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Internal Audit, Risk, Business & Technology Consulting
FPO
As organizations continue to evolve their risk governance practices, focused and relevant information
about emerging risks is at a premium. The objective of Protiviti’s PreView newsletter is to provide
an input for these efforts as companies focus on risks that are developing in the market. We discuss
emergent issues and look back at topics we’ve covered to help organizations understand how these
risks are evolving and anticipate their potential ramifications.
As you review the topics in this issue, we encourage you to think about your organization and
ask probing questions: How will these risks affect us? What should we do now to prepare? Is there an
opportunity we should pursue?
Our framework for evaluation of risks is rooted in the global risk categories designed by the World
Economic Forum. Throughout this series, we use these categories to classify macro-level topics and
the challenges they present.
Inside This Issue
02 The Changing Landscape of Global Logistics
05 Effects of Populism on Trade and Regulation
10 Global Income Inequality: Risks and Impacts
13 The Current State of U.S. Infrastucture
16 On the Radar
17 Where to Learn More
18 Continuing the Conversation
EMERGING RISKS
EconomicTechnological
Environmental
Societal Geopolitical
PreViewProtiviti’s View on Emerging Risks
AUGUST 2017
protiviti.com PreView, August 2017 · 2
Emerging Risk Categories: Economic, Technological, Geopolitical Industries Impacted: Manufacturing & Distribution, Consumer Products & Services, Energy & Utilities, Healthcare & Life Sciences
Increased globalization and the dominance
of e-commerce have led companies and
consumers to depend widely on goods from
other nations. The global supply chain has
grown increasingly complex over the last 20
years, and most modern supply chains traverse
multiple nations. At the same time, there is
a growing trend toward digitalization of the
supply chain and warehouse, lowering many
costs associated with manual and paper-based
labor. Examples include the use of 3D printing,
“uberization” of multiple industries, and the
Internet of Things. In the geopolitical realm,
the changing political climate in the West may
lead to changes in current trade agreements
and strategies, affecting global logistics.
While technological advancements are poised
to drive down the costs of global logistics,
companies should take a close look at how
the current rise of nationalism in Western
countries may impact their business models
and key suppliers.
The graphic below, recreated with U.S. Census
data, shows the state of U.S. trade by destination
over the past 15 years, highlighting a growing
trend in both trade volume and global
interdependency.
The Changing Landscape of Global Logistics
United States Trade by Destination, in Trillions
*Free Trade Agreement (FTA) countries: Australia, Bahrain, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, South Korea, Morocco, Nicaragua, Oman, Panama, Peru, Singapore.
Source: U.S. Census Bureau.
$0 $0.5 $1 $1.5 $2 $2.5$2.5 $2 $1.5 $1 $0.5 $0
Canada and Mexico (NAFTA) Other Free-Trade Agreement Countries*China Other Countries
United States ExportsImports
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017(through April)
protiviti.com PreView, August 2017 · 3
Key Considerations and Implications
Cost of Trade and Supplies
The current state of political affairs poses a
risk to global logistics. Political agendas in the
United States, United Kingdom, and the EU are
threatening current trade agreements. The
Trans-Pacific Partnership was abandoned by the
United States, and provisions of a replacement
agreement are still unclear at this time. Further
changes in existing trade agreements may lead
to higher tariffs, delays in delivery and increased
red tape, impacting the cost and speed of global
supply chains. For example, importing a product
from the UK to the EU post-Brexit will require
applying one of over 19,000 customs codes and
calculating tariffs accordingly — a time delay
Britain’s counterparts inside the EU do not
have to face. See our article in this issue, “The
Effects of Populism on Trade and Regulations,”
for additional information on how the rise in
nationalism affects trade.
The current political pressures may drive
increased costs within the logistics sector and
across the supply chain, particularly for import-
to-export trade where costs exist on both ends.
Further, with nationalist sentiment on the rise,
companies may feel pressured to use domestic
suppliers instead of cheaper international
imports. The manufacturing and oil and gas
industries will be particularly impacted, as they
often import goods to add value (in a refinery,
for example) and then export them to the final
destination. President Trump also has made
a populist pledge to strengthen American
infrastructure with American materials and
labor. This pressure to use domestic suppliers
could potentially lead to higher costs being
passed down to consumers.
