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Results of a Worldwide Survey January 2011
The International Consortium on Governmental Financial Management
About the survey
In 2004, the International Consortium on Governmental Financial Management (ICGFM) asked Grant Thornton LLP (Grant Thornton) to conduct its first international survey of government financial executives, titled “Resisting Corruption in the Public Sector.” In 2009, Grant Thornton conducted a second survey on behalf of ICGFM, focused on public financial management reform. The second survey provided insight into the experience of national governments engaged in improving the management of public resources, as well as in making their finances more transparent and their financial information more useful for managing public sector operations. This third survey, conducted in 2010 by Grant Thornton on behalf of ICGFM, focuses on responses to the global financial crisis, infrastructure investment, public private partnerships and transparency. Survey methodology Grant Thornton partners and staff conducted in-person interviews with public financial managers and executives, using an open and closed-ended survey instrument. We also designed and carried out a multilingual online survey of the same target audience, which member firms of Grant Thornton International Ltd promoted in their respective countries. Of the in-person and online survey respondents, approximately 80 percent were employed by a government, 16 percent by donor organizations and other nongovernmental organizations. The remaining 28 percent were from academia and private companies engaged in government service work. Participants represented 54 countries across Africa, East Asia and Pacific, Europe and Central Asia, Latin America and the Caribbean, the Middle East, South Asia, and North America. Anonymity Our survey does not attribute thoughts and quotations to any respondents, nor do we name them, their institutions or their specific countries. These measures were essential to gain the confidence and full cooperation of the government officials who participated in the survey.
Contents 1 Introduction 2 Impact of the global financial crisis 5 Investment in infrastructure 8 Increasing transparency 10 Conclusions
In the second half of 2008, the world saw the beginnings of the most significant economic disruption in over 50 years. After initial problems in the global credit markets, the economies of most nations were negatively affected with recession becoming the norm in most countries in the world. The resulting challenges to public financial managers resulting from cascading economic impacts have been enormous. Faced with unpredictable economic flows and a demand for government response, governments had to assess the economic impact on their countries, evaluate policy options, and chart a course to counter immediate negative impacts while laying a foundation for future growth.
This survey examines both the impact and the responses to the economic upheavals of the last two years from a public financial management perspective. It seeks to provide insight into the choices made by government financial leaders and the tools employed to respond to the public financial management challenges that have arisen.
Public Financial Management Responses to an Economically Challenging World 1
Impact of the global financial crisis
Nearly half of all respondents said their country had been impacted by the global financial crisis (Chart 1). Of those, 77 percent (or a third of all respondents) saw a negative impact. We asked interviewees to rate the impact of the financial crisis on various economic indicators using a scale of one to five, with one being very negative and five being very positive. Survey respondents reported the highest negative impact to be on Gross Domestic Product (GDP) and currency value (Chart 2). “The main effect is the reduction of internal and external resources; thus, planned projects were delayed,” said one interviewee. Below are a few comments from interviewees who saw a negative 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 direct foreign investment, a loss of foreign investors and fewer locally-produced products in the international market.” • “The crisis has had a negative impact on revenue collection and billing authority. We’ve also seen increased borrowing domestically and higher interest rates.” • “Our economic growth has fallen—from 11.5 percent annual growth in GDP in 2007 to only 5.1 percent in 2010.” • “Our country was on a path of financial consolidation, but those plans all had to be put on hold.” For some, the effect of the financial crisis was mixed: “Initial reaction was negative, but we were able to turn it into an opportunity for growth.” A few saw a positive impact, and one such interviewee said, “The global financial crisis has forced and accelerated public financial management reform to reduce the cost of the Public Administration.” “We’ve put forth new public financial management regulations and solutions,” echoed another.
Chart 1: Has the global financial crisis had an impact on your country?
Yes 48% No 33% Do not know/does not apply 19%
Chart 2: What has been the effect of the financial crisis on economic activities? Positive
100% 80% 60% 40% 20% 0 Gross Domestic Product Currency value Export revenue Ability to issue debt Public sector expenditures
2 Public Financial Management Responses to an Economically Challenging World
As countries around the world have reacted to the crisis, 60 percent of participants said their country has initiated a stimulus program (Chart 3). Of those, 55 percent said the programs were either “successful” or “very successful” (Chart 4). Most programs will begin to wind down before 2012, according to respondents, and an increase in Gross Domestic Product will be the key driver for deciding when programs have run their course, followed by lower unemployment and improved debt capacity (Chart 5).
Chart 4: Rate the success of your country's stimulus program.
Very successful 10% Successful 45% No effect 27% Not successful 18%
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 country's stimulus program?
