Public Finance International Autumn 2015

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THE GLOBAL MAGAZINE FOR PUBLIC FINANCE PROFESSIONALS AUTUMN 2015

GLOBAL POWERHOUSES CITIES ON THE FINANCE FRONTLINE Ian Ball wants radical action on sovereign debt

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Arunma Oteh on thinking big at the World Bank

How Africa can widen and deepen its tax base

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global experts in IPSAS Qualification and training for professionals Across the world public sector organisations are recognising the benefits that International Public Sector Accounting Standards (IPSAS) bring and are making preparations to adopt them.

CIPFA are the leading global accountancy body in the implementation and training for IPSAS, with unrivalled experience across global public sector policy. So become an IPSAS expert today with our specialist online qualification and worldwide training.

CIPFA Certificate in International Public Sector Accounting Standards CIPFA is the first global accountancy body to have developed a dedicated IPSAS qualification. Being IPSAS qualified with CIPFA will demonstrate expertise and competence in applying the standards accurately and appropriately.

Become a Certified IPSAS expert: www.cipfa.org/certipsas

Worldwide IPSAS training CIPFA, IASeminars and EY have joined forces to offer the most comprehensive and relevant IPSAS training available.

Courses are scheduled across many cities including: London, October 2015, March 2016 & August 2016 Nairobi, November 2015 Accra, November 2015 Cape Town, December 2015 Geneva, June 2016

Book your global IPSAS training: www.cipfa.org/iaseminars

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14 PublicFinance

International

ISSUE

06 Editor Judy Hirst Content development director Lem Bingley Reporter Judith Ugwumadu Picture editor Claire Echavarry Chief sub-editor Paul Nettleton Sub-editor Christy Lawrance Contributors Peter Hetherington, Vivienne Russell, Mark Smulian, Rachel Willcox Senior designers Wasim Akande, David Twardawa Digital content manager Amy Lawless Senior sales executive Sarah Walsh Recruitment sales executive Emmanuel Nettey Senior production executive Aysha Miah Printing Stephens and George, Merthyr Tydfil Public Finance International is editorially autonomous and the opinions expressed are not those of CIPFA or of contributors’ employing organisations, unless expressly stated. Public Finance International reserves the copyright in all published articles, which may not be reproduced in whole or in part without permission. Public Finance International is published for CIPFA

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04 High ambitions for finance CIPFA’s Rob Whiteman on meeting the new global development goals 06 News Signposts on the road to Lima and Seoul 08 Cover story Meeting the megacity challenge to fiscal and social sustainability 14 Woman on a mission Arunma Oteh, the new World Bank vice-president and treasurer, talks exclusively to PFI p 18 Aid under the spotlight The refugee crisis highlights why aid needs close scrutiny

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African countries ries nd their need to expand ow can tax bases. How this be done without atural depleting natural resources?

22 Pumping up the tax volume African countries need to expand their tax bases 24 The crisis next time PFM reform is needed to prevent a new debt crisis, says Ian Ball 28 Pivot to Asia Pacific In-Ki Joo on his ambitions for the CAPA conference in Seoul 30 Rising from the ashes Gaurav Malhotra describes how Detroit is turning its finances around 32 Global ambitions Ian Carruthers on taking the helm at IPSASB in the new year

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COVER I MA GE: GET T Y

Tel +44 (0)20 7543 5600 Fax +44 (0)20 7543 5700 00 Email corporate@cipfa.org Address CIPFA, 77 Mansell Street, London, E1 8AN, UK

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OPINION

ROB W H ITEMA N High ambitions for global finances Public finance professionals face huge challenges worldwide. But there are also good reasons to be optimistic about aiming for ambitious goals

W

hen it comes to strengthening global public financial management, reinforcing good governance and improving transparency, we know we’re in for a long haul. Things will not change overnight, but as the world economy edges away from the sovereign debt crisis and historic slump, there are some good reasons for optimism.

As we go to press, the United Nations is taking a significant step by launching its 2030 Sustainable Development Goals (SDGs). Goal 16, which addresses how governments can tackle corruption, bribery, theft and tax evasion, is of special relevance for public finance professionals. These problems, after all, cost developing countries some $1.26trn a year.

Meanwhile, Goal 11 focuses on how global cities have become powerhouses for There is cause for hope too on the progress being made international development and growth, on the OECD/G20’s BEPS recommendations and action plan the theme of this issue of Public Finance to reform the international tax framework, ensuring profits International. Meeting the challenges are reported where activities are carried out and value of these megacities – for sustainable created. funding, infrastructure, economic Since CIPFA launched its Fixing the Foundations in incentives, education and housing 2011, we have also seen a rapid growth in the countries will be a defining issue for the half of embarking on the journey from cash to accruals accounting humanity living in cities today.

– and adopting international public sector accounting The public finance profession also has standards (IPSAS). These are the key to governments a key role to play in delivering Goal 17, accurately measuring their financial sustainability. The which stresses sustainable partnership widespread adoption of IPSAS is further cause for optimism, development between governments, the ensuring greater transparency and improved decisionprivate sector and civil society. Creating making. monitoring frameworks, setting up Alongside implementing consistent international regulation and oversight mechanisms – standards, we must grow the professional talent and including the independent supreme audit expertise in government accounting and audit services. institutions that so many countries lack – Political will from national and transnational bodies will, will be vital for success. of course, be needed to ensure these initiatives succeed.

But with the focus provided by the UN’s new SDGs, campaigns like IFAC’s Accountability Now, and the new public finance and governance frameworks, we can Rob Whiteman is chief hopefully move much closer to sustaining and improving executive of CIPFA outcomes for societies across the globe. ●

R EX

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‘Meeting the challenges of megacities for sustainable funding, infrastructure, education and housing will be a defining issue for half of humanity’

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NEWS DIGEST

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NEWS DIGEST

Go for new UN goals

Let them have cash

UN secretary general Ban Ki-Moon says legislators around the world should commit to the new sustainable development goals. Their success depends on governments and civil society working together, he said, but many governments are curbing NGOs’ operations or terminating their funding.

Giving direct cash aid to people caught up in humanitarian crises is the most effective and transparent form of assistance, a report has found.

The Doing cash differently report, issued by the Overseas Development Institute and the Centre for Global Development, found cash transfers are cheaper to deliver and more flexible because recipients can decide for themselves what they need.

VISIT THE WEBSITE

IN NUMBERS

2150

International members and students who joined CIPFA in 2015

40

PER CENT Number of errors in the EU public procurement process

www.publicfinanceinternational.org

All roads lead to Lima talks MEFMI joins World Bank and IMF in Peru to debate the way forward for emerging economy finances The Peruvian capital, Lima, is the venue for this year’s annual meeting of the World Bank and the International Monetary Fund, which will be held on 9-11 October.

Ahead of the meeting, Road to Lima events put the focus on development milestones essential to emerging economies, from equitable growth to climate change.

These are of special interest to the Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI), which is holding its annual combined forum alongside the meeting.

MEFMI is a regionally owned institute comprised of Angola, Botswana, Burundi, Kenya, Lesotho, Malawi, Mozambique, Namibia, Rwanda, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe. Its mission is to improve the management of macroeconomics, the financial sector and sovereign debt.

In Lima, members of the institute will be meeting IMF and World Bank officials, central bankers, finance and development ministers, business representatives and academics to discuss how to meet these aims.

A key issue will be how best to financially manage the region’s natural resources, given that the MEFMI member states generate substantial export revenues from this source.

The institute’s chief executive, Caleb Fundanga, former governor of the Bank of Zambia, told Public Finance International: “The MEFMI region is richly endowed with natural resources. However, the abundance is not the preserve of the MEFMI region alone.”

Decision-makers must “contribute towards the prudent management of revenue from natural resources, as these have the potential to contribute towards the economic transformation of the MEFMI region”, he said.

MEFMI will present policy proposals on these issues in Lima, based on the outcome of the region’s June 2015 central bank governors’ forum.

That forum focused on leveraging sovereign wealth funds as a tool for economic stabilisation.

It concluded they are key to the successful management of natural resources receipts, even in countries where governance remains a challenge.

WEBSITE

Public Finance International is a news, opinion and information service covering developments affecting government accountants, auditors, regulators and policymakers across the world. With essential news, informative features and provocative blogs, plus video interviews with thought leaders, it’s the essential destination on the web for global public finance professionals. www.publicfinanceinternational.org is brought to you by Public Finance and CIPFA

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‘Grow up’ says Juncker European Commission president Jean-Claude Juncker wants the eurozone to speak with one voice at international financial institutions. In a speech, he said member states need to “grow up” and put common interests first. The Eurogroup president, currently Dutch finance minister Jeroen Dijsselbloem, was the EU’s “natural spokesperson” at the IMF and World Bank.

Fight for financial accuracy goes global A campaign by the International Federation of Accountants (IFAC), called Accountability Now, has been launched to increase accuracy and openness in public finance information around the world.

IFAC president Olivia Kirtley said: “Accountability Now is a campaign convened by IFAC to highlight how highquality government financial information enables better, more informed decision-making in the public interest.”

Governments’ powers to raise and spend taxes represent a “social contract” under which states must be accountable to taxpayers for their stewardship of public money, IFAC argues.

Yet, it has found, good financial management is surprisingly rare. Governments often lack the information they need to manage finances, and what information they do have may be poor and incomplete.

IFAC says one reason for the crisis of 2008 was that governments were able to obscure their financial positions and issue excessive debt. The contagion spread, undermining global capital markets.

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Contracting system error The European Court of Auditors has criticised “persistent problems” in the way public authorities across the EU contract out work. It said that unless there are improvements by next year, payments for 201420 should be suspended. Its damning report, Efforts to address problems with public procurement in EU cohesion expenditure, found errors in about 40% of public procurement projects reviewed.

Sustainable statistics The World Bank is giving $50m to support efforts by the Kenya National Bureau of Statistics to improve the quality of its data. The bank said the Kenya Statistics Program for Results, the first statistics scheme it has funded, will ensure results that are tangible and sustainable. This is needed to attract investment and boost the economy.

Keynote for Korea How the emergence of Asian economies has led to significant change and growth for the profession is a central theme of the Confederation of Asian and Pacific Accountants (CAPA) meeting in Seoul, South Korea, on 27-29 October.

This has given Asian accountants the opportunity to press for highquality governance, business performance and reporting in the public and private sectors.