Supply Chain Management
With changes to global trade already
happening, companies should take a second
look at their geographical dependencies and
map their supply chain risk using a tier system.
Since manufactured intermediates, i.e., semi-
finished goods, still represent the greatest
portion of world trade, original equipment
manufacturers that depend heavily on Tier 1
and Tier 2 suppliers are exposed to higher risk
from changes in the marketplace.
Changes in Asian markets are also worth
noting. The trade-over-GDP ratio in China
declined from around 65 percent in 2006 to 35
percent in 2015, with parallel declines in many
East Asian countries. This could be an indicator
of East Asian markets transitioning to more
domestically focused development, leading to
fewer exports and higher prices for countries
dependent on Asian and East Asian exports.
Third-party supply risk remains an issue, as
conflict minerals, child labor, unsafe working
conditions and the potential for unethical
trade practices remain pervasive among
emerging market suppliers.
Digitalization of Global Logistics
Digitalization advances in supply chain
management can help companies reduce
the downside of the shifting logistics
environment. Examples include the
“uberization” of services, such as UberEATs
and Instacart. The trend is changing supply
chain strategy to favor utilization of existing
resources, such as transport, across different
companies and industries.
Automation in global logistics is another
strong trend, with more companies investing in
warehouse robots to decrease shipping time. Such
advances may well offset the potential increases
in costs resulting from trade policy changes.
Fetch, a company that provides warehouse
robotics, reportedly increased the productivity of
a single semiconductor warehouse by 30 percent,
helping to meet increased demand without hiring
additional resources. Such technologies can help
companies stay competitive in the long term, but
they do require large capital outlays upfront.
protiviti.com PreView, August 2017 · 4
Digital transformation has been making waves
in the ocean container shipping industry over
the last few years. This industry is highly
competitive, with supply outstripping demand
by a significant margin. Any reduction in global
trade or change in global logistics could have
a detrimental effect on the profitability and
solvency of many shipping companies already
operating at a low margin. Digitalization of
processes and the use of analytics software is
one way the industry can cope with the rough
seas it is facing.
Spotlight: Digitalization in the Ocean Shipping Industry
Several products have emerged recently that provide a digital platform to better monitor and utilize shipping data. These include stowage planning software, industry data platforms to visualize data for strategic planning, and software to help shippers comply with changing regulations. These products leverage new technologies, such as machine learning, cloud-based analytics tools, and IoT technology on vessels to improve the overall shipment management cycle.
Inttra, a company that provides an electronic transaction platform to shippers, saw 16 percent year-over-year growth in its processing of container orders in 2016, despite container ship sailings rising only 3 percent in the same period.
IBM and Maersk are collaborating to launch a blockchain technology platform that will digitize the shipping industry paper trail and help improve fraud detection and inventory management, reduce errors and ultimately cut waste and costs.
protiviti.com PreView, August 2017 · 5
Emerging Risk Categories: Economic, Societal Industries Impacted: Energy & Utilities, Agriculture, Financial Services, Manufacturing & Distribution, Consumer Products & Services, Healthcare & Life Sciences, Telecommunications
In the February 2017 issue of PreView, we
noted the rise of populism and its effects
on regulation and trade as an emerging risk
warranting further discussion. In political
parlance, a “populist” is defined as a member
of a political party claiming to represent the
common people. This political approach has
revealed itself recently in the form of rallies
against both foreign trade and regulation,
stemming from the notion that these practices
prevent domestic job growth and redirect
power and wealth from domestic citizens
and corporations to parties abroad. Since the
time of our prior issue, more recent elections
and legislative decisions have confirmed that
longstanding trade agreements, economic
partnerships, and policies and regulations are
vulnerable to populist ideologies.
