The need for good rules to ensure quality in a country

The need for good rules to ensure quality in a country

Interview with Roger Abravanel, expert in the energy business, rules and meritocracy

You have written two important books – Meritocracy and Rules – two concepts that are closely linked to the world of energy. How would you interpret the energy sector from this point of view?

My approach to rules and meritocracy derives precisely from the energy sector. In Italy, basically, there’s no meritocracy and no rules. This leads to a lack of excellence in the country, because its various sectors are not led by excellent people, those who should get to the top of an industry or a country by merit and by respecting the rules. If you work in a context where rules aren’t respected, there can be no meritocracy and the result is a lack of quality that is reflected in the country’s performance.

My book Rules was born out of an analysis of the energy sector. The world has changed: constantly evolving services and technologies tend to give rules a fundamental role. You can’t have an evolution in services without regulation and above all without regulation you can’t have quality. Today’s world is heading in the direction of ever greater regulation.

But what is the link between rules and externalities? We conducted an analysis of three important sectors in Italy: health, energy & environment, and banking. Regulation has failed in these three markets and as a result externalities of two different types have arisen: local externalities, which do relatively little harm, and global externalities with evident impacts. If rules aren’t respected, the impact of externalities increases. In my book, I identified a “cycle of rules”, a process according to which you define a rule, apply it and then correct it. In Italy, sadly, you can’t apply that process because at the outset you don’t have respect for rules and the energy sector is no different.

In 1999, I was called by Franco Tatò, at the time chairman of Enel, to help the company through the process of liberalisation that the government had imposed. We worked for two years with a high-level team of experts to get to the liberalisation of the sector through an agreed process. Alongside the privatization process, the electricity exchange, tariff system and regulator were created. It was a huge job, all based on a definition of the rules of the system, such that the Financial Times, citing Goldman Sachs, wrote that “the Italian State scored +10% because the regulatory system is fair.”

Unfortunately, systems of rules aren’t respected in Italy. But we can’t turn a blind eye to this state of affairs. On the contrary, the world will be ever more regulated.

Enel recently decided to convert 23 thermoelectric power stations that the group owns in Italy. What do you think of this strategy?

It’s a purely economic strategy, not based on green choices. The cost of coal-fired power stations is no longer competitive. This kind of plant doesn’t stand up economically because coal is not economical on the market.

In Italy, we’ve started drilling for oil in the Adriatic Sea and at the same time, for the first time in our history, incentives on renewables have been cut retroactively. Why has green energy been so strongly attacked by the current government?

I believe that in these situations it’s always a case of lobbies operating. In this case, the anti-renewables lobby had an easy ride. Prime Minister Matteo Renzi, not having particular knowledge of the energy sector, was not sufficiently supported and during the elections made a commitment with his electorate: to reduce the cost of electricity bills for small and medium-sized enterprises. An absolutely incorrect commitment to take because it’s not by cutting electricity bills that you make a business competitive.

It’s not by reducing energy costs that you make Italy a more competitive country on international markets. Renzi, once he was elected, had to respect this commitment made during the election campaign.

To make a U-turn was therefore not possible with the consequences that we have all seen for the renewables sector; even though, in reality, potential alternative solutions were thought of, on top of the fact that energy costs were dropping anyway because of the fall in oil prices. In this situation, the real problem is linked to the quality of the regulator in the energy sector. On one hand we can say that the Authority has practically disappeared and on the other that the quality of regulators inside the Ministry of Economic Development were shown not to be up to the job. The quality of regulators is fundamental for the development of a country and its competitiveness.

Coal-fired power stations are being closed around the world and utilities are closing plants. It seems that technology and innovation are winning, despite the attacks, externalities and ineffective regulation. What does the future look like for new technologies?

In order to have innovation and develop new technologies you have to be able to subsidise them. This allows you to start up new processes, but the underlying issue is to understand up to what point a new technology needs to be subsidised. What kinds of innovation have to be helped and sustained? Up to what point?

In this context, the regulator finds itself in a situation of managing a very delicate equilibrium between those who invest, consumers and externalities. In developing countries, for example, regulatory systems are less well structured and for this reason is it easier for situations to arise in which the development of new technologies gets supported, like with solar power in India or the Arab Emirates, or even with telephony in Africa. The regulatory strategy is therefore critical, it’s the basis for business. Good regulation lets you create businesses and lay the grounds for development. Companies, if they really want to bet on the development of their market, should put their best professional talents into divisions that deal with the world of regulation, a bit like Tatò at Enel at the time of the liberalisation of the energy market. Today, unfortunately, this doesn’t happy and for this reason we find ourselves in a situation of generalised crisis.

 

abravanelRoger Abravanel

Born in Tripoli, Libya, in 1946, Roger Abravanel emigrated to Italy in 1963.

He graduated in chemical engineering from Milan Polytechnic University in 1968, winning a prize as the “youngest engineer in Italy”. Afterwards he earned an MBA from INSEAD business school. Abravanel worked for the consultants McKinsey & Company, becoming director in 1984, until 2006.

He currently works in the private equity sector as an advisor to the Wanaka venture capital fund in Israel. He is a member of the board of directors at Luxottica Group, Banca Nazionale del Lavoro, Teva Pharmaceutical Industries and the Istituto Italiano di Tecnologia. He is chairman of the Insead Italy Council and in 2010 was selected among its “50 Alumni who changed the world”.

In 2008, Abravanel published his best-selling Meritocrazia: Quattro proposte concrete per valorizzare il talento e rendere il nostro paese più ricco e più giusto (Meritocracy: Four Concrete Proposals to Give Greater Value to Talent and Bring More Wealth and Justice to our Society). In 2010 he published his second essay Regole (Rules), with five proposals to improve Italy’s competitive capacities. He has also been a columnist for Corriere della Sera since 2008.

 

 


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