CIPFA International chair Ian Ball, pictured, is a keynote speaker, alongside International Federation of Accountants president Olivia Kirtley and CAPA president Sujeewa Mudalige. Ball is speaking on the “public sector revolution, the changing face of accounting and auditing”. Other sessions cover ethics, auditing standards and governance.

CIPFA boosts best practice worldwide CIPFA’s international activities promote and support good public financial management, says Giles Orr, executive director for development and new markets.

They also help develop the skills needed to professionalise public service accountancy, finance and audit functions.

CIPFA works with global bodies, such as IFAC and the World Bank, and supports regional groups on each continent. In the past year alone, it has reached agreements for collaborative working with professional accounting organisations in Bangladesh, Canada, Ghana, Malaysia, Nigeria, Pakistan and Sri Lanka.

In 2015, the institute gained some 550 new international members in 58 countries and a further 600 through agreements with overseas accountancy bodies, plus more than 1,000 students.

CIPFA also works with national and transnational bodies to deliver competency frameworks and capacity development projects. Recent CIPFA initiatives include: ⦁ Helping the Institute of Chartered Accountants Ghana (ICAG) to design a strategy for implementing International Public Sector Accounting Standards. ⦁ Collaborating with the Malaysian Institute of Accountants (MIA) and the Malaysian Institute of Certified Public Accountants to develop the country’s public finances and promote professional qualifications. CIPFA will take part in MIA’s conference in Kuala Lumpur on 26-27 October. ⦁ Developing public financial management training qualifications with Botha University, Botswana. ⦁ Working in the Philippines to develop a competencies framework for public finance accountants. The programme is sponsored by the Australian government’s aid arm, Ausaid. ⦁ Collaborating with the Institute of Municipal Finance Officers of South Africa to develop a joint internal audit qualification.

CIPFA’s executive director of learning and membership, Adrian Pulham, will address IMFO’s annual conference in October, near Johannesburg (pictured above). ⦁Developing a certification scheme with the United Arab Emirates State Audit Institution (UAESAI), to be launched in 2016, when the UAESAI takes the chair of the International Organisation of Supreme Audit Institutions.

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ities power the world economy. They have become the engines of growth. This once seemed the ultimate urban cliché. Now it has the ring of truth.

At least 80% of global GDP is generated in urban areas, according to the World Bank. The most dynamic cities, particularly in Asia, are evolving from financial and business centres into creative and high-tech innovation and manufacturing hubs. Half of the world’s citizens – 3.5 billion people – live in cities and their environs.

In 15 years’ time, a further 1.5 billion will join them on current trends.

Cities are thus becoming the dominant habitat. But whether their rapid growth into global powerhouses is orderly, equitable or sustainable – particularly given the potential for economic meltdown in China – remains an open question. Can an urban world keep growing at this pace without social, let alone environmental, consequences? At the extremes these could include unrelenting congestion, unbearable pollution levels, widening income disparities, inadequate housing and even social turmoil. We are heading into uncharted territory.

“With more than half of humankind living in cities – and the number of urban residents growing by nearly 73 million annually – it is here that our future will be decided,” declares Joan Clos, head of the United Nations’ human settlements programme, UN-Habitat. At this stage, he is cautious. “We need cities that are inclusive, safe, resilient and sustainable. We are failing in how we plan, build and manage cities.”

That, then, is the downside. Who, after all, could have foreseen global urbanisation on this scale in such a relatively short time? We have progressed from a uni-polar 1990s, led by an allpowerful United States with outliers in the European Union and Japan, to a multi-polar world in which Asian, South American and, increasingly, African and Middle Eastern cities – Lagos and Abu Dhabi spring to mind – are global players.

In this fast-changing world, the centre of gravity has shifted to the east and, perhaps, to the south. This has led to the ultimate

BY PETER HETHERINGTON

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The sun shines on Shanghai, which is heading towards a population of 23 million

GETT Y

TY CHALLENGE The world’s future is urban, with vast megacities driving economic growth. But these global powerhouses face fiscal and social challenges, particularly as the world economy slows down.

What can be done to keep sustainable growth on track?

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‘Global cities draw the great name companies, highflying financial firms and the start-ups that become tomorrow’s star tech firms’ role reversal: western cities turning to their counterparts in Asia, Latin America and other emerging nations for inspiration and investment.

If the West originally set the pace for urbanisation – from the ancient Greeks to the Romans, followed centuries later

by Manchester, as the world’s first industrial city, then by the surging cities of America – the megacities of Asia have undoubtedly become the trailblazers of the 21st century.

Yet the phenomenon of the ‘megacity’, ascribed to the giant urban centres of Asia and South America – be they São Paulo, Singapore, Seoul, Shanghai or Shenzhen – is not new.

The Greeks thought their Megalopolis, founded in 370BC, was truly large, while Rome in the 4th century AD was probably the first giant city, with a population approaching one million – “a rehearsal of a trailer for what cities would become”, according to the late Sir Peter Hall.

Hall, a renowned urbanist, foresaw multiple roles for cities beyond traditional manufacturing. They would, he thought, increasingly exploit scientific knowledge and technology combined with information gathering – alongside international trade, higher education, financial services, culture and entertainment – to create another economic order.

And so it has turned out. A new phenomenon – “FinTech” – has emerged. It is a fusion of high technology with start-up finance on the doorstep. Bright young people, maths and science graduates, are colonising renewed and new buildings in central business districts from Seoul to Singapore, London to New York. They are reinventing the city, reshaping its economy. As international property consultancy Knight Frank points out, in its 2015 Global Cities report: “By attracting the most productive workers, global cities draw the great name companies, high-flying financial firms and the start-ups that become tomorrow’s star tech firms.”

FA ST FACTS

60% 8.5 PROPORTION of the Chinese population forecast to be living in cities by 2020

MILLION Population of Lima.

Many live in ‘informal’ neighbourhoods

A favela in São Paulo: Brazil’s Ministry of Cities has taken steps to improve and legitimise the shanty towns

Some of the most dramatic action is emerging in Asia. Seoul, the South Korean capital, was recently pronounced the closest rival to Silicon Valley in California. Singapore, that seemingly booming city-state and another high-tech hub, is even exporting its planning expertise to China. In truth, the east embraces the best, and sometimes the worst, of this fast-track growth.

China’s first national urbanisation plan, which was agreed last year, foresees city residents accounting for 60% of the country’s population by 2020 – a rise of over 6%, though still below the average of 80% in western nations.

Rapid urbanisation, however, can come at a heavy price, as the megacities of South America – notably in Brazil and Peru – can attest. China has 16 cities with populations totalling more than five million (and a quarter of the world’s 500 largest urban areas) with Shanghai topping the list and heading towards 23m – five million more than Beijing.

As the Brazilian city planner Edesio Fernandes cautions, with his eyes on China, the east and Africa: “Brazil has experienced one of the world’s most drastic processes of socioeconomic and territorial reorganisation through rapid urbanisation since the 1930s … generating a national urban crisis through social segregation, poor environment, violence and growing informal development.”

With only 15% of its population living outside cities, Brazil has addressed the issue through a dedicated Ministry of Cities, to which Fernandes was once attached – and it has, arguably, turned the corner with some innovative urban thinking to legitimise and improve the sprawling favelas, or shanty towns, with property rights for inhabitants, formal road networks and (legal) electricity.

The phenomenal growth of Peru’s capital, Lima, provides another case in point: a population of 1.9 million in 1960 grew to 4.8 million by 1980 – and today stands at 8.5 million, the third largest in the Americas, largely through irregular development. Urban land reform has moved in another direction, particularly around Lima – where several million residents in sprawling, “informal” neighbourhoods, pueblos joyenes, have been given formal rights and, hence financial and domestic security. With those rights come responsibilities: formal residency, after all, involves paying taxes to the municipality,

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MEGACITY METRICS 2014

Tokyo

New York

37,833 3 37

18,591 Cairo

Mexico City

Shanghai

18,419

20,843

22,991 Mumbai

Lagos 12,614

20,741

SÃo Paulo

20,831 C ORB I S

Population in thousands thus improving the city finances. For S O U RC E : Fernandes, it also means capturing the United Nations Department of Economic and Social Affairs/Population Division inevitable increase in land value that World Urbanisation prospects: The 2014 Revision formalisation brings for the benefit of the community rather than a handful of property developers.

Fernandes and other city planners caution that there are salutary lessons to learn from South America’s rapid urbanisation. Whether cities in China, elsewhere in Asia or Africa, are taking these lessons on board is a moot point.

“Growth and how to manage it is a huge challenge in sub-Saharan Africa, in large parts of Asia including concerned about growing civil unrest, have promised to deliver India and, right now, in China,” says Julio Dávila, professor of urban universal rights common in democracies, but the migrants are policy and international development at University College London. still waiting.

Dávila, a civil engineer and planner, who has worked extensively How long then before these social tensions boil over? And in South America and Africa, praises the way cities in the Americas how can Chinese cities become self-sustaining in the face – such as Lima, Mexico City and São Paulo – have managed the of such unrelenting urban growth? “Good question,” replies growth transition. But he cautions that, in the final analysis, active Karen Seto, professor of geography and urbanisation at Yale governmental involvement has been essential to bring order to the University, and an expert on urban China. “They are asking chaos delivered by rapid urbanisation. that question too … but they are coming at this from the China’s economic, environmental and social problems – opposite view. Can they sustain a growing economy without exacerbated by the recent enormous chemical explosion in Tianjin a growing urban population with the incomes to buy the and by falling economic growth and a volatile stock market – are goods they produce? You cannot become the biggest economy well documented. The country’s dramatic rate of urbanisation without consumers.” has been driven by the pull of higher wages for a once-dominant If that is one challenge for China’s leaders, the other is the rural population. Whether it continues apace amid such volatility scale of urbanisation and the kind of cities being created – “cut is an open question. But for three decades, cheap labour from the and paste designs,” according to Seto. It is, she observes “like countryside has underpinned what some have called an economic opening 100 [retail] stores and not knowing how the business miracle. The rural population has dropped from 80% of the total in plan can work”. Might a pause then, to take stock, be a good 1980 to less than half that now. Up to 50 million of the 270 million idea? Perhaps. migrants to the cities have had little choice; they were forced to leave In-Ki Joo, a former president of the Confederation of Asian after the expropriation of their land. and Pacific Accountants, believes China needs to proceed on Once these migrants are in cities, tensions run high because they both fronts. “I think the Chinese central government will are still classed as rural under a restrictive hukou registration system have to continue providing funds to support urban growth, that denies them access to basic services. The country’s leaders, because its urban infrastructure is not yet fully developed,” AUTUMN 2015 • PUBLICFINANCEINTERNATIONAL.ORG 11

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he tells Public Finance International. “And with this government guarantee, global funds can also provide the necessary finance to underpin growth.”