While the full scope of populism has yet to
manifest itself, its effects on global trade and
regulation are already emerging. According to a
Financial Times article, the World Bank counted
283 deregulatory reforms in 2015-16 across 137
different countries, up 20 percent from the
previous year. Further, world trade growth
has been exceptionally weak during the same
period, weighing on productivity and wage
growth while continuously dampening demand
as protectionism becomes more prevalent
globally. Protectionism, in the form of specific
government practices, such as import tariffs that
seek to limit global trade, has been a popular
component of populist campaigns due to its
appeal to citizens and businesses that have been
hurt by foreign trade.
Effects of Populism on Trade and Regulation
Non-Tariff Barriers to Global Trade, 2001-2016*
* Restrictions and barriers on trade based on specific trade concerns, initiated by 143 countries between 2001 and 2016.
Source: WTO, http://i-tip.wto.org/goods/Default.aspx.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1,6
14
1,6
63
1,6
22
2,0
49
2,4
26
2,7
07
2,7
12
1,8
08
1,6
75
2,1
06
2,5
64
2,4
82
2,9
14
3,0
30
2,9
88
3,0
21
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Nu
mb
er of M
easures In
itiated
protiviti.com PreView, August 2017 · 6
HEALTHCARE
The new U.S. administration, in a populist bid to reduce the size of government, has consistently challenged the Affordable Care Act (ACA) since coming into office in 2017. As a result, major healthcare insurance providers have recently announced decisions to reduce involvement or completely exit regional marketplaces created by the ACA. Exits in some cases have left entire counties with no healthcare providers from which ACA enrollees can choose. As of June 12, 2017, there were 38,000 ACA enrollees across 47 counties where no insurers were participating in the marketplace.
Insurance companies have stated that the primary cause for exiting the marketplaces is the uncertainty from the current U.S. administration regarding whether the government will actually pay for cost-sharing subsidies associated with the marketplaces. Without a cost-sharing commitment or an equitable new healthcare bill from the U.S. administration, consumers and insurers alike will face risks. All that said, the recent failure of Republicans to pass a healthcare reform bill in the Senate indicates that any changes to the ACA will have to come from a bipartisan effort. Until that happens, ACA remains the law of the land.
AGRICULTURE
The new U.S. administration has expressed reticence to cooperate with longstanding trading partners and imposed trade sanctions on China shortly after taking office in 2017. Withdrawal from such partnerships could lead to a decrease in productivity within the agricultural sector. Retaliation for these trade sanctions from China, which accounts for about 20 percent of U.S. agricultural exports, could be detrimental to domestic farmers. The United States is China’s largest source of agricultural products, and in 2015 agricultural exports to China (primarily soybeans) represented the second largest U.S. export market, at $20.2 billion dollars annually. Increased sanctions could significantly reduce such exports, leaving domestic farmers with an unwanted surplus of goods. It should be noted, however, that despite the sanctions, the U.S. and China recently struck a significant trade deal in which the U.S. agreed to accept chicken imports from China, and China agreed to accept U.S. beef imports. Trade deals such as this provide encouragement for farmers that the new administration will cooperate enough to sustain production levels.
MANUFACTURING
Increasing protectionist sentiments in emerging economies, such as Brazil, Indonesia and South Africa, which are largely reliant on commodity exports, could lead to trade disruptions, rising income inequality and poverty rates, and potentially could stall global economic growth. However, larger markets such as the U.S. and the UK can potentially benefit from such changes. An April 2017 U.S. Presidential Executive Order called “Buy American, Hire American” calls for the increase in the use of goods, products and materials produced in the United States, including iron, steel and manufactured goods currently produced in emerging markets. However, the order did not specify when such changes will take place. If the U.S. does change its steel import policy, China and other major steel exporters, such as Japan, could retaliate with their own sanctions, which may result in decreases in productivity and profits for corporate parties involved in trade with these countries.
Key Considerations and ImplicationsThe rise of populism and its effects on trade and regulation are having wide-ranging impacts on
specific industries, as outlined below.
protiviti.com PreView, August 2017 · 7
FINANCIAL SERVICES
Substantive regulatory scale-backs, another byproduct of populism, could drastically change the landscape of the financial services industry. For example, a scaleback of the Dodd-Frank Act in the U.S. could ease access to capital and improve bank profitability by reducing minimum capital ratios and/or stress testing requirements. However, large-scale repeals have the potential to weaken or remove guidelines put in place to address internal control deficiencies that contributed to the most recent crisis in the financial markets. In Europe, the UK government and leadership have increasingly expressed a desire for regulatory reform (easing of regulations), according to Financial Times. According to the Organisation for Economic Co-operation and Development (OECD), cited in the article, banking reforms will "allow for a real opportunity to stimulate the economy at a domestic level."
