During the last few years I’ve seen charts showing sharp growing rates of the middle class in Latin America. The charts look good but what they do not show is that, at least for the poorest economies, all this growth is based on wider access to loans. Basically, it’s not an increase in sustainable revenue but rather an increase in debt. The raise in debt is, of course, coordinated with a sharp raise of real estate prices.
As a side effect, the middle class growth is raising demands on governments and businesses for better public services which require more funds raised by either increasing taxes or getting public loans which leads to more debt.
The scenario tends to look familiar. In my opinion this is not going to last for long and we’ll see some real economical and social issues in Latin America over the next five to seven years.
Understanding what drives the amount of corporate income tax paid by companies has become increasingly important in recent years as governments adapt their policies to encourage growth, while recognising the need to raise revenues to fund social investment programmes and to repair public finances in the wake of the global economic downturn. It is important to recognise and understand the impact of tax policies on the revenues received by governments, revenues that governments rely on to enable them to discharge their obligations to provide funding for infrastructure, education and public health. This includes the need to ensure that the tax system provides an economic environment which fosters economic growth, helping to increase the size of the economy from which revenues can be drawn.
For companies, this has become important as they come under increased scrutiny over how much tax they pay and whether they are paying the ‘right amount of tax’. For companies the amount of tax that they pay represents a key element of the contribution that they make to the economies in which they operate. Taxes are a cost that has to be managed like any other cost, and the level of taxes paid is one of a number of factors that are taken into account when making decisions on where, when and how much to invest.
Over the last seven years PwC has worked with the World Bank on the “Paying Taxes” study which measures and compares how easy it is to pay taxes in 183 economies around the world using a case study company with a standard fact pattern. The study looks at all of the taxes that a company might pay including corporate income tax. It showns a consistent downward trend in the statutory rates of corporate income tax which have been applied over the last seven years, as governments have looked to ensure their tax systems remain competitive in a globalising economy. Another consistent feature of the results of the study is that the amount of corporate income tax actually paid can often be different and on occasions very different from the amount derived by simply multiplying the accounting profit by the headline rate of corporate income tax.
The results are quite striking
They show how the downward trend in statutory rates has resulted in those now applied falling within a fairly narrow range. More than half of the economies around the world have a statutory corporate income tax rate between 15% and 30%. And as regards the rate of tax actually paid by the company, the study identifies 40% of economies which make adjustments which increase the amount of tax paid while 60% reduce it. PwC’s analysis identifies the key reasons for these differences and provides some interesting insights on a regional basis and for a selection of individual economies.
It will be interesting to see how corporate income tax regimes around the world continue to develop, and whether the need for governments to demonstrate that their systems are competitive takes priority over the need to generate much needed funds.
Political leaders rarely campaign for office on a platform of government effectiveness. In many cases, tackling the bureaucracy is perceived as high risk and low reward compared with passing new laws in the legislature. Yet few succeed without achieving some reform. Many departing presidents, prime ministers, and cabinet secretaries reflect on how the engine of government itself was at the very heart of their successes or failures.
What it takes
Those that have achieved sustainable and significantly higher levels of government performance did so by explicitly designing and executing multiyear reforms that push beyond everyday initiatives designed to improve management capability.
McKinsey recently published a report – “Government designed for new times” in which they identify 40 such programs that have been enacted around the world in the past two decades. There were a number of objectives these programs were designed to achieve: significant fiscal consolidation, better outcomes across multiple public services, and economic growth. Here is a map of programs in a selected number of countries that McKinsey has put together:
How much control should political leaders have over government effectiveness?
The intense pressure for reform makes innovation a critical capability. In many areas, government agencies around the world are redesigning how services are delivered (for example, through one-stop shops and e-portals) by providing greater data availability and through mobile services that allow citizens to get instant help and support. McKinsey shows that Governments that are willing to reform and build such capabilities are better able to achieve major breakthroughs in the most fundamental policy areas, even in the absence of new policy or legislation.
I would raise a question mark whether such a discussion should take place from the very beginning. Should government agencies look at themselves for making their services more efficient or should this fall under political control? Let’s consider that, regardless of the fiscal policy, efficiency of the fiscal agencies should follow a consistent improvement track so the question is: should its efficiency be influenced by the policy itself?
Austerity programs have failed consistently during history yet we are using them as an argument to “fix” our crisis. One may argue that austerity shrinks the economy and therefore debt to GDP is even more difficult to reduce if GDP is falling. This becomes more and more clear as we look at the estimates for public debt of some of the austerity countries. Here are some figures published by CEEMEA in their latest Global Business Outlook:
The idea behind austerity is that reduced budget deficit levels will “instill confidence” into the markets but it seems that by undermining growth and destroying consumer confidence it achieves the exact opposite.