But at the same time, says Joo, China’s government “needs a strong policy to prevent overgrowth of urban areas, and to encourage development in rural areas too”.

The vast growth of China’s cities has, of course, been central to its powerhouse status. As the Financial Times noted recently: “For well over a decade, China’s economy has been powered by two main engines: its enormous export-oriented manufacturing and its scramble to build cities from scratch, even if no one actually wants to live in them.”

To fund this growth, in the aftermath of the 2008 global financial meltdown, the government ordered its banks to unleash a wave of credit. As a result, total debt in the Chinese economy has quadrupled to over 280% of GDP. The financial sustainability of this massive debt burden is now being called into question.

In August, the FT’s Beijing bureau chief, Jamil Anderlini, asked: “With a debt load bigger than the US and Germany, an economy overly dependent on credit-fuelled property development and capital flight accelerating, what will China’s mandarins do next to avoid what many believe is a gathering economic crisis?”

One answer is the new freedoms the Chinese government has recently introduced to allow local authority pension funds to invest in the stock market. This measure clearly aims to shore up the struggling Shanghai exchange and restore investor confidence at a time of global economic turbulence. But the debt swap is also intended to restructure the liabilities of the country’s local governments, China’s most indebted public institutions (they owe about 40% of GDP).

Elsewhere, other cities and countries in the east have been rather more cautious about unfettered growth. The city-state of Singapore (population almost 5.5 million) has little alternative than to be plan led; as an island, linked by causeway to Malaysia, it cannot expand. One of the most successful global cities, it conducts a brisk trade in promoting its planning and fiscal know-how – namely, in how to create one of the world’s strongest economies while managing urban growth. The former British colonial outpost and second busiest port in the world is selling its expertise well beyond its docks. It is exporting itself.

Not for nothing did UK prime minister David Cameron recently lead a trade delegation to this city-state, accompanied by political leaders of several English cities anxious to publicise their emerging Northern Powerhouse plan for a linear economic zone, linking the cities of Liverpool, Manchester and Leeds.

For them and for Cameron, Singapore is an exemplar. It is selling its leading-edge skills and technological and business models to the rest of Asia and beyond – from treating water, teaching maths, developing airports to even helping mainland China create entire cities through its expertise in urban planning. Britain, in short, thinks that it has much to learn from Singapore, not least in education (the tiny country regularly tops the global league table in mathematics) and in fostering high-tech business start-ups.

The UN’s Joan Clos is seeking a new model of urbanisation

‘We need cities that are inclusive, safe, resilient and sustainable.

We have a unique opportunity to address the challenges of rapid urban growth’

Reclamation, Singapore style: the 101 hectare Gardens by the Bay have been designed by the government to green the city-state

Seoul, the capital of South Korea, with a population of 10 million – rising to more than 25 million including its metropolitan area – is often seen as another modern, exemplar city. It has been transformed, after two decades of enormous public investment, into a high-tech global powerhouse. And it has worked hard on its image over the past decade, combining culture and design with new parks and open spaces alongside central waterways.

Like Singapore, it is selling itself hard to China, notably as a tourist hub for Chinese people who now have the disposable income to travel.

If an industrial revolution, in several phases, spurred the growth of cities in the 19th and 20th centuries, the Fin-Tech fusion of technology and finance is now helping to drive the economies of megacities. Seoul has become a magnet for venture capital, which is starting to flow across the Pacific; Google has opened its first Asian campus in a city that is blanketed with free wi-fi delivering the world’s fastest internet speeds – twice as fast as in the US. The municipality’s 2030 Seoul Plan lays down three key objectives: a dynamic global city with a strong jobs market; a vibrant cultural and historic city; and – crucially – a “stable housing and easy transportation, communityorientated city”. In-Ki Joo adds a fourth: citizen involvement. “Government initiatives, on their own, have their limitations,” he says. “Citizen involvement will bring creative and inspiring ideas on board, that will help make Seoul a unique player on the world stage and secure the

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GET T Y

success of the new city plan.” However, government officials must be sincere about involving citizens in the process, he warns.

Perhaps there are lessons to be learnt from the South American experience, where considerable strides have been made made in bringing marginalised residents into the municipal mainstream, and thus into the taxpaying citizenry.

Cities at their best inspire creativity, stimulate pride, reinforce a sense of belonging and underpin an identity.

These elements of local democracy – combined with effective planning – are critical during times of rapid urban expansion.

Yet even the most dynamic cities are not islands. In a fast-changing world where buoyant and growing emerging economies are stalling on the back of China’s financial turmoil – leading to fears of severe economic headwinds – there are concerns about whether these powerhouses can keep firing on all cylinders.

At the United Nations, Joan Clos is putting his trust in effective municipal governance to help keep global cities on track. As the UN prepares for its third major international urban conference next year – Habitat 111 – Clos, himself a former mayor of Barcelona, has one hope.

“We need cities that are inclusive, safe, resilient and sustainable,” he says. “We have a unique opportunity to engage in a new urban growth agenda that addresses the challenges of rapid urban growth and offers a new model of urbanisation.”

Wishful thinking? Hopefully not. ●

CITY FUTURES The United Nations predicts that by 2050 the proportion of the world’s population living in cities will have increased from 54% to 66%. This trend is being driven by “rapid urbanisation in emerging markets and continued urbanisation in mature markets”, according to a report by business consultants EY, Megatrends 2015: Making sense of a world in motion.

Research conducted by Oxford Economics and EY predicts that Asia and Africa will urbanise at the fastest rate of all the regions, and that rapid urbanisation will drive the world’s economic growth.

Yet the cities of the future face many challenges, says the report.

Policy-makers must ensure: ● Effective planning and sustained investment in railroads, highways, bridges, ports, airports, water, power, energy, telecommunications and other types of infrastructure. ● Effective responses to challenges such as climate change and poverty to make cities of the future competitive, sustainable and resilient.

Global cities wanting to raise funds for these purposes are “very dependent on macroeconomic and geopolitical circumstances,” according to Roshana Arasaratnam, a vice president at Moody’s Investors Services. These circumstances are in turn linked to the ability of cities to service sovereign debt.

Moody’s looks at a number of issues when rating cities’ creditworthiness, including: their financial performance; level of debt; access to liquidity; and governance and management.

The main reason cities want to access capital markets is to finance infrastructure, says Arasaratnam. “This means taking on a lot of debt. The question is, can they fund it? Rapid population growth may enhance cities’ tax revenues, or it may not. We need to look at what cities’ growth really means.”

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Arunma Oteh, the new vice president and treasurer at the World Bank, talks exclusively to PFI about thinking big on global development goals, ending poverty and her ambitions for her new job

ig development challenges need big money behind them, says Arunma Oteh. “We’re not going to nickel-and-dime it if we really want to eliminate extreme poverty or encourage greater shared prosperity,” she says.

The Americanism is appropriate. Harvard-educated Oteh has returned to the US after five years as head of the Securities & Exchange Commission in her native Nigeria to take on the critical role of World Bank vice president and treasurer. Taking a break from house-hunting in Washington DC, she gave an exclusive interview to Public Finance International just before starting her new job on 28 September.

As treasurer, Oteh’s job is all about big money.

It is her responsibility to maintain the World Bank’s high standing in the financial markets and to oversee its client advisory, transaction and asset management business.

The numbers are dizzying. The bank’s treasury team manages about $150bn in funds, including the bank’s own pension fund, and raises between $45-50bn a year, in around 20 currencies, from the capital markets.

Oteh is crystal clear about her priorities.

“First, my mandate will be to ensure that nothing compromises this first-class treasury operation that has existed over the years,” she says.

“The second thing – which I believe is crucial – is to ensure that the World Bank treasury better supports the mandate and mission of the World Bank. This is particularly important because 2015 is a critical year. This is the year everyone is focused on how we craft the development agenda going forward.”

Indeed, Oteh joins the World Bank at a key moment for international development: the eight

BY VIVIENNE RUSSELL Millennium Development Goals are, after 15 years, about to expire and make way for the 17 Sustainable Development Goals. After three years of consultation and discussion, the SDGs (or Global Goals as they will also be known) were published in August and formally adopted by the United Nations at a special summit at the end of September. this is a particularly exciting time to be in As well as being more numerous than the MDGs, the SDGs are both broader and development because I think more people deeper, placing greater emphasis on economic growth, infrastructure development, get it than have in the past. They get it inequality within and between developing countries and green issues. about the risks to the world when growth Oteh commends the progress made towards implementing the eight MDGs. is not inclusive.”

While these have not been met by everyone, she observes that useful lessons have That brings us to the issue of how this been learned from them. refreshed view of development is going to “In my personal view, while the MDGs were really meant to end poverty, the be financed. Does the shift from the MDGs SDGs are designed to finish the job.” to the SDGs demand a parallel shift in The goals place a greater emphasis on enablers of poverty eradication, such as financing? access to energy networks and their design – they are underpinned by 169 targets “Absolutely,” says Oteh. “And the World – should make monitoring easier, she says.

Bank has been taking the lead.”

“In 2030, we’ll see how we’ve done. For me, what is most important is that The assumption that conventional aid

WOMAN

ON AM I

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‘We’re not going to nickel-anddime it if we really want to eliminate extreme poverty or encourage greater shared prosperity’

AL AMY/ C O R B I S

M ISSI N Washington DC: Arunma Oteh’s kind of town

flows would be sufficient to deliver the eradication of extreme poverty and other targets has proved to be incorrect. There’s a need to think bigger – in trillions not billions of dollars she says.

On infrastructure alone, the World Bank estimates that $1trn is needed to fulfil unmet demand in emerging and developing economies.

“There’s no way the multilateral agencies can solve that themselves, but there are pension assets, there’s all kinds of institutional money that is looking to be invested, particularly with what has happened with yields over the years … most people can’t make the kinds of returns they used to make in developed countries,” Oteh says.

