Pfm responses to_an_economically_challenging_world_2011_icgfm_survey


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Pfm responses to_an_economically_challenging_world_2011_icgfm_survey

  1. 1. Public Financial ManagementResponses to an EconomicallyChallenging WorldResults of a Worldwide Survey January 2011 ICGFM The International Consortium on Governmental Financial Management
  2. 2. About the survey ContentsIn 2004, the International Consortium on Governmental Financial Management(ICGFM) asked Grant Thornton LLP (Grant Thornton) to conduct its first 1 Introductioninternational survey of government financial executives, titled “ResistingCorruption in the Public Sector.” In 2009, Grant Thornton conducted a second 2 Impact of the global financialsurvey on behalf of ICGFM, focused on public financial management reform. crisisThe second survey provided insight into the experience of national governmentsengaged in improving the management of public resources, as well as in making 5 Investment in infrastructuretheir finances more transparent and their financial information more useful formanaging public sector operations. 8 Increasing transparencyThis third survey, conducted in 2010 by Grant Thornton on behalf of ICGFM, 10 Conclusionsfocuses on responses to the global financial crisis, infrastructure investment,public private partnerships and transparency.Survey methodologyGrant Thornton partners and staff conducted in-person interviews with publicfinancial managers and executives, using an open and closed-ended surveyinstrument. We also designed and carried out a multilingual online survey of thesame target audience, which member firms of Grant Thornton International Ltdpromoted in their respective countries.Of the in-person and online survey respondents, approximately 80 percentwere employed by a government, 16 percent by donor organizations and othernongovernmental organizations. The remaining 28 percent were from academiaand private companies engaged in government service work. Participantsrepresented 54 countries across Africa, East Asia and Pacific, Europe andCentral Asia, Latin America and the Caribbean, the Middle East, South Asia, andNorth America.AnonymityOur survey does not attribute thoughts and quotations to any respondents, nor dowe name them, their institutions or their specific countries. These measures wereessential to gain the confidence and full cooperation of the government officialswho participated in the survey.
  3. 3. IntroductionIn the second half of 2008, the world saw the beginnings of the This survey examines both the impact and the responsesmost significant economic disruption in over 50 years. After to the economic upheavals of the last two years from a publicinitial problems in the global credit markets, the economies of financial management perspective. It seeks to provide insightmost nations were negatively affected with recession becoming into the choices made by government financial leaders and thethe norm in most countries in the world. tools employed to respond to the public financial management The resulting challenges to public financial managers challenges that have arisen.resulting from cascading economic impacts have been enormous.Faced with unpredictable economic flows and a demand forgovernment response, governments had to assess the economicimpact on their countries, evaluate policy options, and chart acourse to counter immediate negative impacts while laying afoundation for future growth. Public Financial Management Responses to an Economically Challenging World 1
  4. 4. Impact of the global financial crisisNearly half of all respondents said their country had been Chart 1: Has the global financial crisis had an impact on your country?impacted by the global financial crisis (Chart 1). Of those, 77percent (or a third of all respondents) saw a negative impact. Yes 48% We asked interviewees to rate the impact of the financial No 33%crisis on various economic indicators using a scale of one to five, Do not know/does not apply 19%with one being very negative and five being very positive. Surveyrespondents reported the highest negative impact to be on GrossDomestic Product (GDP) and currency value (Chart 2). “The main effect is the reduction of internal and externalresources; thus, planned projects were delayed,” said one interviewee. Below are a few comments from interviewees who saw anegative effect:• “My country depends on foreign aid, which was reduced. The size of projects had to be reduced accordingly.”• “There has been a reduction in taxes collected from expatriates working in different countries, a reduction in Chart 2: What has been the effect of the financial crisis on direct foreign investment, a loss of foreign investors and fewer economic activities? locally-produced products in the international market.” Positive Neutral Negative• “The crisis has had a negative impact on revenue collection and billing authority. We’ve also seen increased borrowing 100% domestically and higher interest rates.” 80%• “Our economic growth has fallen—from 11.5 percent annual growth in GDP in 2007 to only 5.1 percent in 2010.” 60%• “Our country was on a path of financial consolidation, but those plans all had to be put on hold.” 40% 20% For some, the effect of the financial crisis was mixed: “Initial 0reaction was negative, but we were able to turn it into an Gross Domestic Currency Export Ability to Public sectoropportunity for growth.” Product value revenue issue debt expenditures A few saw a positive impact, and one such intervieweesaid, “The global financial crisis has forced and acceleratedpublic financial management reform to reduce the cost of thePublic Administration.” “We’ve put forth new public financial managementregulations and solutions,” echoed another.2 Public Financial Management Responses to an Economically Challenging World