ENERGY
The new U.S. administration has rolled back requirements related to financial disclosure and toxic waste for energy companies to purportedly ease the overall regulatory burden on the industry. The administration’s “America First Energy Plan” seeks to roll back policies such as the Climate Action Plan and the Waters of the U.S. rule to take advantage of an estimated $50 trillion in untapped shale, oil and natural gas reserves and to revive America’s coal industry. The plan is intended to stimulate the economy and seek energy independence from the OPEC cartel. Deregulation seems to be a benefit for U.S. oil and gas companies, promising increased production of domestic oil. However, increased oil supply in the U.S. could lead to a drop in oil prices and could cause diplomatic friction with OPEC members who have agreed to cut their own production to keep supply at a suitable level. Additionally, environmental advocacy groups, such as the Natural Resources Defense Council (NRDC), have stated that extensive energy deregulations could compromise the environment and human health, which will ultimately affect citizens, as well as corporations, in an adverse manner.
TELECOMMUNICATIONS
A number of internet privacy protections, such as those requiring internet providers to obtain consumer consent before using precise geolocation, financial and health information, information about minors and web browsing history, have been reversed by the current U.S. administration. Consumers will be allowed to opt out of having their data sold but they would have to do it explicitly and would potentially have to pay a surcharge if they choose to do so. The move will benefit large internet service providers, such as Comcast and Verizon, and bring them on the same footing as Google and Facebook, which are governed by less restrictive rules. Advocates for the bill say it levels the playing field between major internet service providers and major websites, while opponents warn against potential misuse of personal data by the companies or their third-party vendors. In Europe, the EU recently introduced new digital privacy rules, and historically has enforced competition-friendly regulation to keep consumer costs down and promote innovation. However, telecommunications firms in the UK may push for U.S.-like regulatory repeals for the industry once Brexit takes place.
protiviti.com PreView, August 2017 · 8
European elections in France and the
Netherlands have shown how modern populist
movements can spread quickly and disrupt the
political status quo. Populist candidates were
defeated in the Dutch and French elections;
however, the large support for the defeated
candidates revealed growth in anti-EU, anti-
trade and anti-regulation sentiments. While
some may claim that right-wing populism
has peaked and point to the recent defeats as
evidence, the French and Dutch elections are
not enough to ensure that political uncertainty
has been reduced. This is evidenced by the
fact that populist ideologies have already
played a key influencing role in upcoming
elections in Germany, Austria and Italy.
Political experts believe that populism will
continue to flourish and test the strength of
longstanding institutions in the realms of trade
and regulation. The possibility of additional
exits from the EU means that businesses and
consumers alike will feel the impact of these
changes in the years to come.
Spotlight: European Elections
Rise in Right-Wing and Far-Right Party Ideology in EuropePercentage Won in Parliamentary Elections
The 2016 results for Austria represent presidential, not parliamentary elections. France's 2017 presidential and legislative election results are not reflected in this graph.
Data for the above graph was sourced from the New York Times article “How Far Is Europe Swinging to the Right?” by Gregor Aisch, Adam Pearce and Bryant Rousseau, March 20, 2017. Cited sources: European Election Database, Inter-Parliamentary Union, ElectionGuide.org, government websites.
NetherlandsFrance Germany Austria Britain Hungary Poland
60%
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30%
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10%
0%
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protiviti.com PreView, August 2017 · 9
EUROPEAN UNION
The negotiation process of Brexit is in its first phase and it has already exposed anger toward certain European institutions — a sentiment only expected to increase over the next two years.
HUNGARY AND POLAND
Countries in Eastern Europe, such as Hungary and Poland, are drifting toward illiberalism as their governments’ trust in the EU has diminished as a result of the political and economic crises in 2010 and the migrant crisis in 2015.