The private sector needs to become more involved, with multilateral agencies acting as catalysts to draw in alternative forms of financing and encouraging innovation, Oteh argues.

Institutions such as the World Bank can be vital in sending out signals to sometimes-nervous investors and building market confidence.

She draws on a specific example from the recent past, the creation of the International Financing Facility for Immunisation (IFFIM), on whose board she sat between 2006 and 2011. The facility, a UK initiative spearheaded by the then British prime minister Tony Blair and chancellor Gordon Brown, was set up in 2006, in an attempt to use the capital markets to secure funding for a key development challenge, namely immunisation.

With the World Bank acting as treasury manager, countries make pledges covering, say, a 20-year period, which are then used as a basis to go to the capital markets and raise funds upfront.

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ARUNMA OTEH AT A GLANCE

September 2015 Treasurer and vice president, World Bank 2010/15 Director general, Securities & Exchange Commission, Nigeria 2006/11 Pioneer board member, International Financing Facility for Immunisation

‘I think people tend to focus on headlines that are always very negative.

There is nothing like living in Nigeria and just seeing the energy, the quality of the people, the determination to do well’

“You’re frontloading the funding on the basis of those government pledges,” Oteh explains. “It’s an opportunity to fund immunisation today rather than wait for a 20-year period when those funds come.”

People want to both make money and do good, she believes: “IFFIM bonds are very attractive to investors around the world because then they can feel they are actually doing something worthwhile.”

Oteh’s CV is an intriguing mix of corporate and development finance.

Before she took on her role at the Nigerian Securities & Exchange Commission, the country’s capital market regulator, Oteh worked for many years at the African Development Bank, starting as a financial analyst, becoming group treasurer in 2001 and moving up to vice president for corporate services in 2006. She is also a member of the Africa advisory council of World Women’s Banking and sits on the African policy advisory board of ONE, the campaigning NGO founded by Bono.

1992/2009 Senior financial analyst – group vice president, African Development Bank 1990/91 Research associate, Harvard Institute for International Development 1987/88 Investment consultant, London 1985/87 Corporate finance officer, Centre Point Investment, Nigeria

The move to the World Bank means a return to the development arena and Oteh is looking forward to re-establishing her connections at October’s World Bank/ IMF annual meeting in Lima.

Relocating to Washington DC is a welcome move. “I love DC very much,” Oteh says. “It’s a very cosmopolitan town.

It’s much easier than most cities around the world – it’s certainly easier than New York and London – and I like it that the multilateral agencies and the government kind of shape the city.”

Her only concern, she jokes, is the often-biting Washington winter. “I don’t want to be shovelling snow. That’s the only thing I’m worrying about as I look for a house.”

She agrees that this year’s annual meeting in the Peruvian capital is a welcome opportunity to get out of the Washington DC bubble. “More generally, the World Bank has, over the years, been very focused on being very close to

the ground in developing countries like Nigeria,” she adds.

“Sometimes I think it’s more present than some of the other multilateral development agencies … it’s made a very conscious decision and knows that part of why it’s successful is being very close to its clients.”

Mention of Nigeria prompts some musing on the development challenges of Oteh’s home nation and how they can be tackled. As an example, she cites Nigeria’s historic reliance on oil as a means of financing public expenditure, so diversifying the economy and revenue base is important, as is investment in infrastructure, particularly energy and housing: “I like to say to people: if you focus on housing, you can get jobs for the plumber and jobs for the investment banker.”

Addressing corruption is also key and Oteh says good public financial management, not only in Nigeria but also around the world, is “absolutely essential”, particularly given its role in boosting public trust.

“Public trust is much more fragile today because the public has much more information available to it and people are prepared to vote with their feet,” she says.

“There is not enough wealth in the world to go around and, where public financial systems are not strong, it’s harder to ensure that the wealth that is created is well distributed.”

The World Bank, she adds, has played a crucial role in strengthening public financial management around the work: “It’s a very important portion of its work.”

Nigeria’s greatest asset, says Oteh, is its people, who she characterises as entrepreneurial, hard working and resilient.

“I’m an eternal optimist,” she admits, “but it’s [an optimism] that comes from a more informed understanding of Nigeria. I think people tend to focus on headlines that are always very negative – the whole Africa thing – war, famine, disease, corruption and all that.

“I lived away for 22 years and returned at the end of 2009, but used to visit annually.

There is nothing like living in Nigeria and just seeing the energy, the quality of the people, the determination to do well. I’m very optimistic.”

Oteh charmingly deflects suggestions that she will bring some of this Nigerian energy and drive to her team at the World Bank. “I’m fortunate; I have a great team … my bosses are amazing, they’re really bright

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FA ST FACTS

$150 BILLION Value of funds managed by World Bank treasury team

$45-50 BILLION Amount raised by treasury team per year, in about 20 currencies

The World Bank, as treasury manager, can speed up funding for immunisation schemes

and passionate about development.

All of what you need to be energetic about your job, I’ve got it.”

Oteh was born in Dundee in Scotland; her family (she has two older sisters and a much younger brother) moved back to Nigeria when she was two. She was educated at a Unity boarding school, established to bring together Nigeria’s diverse ethnicities, and the multicultural approach was an important influence on her. “I enjoy multicultural environments much better than insular environments,” she says.

After leaving school, Oteh studied computer science at the University of Nigeria in Nsukka, graduating with firstclass honours. A few years later, following a stint working in corporate finance, came the move to the US and an MBA at Harvard, then back to Africa for the job at the development bank.

Oteh is conscious of her position as a woman in a high-profile international

‘There is not enough wealth in the world to go around and, where public financial systems are not strong, it’s harder to ensure that the wealth that is created is well distributed’

role and the message that sends out to young women; she also stresses the business benefits.

“Men and women bring different attributes to a workplace. I think that in encouraging a more inclusive environment where men and women can contribute, you encourage a richer environment, there’s more innovation … But I don’t think you should have trophy women.

There are enough competent women around the world and people should compete and be the best.”

Her own will to succeed came from her parents who, she says, instilled some strong values in her.

“Whoever I have become, the credit needs to go to my mother and father,” she says.

“I never had the impression that I needed to work differently from a male child. My parents said the sky is the limit and you need to be the best that you could be. Those early foundations are very important in my view.” ● AUTUMN 2015 • PUBLICFINANCEINTERNATIONAL.ORG 17

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GETT Y

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Inside a migrant camp in France

BY RACHEL WILLCOX

The vast humanitarian crisis unfolding on the EU’s doorstep highlights the importance of scrutinising international aid spending much more closely

AID UNDER

THE

T

he United Nations has labelled it the worst migration crisis since the Second World War. Close to 12 million people have been displaced by nearly four years of war in Syria, including 3.8 million who have fled to neighbouring countries. The scale of the emergency has propelled international aid, already a sensitive issue, even further into the political spotlight. It has also prompted an intense debate across the EU and globally about how best to handle the migrant crisis.

In the UK, chancellor George Osborne has pledged that money from the country’s international aid budget will be used to help councils house refugees from Syria. He has also said there should be a fundamental rethink of how the UK uses its £12bn international aid budget.

Ensuring the best possible performance across a large and multifaceted international aid programme is a complex management challenge, especially at a time when international aid budgets are under increasing pressure. Official figures show that development aid from the 29 members of the OECD’s development assistance committee last year totalled $135.2bn – a 0.5% decline in real terms.

Meanwhile, aid to the poorest countries continues to fall; excluding debt relief, Official Development Assistance (ODA) to the poorest countries was down by 8%. Against this backdrop, the onus on achieving efficiency has never been greater.

In the UK, a Bill to protect the country’s commitment to spending 0.7% of national income on international aid received royal assent on 26 March, allowing the government to shift the debate away from the amount that is spent to the quality of aid provided.

This ringfencing of funds has also led to much greater scrutiny of where taxpayers’ money is being funnelled.

At the same time, the Sustainable Development Goals – a global set of targets with the aim of eliminating extreme poverty, agreed at the UN in September – potentially mark a real turning point for international development.

It is no surprise then that when Alison Evans took over as the new chief commissioner of the UK’s aid spending watchdog, the Independent Commission for Aid Impact (ICAI), on 1 July, she described it as a “challenging and crucial time” for development. The non-governmental

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FA ST FACTS advisory body was set up almost four years ago to provide an unbiased view of the aid money spent by the UK government and advise on future ODA spend, using an evidence-based approach to analyse the successes – and failures – of the UK government’s Department for International Development (DFID).

In a speech made earlier this year, secretary of state for international development Justine Greening said the establishment of ICAI has succeeded in driving much greater transparency and scrutiny of DFID’s work. However, Greening also accepted that DFID needs a much greater focus, and far more coordination and ambition.

“I’ve focused on driving greater efficiency, introducing better ways of working with suppliers and greater ministerial oversight on value-formoney projects, with the goal of squeezing every penny out of our development budget,” she said.

Tina Fahm is one of four commissioners at ICAI, and chief executive officer of a consulting firm that advises on governance, risk management and compliance in sub-Saharan Africa. She told PFI that, while the watchdog is aware of an increased focus on efficiency, that pressure has not changed ICAI’s approach to reviewing DFID’s performance.

Financial and risk management lie at the core of evaluation, Fahm explains.

ICAI uses three measurement systems – performance, impact and learning review – to gauge the success of programmes, irrespective of their theme. “We look at how DFID organises itself. We look at the quality of the design of programmes and their implementation and what has been

8

€135.2

% FALL in Official Development Assistance aid to the poorest countries

BILLION OECD development aid last year, a 0.5% decline in real terms

achieved. The learning review is where we look at new or emerging areas of aid programming or DFID responds to a recent challenge, and we take a snapshot of their efficiencies to further their development.”

“We have a very detailed and elaborate planning process that allows for very careful collection of evidence in a variety of ways that is continuously stress-tested and fact-checked to make sure we are sure of our ground. Part of that nine-month process involves milestones where we

‘The aid industry and DFID need to start being honest with the public about what works and what doesn’t’

GETTY

An Ebola victim's body is taken to a morgue in Sierra Leone

apprise DFID of those emerging findings and they have an opportunity to challenge those findings,” Fahm says.

“We have the most elaborate system I have seen in ensuring the evidence supports the recommendations we make.

We report the facts.”

One industry expert told PFI that ICAI has certainly ruffled feathers, as its noholds-barred reports suggest that the international aid managed by DFID could go further in some of the poorest parts of the world if those handing it out were better at deciding how it should be spent.