  5. 5. Stimulus programs Chart 4: Rate the success of your countrys stimulus program.As countries around the world have reacted to the crisis, 60percent of participants said their country has initiated a stimulus Very successful 10%program (Chart 3). Of those, 55 percent said the programs Successful 45%were either “successful” or “very successful” (Chart 4). Most No effect 27%programs will begin to wind down before 2012, according to Not successful 18%respondents, and an increase in Gross Domestic Product will bethe key driver for deciding when programs have run their course,followed by lower unemployment and improved debt capacity(Chart 5).Chart 3: Has your country initiated a stimulus program? Chart 5: What are the key indicators that will activate the need to unwind or end your countrys stimulus program? Yes 60% No 25% 30% Do not know/does not apply 15% 25% 20% 15% 10% 5% 0 GDP Lower Improved debt Inflation Interest Political growth unemployment capacity rates climate Public Financial Management Responses to an Economically Challenging World 3
  6. 6. Types of stimulus programs Improving governance and accountability will produceRespondents described a host of programs and initiatives long-term results in addition to improving economic conditionsimplemented in response to the financial crisis, which fit into the in the short term, according to respondents. “We implementedfollowing categories: tax and rate cuts; social welfare programs large-scale institutional reforms, putting in place a financial(e.g., unemployment benefits and aid to families); budget cuts; controller and electronic monitoring of public expenditures. Wetargeted spending on agriculture and infrastructure investments; now publish regularly the amount of taxes collected and haveand government restructuring efforts. Below, interviewees transparency in our budget execution,” said one respondentdescribe stimulus measures: whose country focused on government restructuring efforts. Another such respondent said, “We have embarked on a• “We cut taxes for the poor, extended Public Works public sector financial management reform programme with the programmes and controlled inflation together with interest help of the World Bank.” rates. This had a limited sustainable impact though, and more 25 percent of countries were not able to implement a stimulus is required.” program. As an interviewee from one such country said, “[a• “Funds were earmarked for priority sectors such as stimulus program] could not be possible since much of the infrastructure, education and health.” development programmes are donor-funded, and in the economic• “We implemented a program to support the agricultural downturn, such donations also went down, consequently leading sector by financing seeds and insecticides.” to a slowdown in development projects.”• “Focus on agriculture and improving the supporting infrastructure to allow farms to grow more for export.”• “We increased public expenditures to create employment.” Some countries made use of a combination of initiatives.“Faced with the global financial crisis and the lowest consumerand business confidence levels since 1993, my country enactedmeasures to support families, employment and business, andto restructure the government,” said one interviewee whosegovernment made a significant investment to bolster its economy.4 Public Financial Management Responses to an Economically Challenging World
  7. 7. Investment in infrastructureInfrastructure investments serve as one of the primary vehicles Attracting outside investmentfor stimulating an economy, and nearly all respondents According to survey respondents, outside investment is anreported that their country will need substantial investment in important source of revenue for infrastructure projects, andinfrastructure to support economic expansion. The top three more than half of our respondents said their country is focusedareas of need are education, transportation and healthcare on securing such investment. The most often-cited goals of(Chart 6). outside investment are improving the necessary infrastructure, improving their country’s legal system, increasing government transparency, and providing tax incentives and currency reforms (Chart 7). Even among the few respondents who said their country was not making a significant push to attract foreign investment, creating the right environment to facilitate that type of investment was still an area of focus. As one respondent said, “We have not pursued an active policy to attract outside investments; no special treatment has been provided. However, our government’s position is to avoid creating structural obstacles for foreign investors.”Chart 6: Which areas of infrastructure present the most critical need Chart 7: What are your countrys primary areas of focus to increasefor investment? outside investment?20% 40%15% 30%10% 20%5% 10% 0 0 y er t tion tion are les g ing t en nse ons Improve necessary Improve Greater Tax Currency ca rta lt hc wa b n olo ou s Wa tm fe ris Ed u o a e ch H tre a De P infrastructure legal system transparency incentives reforms n sp He en Te a /R te Tr rg y ion Wa s e at En orm Inf Public Financial Management Responses to an Economically Challenging World 5