TURKEY
The European Union’s relationship with Turkey is deteriorating as opposition grows among Turkish citizens to the EU-Turkey migrant deal that is keeping 3 million Syrian refugees in Turkey.
ITALY
As Italy’s economy continues to weaken, the likelihood that the Five Star Movement (M5S) will win the next Italian election increases. This could result in a spike in the Euro interest rates, and could potentially derail Brexit negotiations as Brussels is likely to prioritize the EU's survival rather than negotiations with the UK.
FRANCE
Despite the election results, at which centrist Emmanuel Macron beat far-right candidate Marine Le Pen, France remains heavily divided. Le Pen won a remarkable 34 percent of the vote, and the National Front party, which she represented, won 13 percent of the popular vote. With the populist sentiment in France not subsiding, it will be tough for Macron to push his pro-EU political agenda.
European Countries to Watch as Far-Right Ideology Transforms Relationships
protiviti.com PreView, August 2017 · 10
Emerging Risk Categories: Economic, Societal, Geopolitical Industries Impacted: Financial Services, Technology, Government, Consumer Products & Services, Healthcare & Life Sciences
According to a January 2017 report published
by Oxfam, an international confederation
of charitable organizations focused on the
alleviation of global poverty, eight individuals
own the same wealth as half of the world’s
population (3.6 billion people). The research
correlates the design of world economies and
policy-driven factors with the stagnation of
the incomes of the bottom 50 percent of earners
and the rapid income growth experienced by
the top one percent. Additionally, projections
suggest that the gap between the rich and the
poor will continue to widen. This will make
it increasingly difficult for the poor to afford
opportunities such as higher education, and
may result in a shortage of educated workforce
to fill industry positions. The economic, social
and political implications of income inequality
make it a leading global risk today.
Global Income Inequality: Risks and Impacts
Income Inequality as a Ratio of Disposable Income Between the 90th and 10th Percentile
0
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Mexico IsraelUnitedStates
Lithuania AustraliaKorea UnitedKingdom
Hungary Netherlands Finland
Source: https://stats.oecd.org/Index.aspx.
The graph above was created with data from the Organisation for Economic Co-Operation and Development (OECD). The data is from 2014 for all countries, with the exception of the United Kingdom and Lithuania (2013 data). The graph portrays the ratio of disposable income between those in the 90th percentile (rich) and those in the 10th percentile (poor). For example, the ratio shows that in the United States, those in the 90th percentile earned 6.4 times more than those in the 10th percentile.
Measures of Inequality
There are numerous ways to measure economic inequality, each yielding a slightly different result. The most widely used measure is the Gini index, which rates income dispersion on a scale from zero to one; zero indicates that all people have the same share of income, and one indicates that one person has all of a nation’s income. The U.S. income Gini index increased from 0.377 in 1983 to 0.411 in 2013.
protiviti.com PreView, August 2017 · 11
Key Considerations and Implications
Decreasing Income From Labor
In developed countries especially, jobs
involving routine tasks, such as clerical work,
are increasingly replaced by technology, leading
to job displacement or underemployment of
middle income workers. At the same time,
approximately 22 percent of the global
workforce works more than 48 hours each
week. A 2011 study found that those in the
middle quintiles saw household income
increase by approximately 40 percent in the
period between 1979 and 2007, while for the
top one percent household income grew 275
percent over the same period. This disparity
is attributed to an increased concentration of
market income — consisting of labor income,
business income, capital gains and capital
income — into high-income households. Skill-
biased technological change and decreased
returns for hours worked have forced many
middle-income workers to take on multiple jobs
to make ends meet. For example, in September
of 2016, the number of workers holding multiple
jobs in the U.S. was the highest in the previous
eight years. This trend may affect businesses
as the labor productivity of an increasingly
overworked workforce drops.