One of its most recent reports, published on 11 June, said a focus on short-term results at DFID meant aid is not being spent as well as it could be. It also warned that achievements involve some important trade-offs. “Some of DFID’s tools and processes for measuring results have had the unintended effect of focusing attention on the quantity of results over their quality,” it said.

Professor Tim Allen, head of the Department for International Relations at the London School of Economics (LSE), says external assessment is a useful tool in the quest for efficiency.

“ICAI has certainly been effective at making DFID nervous,” he says. “However, I suspect DFID does better than lots of other government departments on the criteria used, and better than most NGOs. A basic problem with DFID is that staff are overstretched.”

To exert further pressure on an already overstretched DFID, the Commons international development committee, chaired by Labour MP Stephen Twigg, is also charged with measuring the effects of aid. “Recent events, such as the Ebola outbreak in West Africa and the Syrian refugee crisis, show the public that we are all part of one world,” he told PFI. “However, it’s vitally important that aid money is spent with the public in mind.

This means ensuring that development projects provide value for money as well as

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GLOBAL COLLABORATION

12 MILLION people have been displaced by nearly four years of war in Syria

having realistic goals and expectations.”

Twigg said building on the successes of the past at both national and international levels is critical. “I am impressed so far by the extent to which DFID’s policy-making is evidence-based and its research thorough and innovative, but there is a question over how this translates into policy and here there may be room for improvement.”

In terms of measuring it is clear that one size does not fit all. Metrics will vary wildly as different aid programmes have different objectives. DFID, for example, is held to account to parliament on the basis that the funds are spent to alleviate poverty, whereas other official aid programmes openly state that aid is to promote economic growth.

“It makes little sense to assess aid given explicitly to promote the interests of the donor on the basis of alleviating poverty,” Allen says.

However, Jonathan Foreman, senior research fellow at Civitas: the Institute for the Study of Civil Society, believes that analysis into the impact of international aid continues to rely on too many assumptions, rather than on actual facts about the difference it makes. For example, school enrolments may be used to measure the impact of aid on education, even though it’s a notoriously flawed measurement.

“Measurement is a failing. Sometimes the benefits of an aid programme are hard to measure even if they’re real. We need to change the whole culture of the aid industry and DFID. They need to start being honest with the public about what works and what doesn’t. That would probably mean we would have a smaller number of good projects. Politicians don’t want people asking difficult questions because they’re terrified it will undermine their marketing,” Foreman says.

A move towards results-based measurement is certainly a step in the right direction, says Paddy Carter, a research fellow at the Overseas Development Institute in London. “There is a healthy

Effective aid needs strong financial management Financial and risk management is at the core of the Independent Commission for Aid Impact’s evaluation of the effectiveness of international aid. Robust financial systems and infrastructure in developing countries are critical to the success of aid programmes, ICAI commissioner Tina Fahm says.

Recognition of the role of strong financial management in driving inefficiencies out of the system culminated in the signing of a historic agreement at a forum on aid effectiveness, hosted by the OECD in 2011.

The objective of MOSAIC (Memorandum of Understanding to Strengthen Accountancy and Improve Collaboration) is to improve the quality of financial management systems in emerging economies through better cooperation and collaboration between the global accountancy organisation IFAC, international donors and the international development community.

“There is an inextricable link between good financial management and good service delivery and reduced corruption,” says Alan Edwards, chair of CIPFA Development. “We’re trying to work with other institutes and develop centres of excellence around good financial management.”

In February 2013, the United Nations Development Programme signed a contract for CIPFA and Kaplan Financial to train up to 500 UNDP finance staff from nearly 50 countries in CIPFA’s international public financial management qualifications; these are the first in the world to be based on International Public Sector Accounting Standards. The objective is to help the agency – one of the UN’s largest – to manage development spending around the world.

trend towards judging success in terms of the ultimate outcome, such as children who can read and write, rather than inputs such as school attendance or teachers trained.

The UK is leading the way in experimenting with results-based aid that creates an explicit link between aid and outcomes.”

The focus on results comes with some risks that will be familiar from debates around results-based management in public services, and whether quantitative targets can have unhelpful unintended consequences.

“In the context of aid, there is a risk of projects being chosen because it will be easy to demonstrate impact, as opposed to doing what’s best to promote development,” Carter says.

He also warns that the cost of monitoring and evaluating the effects of aid can result in difficult trade-offs for donors: “Oversight can be expensive, and cause aid workers to be behind a computer screen filling out forms when they should be out in the field.

Donors’ reporting demands can overwhelm understaffed bureaucracies in recipient countries that often have to deal with dozens of donor missions.”

Nonetheless, Fahm remains bullish: “We’re looking to make transformational impact to support the world’s poor.

Hindsight is a wonderful thing. However, we know we have helped strengthen the

scrutiny of UK aid, and the work we have done on anti-corruption has led to stronger financial controls.”

Foreman observes that the business of foreign aid has been going on since the 1950s but we’ve only been talking about efficiency for the past 10 years. He believes success will require donors to be more modest, more humble and self-questioning and to realise that the most effective forms of aid are things that don’t necessarily make us feel good.

Put into the context of history, politics and the incredible complexity of economies, Carter says it becomes clearer that foreigners pitching up with a bit of money to spend is not often going to bring about fundamental change. “Even important ingredients like better roads and reliable electricity are not magic bullets.

More realistic is the ambition of simply making the lives of people living in extreme poverty a little better.

“Everybody wants aid to help turn poor countries into rich countries, and some of the things that donors do should have high ambitions of transforming economies,” he adds. “But we should not expect success very often.”

A sentiment that – against the backdrop of the complex geopolitics driving the humanitarian crisis on Europe’s doorstep – has a very contemporary relevance. ● AUTUMN 2015 • PUBLICFINANCEINTERNATIONAL.ORG 21

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T

ax revenues pay for everything governments do, or hope to do. But no politician ever got popular by creating new taxpayers. Unsurprisingly, expanding the national tax base is treated with some caution.

In African countries, this is a particular problem.

Alongside the many development challenges they face, few governments want to run the risk of increasing the tax they collect from individuals and businesses – many of whom pay little or nothing.

Yet it is essential, even for governments that are confident they can get by through taxing finite natural resources.

Otherwise, they will simply not have the funds they need.

According to Wilson Prichard, co-director of the International Centre for Tax and Development, Africa still has a long way to go.

Outside South Africa, only Kenya has an effective tax collection system, he says, although Tanzania has made significant recent progress and Zambia stands out for its effective taxation of mining.

“It’s really difficult to answer which African countries have done well, as data may be poor, or the underlying GDP data might be. So claims about increasing tax as a proportion of GDP need to be treated with caution,” he tells Public Finance International. “I would say the main issue is difficulty in national tax collection, since local taxes are only a small proportion of what is collected – about 5% of the total.”

Countries that have done the most to increase their tax base have some factors in common, says Caleb Fundanga, executive director of the Macroeconomic and Financial Management Institute of Eastern and Southern Africa. These include establishing efficient tax administrations, creating incentives to bring the informal sector into the official tax system, and industrial expansion, which creates companies that may be taxed.

Fundanga thinks most African countries are not well equipped to take some parts of their economies into the tax system, such as the informal sector and the other components of the ‘unobserved’ economy. Plus, taxation of individuals is almost entirely through pay-as-you-earn systems. There is a persistent inability to tax self-employed individuals, such as doctors and lawyers, who can avoid it, says Prichard.

Then there is the question of politics.

People with money tend also to have

BY MARK SMULIAN influence, he says: “Widening your tax base is a political issue, as it may mean widening the number of people who will oppose you or that you are taxing influential people who will object.”

Many governments have given tax breaks to various business sectors in an attempt to attract international investment. “There is little evidence to suggest the investment is really additional,”

Prichard says. “Governments may struggle to identify taxpayers and corruption undermines collection, so there are many opportunities for companies to evade tax and using these tax breaks has been rather ineffective.”

Fundanga also doubts that international investors need or expect specific tax breaks. He says: “A transparent tax system would be enough. Serious international investors do not need tax breaks to attract them to invest. The ability to pay tax is part of their capacity as investors.”

Tax Justice Network–Africa and ActionAid denounced the practice of granting corporate tax incentives, in a joint report issued last August. Looking at the experience of the Economic Community of West African States, they urge countries to review all corporate tax incentives and assess tax that would be foregone against any investment attracted.

While a lack of reliable data hampers calculations, the report estimates that Ghana, Nigeria and Senegal are together losing up to $5.8bn a year through tax incentives. Corporate tax incentives are often managed by multiple, uncoordinated entities in each country and granted arbitrarily rather than according to cost-benefit analysis.

The report also found foreign direct investment to West Africa has increased, but not in the sectors that create the most jobs, such as manufacturing. “The use of corporate tax incentives is causing a competitive race to the bottom among countries in West Africa, which is detrimental to national revenue bases and regional integration,” it concludes.

Another option for raising revenues is taxing natural resources.

This is tempting, since it allows large sums of money to be raised from a few companies. However, relying on this can mean countries forgoing additional revenue they could raise from other sources, and having little tax revenue to fall back on once natural resources are exhausted. “Many countries are not very effective at taxing extractive industries; they may have very large

AFRICA:

‘Widening your tax base is political, as it may mean widening the number of people who will oppose you or that you are taxing influential people’

PUMPING THE TAX V

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African countries urgently need to expand the revenue they raise from taxes. How can this be done in a sustainable way, without reliance on depleting natural resources?

FA ST FACTS

TAX COLLECTION Gain

3.5

% a year Tunisia’s average rise in tax income Loss

5.8

$bn Annual loss through tax incentives in Ghana, Nigeria and Senegal

UP V OLUME

industries but receive relatively little revenue,” notes Prichard.

Fundanga also warns against over-reliance on natural resources for tax revenues.

“This income source is only available as long as the natural resources exist – once depleted, it ceases to exist. What countries should do while this income source is still available is convert the natural resources into financial resources by establishing sovereign wealth funds and other such facilities,” he says.

“It is not safe to depend entirely on natural resources revenue because they get depleted at some point – but tax revenue from natural resources can be used to develop other sectors of the economy, which will expand the tax base.”