  8. 8. Public private partnerships Chart 8: Has your country used public private partnershipsWhile attracting outside investment is an area of focus, a few (PPPs) to find sustainable funding for infrastructure investments?interviewees said it is difficult to obtain. More than 60 percent Yes 61%have turned to public private partnerships (PPPs) to secure No 29%funding for infrastructure investments (Chart 8). Do not know/does not apply 10%The results of PPPs have been mixed. Less than half ofrespondents whose countries had used PPPs reported that theywere either “successful” or “very successful.” Nearly 40 percentsaid they were “not very successful” (Chart 9). “Public private partnerships offer affordable, practicalsolutions to the needs of governments and businesses,” said arespondent who is generally supportive of the concept. Below isa sampling of quotes from others who share that sentiment.• “We implemented a project to improve transportation infrastructure that would not otherwise have been feasible.”• “Large projects were able to be speeded-up for development Chart 9: Please rate the success of your countrys PPPs. and implementation, and the private sector’s know-how was utilized.”• “PPPs for housing for low-income individuals have been Successful 46% very successful and have helped the private banking sector No effect 16% Not very successful 38% and construction companies.” Some interviewees are taking a “wait and see” attitudetoward these types of investments: “Most PPPs are quite newand have had limited success up to this point. The benefits willbe more tangible in future.” Said another, “this is still a very new phenomenon, whichis still being debated. There is no legal framework to supportit as yet. With the inability of the public sector to fund all thenecessary infrastructure, it is an idea that many see as the way togo. We just need the legal framework to support it.”6 Public Financial Management Responses to an Economically Challenging World
  9. 9. Creating the right legal framework and other governance Chart 10: Why has your country not used PPPs?issues were the most cited reason for not using PPPs,specifically “a lack of policy and guidance.” The second 40%most pressing challenge is the unavailability of resources tocoordinate projects “on the ground.” Political circumstances 30%also play a role (Chart 10). For developing countries, PPPs pose unique challenges: 20%“In view of recent events, our government tried to interest theprivate sector in a PPP-type investment, but this first try has 10%not met with great success because of mistrust between thetwo parties—and the fact that rampant corruption exists in the 0 Lack of Lack of PPP unit Political Lack of interestpublic sector.” policy and to coordinate circumstances from investors A few interviewees said that the private sector is where the guidance efforts on the ground or operatorsrelationship that serves as the foundation of a public privatepartnership breaks down. “The government will is real, but theprivate investors and operators don’t follow.”“In view of recent events, our government tried to interest the private sector in a PPP-typeinvestment, but this first try has not met with great success because of mistrust betweenthe two parties—and the fact that rampant corruption exists in the public sector.” Public Financial Management Responses to an Economically Challenging World 7
  10. 10. Increasing transparencyThree-quarters of interviewees said their country had either Chart 12: Has your country adopted new international standardsmade or renewed a strong commitment to improve financial to improve public financial management governance and transparency?management transparency for citizens (Chart 11). 80 percent Yes 80%have adopted new international standards to improve public No 10%financial management governance and transparency (Chart Do not know/does not apply 10%12). The most commonly-adopted standards are InternationalAuditing Standards, International Public Sector AccountingStandards and Government Financial Standards (GFS) compliantchart of accounts (Chart 13).Chart 11: Has your country made or renewed a strong commitment Chart 13: Which new international standards has your country adopted?to improve public financial management transparency for your citizens? 50% Yes 76% No 19% 40% Do not know/does not apply 5% 30% 20% 10% 0 International International Government Financial Auditing Public Sector Standards/Compliant Standards Accounting Standards Chart of Accounts8 Public Financial Management Responses to an Economically Challenging World
  11. 11. XBRL and financial managementThe use of eXtensible Business Reporting Language (XBRL) isseen as the next important step to creating true transparency andto enabling access to public sector financial reporting. Yet only10 percent of interviewees said their country has adopted XBRL.Furthermore, only 23 percent reported plans to adopt XBRL inthe future (Charts 14a and 14b).Chart 14a: Has your country adopted eXtensible Business Reporting Chart 14b: Are there plans to adopt XBRL in the future?Language (XBRL) to enhance transparency and public access to data? Yes 10% Yes 23% No 62% No 15% Do not know/does not apply 28% Do not know/does not apply 62% Public Financial Management Responses to an Economically Challenging World 9
