a time, many of the economies of Europe looked to the “IRI formula” as a model for effective cooperation between private and state-owned business.

IRI’s successes during the postwar years were notable. Among the most important achievements was the creation of modern integrated steel production facilities, which served both political and social functions in Italy. Between the years 1937 and 1953, IRI developed the steel industry from one which could not compete in European, let alone world, markets to one that allowed Italy admittance into the European Coal and Steel Community, and later the European Common Market, thus making Italy a full member in the newly revitalized Europe. Moreover, IRI’s commitment to developing the steel industry in the southern, or Mezzogiorno, region of the country solved the long-standing social tension between prosperous, industrialized northern Italy and backward, agricultural southern Italy. IRI’s proponents claimed that the company healed the nation.

IRI continued to engage in activities that would benefit the nation throughout the 1950s. In 1956, it proposed the construction of the Milan-Rome-Naples motorway, raised the necessary funds in the financial markets, and supervised construction over some of the most difficult terrain in Italy. In 1959, IRI rationalized the diverse Italian shipbuilding industry into a separate holding company, FINCANTIERI, thus assuming the burden of a struggling but important industry. The Italian government further invested its national identity in IRI when, in 1952, it transferred an absolute majority of shares in RAI, the national broadcasting company, to IRI. Moreover, the company took control of ALITALIA, the national airline, in 1957.

During the years of its intense growth, IRI behaved unlike any corporation seen before. Because it served the interests of the state, it did not have to concern itself with profits. Thus IRI could sink millions of lire into enterprises, like steel and roadbuilding, that profit-driven companies shied away from. The effect of such government investment was to create markets in which other companies could then compete, thereby expanding the economy as a whole. Instead of using tax-breaks and incentives, as did the U.S. government, Italy employed IRI. Not only did IRI create economic markets, it did so in areas that were thought to be most beneficial to the country as a whole or in areas that were of strategic importance.

IRI also avoided the pitfalls of most state-run businesses. The problem with most state-run businesses, especially in communist countries, was that there were few incentives to be productive or efficient. Thus, state-run companies often became notorious for mismanagement, creating unnecessary jobs and spending public money unwisely. IRI avoided these pitfalls by creating some distance between itself and its subsidiary holding companies. IRI’s subsidiaries were encouraged to behave as if they were private enterprises; they were told to be entrepreneurs, while the small core of IRI management acted as investors, backed by the financial might of the Italian government. While IRI was 100 percent government owned, the subholdings were not, and thus these subholdings could attract private investment as well.

When IRI was working well, it combined the dynamism of entrepreneurial capitalism with the social guardianship of the most benevolent socialism. The success that IRI had in the 1950s and 1960s soon made it the model for governmental involvement with industry around the world. In the 1960s, Great Britain, France, Australia, Canada, Sweden, and West Germany all initiated programs that were based at least in part on the IRI formula of mixed state/private investment.

When IRI reached its zenith in the late 1960s, its reach extended to nearly every area of the Italian economy. As long as that economy expanded, so did IRI. But when the bottom dropped out of the world economy in the early 1970s, the IRI formula for success quickly turned out to be a recipe for failure. Though IRI’s decline in the 1970s was initiated by the recession, it was compounded by internal weaknesses in the organization that had been hidden by economic prosperity. When times were good, IRI provided the impetus for growing companies to expand. But by the mid 1970s, noted Euromoney, “IRI had become the dumping ground for all the flagging companies which private industrialists no longer had the resources or the inclination to support.” As IRI became increasingly burdened with unprofitable companies, private investment declined and the public sector’s share of ownership crept from 51 percent to between 80 and 100 percent. “The state companies were saddled with large quantities of expensive bank debt,” wrote Euro-money,” and were used as political vehicles for providing jobs and winning votes.”

According to company literature, during the 1970s “IRI was compelled to undertake more difficult and varied tasks: promoting the economy in the South, investing against recession, maintaining employment, and supervision of areas of vital importance to the nation’s economy, often with no sound economic criteria underlying these efforts.” As it tried to hold the Italian economy together, IRI mushroomed in size until, in 1982, it consisted of 1,000 companies with more than 500,000 employees, three percent of Italy’s total employment. According to Business Week,” losses topped $2 billion a year. IRI had $24.3 billion in debt in 1982, and its borrowing for the year was equal to 12 percent of all debt taken on by Italian households and companies.” IRI had become, said one executive, a “garbage pail” for unprofitable companies, and it was losing over $5 million a day.