Geopolitical Stability At Risk
According to an IMF review of existing research,
income inequality in advanced economies was
an influencing factor in the recent financial
crisis. According to this study, higher levels
of income inequality created a financial
environment more prone to overextending
credit, relaxing underwriting procedures
and lobbying for financial deregulation. The
findings illustrate how income inequality can
impact the strength of a nation’s financial
markets, which in turn may open up additional
areas of risk and uncertainty, such as protests
and revolts. Looking forward, as power becomes
more concentrated in the hands of a few
wealthy individuals, conflicts may become
more prominent and may impact nations on
a macroeconomic level, discouraging foreign
investment. This is because inequality makes
the opportunity cost of engaging in conflict
lower, as those who become increasingly
disadvantaged have less to lose — particularly
as the percentage of food to total household
consumption increases. For example, lower-
income workers may strike in order to improve
their financial position, causing an impact
on productivity and a potential detriment to
supply chain operations.
Tax Policies and Income Inequality
A progressive tax system, in which the effective
tax rate increases with the taxable base amount,
is a policy aimed at reducing income inequality
through income redistribution. The United
States currently has a progressive tax policy;
still, tax rates for the top 0.1 percent of earners
declined by approximately 40 percent between
1960 and 2005. Multiple changes to the tax
code occurred in this period, with the net result
being a less progressive tax code. Changes in a
country’s tax code, including shifts in policy-
driven incentives to combat income inequality,
may pose a risk to businesses and to the economy
as a whole, whether the policy becomes more or
less progressive.
PreView, August 2017 · 12protiviti.com
Universal Basic Income Worker Re-Education Normative Concerns
Some policymakers believe a basic, guaranteed income will ease the burden of job loss caused by automation and help offset income inequality. Basic income provides all people with a monthly allowance to cover basic expenses such as food, clothing and shelter, regardless of the recipient's employment status. In February 2017, Finland launched an experimental program that gives 2,000 citizens a guaranteed income for a two-year period. If the program is successful, Finland's lawmakers plan to expand it to include all adult Finns. However, critics state that not only would such a program be very costly, but it could discourage individuals from seeking employment, leading to a potential labor shortage.
Certain countries place their focus on investment in technical education and training in key industries, such as healthcare and financial services, as a potential solution to income inequality. For example, a CNBC article states that Canada’s 2017 budget includes more grants and interest-free loans for students than previous budgets. In addition, the Canadian government is investing in 13,000 “work-integrated placements,” which offer practical, work-related instruction in markets that are experiencing higher demand for workers.
A key point of contention among economic experts when considering the issue of income inequality is the level of inequality that should exist. According to the IMF review cited earlier, some researchers find that a certain level of income inequality can be beneficial for labor force participation and the overall well-being of the economy, while others believe the benefits to society are higher when there is a more equal income distribution. Such normative considerations about the benefits and drawbacks of various levels of inequality are a large factor in applying potential solutions.
Income Inequality: Possible Solutions and Normative Concerns
The inability of the private sector to arrest
the trend toward income inequality provides
impetus for proposed solutions in the public
sector, including raising taxes on the wealthy
and reducing taxes on low and middle class
wage earners. As noted earlier, significant policy
initiatives can have unintended consequences.
Under the current U.S. administration, the focus
is on increasing jobs and reducing tax rates for
most corporate and individual taxpayers. If the
income inequality gap continues to grow, we
could see the left emboldened to propose income
redistribution solutions in the 2020 presidential
election. Below are examples of some solutions
being discussed by policymakers in the U.S.
and elsewhere.
protiviti.com PreView, August 2017 · 13
Emerging Risk Categories: Economic, Technological, Societal Industries Impacted: Government, Energy & Utilities, Transportation, Manufacturing & Distribution, Construction, Financial Services
In 2016, an average of 188 million trips each day
included passing over a structurally deficient
bridge. One out of every five miles of highway
pavement is in poor condition. According to the
American Society of Civil Engineers (ASCE),
the U.S. infrastructure is barely maintaining
a below-standard grade of “D+” — a result of
deteriorating and aging roads, bridges, levees,
dams and other structures. No doubt, repairing,
replacing and expanding this crumbling network
will require a significant investment, even as
politicians and legislators continue to battle
federal, state and local budget shortages.
