KPMG: The wolf is at the door

Heavy borrowing to bail out the private sector in the global economic crisis has left many governments around the world deeply in debt. Funding the fiscal stimuli that were believed necessary to kick start economies in recession has meant many governments may not have the funds needed to address public sector issues. Many governments face growing demands for public services with severely reduced public resources. Where will the money come from?

Continuing KPMG’s long-running series of research projects into the key trends in the public sector, KPMG’s Global Government practice commissioned a survey of 124 senior executives in the public sector from Australia, Canada, Germany, The Netherlands, the UK, and the USA, in order to provide an in-depth analysis of the different ways some governments are dealing with the effects of the economic downturn.

KPMG’s resulting survey, Effects of the downturn on the public sector, compares and contrasts the varying degrees of a shared global problem; that of serious government and public financial hardship, the survey also examines different national responses to the difficult issues many governments face.

The survey seeks to examine the hard choices some governments face. Many public sectors around the world expect smaller budgets as governments try to reduce spending, despite having to cope with ageing populations that are placing increased demands on health care and social services with fewer resources to meet these demands. All this, while the tax base declines and the need to make decisions on the care the public sector can and will provide becomes ever more pressing.

“The world economy has enjoyed a long period of growth, and many public sector organizations have become accustomed to steady increases in funding. Over the last decade, there have been calls for greater efficiency in the delivery of public services, but these have been easy to ignore, because there has been no real financial pressure. It has been possible to disregard predictions of tough time ahead, as in practice things have generally turned out OK – but not this time”, Bill Bowman, Head of Audit and Deputy Senior Partner in KPMG in Romania, comments.

Unless many governments act now, he continued, public services as they are currently provided are likely to simply become unaffordable. However, government bodies have one great advantage over the private sector: they have the benefit of advance warning, because the public sector recession will lag a year or two behind the recession in the economy. This is because governments are committed to a short-term increase in public spending, to help ease their national economies out of the downturn.

“In recent months there has been a dramatic reversal of fortunes. Numerous governments around the world will urgently need to save money. This time it’s not a false alarm. The wolf really is at the door”, said Bill Bowman.

One of the major risks is that some managers in the public sector will wait for the crunch to arrive before taking action. By then it may be too late, and the only course open to them will be to make painful, knee-jerk cuts in public services.

But Bill Bowman says there is an alternative – to make plans now for radical changes in the way public services are provided, in order to manage the situation and to try to ensure that the most important public services continue to be funded.

“No government can afford to be complacent. This is not just a problem for the UK and USA, where huge sums have been spent to bale out banks and other failing companies. This is a global problem but also a challenge for the Romanian government, because demand for public services is rising (for demographic and other reasons), while the money available to fund them is dwindling,” KPMG representative added.

As the crisis continues, and those governments that have borrowed to create a fiscal rescue package are unable to borrow more money, KPMG’s Effects of the downturn on the public sector survey looks at what is going to happen to the public sector.

Creating funding from tax increases would be universally unpopular in any country and at any time and would be especially so in the current climate of great economic hardship for many people around the world.

KPMG’s survey concludes that globally one of the best strategies for many governments is to cut costs and cut them now.

“We recommend a three-stage approach to try to tackle the problem in a measured and effective way: first, a review of costs, to eliminate waste and create some room for stages 2 and 3. Second, a major re-appraisal of expenditure priorities, with a view to cutting or drastically reducing programs that are no longer affordable in the new economic climate. And third and finally, a series of initiatives intended to re-engineer the way that public services are delivered, learning lessons from the private sector, where the internet, call centres and distribution hubs have revolutionized the way that many companies do business,” said Daniela Nemoianu, Head of Risk Advisory Services.

Perhaps surprisingly, given the potential immediacy and likely depth of the public sector problem, KPMG’s Effects of the downturn on the public sector survey reveals that 63 percent of respondents are unlikely to change their strategy in the next year as a result of the current global economic downturn, even though the full impact of the crisis is not likely to hit the public sector until 2011 or 2012.

The majority of respondents, some 60 percent, indicate that they are making long term changes to put their organization in a good position for the next decade, but few respondents are pursuing these changes with the urgency that is required, and few are contemplating the radical surgery that KPMG firms’ professionals believe to be necessary. For example, the survey reveals that only 20 percent of public sector organizations are planning to change their business model.

A significant improvement in the take up of EU funds by both public and private sectors is essential for the Romanian economy, particularly in the context of the global economic downturn.

One of the impediments to more effective use of EU financing has been the low number of eligible projects, the slow bureaucratic process, and the lack of transparency. Clearly, use of these EU funds is an excellent way for emerging economies in our region to ‘weather the storm’ of the current global economic crisis, as EU funds can make up anywhere from about 2-5% of these states’ annual GDPs. Within the context of the crisis it is even more crucial that they make the most of the available funding for 2007-2013.

However, attracting the funds, without carefully planning administration and subsequent implementation, could generate major risks, especially under the current economic crisis conditions, affecting both public and private sectors. The lack of support from payment structures and of clear regulations on financial reporting could lead to payment incapacity and consequently to an additional contraction of the Romanian economy.

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