Yes 60% No 25% Do not know/does not apply 15%
30% 25% 20% 15% 10% 5% 0 GDP growth Lower Improved debt unemployment capacity Inflation Interest rates Political climate
Public Financial Management Responses to an Economically Challenging World 3
Types of stimulus programs
Respondents described a host of programs and initiatives implemented in response to the financial crisis, which fit into the following categories: tax and rate cuts; social welfare programs (e.g., unemployment benefits and aid to families); budget cuts; targeted spending on agriculture and infrastructure investments; and government restructuring efforts. Below, interviewees describe stimulus measures: • “We cut taxes for the poor, extended Public Works programmes and controlled inflation together with interest rates. This had a limited sustainable impact though, and more is required.” • “Funds were earmarked for priority sectors such as infrastructure, education and health.” • “We implemented a program to support the agricultural sector by financing seeds and insecticides.” • “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 consumer and business confidence levels since 1993, my country enacted measures to support families, employment and business, and to restructure the government,” said one interviewee whose government made a significant investment to bolster its economy.
Improving governance and accountability will produce long-term results in addition to improving economic conditions in the short term, according to respondents. “We implemented large-scale institutional reforms, putting in place a financial controller and electronic monitoring of public expenditures. We now publish regularly the amount of taxes collected and have transparency in our budget execution,” said one respondent whose country focused on government restructuring efforts. Another such respondent said, “We have embarked on a public sector financial management reform programme with the help of the World Bank.” 25 percent of countries were not able to implement a stimulus program. As an interviewee from one such country said, “[a stimulus program] could not be possible since much of the development programmes are donor-funded, and in the economic downturn, such donations also went down, consequently leading to a slowdown in development projects.”
4 Public Financial Management Responses to an Economically Challenging World
Investment in infrastructure
Infrastructure investments serve as one of the primary vehicles for stimulating an economy, and nearly all respondents reported that their country will need substantial investment in infrastructure to support economic expansion. The top three areas of need are education, transportation and healthcare (Chart 6).
Attracting outside investment
According to survey respondents, outside investment is an important source of revenue for infrastructure projects, and more than half of our respondents said their country is focused on securing such investment. The most often-cited goals of 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 for investment?
Chart 7: What are your country's primary areas of focus to increase outside investment?
Ed u t ca
ion n o sp
ion a He
re e en o
b wa at
les ch Te n
er te tre a
n fe se P o ris ns
Improve Improve necessary legal system infrastructure
Public Financial Management Responses to an Economically Challenging World 5
Public private partnerships
While attracting outside investment is an area of focus, a few interviewees said it is difficult to obtain. More than 60 percent have turned to public private partnerships (PPPs) to secure funding for infrastructure investments (Chart 8). The results of PPPs have been mixed. Less than half of respondents whose countries had used PPPs reported that they were either “successful” or “very successful.” Nearly 40 percent said they were “not very successful” (Chart 9). “Public private partnerships offer affordable, practical solutions to the needs of governments and businesses,” said a respondent who is generally supportive of the concept. Below is a 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 and implementation, and the private sector’s know-how was utilized.” • “PPPs for housing for low-income individuals have been very successful and have helped the private banking sector and construction companies.” Some interviewees are taking a “wait and see” attitude toward these types of investments: “Most PPPs are quite new and have had limited success up to this point. The benefits will be more tangible in future.” Said another, “this is still a very new phenomenon, which is still being debated. There is no legal framework to support it as yet. With the inability of the public sector to fund all the necessary infrastructure, it is an idea that many see as the way to go. We just need the legal framework to support it.”
Chart 8: Has your country used public private partnerships (PPPs) to find sustainable funding for infrastructure investments? Yes 61% No 29% Do not know/does not apply 10%
Chart 9: Please rate the success of your country's PPPs.
Successful 46% No effect 16% Not very successful 38%
6 Public Financial Management Responses to an Economically Challenging World
Creating the right legal framework and other governance issues were the most cited reason for not using PPPs, specifically “a lack of policy and guidance.” The second most pressing challenge is the unavailability of resources to coordinate projects “on the ground.” Political circumstances also play a role (Chart 10). For developing countries, PPPs pose unique challenges: “In view of recent events, our government tried to interest the private sector in a PPP-type investment, but this first try has not met with great success because of mistrust between the two parties—and the fact that rampant corruption exists in the public sector.” A few interviewees said that the private sector is where the relationship that serves as the foundation of a public private partnership breaks down. “The government will is real, but the private investors and operators don’t follow.”
Chart 10: Why has your country not used PPPs?
10% 0 Lack of policy and guidance Lack of PPP unit to coordinate efforts on the ground Political circumstances Lack of interest from investors or operators
“In view of recent events, our government tried to interest the private sector in a PPP-type investment, but this first try has not met with great success because of mistrust between the two parties—and the fact that rampant corruption exists in the public sector.”
Public Financial Management Responses to an Economically Challenging World 7
Three-quarters of interviewees said their country had either made or renewed a strong commitment to improve financial management transparency for citizens (Chart 11). 80 percent have adopted new international standards to improve public financial management governance and transparency (Chart 12). The most commonly-adopted standards are International Auditing Standards, International Public Sector Accounting Standards and Government Financial Standards (GFS) compliant chart of accounts (Chart 13).
Chart 12: Has your country adopted new international standards to improve public financial management governance and transparency? Yes 80% No 10% Do not know/does not apply 10%
Chart 11: Has your country made or renewed a strong commitment to improve public financial management transparency for your citizens? Yes 76% No 19% Do not know/does not apply 5%
Chart 13: Which new international standards has your country adopted?