The news about Africa’s tax base is far from uniform. Martin Brownbridge, an adviser on African banking, writing in African Economic Outlook, argues that many countries have successfully enlarged their bases, citing Tunisia’s yearly average increase of 3.5%, while Egypt’s revenues have more than doubled in the past five years and Côte d’Ivoire has rebuilt its tax base after a civil war.

A recent International Monetary Fund working paper, examining tax administration reform in Francophone subSaharan Africa, concludes these states have taken many steps associated with good administration – but lag behind many other African countries when it comes to the ability to raise revenue.

Political and social contexts play a role, and are common to countries that successfully reform their tax operations, argue the authors, economists Patrick Fossat and Michel Bua. “This was true, for example, in Rwanda following the genocide and in Uganda where the political situation remains difficult,” they note.

“Despite these difficulties, an effective use of the technical and financial support provided by the World Bank and [UK] Department for International Development have enabled these countries to structure their tax administrations as revenue agencies in which major organisational and procedural reforms were implemented. Less than ten years after the launch of these reforms, the Rwandan and Ugandan tax administrations are now recognised as models for others in Africa.”

So could African countries do more to collect local taxes?

“The big under-exploited area of tax is property and that is true across Africa, although action to do that may be stopped by the people who own property,” explains Prichard.

The Commonwealth Local Government Forum’s 2015 conference in Gaborone, Botswana, heard from Morris Chikosa, revenue mobilisation officer of Mzuzu City Council in Malawi, about how this can be done. The council has significantly increased its revenue through improved, comprehensive and accurate property information, a mass valuation assessment – and better enforcement backed by the political will for change.

This, it seems, is the critical issue. The ways in which African countries could expand their tax bases are now well known.

Whether there is the political will to act on this knowledge is another question. ● AUTUMN 2015 • PUBLICFINANCEINTERNATIONAL.ORG 23

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BY IAN BALL

GETT Y

The sovereign debt crisis has not gone away. And, as markets become more turbulent, only reform of global financial governance will cast light on governments’ true performance

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O

ver recent months, the news media has been running a seemingly endless stream of articles about Greece’s debt, as well as mounting solvency issues in Ukraine, Puerto Rico and other countries.

Meanwhile, general economic uncertainty and high levels of volatility in financial and capital markets – reflecting among other matters the downturn in China – have created a threatening backdrop for widespread concerns about debt levels in general, and sovereign debt in particular.

The facts are clear – debt, both private and public, is at very high levels and has increased markedly since the financial crisis. Two recent reports illustrate this.

One, from management consultants McKinsey & Company, reports that global debt has increased by $57 trillion since the crisis to just under $200trn (see table, page 26). The other, from the Jubilee Debt Campaign, reports that 22 countries are already in a debt crisis, with another 14 getting close.

Regarding government debt, the OECD recently reported that: “In 2013, the average debt level in OECD countries reached 109.3% of GDP. Between 2007 and 2013, debt increased by 34.7 percentage points across OECD countries.”

This increase means that OECD governments have significantly less fiscal space in the event of further economic and financial shocks. The Institute of International Finance notes, in its Capital markets monitor, that one implication of these levels of debt is that “… at

GETT Y

‘In the absence of an international framework to manage sovereign debt, world leaders will lurch from one crisis to the next’

THE CRISIS NEXT TIME

present there are 11 countries, mostly emerging markets, carrying a CAA1 rating by Moody’s – implying a high risk of default.”

Other commentators have pointed to the sensitivity of the global financial system to small changes. Olivier Blanchard, the outgoing International Monetary Fund chief economist, told the Los Angeles Times recently: “The post-crisis world is a world of high debt, and it doesn’t take much. It just takes a bad shock for the debt dynamics to go wrong.” Referring to the recent Greek default, he warned: “We have to be ready to see other episodes of this kind.”

Similar forebodings are expressed by Domenico Lombardi, a global economics expert at the Centre for International Governance Innovation in Ontario.

He warned that, in the absence of an international framework to manage sovereign debt, world leaders will “lurch from one crisis to the next”. He told the Los Angeles Times: “This is one area where we have no global governance.”

Before considering what that global governance might consist of – and the issues associated with accounting and the accountability of governments – it is worth emphasising just how important governments perceive financial reporting to be when it comes to private sector issuers.

This importance is reflected in the statutory and regulatory requirements imposed by states or their regulatory agencies on the governance of and financial reporting by publicly listed companies.

At the heart of those requirements are rules that govern the way companies are required to report – their financial reporting rules (or standards). Because companies are self-interested, these rules are backed by mandatory audit requirements and auditing standards.

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And, because auditors need to be both competent and independent, there are further rules about their registration and independence. Finally, to ensure the quality of audit, the application of the auditing and independence rules by audit firms is both regulated and closely monitored.

These layers of regulation and oversight speak to the importance of financial reporting in a capital market context. Further evidence can be seen in the international response to the financial reporting failures in the private sector in the early years of this century, when governments and regulatory authorities around the world acted swiftly and decisively to enact financial reporting reforms. There was again action to strengthen financial reporting and auditing after the 2007/08 global financial crisis, even though financial reporting was not seen as a significant contributor to it.

Interestingly, while there is a consensus over the importance of high-quality corporate financial reporting, different standards seem to apply when it comes to the risks around the fiscal sustainability of governments.

For example, the UK Financial Reporting Council, in its updated code of corporate governance, focuses on “the provision by companies of information about the risks which affect longer term viability”, stressing that companies will “need to present information to give a clearer and broader view of solvency, liquidity, risk management and viability”.

Implicitly, this recognises that, even with a full set of financial statements that have been prepared according to relevant accounting standards, additional reporting is required to enable investors to make informed judgments on a company’s financial position and long-term prospects.

There is a striking difference between this and the regulatory requirements that apply to

‘Unlike companies, governments choose their own financial reporting standards … some do not release any financial statements at all’

FA ST FACTS

Global debt has increased by $57 trillion since 2007, outpacing world GDP growth Compound annual growth rate (%)

Global stock of debt outstanding by type1 $ trillion, constant 2013 exchange rates

199

2000-07

2 2007-141

7.3

5.3

40

Household

8.5

2.8

56

Corporate

5.7

5.9

58

Government

5.8

9.3

37

45

Financial

9.4

2.9

Q4 07

Q4 141

+57 trillion 142 33 87

38

19 26

33

22 20 Q4 00 246 Total debt as % of GDP

269

289

1 2014 data for advanced economics and China; Q4 13 data for other developing economies.

NOTE: Numbers may not sum due to rounding.

S O U RC E : H AV E R AN ALY T I C S ; N AT I O N AL S O U RC E S ; WO R L D EC O NOM IC OU TLOOK , IM F; B IS ; MC KI N S E Y G LO B AL I N ST I T U T E AN ALY S I S

governments: here, do as we say, not as we do, appears to be the rule.

Unlike companies, for example, governments choose their own financial reporting standards and practices. In some cases, these standards are determined through an independent agency, but frequently they are set by the ministry of finance.

An increasing number do report on an accrual basis (including the UK, Canada and the US), and some of those report according to independently developed financial reporting standards – the International Public Sector Accounting Standards (IPSAS). These include New Zealand and Estonia.

This reporting often involves adaptations, such as the omission of the liability associated with public service pensions (as in France and Switzerland). Many still report on a cash basis (including Japan, Germany and Greece, although Greece has recently announced an intention to implement IPSAS). Finally, some governments do not release any financial statements at all (such as the Vatican and Abu Dhabi) even when, as in both these cases, their statements are reportedly prepared in accordance with IPSAS. Government accounting has improved markedly over the past two decades. However, it is still seriously deficient in providing comprehensive, comparable, accurate, relevant, timely and publicly available information on the financial performance and position of governments.

Because so few governments produce complete, accrual-based information, economic, political and public discourse focuses on two metrics: deficit and debt, with the former measured in cash terms and the latter in nominal dollars.

Neither of these reflects adequately the economic substance of governments’ performance and position, and both metrics may be seriously misleading and dysfunctional.

This situation carries significant risks for the global economy. As long ago as 2007, the International Federation of Accountants wrote to the International Organisation of Securities

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fiscal position focusing on debt and deficit numbers that are increasingly viewed as meaningless and Reaction to August are radically different share plunge at Haikou stock exchange, China from those that would be produced IMF managing director Christine under IPSAS or IFRS. Lagarde: the Fund is In the polite words critical of using debtto-GDP ratios as an of the IMF: “Given indicator of future debt the extraordinarily concessional terms that now apply to the bulk of Greece’s debt, the debt/GDP ratio is not a very meaningful proxy for the forward-looking debt burden.”

Even more troubling is that, while there has been little effort to address the accounting problems exposed by the sovereign debt crisis, there has been rapid action to make it easier for governments to restructure their debt in the event of future crises. This in itself is not a bad thing. Whether at individual, organisational or national levels, having appropriate mechanisms for the resolution of insolvency serves both efficiency and equity. However, it appears negligent to make the changes necessary to fix the next crisis without addressing the issue – accounting – that both caused the last one and could prevent the next.

At the international level, both the International Monetary Fund and the United Nations are working to improve the resolution mechanisms for sovereign debt. Within Europe, action in this sphere was taken very swiftly with, by 2012, a legislative requirement that among other issues, member states insert collective action clauses (which facilitate debt restructurings) into all new debt issues. The speed with which this was developed and implemented stands in marked contrast to that with which financial reporting deficiencies have been addressed.

When organisations are in financial difficulties, the incentives to misreport their performance and position increase. This is the case for governments, just as for companies. In an environment in which many governments have significant debt burdens, the incentives to misreport will be even greater. The current environment militates against closing the gaps in the governance of sovereign debt. Instead it encourages what has been euphemistically referred to as “fiscal illusion”. Governments, especially those operating on a cash basis, find and use many techniques for misrepresenting their financial position.

The last crisis has left governments with strained balance sheets, giving them stronger incentives to misreport their financial performance and position, and less capacity to deal with the next crisis. This makes it imperative that international action is taken to develop sound governance arrangements for sovereign debt. In particular, there needs to be radical, determined and rapid action to require financial reporting by governments in accordance with international standards of accounting and auditing. Better prevention than remediation. ● Protestors in Athens: the accounting origins of the Greek financial crisis have not been addressed

GET T Y

Commissions, urging it to address this issue. It argued that, although central governments “raise very large amounts of money through the capital markets and in many jurisdictions, eg the United States, the value of trades in sovereign debt is multiples of the value of trades in corporate equities and bonds … the standards and regulations governing sovereign issuers are not of sufficient quality to protect investors and ensure the stability of capital markets.”

