What challenges are we facing?

Changing conditions are raising a number of challenging questions for the Australian market. Our people are listening to clients' concerns and working with them to find opportunities for improvement and growth across a range of areas.

Will Australia learn the lessons of lost
opportunity from the resources boom?
The abrupt end to the commodities boom last year presents an opportunity to reflect on the windfalls and challenges Australia’s resources industry has undergone. Chinese and global demand for resources will return, which will result in the sector’s resurgence at least in the medium term. But what has Australia learnt from the last rush to ensure it is better prepared for the next wave of opportunity?

Australia’s critical infrastructure, particularly its port and rail systems, proved inadequate during the boom. Burgeoning global demand saw ports choked beyond capacity, with ships waiting in queues. Production and delivery had to be slowed due to infrastructure blockages. Addressing these fundamental issues will require a commitment from industry and government to invest for the long term in strategic transport assets. New infrastructure will ensure Australia's resources industry has the capacity to be more competitive internationally.

Regulation has been a persistent barrier to business, particularly during the boom. Multiple and disjointed regulatory approval processes at various levels of government slowed investment decisions. Lack of clarity around Australia’s Foreign Investment Review Board decisions may risk future inflows of offshore capital.

Australia’s taxation system places a complex web of imposts on resource projects that confuse and frustrate investors. However, potential relief on many of these issues is imminent, with the Henry Tax Review due to report later this year. Hopefully this review and other measures will bring about the necessary reform needed to see Australia’s resources industry prosper in the 21st century and beyond.

How do we maintain and improve the vitality
of our health system?
The past year has seen health system reform become a major focus of public debate. For the last 25 years, Medicare has provided Australia with a popular and stable national framework for the financing of the health system. We have enjoyed outstanding health outcomes, ranking as one of the global leaders for long life expectancy.

Why then is there a groundswell of support for significant reform? The challenges facing the Australian health system are common to all developed health systems around the world. The ageing population, the ever-increasing availability of new medical technologies and treatments, and the shift in the burden of disease from acute to chronic mean that health expenditures continue to grow at a rate faster than GDP. At the same time, the traditional structure of health care does not offer solutions to the management of chronic illness. The pressure on our public hospital emergency departments is symptomatic of the absence or failure of other forms of care.

While health systems around the world are diverse, this decade has witnessed an enormous convergence of health solutions. Many systems are addressing sustainability by moving towards the Australian mixed model of public and private financing and developing new models of care to address the diseases of the 21st century. As our leaders prepare for the next 25 years, they will need to recognise and build on the existing strengths of our system to design a framework capable of handling the demands of a rapidly changing world.

What role do financial statements play in
building a company's story?
A number of commentators suggest financial statements have become more difficult to understand, and many stakeholders would agree that it’s not always easy to decipher the real drivers behind a company's performance.

The increased volume of legislation and regulation impacting required disclosures has heightened the risk that companies' annual reports do not convey a clear and easily understood presentation of their performance. Further, the complexity has led to an increased use of presentation packs in an attempt to distil information, which means the data being relied upon by many analysts and other stakeholders is often unaudited.

Although the government is seeking to reduce 'red tape', and standard-setters are working to simplify the accounting framework, it is not their job alone. The accounting profession has a significant role to play in addressing these issues. The Institute of Chartered Accountants in Australia, supported by PwC and others, has recently proposed a broad-based reporting framework to address some of the current reporting shortcomings. We should continue to challenge key stakeholders to develop annual reports and financial statements that are more candid and user-friendly, while pushing for greater rigour in the information that is published in presentation packs and other accompanying documents.

The community is also increasingly interested in understanding the broader strategy and performance of an organisation, from its environmental record to the development of its people. Accountants should encourage boards and management to include these metrics and provide stakeholders with the capability to examine more than just the financial health of an organisation. In the wake of the global financial crisis, we must meet the increasing demand for the knowledge and understanding – not just data – which will ultimately support the restoration of faith in our financial governance and reporting systems.