I was looking with great interest to the economical figures of London Olympic Games and I’ve heard too many times that the British “Olympic Games bet” is not in UK’s favour. I’ve heard how investments went from an estimated £9.3bn to an actual £15bn and how disastrous this is during (I would avoid to say global) economical downturn.
Ever since I’ve seen, a few years ago, the development plans London intended to make for this event, I knew it was a smart move, regardless of the short term outcome. The East side of London was always seen as the underdeveloped part of the city and the opportunity to bring it up in such a short time with only a small percentage of local contribution is a side of the story I see most of the analysts are overlooking. Let’s see some of the figures, as presented by Financial Times:
Some other important figures:
over £7bn contracts have been awarded to British companies which means workplaces and in the end, money returned into the national economy;
almost £10m event tickets sold. Needless to say, the cost of the event ticket is a very small fraction of the attendance cost which makes an exponential increase in the overall British income.
I’m looking at the event costs comments and, unfortunately, I see a very narrow “what do I get today” mindset. Let’s take a look further. Let’s say the Olympic Games are over and the actual income did not reach the actual spent.
A smart eye would see the following:
The East-end of London (Lower Lea Valley near Stratford) now has a brand new 80,000-seater Olympic Stadium for future events.
5,000 homes have been built as residence for many families following the conversion of the Olympic Village after the games.
The transport links to the east of London have been significantly upgraded – £1bn improvement to London East line, extensions to the DLR, 45% capacity increase for the Jubilee line.
New venues have been built in the East London: Olympic Park stadium (athletics, hosting opening/closing ceremonies), Olympic aquatic centre (swimming and diving events), Olympic velodrome (track cycling), Olympic hockey complex, Olympic multi-sport complex (basketball, handball, volleyball, modern, pentathlon events), Greenwich Peninsula hall 1 & 2 (badminton, gymnastics, table tennis), Broxbourne (canoe slalom), University of East London (water polo facilities), Olympic tennis complex.
All these are resources to bring more events than hosted at the 2012 Olympic Games in the future. London has built up in East London a money-making Olympic machine. Not for today but for future generations as well. Need I say more?
As companies globalise, they face a growing body of diverse and complex regulations. The global regulatory environment is changing faster than companies can absorb. This is why CEOs consistently report overregulation as a threat to business growth. And it’s not getting any easier; according to the CEO Survey, only 31% of CEOs believe that regulations will be harmonised among governments. However, the successes of the private and public sectors are increasingly intertwined. Effective partnership models are emerging around the world, ranging from improved communication and better coordination to true collaboration, depending on the market.
71% of CEOs plan to increase investment in an area they also believe is one of the government’s top-three priorities: developing a skilled workforce. And increasingly, governments are making this a top priority. Countries as well as companies are competing for talent, and some governments are investing a lot to make their workforces more competitive. For example, the Singapore government partnered with a local university to launch a talent development programme, bringing together professional services firms, universities and business schools.
Workforce skilling is just one area of focus. Intellectual property, health care, energy, infrastructure, immigration, tax, financial sector convergence… these are major areas in which leaders from both public and private sector organisations say they can work together more effectively to achieve common goals.
Government leadership in building infrastructure is critical for competitiveness. A majority of CEOs identified the priority for the governments of all countries outside of Western Europe and Japan, where infrastructure is well developed, and of China – where the government allocated almost US$600 billion of stimulus spending for infrastructure projects over the past two years, according to PwC’s 14 Annual CEO Survey.
The role of private capital in financing infrastructure is unavoidable: an estimated US$3 trillion per year needs to be spent on infrastructure across the globe in the coming decades, according to a recent report from the World Economic Forum.
However, businesses can provide more than cash: they have expertise, and the abilities to execute and manage risks. This is part of what makes PPPs attractive. As Berthold Leetfink, Deputy Secretary General of the Ministry of Economics, Agriculture and Innovation in the Netherlands told PwC, “At least for the Netherlands, and I think for many other countries, planning and building infrastructure is very much in the hands of government. But it’s obvious that the private sector has a lot of knowledge in terms of building cheaply, efficiently or in a more environmentally friendly way.” As an example, a PPP project in 2009 to connect a 12-mile regional rapid transit line in Vancouver (Canada Line) was completed several months ahead of schedule.
Needless to say, businesses also have a key expectation for their governments: to tackle fiscal deficits to restore stability to the markets in a way that is mindful of the fragile environment for global growth. Public revenues are of course expected to be part of the equation: a majority of CEOs expect taxes will rise, led by 65% of CEOs in Asia and 70% in Latin America.
