Governments’ roles will change with the financial crisis. On one hand, governments around the world will expand and broaden their scope of responsibility just as they have done in the past. On the other hand, they will reinforce global interdependence, and will see a renewed tendency towards devolution of central power from the center to the edge, according to the point of view by Roopen Roy, Managing Director, Deloitte India.
“Governments will likely respond to the crisis the way many of them have responded to past crises, expanding certain domestic commitments on a deficit basis,” said Roy, who mentioned how the public sector is already extending its reach into the financial and manufacturing sectors, and into infrastructure projects tied to job creation.
The difference from past crises is that a more global government coordination relative to the financial markets will emerge from this crisis. “The spread of credit difficulties from nation to nation, and the concerted effort in some quarters to erect firebreaks further puts to bed the idea that any nation is an island,” added Greg Pellegrino, Deloitte Touche Tohmatsu Global Public Sector Leader, who mentioned the recent efforts by the British and French governments to spur preemptive action by the International Monetary Fund (IMF) on behalf of threatened currencies and stocks in Eastern Europe.
Devolution from national governments to regional and local Governments and to key private-sector industries will be another effect from the financial crisis. What may appear at first glance to be just an expansion of the Government’s involvement, is in fact a redistribution of capital, putting resources on the ground in sectors and communities where they can be put to the greatest use. The challenge however will be whether or not big government can establish effective governance and accountability structures without creating a further drag on the sectors they seek to stabilize.
Common responses to deal with the crisis
According to Greg Pellegrino, governments around the world are not all dealing with the crisis in the same way, although there are common responses based on innovation, reexamination of operational models, and thoughtfully directed support of key public- and private-sector institutions.
“Governments will have to implement rigorous cost reduction programs, increase their operational efficiency, improve their controls, and discover new ways to do more for less, which in turn will spark innovation,” said Pellegrino. “Lean times demand new efficiency, while at the same instant, a public under pressure is demanding more from its government. In fact, many of the more significant government transformations which have taken place have occurred during previous major economic downturns.”
Reexamination of operational models
To improve the public sector’s effectiveness, operational models will be revisited: Solutions may lie in consolidation, shared services, cooperation among public services, integration of services across levels of governments, and integration of service provision models.
The relationship between public and private sector operations may also change as a result of the crisis. Public resources that currently return little value, such as abandoned land and buildings, may blossom into productivity under the contractual stewardship of private entrepreneurs. At the same time, an expanded public sector may be more attractive to investors that look for publicly financed private ventures, and better able to negotiate financing terms in some countries. Finally, Governments will find them more willing to consider not only cost concessions but more contract models that peg rewards on the quality of service delivery.
Challenge to attract talent
Another example of the do-more-with-less challenge that characterizes the global financial crisis will be to attract talent to work for the public sector because it will offer more challenges with fewer guaranteed comforts. This will make the public service recruitment a transformative opportunity.
“Governments across the globe may emerge from this shift with a new generation of public servants at the helm, people who come to the profession with plans and expectations that differ from those of their predecessors,” said Roopen. “Their approach to playing a part in government will change. Instead of looking for the stability and long term benefits that were appealing to the post-war baby boomer generation, they will be entering the government with the desire to make an impact on things that matter to them, such as energy issues.”
More infrastructure projects
Infrastructure will be the great benefactor of the financial crisis as the asset class is the center of attention of the financial industry. In fact, the crisis will have an immediate impact on infrastructure. With securitization constrained, mono lines out of play, and private equity showing poor results, global investors will increase focus on infrastructure, which is relatively resilient because of its risk profile. These projects are large, tangible, stable and predictable at the long term, and revenues from infrastructure projects are fairly inelastic to the wider conditions in an economy as the demand generally remains strong.
“Further infusion of government investment in economic infrastructure is a common response in industrial nations, making manufacturing, telecommunications, transportation, and resources sectors even more appealing in a recovery period,” said Greg Pellegrino.
To keep pace with growth, governments may find that innovative financing strategies, such as public-private partnerships (PPPs), provide a useful alternative. “However,” warns Greg Pellegrino, “infrastructure projects should not be just launched to drive job creation but to invest in economic and sustainable growth”.
Who will pay for publicly financed projects?
The present economic climate presented governments with an opportunity to become more efficient by pushing through administrative reforms “that would not have been possible if there was no economic crisis” The financial crisis will also have a negative impact for some projects, especially long-term aspirational goals such as corporate responsibility and environmental protection. “There is no magic strategy that will turn the global financial crisis into an unalloyed positive. However governments worldwide can find the seeds of long term advantage in the decisions they make now” concluded Roopen.
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Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/in/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms. Deloitte India refers to Deloitte & Touche Consulting India Private Limited, a company established under the Companies Act, 1956.
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