The Current State of U.S. Infrastructure
BRIDGES
The U.S. has 614,387 bridges, of which almost 40 percent are 50 years old or older. Furthermore, 9.1 percent of all bridges are considered to be structurally deficient, requiring substantial improvements. One in eight bridges is considered functionally obsolete, meaning it does not meet current engineering standards. ASCE cites the most recent estimate of bridge rehabilitation needs at $123 billion.
DAMS
There are 90,580 dams in the country, with an average age of 56 years. People and industries depend on dams for critical needs that include drinking water, irrigation, flood control and hydropower. Approximately 15,500 dams have a high-hazard classification, meaning failure could lead to loss of life and significant economic losses. Nearly $45 billion would be needed to repair aging, yet critically needed high-hazard dams.
LEVEES
There are 30,000 documented miles of levees, which protect more than $1.3 trillion worth of property by containing, controlling and diverting the flow of water to reduce the risk of flooding. The estimated price tag for maintaining and repairing this levee system over the next 10 years is $80 billion, according to ASCE.
RAILROADS
Railway systems carry approximately 85,000 passengers, one-third of U.S. exports and five million tons of freight every day. While freight rail has seen an increase in private investment over the last five years, passenger rail continues to rely on government funding for capital investments. Compared to many European countries and China, the U.S. invests less funding in passenger rail relative to the size of its population and land mass. Amtrak estimates that it needs $11 billion to fund basic rail infrastructure projects and $17 billion for backlog projects on its Northeast Corridor, its busiest regional system.
ROADS
There are over 4 million miles of roads in the United States, with nearly 20 percent of those in poor condition. In 2014, Americans spent 6.9 billion hours delayed in traffic (an average of 42 hours per driver), wasting 3.1 billion gallons of fuel. There is an estimated $713 billion backlog of highway system capital investment needs. This number is comprised of $420 billion to repair existing highways, $167 billion for system expansion, and $126 billion for system enhancement.
The Current State of Key Types of Infrastructure in the United States, According to ASCE
protiviti.com PreView, August 2017 · 14
Key Considerations and Implications
Funding Sources
It is estimated that a total of $4.59 trillion
would be needed over the next decade to
bring the country’s aging infrastructure up
to a safe functioning level. To raise these
funds, federal, state and local governments
and municipalities may explore a variety of
methods, including increasing taxes, levying
additional fees and tolls for the use of existing
infrastructure, and exploring the use of public
and private debt financing.
Long-Term Economic Costs
An increased investment in public infrastructure
can have several positive effects on national
and local economies, including job creation,
along with indirect cost savings. For example,
the ASCE estimates that decaying tunnels,
railways and waterways, if not addressed, will
cost the U.S. economy nearly $4 trillion in lost
gross domestic product by 2025 as a result of
productivity and efficiency losses.
Public Pressure
As failures in public infrastructure become
more prevalent and capture the attention of the
media (for example, the Oroville Dam crisis in
northern California), safety and humanitarian
concerns and public pressure to address the
aging infrastructure will continue to mount.
Industry Impacts
The continued deterioration of infrastructure
affects and will continue to affect transportation
and shipping industries, which should take
into account the risks of aging infrastructure
to their day-to-day operations. For example,
it may cause an increase in delivery times
and pricing for online products. Many of the
products produced by technology companies
are manufactured offshore, necessitating
transportation of both raw materials and finished
products into and out of distribution hubs or value
added resellers (VARs). The delays in shipping via
FedEx, United Parcel Service or the United States
Postal Service may result in higher costs built
into the pricing of products and have a negative
impact on online purchasing.
On the upside, government and financial
services firms should consider the potential
opportunities from investing in the rebuilding
of the infrastructure. Construction, equipment
manufacturing and transportation companies
will be direct short-term beneficiaries of any
such investments, with alternative energy and
alternative transportation companies likely to
benefit in the long term.
protiviti.com PreView, August 2017 · 15
On January 24, 2017, President Trump signed an
executive order asking Congress to approve a $1
trillion investment in the U.S. infrastructure.
According to Moody’s Analytics, a $1 trillion
stimulus program spread over a decade would
employ over 800,000 workers for five years.