Two-and-a-half years ago, McKinsey described eight technology-enabled business trends that were profoundly reshaping strategy across a wide swath of industries. Since then, the technology landscape has continued to evolve rapidly. The dizzying pace of change has affected those original eight trends, which have continued to spread (though often at a more rapid pace than anticipated), morph in unexpected ways, and grew in number to ten:
1. Distributed cocreation moves into the mainstream
By McKinsey’s estimates, when customer communities handle an issue, the per-contact cost can be as low as 10 percent of the cost to resolve the issue through traditional call centers. Other companies are extending their reach by using the Web for word-of-mouth marketing. However, since cocreation is a two-way process, companies must also provide feedback to stimulate continuing participation and commitment.
2. Making the network the organization
The recession underscored the value of such flexibility in managing volatility. McKinsey believes that the more porous, networked organizations of the future will need to organize work around critical tasks rather than molding it to constraints imposed by corporate structures.
3. Collaboration at scale
Across many economies, the number of people who undertake knowledge work has grown much more quickly than the number of production or transactions workers. While the body of knowledge around the best use of such technologies is still developing, a number of companies have conducted experiments, as one may see in the rapid growth rates of video and Web conferencing, expected to top 20 percent annually during the next few years.
4. The growing ‘Internet of Things’
Assets themselves became elements of an information system, with the ability to capture, compute, communicate, and collaborate around information – something that has come to be known as the “Internet of Things.” Embedded with sensors, actuators, and communications capabilities, such objects will soon be able to absorb and transmit information on a massive scale and, in some cases, to adapt and react to changes in the environment automatically. These “smart” assets can make processes more efficient, give products new capabilities, and spark novel business models.
5. Experimentation and big data
McKinsey affirms that some companies haven’t even mastered the technologies needed to capture and analyze the valuable information they can access. More commonly, they don’t have the right talent and processes to design experiments and extract business value from big data, which require changes in the way many executives now make decisions: trusting instincts and experience over experimentation and rigorous analysis. To get managers at all echelons to accept the value of experimentation, senior leaders must buy into a “test and learn” mind-set and then serve as role models for their teams.
6. Wiring for a sustainable world
Companies are now taking the first steps to reduce the environmental impact of their IT. Information technology is both a significant source of environmental emissions and a key enabler of many strategies to mitigate environmental damage.
7. Imagining anything as a service
In the IT industry, the growth of “cloud computing” (accessing computer resources provided through networks rather than running software or storing data on a local computer) exemplifies this shift. Consumer acceptance of Web-based cloud services for everything from e-mail to video is of course becoming universal, and companies are following suit.
8. The age of the multisided business model
Thr advertising-supported model has proliferated on the Internet, underwriting Web content sites, as well as services such as search and e-mail. It is now spreading to new markets, such as enterprise software: Spiceworks offers IT-management applications to 950,000 users at no cost, while it collects advertising from B2B companies that want access to IT professionals.
9. Innovating from the bottom of the pyramid
Hundreds of companies are now appearing on the global scene from emerging markets. For most global incumbents, these represent a new type of competitor: they are not only challenging the dominant players’ growth plans in developing markets but also exporting their extreme models to developed ones. To respond, global players must plug into the local networks of entrepreneurs, fast-growing businesses, suppliers, investors, and influencers spawning such disruptions.
10. Producing public good on the grid
Technology can also improve the delivery and effectiveness of many public services. At the UK Web site FixMyStreet.com, for example, citizens report, view, and discuss local problems, such as graffiti and the illegal dumping of waste, and interact with local officials who provide updates on actions to solve them.
A recent McKinsey survey show that among companies whose primary market is in the European Union or the United States, less than a quarter of respondents say their companies are effective at developing and executing strategies for engaging with all relevant government stakeholders.
The results show that government actions have a significant effect on companies’ economic value: 34% of respondents say 10% or more of their operating income is at stake. Some government actions, such as providing infrastructure and access to capital, are likelier to have a positive than a negative effect on company finances. However, passing laws and setting policies—the actions executives say most often affect their companies’ economic value—have an overall negative effect. Respondents whose primary markets are in developing economies are more positive than others, however, about the effect of government actions, such as the passage of laws and enforcement of rules.
Given this value at risk, it’s promising that 71% of respondents say companies should proactively and regularly engage with government, but it’s less encouraging that only 43% say their companies actually do so.
Some of the reasons for the relative lack of engagement may be executives’ own views of government. More than 75% agree that business must be actively involved in shaping government policy to succeed and that it’s beneficial for companies to be as transparent as possible with government, but large shares also express frustration with government along various dimensions.
When companies do engage with government, executives indicate they’re not particularly good at it. Engaging with the governments of their companies’ primary-market countries is a top-three priority for only 30% of CEOs—although the figure rises to nearly 60% in China. More are involved in overseeing their companies’ efforts to engage: almost two-thirds of respondents say their CEOs either sponsor those efforts personally or oversee the group that does so.