50% 40% 30% 20% 10% 0 International Auditing Standards International Public Sector Accounting Standards Government Financial Standards/Compliant Chart of Accounts
8 Public Financial Management Responses to an Economically Challenging World
XBRL and financial management
The use of eXtensible Business Reporting Language (XBRL) is seen as the next important step to creating true transparency and to enabling access to public sector financial reporting. Yet only 10 percent of interviewees said their country has adopted XBRL. Furthermore, only 23 percent reported plans to adopt XBRL in the future (Charts 14a and 14b).
Chart 14a: Has your country adopted eXtensible Business Reporting Language (XBRL) to enhance transparency and public access to data? Yes 10% No 62% Do not know/does not apply 28%
Chart 14b: Are there plans to adopt XBRL in the future?
Yes 23% No 15% Do not know/does not apply 62%
Public Financial Management Responses to an Economically Challenging World 9
Turmoil in the financial markets that began in 2008 affected economies around the world, including more than half the countries included in this survey. For a majority of these countries, the impact was negative. Respondents pointed to adverse effects on economic growth, currency values and export revenue, among others. To respond to these negative consequences, public financial managers followed similar policy paths adopting economic stimulus programs. Over 60 percent of respondents indicated that stimulus programs had been adopted, and over half of those pursuing stimulus programs believed them to have been successful. By their nature, stimulus programs cannot go on indefinitely. Having opted to stimulate the economy through public expenditure, public financial managers must consider which economic triggers should serve as a benchmark measurement for phasing out economic recovery programs. Most respondents indicated that improvements in economic growth should be the primary trigger, followed by improvement in general employment. The third most often cited reason to phase out stimulus spending was a country’s limit to debt capacity. For some countries, the ability to use public expenditures to boost economic activity is constrained by an inability to borrow at will to increase expenditures.
When adopting a spending program, public financial managers must determine the focus of additional spending. An increase in spending on infrastructure was given as the number one area of focus for increased investment. When asked what type of infrastructure was most critical, respondents ranked Education, Transportation and Healthcare as the top three priorities. Along with the adoption of extraordinary policies to combat the impact of the global financial crisis was also a commitment to increased transparency in public financial management, as indicated by more than three-fourths of all respondents. One method used to introduce greater accountability and visibility into public financial management was the adoption of international public sector financial standards, including International Auditing Standards and International Public Sector Accounting Standards. The full impact of the global financial crisis is not yet over, and headlines continue to be dominated by the resulting economic fallout. Ongoing impacts include localized debt crises, deficit sustainability and continued high unemployment. Public financial managers face some of the most challenging times in decades in meeting their responsibilities, but they have faced them not only with a variety of policy measures but with an unprecedented commitment to transparency.
10 Public Financial Management Responses to an Economically Challenging World
Public financial managers face some of the most challenging times in decades in meeting their responsibilities, but they have faced them not only with a variety of policy measures but with an unprecedented commitment to transparency.
Public Financial Management Responses to an Economically Challenging World 11
The International Consortium on Governmental Financial Management
The International Consortium on Governmental Financial Management (ICGFM) brings together diverse governmental entities, organizations and individuals who are financial management practitioners such as accountants, auditors, comptrollers, information technology specialists, treasurers and others working in all levels of government. Our mission emphasizes activities to promote professional development and the exchange of information. Our programs provide activities and products to advance governmental financial management principles and standards and promote their implementation and application. Internationally, ICGFM sponsors meetings and conferences that bring together government financial managers from around the world to share information and experiences in governmental financial management to educate members and others about innovations, best practices and emerging issues. We also foster research concerning governmental financial management and disseminate information and results to our members and the public. Working globally with governments, organizations and individuals, the International Consortium on Governmental Financial Management is dedicated to improving financial management so that governments may better serve their citizens. For more information on ICGFM, visit http://www.icgfm.org. 2208 Mount Vernon Avenue Alexandria, VA 22301-1314 T 703.562.0035 F 703.519.0039 E ICGFM@icgfm.org James R. Ebbitt, President Patricia Cornish, Managing Director
Grant Thornton LLP Global Public Sector The people in the independent firms of Grant Thornton International Ltd provide personalized attention and the highest-quality service to public and private clients in more than 100 countries. Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd, one of the six global audit, tax and advisory organizations. Grant Thornton International Ltd and its member firms are not a worldwide partnership, as each member firm is a separate and distinct legal entity. Visit www.GrantThornton.com/publicsector. Grant Thornton LLP Global Public Sector, based in Alexandria, Va., is a global management consulting business with the mission of providing responsive and innovative financial, performance management and systems solutions to governments and international organizations. 333 John Carlyle Street Alexandria, VA 22314 T 703.837.4400 F 703.837.4455 E David.Nummy@gt.com or Jason.Levergood@gt.com David Nummy Jason Levergood Tabetha Mueller Richard Hudson
Content in this publication is not intended to answer specific questions or suggest suitability of action in a particular case. For additional information on the issues discussed, consult a Grant Thornton client-service partner.
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