Yet, even with the financial and economic consequences of the sovereign debt crisis triggered by the financial reporting failure of the Greek government, there has been no sense of urgency on the part of governments to address governance deficiencies in respect of sovereign debt. The accounting origins of the crisis remain unaddressed at regional or global levels – and investors remain without adequate financial information to assess sovereign debt. The risks to financial stability continue.

At a regional level, the European response has been especially slow and timid. Despite a recommendation in 2011 from the economic and monetary affairs committee of the European Parliament that all member states move to adopt IPSAS within three years, there has, four years later, been no change in the financial reporting requirements on member states. Neither is any in prospect within the next few years.

Among many other consequences, Ian Ball is chair of this has left the debate over Greece’s CIPFA International

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N

ame some key challenges you face as chair of the CAPA conference organising committee.

We want participants to get acquainted with the most recent and relevant knowledge in the accountancy field, and to understand the major challenges their profession faces. We want them to come away with a shared vision.

But getting more participation from member bodies in developing countries is a challenge. There will be over 200 participants from Japan at the Seoul conference, and more than 100 from China. For some countries, though, the costs of participating are too high.

We are trying to overcome this by providing subsidies, particularly for countries that have recently experienced natural disasters. We hope this will enable all member nations to participate in what promises to be a high-quality conference with prominent global speakers.

How does CAPA deal with the diverse needs of its member bodies?

CAPA consists of both developed and developing countries, with very diverse economies, sizes and needs. They also differ in their levels of

PIVOT TO ASIA PACIFIC

Seoul: public sector financial management will be the subject of a session at the CAPA conference

industrial development. In China and South Korea, for example, manufacturing industry is highly developed. Other countries, like Australia, have very advanced finance and banking sectors.

CAPA has a long track record of joint participation in projects by different member bodies, to help deal with this very diverse environment. An example of that was a training exercise we held recently (on IFRS for SMEs) in both Kuala Lumpur and Hyderabad.

Funded by the World Bank and supported by prominent speakers from developed countries, it helped to link up our member bodies.

What are some of the main drivers of economic change in the Asia Pacific region?

There are two key factors: the relatively high number of well-educated people in the region; and the role of Confucian culture that, many would argue, motivates people to work hard.

In many Asian countries influenced by this culture, people see education as vital to improving their status. Parents believe it is their duty to ensure children are educated to the highest possible level. This focus on education has been a major driver in

The Confederation of Asian and Pacific Accountants (CAPA) is holding its 19th conference in Seoul, South Korea, from 27 to 29 October. Public Finance International asked the conference chair, In-Ki Joo (right), about his ambitions for the event and the region 28 PUBLICFINANCEINTERNATIONAL.ORG • AUTUMN 2015 PUBLICFINANCEINTERNATIONAL OCTOBER 2014 www.publicfinance.co.uk

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There are not enough competent accountants in government organisations.

And most senior government officials in the region, with economics or law backgrounds, do not have the required accounting knowledge to understand or implement accrual-based accounting in the public sector.

CAPA has a public sector financial management committee to tackle these issues, and holds regular seminars on this theme – for example, the Financial Reporting for Economic Development Forum in Sri Lanka last year. Whenever CAPA holds an event, it tries to have a session on public sector financial management. This will be the case at the Seoul conference.

What’s the best way to improve transparency and accountability in public sector accounting in the region?

The best way would be to introduce a reliable international index. For example, the World Bank or some other internationally recognised organisation could announce the index score for public sector transparency and accountability for each country once a year.

This way, the conditions and terms of all foreign aid and international lending would be clearly determined, based on countries’ rankings on this index.

GE T T Y

transforming low-technology industries into high-technology ones in the region.

However, the emphasis on hierarchy and seniority can also deter the development of new ideas and the flexible ways of working that are needed in uncertain times. This in turn can act as a brake on innovation.

What progress are CAPA member nations making towards harmonising international accounting standards?

Most of our member nations are confident their accounting standards are converging to IFRS, and many countries have adopted IFRS for SMEs. It is almost unthinkable that any member country can ignore or deviate from these standards.

The major challenge though is to build an accounting infrastructure that supports this process. That means educating and training accountants to an adequate level. CAPA has been doing this via a project with the World Bank that provides education to accountants in the region.

What headway has been made in public financial management reform – especially on accrual accounting and implementation of IPSAS? Almost all countries agree that accrualbased accounting provides higher quality information for the public sector.

However, the lack of an accounting infrastructure is a problem.

Name three of the most important challenges facing the Asia Pacific accountancy profession?

First, low social recognition of the profession’s contribution to society. And linked to this, low service charges due to severe competition.

Second, the profession’s narrow scope. Audit and taxation are considered the major focus, whereas it should be extended to business strategy and corporate governance.

Integrated reporting is a good example.

Third, campaigning against corruption when it comes to the preparation of financial information is another important challenge.

How does CAPA work with other accountancy bodies and aid agencies in the region?

We have an open policy of inviting any accountancy bodies in the region, such as the Asean Federation of Accountants, to CAPA activities. The 2015 CAPA Seoul conference is open to all accountancy bodies in the region.

We also try to work together with aid agencies such as the Asian Development Bank and the World Bank. For example, CAPA runs a “Training the Trainer” programme with the World Bank, and other joint initiatives.

‘Accrual-based accounting provides higher quality information for the public sector.

However, the lack of an accounting infrastructure is a problem’

What are some of your proudest achievements as past president (2009/11) of CAPA? I would say initiating and running these joint projects. Also, setting up leadership structures and a performance evaluation system within CAPA, and recruiting a chief executive capable of developing and enhancing the organisation’s strategy.

Plus, emphasising and creating awareness about the importance of public sector financial management within the Asia Pacific region. This was promoted at the seminar we hosted with prominent professionals at the CAPA council meeting in Seoul in 2011, and will be taken forward at this year’s conference. ● AUTUMN 2015 • PUBLICFINANCEINTERNATIONAL.ORG 29

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RISING

FROM THE

BY G A U R AV M A L H OT R A

When Detroit filed for bankruptcy in 2013, it wasn’t the first time the city faced ruin. So how were its public finances restructured, and what can other cities learn from its experience?

Gaurav Malhotra reports

ASHES

n the morning of 11 June 1805, a fire started in a Detroit bakery. The blaze spread quickly, destroying wooden buildings. Despite the best efforts of citizens who tackled the fire, most of the city burned down.

The Great Fire of 1805 is commemorated on the city’s flag, which carries the motto, in Latin: “It will rise from the ashes.” And rise it did. The city’s population expanded, grand boulevards were built, its men fought bravely on the fields of Gettysburg, and it thrived in the 20th century, powered by industrialisation, armaments and, of course, the automotive industry.

Then, 200 years after the Great Fire, the city faced another crisis. As manufacturing industries declined and the population fell, Detroit became a byword

for urban decline. High rates of unemployment and crime, coupled with blighted neighbourhoods and a widespread failure to collect taxes, put intolerable pressure on the city’s finances. On 18 July 2013, Detroit became the largest city in the US to file for bankruptcy. Five months later, it was declared bankrupt, with liabilities of $18.5bn. Detroit emerged from bankruptcy in December 2014 and is now on course for a second revival.

Could this happen in other cities, and what can be learned from Detroit’s experience?

The story of Detroit reflects the financial distress seen in many other cities and municipal entities, including school systems and utilities. Cities face insolvency as they grapple with difficult economic conditions, high levels of debt and large, underfunded liabilities, such as pensions and retiree healthcare.

So it seems a good time for municipal policy-makers

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to rethink the possibility and implications of a comprehensive restructuring process.

What happens to a city that files for bankruptcy?

EY assisted in devising and implementing Detroit’s restructuring plan under the leadership of the city’s mayor, chief finance officer and emergency manager. While each municipality will have its own circumstances and priorities, our work with Detroit has enabled us to draw together the features of a successful approach to restructuring.

As part of a restructuring plan, cities can look for efficiencies in operating budgets, consider whether they should provide non-core services and explore partnerships with public and private sector entities.

When it comes to cutting costs, cities may be tempted to take a top-down approach, and decide to cut, say, 10% across the board. However, this is unlikely to produce the anticipated benefits. Cities have to deliver public safety services, such as police and fire, which take big chunks of budgets. Blunt tools, such as a uniform cut, do not take into account the large number of exceptions needed to keep essential services going. So it is critical to undertake a department-by-department analysis.

Just as controlling costs is vital, so is protecting

‘Cities may be tempted to cut costs across the board.

This is unlikely to produce the anticipated benefits’ revenue. Although the composition of a city’s revenue stream is generally consistent year after year, it is critical to monitor the underlying trends that will affect future revenue estimates.

To balance budgets, cities often rely on one-time revenues, such as proceeds from asset sales or from issuing long-term debt. However, this can mask a systemic imbalance in annual budgets in the short term, and some cities fail to replace eroding sources of income.

So they need to review sources regularly and adapt their budgeting. Identifying new grant-funding opportunities is important, and maintaining sufficient budget reporting is critical to ensuring this source of funds continues, particularly in the early days of restructuring.

The importance of financial controls cannot be overstated. It is good practice to take a long-term perspective on city finances, beyond periodic audits.

This requires capital investment in systems, updated budgeting and audit processes, and regular strategic financial reviews. City managers should: Gaurav Malhotra is senior managing director at Ernst & Young Capital Advisors LLC

⦁ Get a grip on liabilities Focusing on costs and revenue may not be enough.

Long-term liabilities may need to be restructured to make finances sustainable. It can be a challenge to

restructure pension liabilities, given contractual and legal protection. City officials should know the legal provisions that may affect their ability to restructure such liabilities. It is also important to invest in actuarial analyses, financial forecasts and scenario planning.

Administrators can review medical plans and benefits for employees and retirees, and benchmark them against schemes from other cities. Armed with this analysis, officials can seek to cap the commitment to funding these obligations in the future. ⦁ Negotiate smartly with creditors Employees and retirees are key stakeholders in negotiations. They work or have worked for the good of the city, and cutting their benefits is likely to be sensitive and controversial. Against this backdrop, officials need to negotiate with representatives of all creditors. The preparation of a clear blueprint of the restructuring plan, with proposals for all creditors, including unions, pension systems and debt holders, is critical to productive negotiation.