Is Australia ready to be in a region at
the centre of global affairs?
Over the past 18 years, Australia’s engagement with the world has tripled, but its engagement with Asia has quadrupled. This relationship with Asia is not only likely to continue to grow, but also become more challenging. Today we are entering a new period in which our nation, and much of the world, will be increasingly shaped by a shift in global economic and strategic power to Asia. Assessing and navigating the opportunities and dangers in this post-Western Asia will require skill and sensitivity. Australian organisations will not only need language skills, but an awareness of national rivalries, complex religious and ethnic undertones and different business dynamics.

PwC, together with the Melbourne Institute and Asialink, has developed the first multi-indicator measure of engagement between Asia and Australia, examining and tracking Australia’s involvement with Asia and the rest of the world over the past two decades. The index tracks engagement along seven dimensions, providing insights into the evolution and nature of Australia's international relationships. For example, while it is true that China has become extremely important to Australia's economy, the 2008 index found the Association of Southeast Asian Nations (ASEAN) has actually become Australia’s most important trading partner, with a higher volume of two-way trade.

Asia holds half of the world's population and is on the verge of what may be the largest industrial revolution the world has ever seen. We believe that the success of Australia in the 21st century is inextricably linked to our ability to effectively engage with this population across a broad range of areas, from trade and investment, to education, tourism and migration. By strengthening bilateral discussions and building cross-cultural understanding, Australia will be well placed in the region to make the most of opportunities and foster mutually beneficial long-term relationships.

Are new mindsets, behaviours and culture necessary
to restore trust in the financial sector?
Many financial services organisations around the world are currently re-examining their strategic intent and their style of operating in response to what undoubtedly has been a financial crisis, but is now increasingly becoming a period of reflection and adaptation. The changes emerging during this period show a greater focus on risk and uncertainty, for instance, in improving the ongoing sustainability of products and services. Decision makers are placing even greater weight on corporate responsibility – a mindset change around the inter-connected nature of the financial system, economy and community stakeholders.

In tackling issues of corporate responsibility, some soul searching appears to have transpired in response to ill-disciplined behaviours centred on growth and profit. There has been significant debate as to how the financial sector can align desired behaviours with outcomes and rewards.

This question is sure to provoke ongoing response from many stakeholders in the coming months. The manner in which the sector conducts, and responds to, the debate will influence the degree of trust bestowed upon its leaders.

What this seems to be creating – for which there are hints but no conclusive proof as yet – is a quantum shift in the mindset and behaviour of the sector. A culture of innovation and entrepreneurship still needs to be cultivated, but not at the expense of honesty, transparency and objectivity. Public policy makers should assess if and how any legislative changes will make a material difference to the restoration of trust.

The balance between trust and control is always a delicate one, not least in the current circumstances. Changes are undoubtedly needed to restore the community's confidence in the financial services sector, but the impact of changes will ultimately lie in the behaviours of the sector's leaders and their organisations. As always in financial services, trust will be a key source of competitive advantage.

Is a downturn the right time to invest in innovation?
Innovation suddenly seems to be high on the agendas of many top organisations. In fact, eight out of 10 CEOs interviewed in PwC’s Annual Global CEO Survey said change was on their radar and innovation was the key to that change.

If you look at the companies that successfully competed in past recessions (e.g. Google, Apple, Procter & Gamble), they invested in the downturn in preparation for a new market. FY09 is no different and leaders are widely quoted on their commitment to invest in the future, inventing new answers to old questions as well as creating new questions.

But what is innovation really? Most will say it is about creating new value, but the real power is not in the definition itself. Businesses focused on building a culture of innovation are achieving better outcomes. Risk taking, removing fear of failure, engaging people in new ways of thinking and designing systems to support that thinking are the trademarks of businesses that will step ahead of their competitors.

The role of leaders in this scenario is critical. They need to provide clear strategic intent, act as an advocate and protector of the innovation activities, and allocate the right levels of resources to ensure success. They must also be relentless in communicating both failures and success, encouraging participation and experimentation.

Derek Kidley
Managing Partner, Clients and Industries
Luke Sayers
Managing Partner, Markets

"The thing that impresses me about PwC is that they are open; they work collaboratively with us and they understand our business. They're also not afraid to draw my attention to any areas which I need to correct - and if I do need to correct them it's done in a very open, professional environment."

Steven McDonnell, Group Manager for Accounting and Taxation, ActewAGL