Infrastructure and financial sector key challenges for regional governments

Optimism is returning to the private sector in the countries worst hit by global recession but the public sectors in many countries are now facing their own challenges as governments battle to control increased public spending and manage public sector debt, according to the PwC 14th Annual Global CEO Survey.

Public sector managers are facing many of the same challenges with which private sector CEOs have been wrestling through recession: such as the need to retain and motivate core talent, and to innovate operations so they deliver more for less.

The report sets out the views of CEOs, including a shared agenda with governments on issues such as health, wellbeing, education and climate change. It also highlights PwC’s views on how public sector organisations could do things differently to meet the needs of business and citizens.

The key risk facing business – uncertain, volatile economic growth – is now integrally linked with the challenge to governments, mainly in the West, of stabilising their economies by dealing with fiscal deficits and scaling back government debt whilst avoiding punitive tax increases.

Jan Sturesson, PwC’s Global Leader, Government & Public Services, said: “Clearly, the issue of uncertain growth and fiscal deficits does not apply equally to all countries, particularly in strongly growing economies such as China, India, Brazil and the Middle East. But we were surprised by the degree of consensus internationally on the threat to business arising from the impact of fiscal deficits.”

Nearly two thirds (61 per cent) of CEOs surveyed were concerned about fiscal deficits – including CEOs in countries where governments are not undertaking major austerity measures in their domestic economies (the exception being the Middle East). But there is evidence that business will actively support new government policies that will promote growth that is economically, socially and environmentally sustainable – 72 per cent agreed with this approach.
The challenges identified by CEOs in the Middle East include (in order of priority): improving national infrastructure, ensuring financial sector stability and access to finance, and creating a skilled workforce.
 
David Stevens, PwC’s Middle East Government Leader, said: “These three priority areas for governments are fundamental to the creation of employment and new business opportunities that the increasing number of young people in the Middle East will require for the future.”

So what actions must governments take in order to respond to the challenges?
·  Deal with deficits: cost-cutting and risk management are necessary, but not sufficient. There is a need to maintain investment in innovation and talent management, and to deliver public services at lower cost through joint ventures, alliances and public-private partnerships.
·  Future proof: governments not under immediate budget pressures should still take a fresh look at future-proofing activities to minimise the risks of facing problems in the years ahead.
· Promote good growth: governments should focus on sustainability in its widest sense, not short-term fixes.

David Stevens added: “In our view, governments must rethink the role of the state in the 21st century, develop policies to achieve ‘good growth’, tackle their finances, and innovatively consider doing fewer things and doing them very differently. Even those governments in the region that are not under such extreme budgetary pressures will benefit from taking a fresh look at ‘future-proofing’ their activities so they reduce the risk of being confronted with these types of problems in the future.”A key message is the backing given by business for collaboration; 54 per cent of CEOs surveyed believe that government and business partnership will be more effective at mitigating global risks from climate change to financial crisis. The need for collaboration is exemplified by the issue of infrastructure development, which is a top priority in the Middle East.

Neil Broadhead, Middle East Capital Projects and Infrastructure Leader, PwC commented further: “Given the dramatic need for investments in infrastructure, occurring at a time when many governments are scrutinising their budgets, the role of private capital in financing and developing infrastructure seems more critical than ever. Vast segments of existing infrastructure in the developed world are becoming deficient and the demand for new infrastructure in developing economies is growing. The scale of this infrastructure funding requirement means it’s unlikely to be met solely through public finance - there is a need for governments to collaborate with the private sector and reinvigorate capital markets as a source of funding.”But it’s a different story when it comes to turning words into action on major issues such as the international harmonisation of tax and regulation; only 40 per cent expect new regulations to be harmonised through cooperation amongst governments, or that tax policies and rates will increasingly converge among nations.  International competition to attract business investment and talent remains a fundamental aspect of CEOs’ future outlooks.

“Collaboration needs persistent engagement – perspiration as much as inspiration,” added Jan Sturesson. “A long-term view, investment in relationships and effective governance arrangements all need to be in place to realise desired outcomes.”

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