Comprehensive restructuring creates a breathing space for the city to negotiate with each creditor group.

Detroit negotiated with creditors, bond insurers, swap counterparties, union leaders and retiree groups in informal talks and court-supervised discussions.

Access to bankruptcy proceedings increased the city’s capacity to prioritise its obligations, allowing significant and unprecedented negotiation with claim holders.

Through negotiation, Detroit de-risked its pension plans by negotiating a reduction in liabilities. Uniformed retirees did not see any reductions to their pension income, but gave up a portion of future increases in benefits. The city reduced its retiree medical liabilities by establishing two voluntary employee beneficiary associations to administer retiree health care benefits.

Detroit participated in mediation sessions with police, fire and general staff unions to establish new collective bargaining agreements. These negotiations took place in good faith, with workers continuing their daily duties despite the threat of reduced benefits. ⦁ Invest for a better tomorrow No city can expect to see sustainable growth without investing in its economy. This is necessary to strengthen communities, ensure public safety and improve citizens’ quality of life – and attract new investment and jobs.

So, once budget savings have been made, the challenge for administrators is to reinvest these savings smartly. This includes making clear, long-term plans for investment in core services and providing persuasive incentives for businesses to move into the city.

Back in 1805, when their city was blazing, the people of Detroit formed a human chain from the river to the fire. They passed buckets of river water up the chain in a vain attempt to control and extinguish the fire.

In the 21st century, when the city faced financial ruin, the tools at its disposal were more sophisticated.

Financial discipline, reducing liabilities, effective negotiation and planning for economic development enabled it to turn financial distress into a platform for growth. Detroit can, once again, face the future with confidence. ● AUTUMN 2015 • PUBLICFINANCEINTERNATIONAL.ORG 31

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GLOBAL AMBITIONS

B

Ian Carruthers takes the helm at the Toronto-based IPSASB in the new year.

He's got big plans for raising public financial management standards worldwide

y his own admission, Ian Carruthers is an accountant by accident rather than design. CIPFA’s policy and standards chief freely admits to having gone from being an aspiring medic, through a number of other possible career paths – to becoming the incoming chair of the Toronto-based International Public Sector Accounting Standards Board (IPSASB).

“I am excited,” he tells Public Finance International. “It’s a role I’ve wanted to do for a number of years.” And no wonder.

From 1 January 2016, Carruthers

BY JUDITH UGWUMADU IMAGES AKIN FALOPE will be the new “face of the board”, leading IPSASB, the independent standard setting board hosted by he wanted to be a doctor. His parents the International Federation of His lightbulb moment came when were in the profession, and it Accountants (IFAC), in developing and he took over as a university society seemed an obvious plan. But it wasn’t promoting the financial reporting treasurer from a woman who was long before he started to rethink. standards and guidance increasingly applying to become an accountant.

Carruthers explains he has always used by public sector entities globally.

“She was really positive about it been interested in people and how He’ll be spending about 75% of his saying, ‘[accountancy] is really organisations work, but “having got time with IPSASB (CIPFA will still get interesting, you find out how things offered a place at medical school I 25% of him), which means swapping work, go into different organisations realised it was going to take an awful CIPFA’s HQ in east London for a more and talk to people’,” he says. “It was long while to really get to be involved globe-trotting existence. He is eager, talking to her that got me thinking. in the areas I was interested in he says, to get started.

That’s how the decision to go into as a doctor. I decided that it really But he could easily have ended up in accountancy came about. The start of wasn’t for me.” an entirely different career. As a child, my career was actually accidental. But Instead he studied chemistry at the I suppose I’ve always had a scientificUniversity of York, where he enjoyed mathematical type of mind, and I love aspects of his degree, such as figuring puzzles and making sense of things.” out how large chemical plants work, After graduating, he went on to start and the management and financial his career in public finance, at one of decisions involved, but still couldn’t see the predecessors to the auditing firm his way forward in career terms.

PwC, based in London.

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‘The more efficiently you spend public money, the more that’s available for the provision of services. That has really been the thing that’s driven me’

He spent 14 years there, working with mainly public sector clients, but also in the private and not-for-profit sectors. After a two-year period seconded to the Treasury as a financial adviser to a number of the spending teams, he moved there as a permanent civil servant in 1999, playing a key role in the UK government’s transition from cash to accrual budgeting and reporting.

In particular, he led the Whole of Government Accounts programme, implementing the 1,500 body, cross-public sector consolidation from scratch. This included everything from government departments, the health service and the BBC, to local government and education. It involved simultaneously leading projects ranging from policy work, and getting legislation drafted and through parliament, to procuring and implementing a consolidation system.

Crucially it got him involved in standard setting for the first time, developing accrual accounting policies for the UK tax system, and through this his first involvement with IPSASB as part of their steering committee working on this area.

“I was incredibly lucky that my career coincided with a time when [the UK government was] looking to move to accrual accounting and budgeting in the public sector,” says Carruthers. He describes it as a fascinating period, when the government “was doing something entirely new, and I was playing a key part in it. It also taught me a lot about how to work with, and influence, really diverse professional and stakeholder groups.”

AUTUMN 2015 • PUBLICFINANCEINTERNATIONAL.ORG 33

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This in turn led to his appointment, in June 2006, as executive director for policy and standards at CIPFA. Together with becoming technical adviser to former IPSASB chair Mike Hathorn, as CIPFA’s activities became more global, he has also spent an increasing amount of time travelling, promoting stronger public financial management and governance internationally.

His CIPFA role is just one of many hats he now wears. In 2010, Carruthers became a member of IPSASB. He also represents the board on the Eurostat Task Forces, developing proposals for European Public Sector Accounting Standards (EPSAS), and serves on the UK Financial Reporting Accountancy Board (FRAB).

From here, it felt logical to apply for the post of IPSASB chair, succeeding Andreas Bergmann. Evidently IFAC agreed with that assessment too.

On taking up the post in January, he will work closely with Bergmann for a couple of months, embarking on a joint hello and farewell tour. Its aim is to build support for IPSASB’s work, emphasise continuity and show how the board is moving forward with the strategy he played a key role in developing during Bergmann’s term.

Carruthers says that his top priority will be to put real impetus into key public sector-specific projects that the board has included in its forward work-plan.

These will be guided by the conceptual framework for public sector reporting that IPSASB finished last year, and the strategy it has recently adopted to help strengthen public sector financial management globally.

Social benefits such as state pensions are a really important issue for the public sector, he says, and also one of the bigger gaps in the IPSASB standards suite. “We’ve now just agreed what the board’s work programme will be over the next two to

Ian Carruthers will spend 75% of his time working for Toronto-based IPSASB

CARRUTHERS AT A GLANCE

Jan 1 2016 Chair, International Public Sector Accounting Standards Board Jan 2010 – To date Board member, IPSASB Jun 2006 – To date Executive director, Policy and Standards, CIPFA Feb 1999 – May 2006 Head of WGA Programme then director, Government Reporting, HM Treasury Oct 1994 – Aug 1996 Seconded to HM Treasury as financial adviser Sep 1984 – Jan 1999 Trainee to senior manager, PwC and predecessors

three years. There are some big issues for the public sector that we will address, including non-exchange expenditure other than social benefits, and approaches to asset valuation, particularly heritage assets and roads.”

Bergmann’s term as IPSASB chair has seen a real momentum build up for IPSAS adoption in key areas such as South-East Asia and Latin America, as well as the plans afoot in Africa. The EPSAS project will also soon reach a critical phase.

Promoting and maintaining the focus on IPSAS adoption as a key part of PFM reforms will therefore be important for Carruthers and other board members during his term, he says.

Carruthers’ proposals are backed by Bergmann, who says he is confident his successor will continue the work started during his term. “Firstly, I would like to congratulate Ian. I think the international call for nominations ... has resulted in the appointment of a very strong new chair,” he tells PFI. “Ian has a background both in the private, but to a much larger degree in the public sector, in the UK and abroad. He combines excellent technical knowledge with strong leadership.”

This view is warmly endorsed by CIPFA chief executive Rob Whiteman. “I’m delighted to see Ian appointed to chair of IPSASB,” he says. “He has been an

effective IPSASB board member who is well regarded and respected around the world. I think anybody who has come into contact with Ian will be pleased that so strong an appointment has been made. From CIPFA’s perspective we’re actually proud to see one of our directors recognised in this way.”

Carruthers believes his appointment will bring wider benefits for the institute, reinforcing and raising its profile in the international arena, and increasing opportunities to build relationships in different countries.

When he’s not being a player on the international stage, Carruthers has a more domestic passion. For 15 years he has been chair of a small touring theatre company.

Chairing a board including a senior lawyer and business executive, plus actors and people involved in creative media, has been a challenge at times, he says. “But we’ve all been united by a commitment to sharing our love of theatre.”

He also loves international travel and, with both daughters likely to be at university soon, Carruthers hopes that his wife will be joining him for some of his time away, in between the demands of her own training and facilitation business.

Above all, he is excited about applying the lessons of his 30 years in public finance across the globe. These, he says, are all about providing the best public services you can, with finite resources.

“The more efficiently you spend public money, the more that’s available for the provision of services. That has really been the thing that’s driven me.”

Or to put it another way, it’s all been about making a difference, for people and organisations. Just not quite in the way originally expected. ●

34 PUBLICFINANCEINTERNATIONAL.ORG • AUTUMN 2015

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creating global finance experts The Chartered Institute of Public Finance and Accountancy is the world’s only professional accountancy body to specialise in public services, making the CIPFA qualification a great foundation for a career in public finance.

The CIPFA qualification is highly respected globally for its expertise by governments, donors and public finance professionals to advance public finance and support public services.

The CIPFA suite of global qualifications: CIPFA Certificate in International Public Sector Accounting Standards CIPFA International Counter Fraud qualifications CIPFA International Public Financial Management qualifications* * Successful completion of the CIPFA International Public Financial Management qualifications leads to full membership of CIPFA and use of the global designatory letters CPFA – Chartered Public Finance Accountant.

Study online anywhere in the world with CIPFA You can now study CIPFA’s global qualifications and enhance your career wherever you are in the world.

CIPFA live online is a virtual classroom giving you comprehensive training, support and knowledge to pass through workbooks, question packs and a progress test.

www.cipfa.org/internationalstudy

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builders of a better working world.

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