Business confidence is returning, with 81% of CEOs showing some measure of confidence on revenue growth prospects over the next 12 months, even though 60% expect national economic recoveries only in the second half of 2010 or later. CEOs in BRIC economies, and in large companies, are by far the most confident. But CEOs still have many concerns – of protracted recession (65%), of over-regulation (60%), of unstable capital markets (59%) and as yet unfounded fears of a wave of protectionism (49%).
Yet the unprecedented global coordination by governments to stabilise the financial system in 2009 has drawn qualified praise from businesses in Europe and globally:
» CEOs have reversed their opinions from last year about whether businesses and governments can successfully mitigate systemic risk – a majority (57%) now think they can (compared with 46% last year).
» Almost half of CEOs interviewed (49%) also believe that government ownership helps to stabilise an industry during a crisis.
This optimism for international coordination, and for more effective governmental collaboration with business, is one of the major findings in the survey this year, one that can reset the relationship between business and government.
Clearly, such collaboration is not easy – the recent Copenhagen climate change talks demonstrated the pressures created by competing national interests when trying to negotiate global frameworks. Leaders in government are well aware of the challenges that lie ahead whilst business also worries about the consequences, as shown by the rise in CEO concerns of protectionism in the survey (up 10 percentage points from last year).
Leaders in the public and private sectors know that they have important, and different, roles to play if systemic risks are to be mitigated successfully. In PwC’s view, this year’s survey highlights the need for governments to build on this platform and focus on creating and delivering value in their different roles:
» As larger owners of business: with one in seven of CEOs surveyed having some form of government backing (up from one in 10 last year), governments are altering the business landscape and becoming strategic ‘game- changers’ as owners, customers, competitors and regulators to different degrees in different markets.
» As credible debtors: with the rapid rise in budget deficits in many economies, particularly developed G20 economies (with debt to GDP ratios projected to rise to 118% by 2014), credible plans are needed now setting out the exit strategy from government stimulus packages and subsequent actions to turn the tide of debt. Tough decisions involving increasing tax revenues and reducing spending will be critical to restoring the public finances back to health. Failing to fix these fiscal deficits, by contrast, would be a recipe for persistently high interest rates, more volatile currencies and a less certain environment for business investment, employment and growth.
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As more collaborative, smarter regulators of business: with six in 10 CEOs concerned about over-regulation (and a rise of 9% of those ‘extremely concerned’ from last year), and a significant increase in CEO perceptions of rising regulatory burdens (67%, compared with 57% last year), dialogue and closer working between business and government – co-design – is needed more than ever to achieve smarter regulation.
Strategic ‘game-changers’
More than two thirds of the CEOs surveyed have significant concerns about long-term state involvement in business with important implications for government policies on competition and fair markets. Despite the antipathy of most CEOs to state ownership, including a majority of the CEOs surveyed with government backing, there are also times when government intervention is necessary to stabilise industries, as CEOs also largely agree.
Given the increase in government stakes in business – an extension of last year’s trend – the challenge for government now is to make decisions on how long they will retain their stakes in business and, for those that it is decided should return to the private sector, set out their exit strategy alongside a realistic timetable.
Whether it is ideologically or economically driven, governments will still retain some stakes in businesses for the foreseeable future. For instance, the PwC report Back to the Future, which focused on the relationship between government and financial services, anticipated that the complexity of individual financial institutions’ situations, difficult market conditions and an unattractive disposal environment will combine to make the possibility of early government exit from their stakes in the private sector highly unlikely, perhaps taking five to seven years or more before governments are able to fully divest of their stakes and related guarantees.
In the interim, clear objectives and governance arrangements are needed to ensure governments act as good owners and manage carefully the potential conflicts arising from their distinct roles as owners/shareholders, acting on behalf of taxpayers, and supervisors/regulators, acting on behalf of consumers and businesses.
Credible debtors
With budget deficits rising in most economies, and with critics of government policy challenging the cost and efficiency of economic stimulus programmes in creating jobs amid estimates by some commentators of high costs per job created, governments are facing a conundrum – how to deal with ever more debt at a time when the needs of businesses and citizens for support are rising, with the economic downturn resulting in greater numbers of unemployed and disadvantaged people needing state assistance. The lesson from history is that a focus on efficiency is rarely enough to turn around major fiscal deficits – governments must transform their approach and seek radically new ways of doing things. There is a need to revisit the role of government, stop some activities, prioritise some areas over others and re-design service delivery, if radical cuts are to be achieved.
Sustainable solutions require political will and ownership at the highest level. This will, in our view, entail a combination of tax rises and spending cuts, where the decisions on both are guided by the impacts on economic growth and social outcomes – progressive austerity is the order of the day. But, as any business or family household knows, balancing budgets still requires tough choices and a robust, evidence-based approach to prioritisation, which balances the relative importance of government programmes with the ability of government to deliver.
Smarter, more collaborative regulators
The burden of regulation continues to grow in the eyes of CEOs – two thirds of CEOs do not believe governments have reduced their regulatory burdens – and business is also still seemingly unconvinced by government’s track record on achievement of its priorities on issues such as infrastructure, skills development and climate change.
Yet there is still a desire for collaboration to achieve a win/win for business and government when it comes to smartening regulation. This is particularly critical at the current point in the economic cycle when governments must beware of imposing regulations which stifle innovation, competitiveness and the growth of jobs – the call from business this year is for a combination of less regulation in areas which stifle competitiveness (like access to capital) and better enforcement of existing regulations in other areas (such as financial sector stability).
This year, PwC went further and asked CEOs and government officials how best to achieve the goal of smarter regulation. The clear response was for dialogue and closer working between business and government – co-design.
Clearly, achieving a smarter approach to regulation nationally is a challenge – whether this can be achieved globally is even more open to question. Whilst harmonisation of regulatory approaches and increased collaboration is in vogue, with a desire expressed by both business and government for a more systemic approach to tackling global risks, there is little desire among business or government for new supranational regulatory institutions.
There is no doubt that much stronger global governance is needed to safeguard the fundamentals of the world economy. The G20 is evidently seen by CEOs as the key forum for collaboration, although whether it has the capacity and cohesiveness to make a real difference is as yet untested, with a number of reforms proposed at recent meetings yet to be followed through. As such, PwC believes that more needs to be done to strengthen its capacity for effective decision-making and follow-through by reforming the supporting infrastructure, including global organisations such as the IMF and the World Bank.
Governments as intelligent investors
Business concern currently focuses, rightly, on protracted recession. However, CEOs and governments around the world need to look forward. Governments must act as intelligent investors: for growth to take off, governments at all levels must invest strategically and sustainably in the various ‘capitals’ needed by any society for long-term prosperity, with the priority being projects with a high social and economic return. This will assist private sector wealth creation, particularly in infrastructure. Equally, governments should be wary of cutting investment plans to balance the books – this will not solve structural fiscal deficits, and will only serve to solve today’s problem at the expense of creating new ones for tomorrow.
Most importantly, governments must continue to re-build confidence and public trust, reduce uncertainty further through intelligent and authentic leadership and vision and create policies and mechanisms for collaboration that are appropriate for today’s global flows of capital. Public sector leaders must shift gear, from being reactive to events to being both proactive and interactive, with business and society. Governments must seize the opportunity to chart a way ahead, investing in the future as the global economy takes off towards growth.