In November 1982, the Italian government appointed a new chairperson to run the ailing industrial giant. Romano Prodi, a professor of industrial organization at Bologna University, took charge of IRI, determined to shake things up. Within four years, Prodi had returned IRI to profitability by exploiting a changing political climate and a reviving Italian and world economy. In a world economic climate in which capitalism was the clear victor over socialism, Prodi attempted to renegotiate the ties between the state and the economy. Prodi’s methods—privatization and professionalization—created profits while changing the role of IRI. Under Prodi, the world’s largest state-run business would operate only in areas of strategic importance to the state.

Change within IRI could not have occurred had politicians not realized that their great experiment was no longer working. Swollen with ten years worth of failed businesses and staffed by employees whose jobs had been created by politicians seeking votes, IRI had become a great drain on the Italian economy. “Things were so bad that the politicians finally realized that without drastic change they were risking their own jobs,” a senior manager at IRI’s aerospace unit was quoted in Business Week. Throughout Europe the consensus was building that the solution to the problem was privatization. Although Italy was not ready to follow the lead of Prime Minister Margaret Thatcher of Great Britain, who urged privatization on a grand scale, it too recognized that if it wanted to compete with the United States, Japan, and West Germany, it would have to allow profits—and not social planning—to determine the direction of the economy.

Among Prodi’s first actions was replacing the politicians with professional managers. To this end, Prodi replaced 70 percent of the top managers at IRI headquarters and half of the senior staff within the subholding companies, and introduced a merit-based pay system, according to Business Week. He also won concessions from Italy’s radical labor unions that allowed him to abolish 60,000 jobs in the first four years of his tenure. Such tactics were successful in turning around Italtel, a telecommuni cations company controlled by IRI’s STET division. Italtel reduced employment by 30 percent, completely revamped its product line, and, in just four years, tripled its sales. Euromoney lauded the Italtel case as an example of the benefits of business rationalization.

Equally important in Prodi’s scheme was the privatization of non-strategic businesses. “The state ought not to make ice cream,” Prodi once said, and he explained to Euromoney that “an optimal allocation of resources should require state intervention in very few industries. In any case where the private entrepreneur is able to do it, we should study the opportunity for privatization.” Prodi did more than study the opportunity; by 1988, he had privatized 29 different companies, including the car maker Alfa Romeo and the commercial bank Mediobanca. During the first three years of Prodi’s tenure, sales of shares in IRI companies raised $1 billion from the market. By 1986, IRI was breaking even, and, in 1987, the company turned its first profit in over a decade, earning $150 million on sales of $43 billion.

As the 1980s came to an end, slowing economic growth and political pressures combined to slow the pace of change at IRI. In a booming economy, many investors chose to place their money in the stock market, purchasing the stock of IRI companies. As the economy slowed, small investors left the stock market and only a handful of powerful industrialists continued to purchase stock. The politicians who oversaw IRI feared allowing too much control to fall into the hands of these few, and slowed privatization. Moreover, the small Milan Stock Exchange was becoming flooded with IRI stock, which at times accounted for as much as 25 percent of the activity on the exchange. Such dominance of the stock market ran counter to IRI’s strategy of decreasing its role within the Italian economy.

Politics also played a part in slowing IRI’s growth rate. According to the Economist, privatization was “fiercely resisted by politicians who have built up power bases on their ability to channel the flow of public money.” This was especially true in a slowing economy, in which politicians sought to preserve for their constituents all available jobs. Another political factor was favoritism; when Prodi arranged for the sale of SME, IRI’s food group, to the Buitoni food group, owned by Carlo De Benedetti, the sale was blocked by prime minister Betuno Craxi, De Benedetti’s political enemy. Similarly, an attempt to merge Italtel with Telettra, a company controlled by Fiat, to form a internationally-competitive telecommunications manufacturer failed when the Socialist Party insisted that a member of their party serve as managing director. Though IRI’s managers sought to run the company for profit, the company’s real managers, the politicians, made sure that the company still functioned as a tool to dispense the power of the state.

By 1989, Prodi left IRI. “It was known that various parties and politicians, whose interests required maintaining the status quo, had exerted great pressure to make him leave,” wrote Europe contributor Niccoló d’ Aquino. Within a year, IRI was back in debt, and, in 1992, the company reported losses of $2.9 billion. Compounding its difficulties was the arrest of new chairperson Franco Nobili on corruption charges. In 1993, Business Week contributor John Rossant wrote, “At a time when Italy’s postwar political and financial institutions are under fire as never before, IRI’s problems are adding to the deep sense of crisis that is pervading the country.”