  12. 12. ConclusionsTurmoil in the financial markets that began in 2008 affected When adopting a spending program, public financialeconomies around the world, including more than half the managers must determine the focus of additional spending. Ancountries included in this survey. For a majority of these increase in spending on infrastructure was given as the numbercountries, the impact was negative. Respondents pointed to one area of focus for increased investment. When asked whatadverse effects on economic growth, currency values and export type of infrastructure was most critical, respondents rankedrevenue, among others. Education, Transportation and Healthcare as the top three To respond to these negative consequences, public financial priorities.managers followed similar policy paths adopting economic Along with the adoption of extraordinary policies to combatstimulus programs. Over 60 percent of respondents indicated the impact of the global financial crisis was also a commitmentthat stimulus programs had been adopted, and over half of to increased transparency in public financial management,those pursuing stimulus programs believed them to have been as indicated by more than three-fourths of all respondents.successful. One method used to introduce greater accountability and By their nature, stimulus programs cannot go on indefinitely. visibility into public financial management was the adoptionHaving opted to stimulate the economy through public of international public sector financial standards, includingexpenditure, public financial managers must consider which International Auditing Standards and International Public Sectoreconomic triggers should serve as a benchmark measurement Accounting Standards. The full impact of the global financialfor phasing out economic recovery programs. Most respondents crisis is not yet over, and headlines continue to be dominatedindicated that improvements in economic growth should by the resulting economic fallout. Ongoing impacts includebe the primary trigger, followed by improvement in general localized debt crises, deficit sustainability and continued highemployment. The third most often cited reason to phase out unemployment.stimulus spending was a country’s limit to debt capacity. For Public financial managers face some of the most challengingsome countries, the ability to use public expenditures to boost times in decades in meeting their responsibilities, but they haveeconomic activity is constrained by an inability to borrow at will faced them not only with a variety of policy measures but withto increase expenditures. an unprecedented commitment to transparency.10 Public Financial Management Responses to an Economically Challenging World
  13. 13. Public financial managers face some of the most challenging times in decades inmeeting their responsibilities, but they have faced them not only with a variety ofpolicy measures but with an unprecedented commitment to transparency. Public Financial Management Responses to an Economically Challenging World 11
  14. 14. Acknowledgments ICGFM The International Consortium on Governmental Financial ManagementThe International Consortium on Governmental Financial Management Grant Thornton LLP Global Public Sector(ICGFM) brings together diverse governmental entities, organizations and The people in the independent firms of Grant Thornton International Ltd provideindividuals who are financial management practitioners such as accountants, personalized attention and the highest-quality service to public and private clientsauditors, comptrollers, information technology specialists, treasurers and others in more than 100 countries. Grant Thornton LLP is the U.S. member firm ofworking in all levels of government. Our mission emphasizes activities to promote Grant Thornton International Ltd, one of the six global audit, tax and advisoryprofessional development and the exchange of information. Our programs organizations. Grant Thornton International Ltd and its member firms are notprovide activities and products to advance governmental financial management a worldwide partnership, as each member firm is a separate and distinct legalprinciples and standards and promote their implementation and application. entity. Visit, ICGFM sponsors meetings and conferences that bring together Grant Thornton LLP Global Public Sector, based in Alexandria, Va., is a globalgovernment financial managers from around the world to share information and management consulting business with the mission of providing responsiveexperiences in governmental financial management to educate members and and innovative financial, performance management and systems solutions toothers about innovations, best practices and emerging issues. We also foster governments and international organizations.research concerning governmental financial management and disseminateinformation and results to our members and the public. 333 John Carlyle Street Alexandria, VA 22314Working globally with governments, organizations and individuals, the International T 703.837.4400Consortium on Governmental Financial Management is dedicated to improving F 703.837.4455financial management so that governments may better serve their citizens. E or Jason.Levergood@gt.comFor more information on ICGFM, visit David Nummy2208 Mount Vernon Avenue Jason LevergoodAlexandria, VA 22301-1314 Tabetha MuellerT 703.562.0035 Richard HudsonF 703.519.0039E ICGFM@icgfm.orgJames R. Ebbitt, PresidentPatricia Cornish, Managing Director
  15. 15. Content in this publication is not intended to answerspecific questions or suggest suitability of action ina particular case. For additional information onthe issues discussed, consult a Grant Thorntonclient-service partner.© Grant Thornton LLPAll rights reservedU.S. member firm of Grant Thornton International Ltd