The crisis in Italy and at IRI was compounded in the early 1990s by pressure from the European Community (EC), whose blueprints for monetary union required drastic changes in the Italian economy. Admittance to the EC, deemed crucial to Italy’s economic survival in the next century, required that public debt be no larger than 60 percent of annual gross domestic product and fiscal debt no larger than three percent of GDP. In 1992, those figures stood at 103 percent and ten percent, respectively, according to the Wall Street Journal In 1991, seeking to meet these requirements, the state ended subsidies for IRI, forcing the company to seek private investment after years of dependence on the government. However, private investors were wary of IRI’s unprofitable companies, and the company went even further into debt. Losses at ILVA, IRI’s steel-making subsidiary, topped $1.8 billion in 1992, while losses at Iritecna, IRI’s construction arm, topped $1.6 billion.

In 1993, new Italian prime minister Carlo Azeglio Ciampi turned again to Romano Prodi to rescue IRI. The reluctant Prodi accepted, insisting that this time privatization must occur even faster than it had occurred under his previous tenure. Prodi’s motto would be “Either we privatize or we die,” according to d’ Aquino. “You can’ t have a conglomerate just because it’s owned by the government,” Prodi told the Wall Street Journal Europe, noting that’ ’ this is not a time for conglomerates—this glue must fade away. And IRI must fade away with it.” Prodi was given some assistance in 1992 by former prime minister Guiliano Amato, who had transformed Italy’s public holding companies, including IRI, into joint stock companies under the control of the Treasury, which, according to Business Week, was “considered the cleanest and most technically competent branch of the government.” The article suggested that “For the first time in a century,... IRI will be subject to corporate legal rules making them more accountable to shareholders and the public.”

Though Prodi insisted that all of IRI was for sale, his first task was to sell off the banks Banca Commerciale Italiana (BCI) and Credito Italiano. IRI’s offering of shares in Credito Italiano in the fall of 1993 was a great success, as was the sale of shares in BCI in the spring of 1994. Plans to sell food group SME also progressed in 1993, as international food companies Nestle S.A. and Unilever and Italian companies Parmalat and Cragnotti expressed interest in portions of SME. Prodi also initiated plans to sell off ILVA and SIP, the telephone services sector. “When you have so many companies, the important thing is not to have a rigid order in selling them,’ ’ Prodi told the Wall Street Journal Europe. Prodi noted that “The point is not to sell one or the other first, but to adapt to market needs.”

In the 1990s, IRI faced the difficult task of adapting to market needs even as it dismantled itself. Investors were most interested in the IRI holdings that were profitable, such as SME, STET, and Finmeccanica, its engineering group. However, IRI needed the revenues produced by these companies so that it could restructure the unprofitable holdings, mainly ILVA and Iritecna, which IRI hoped to sell. This was Prodi’s paradox: in order to dismantle one of the world’s largest companies, he must first bring it back to profitability, piece by piece. Prodi insisted that his job was made easier the second time by the support—or at least the lack of interference—of the Italian government. “Resistance is 1/10 of what it was before,” he told the Wall Street Journal Europe, commenting that “we’ ve completely canceled political appointees from the board. I don’ t get calls any more, no one stops by.”

When the conservative government of prime minister Silvio Berlusconi took over in 1994, Prodi again announced that he would leave IRI. But the new government quickly dispelled any rumors that IRI would go back to its old ways by assuring investors that whoever they appointed would be expected to continue the job that Prodi started. What remained a matter of speculation was the form, if any, that IRI would take by the year 2000. Between 1993 and 1994, IRI shrank from the seventh largest company in the world, with $67,547 million in sales and 400,000 employees, to the sixteenth largest company, with $50,488 million in sales and 366,471 employees, according to Fortune. If this trend continued, the ’ ’ remnants of IRI should become seven or eight strong public companies, the perfect counterweight in a corporate scene which is still dominated by family-owned companies,” according to the Economist. For most of the twentieth century, the fate of IRI was the fate of the Italian economy; in the mid-1990s, with IRI’s role in the economy greatly reduced, some analysts suggested that Italians might finally find out what it means to compete in the world market.