Moody’s estimates that every $1 increase in
federal spending could increase gross domestic
product by roughly $1.21 in the subsequent year.
The potential economic impact of the
infrastructure proposal is seemingly positive;
however, the use of private capital in the
rebuilding of infrastructure remains uncertain.
House Speaker Paul Ryan has said that as little as
$25 billion in federal spending could be combined
with $975 billion from the private sector. During
a joint session with Congress, Trump stated that
the White House is considering a repatriation
tax holiday to generate about $200 billion in
funding and lure private investors. According
to the Congressional Budget Office, a federal
infrastructure bank could allow for public-private
partnerships by providing financing for projects
through loans and loan guarantees and repaying
of these loans through tolls and taxes.
However, public and private investors should
keep in mind the fact that most local highways
do not involve tolls or other mechanisms to
collect funds directly from users; as such, not
every project would be a viable candidate for
a public-private partnership. Additionally,
although the federal government assists
in maintaining the infrastructure assets of
local and state governments, local and state
governments own 90 percent of the country’s
non-defense public infrastructure assets and
pay 75 percent of the cost to maintain them.
Spotlight: President Trump’s Infrastructure Proposal
protiviti.com PreView, August 2017 · 16
Gender Diversity in Technology IndustriesThe lack of gender diversity is a growing
concern in tech industries, where the ratio of
men to women in the workforce continues to
remain imbalanced at both the employee and
leadership level. In the U.S., only 21 percent
of executives in tech industries are women,
compared with 36 percent in other industries.
Women today hold 25 percent of computing-
related occupations, which has dropped from
36 percent in 1991. A growing number of
examples of the lack of such diversity have been
highlighted in the media as well, bringing the
spotlight squarely on the tech industry.
This gender gap is a growing risk as the benefits
of gender diversity in the workplace become
more apparent. Companies in the top quartile
for gender diversity are 15 percent more likely
to financially outperform their counterparts,
according to a McKinsey article. Furthermore,
companies with female representation on
their boards have 66 percent greater return
on invested capital, 42 percent greater return
on sales, and 53 percent greater return on
equity, according to 2015 UC Berkeley research.
Enabling gender diversity is important not only
for financial reasons, but social and cultural
reasons as well. As skilled labor shortages are
likely to increase with technological advances,
companies must consider how to fully maximize
on the skills and knowledge of 50 percent of
the population.
U.S. Energy IndependenceThe U.S. is moving toward a goal to become
a fully energy independent nation, shifting
the energy balance from imports to exports.
In the past year, the U.S. became a net
exporter of natural gas for the first time
since 1957. According to the U.S. Energy
Information Administrations’ Annual Energy
Outlook report, this trend is expected to
continue in other areas, and the U.S. may
become sustainably energy independent by
2026. A key driver is the growing domestic
production of crude oil, with domestic energy
production expected to increase even more, by
20 percent from 2016 through 2040. Efforts to
reach energy independence are furthered by
President Trump’s Executive Order, signed on
March 28th, encouraging the Environmental
Protection Agency to increase efforts toward
energy independence.
Household consumers and businesses alike have
already started to see the effects of dropping
energy prices. Natural gas prices in 2016 were the
lowest in almost 20 years. With complete energy
independence, companies will not rely on foreign
imports of oil and gas, and manufacturing would
benefit from lower energy costs, a predominant
factor in chemical manufacturing, power
generation and heating processes.
Though the trend seems positive, companies
must consider the risks of becoming dependent
on lower cost energy that is sourced solely from
domestic suppliers. As a general rule, companies
tend to be more secure over the long term when
energy markets are diversified. Should a natural
disaster disrupt the U.S. production of energy,
centralized in the Gulf Coast, companies will need
to shift suppliers quickly and turn back to imports
from the global energy market. With these
trending changes, companies must consider how
changes in energy costs and sources will affect
their overall cost structure and further impact
their supply chains and operations.
On the Radar
protiviti.com PreView, August 2017 · 17
“Global Trade, Policies and Populism,” OECD, December 2016: www.oecd.org/tad/policynotes/global-trade-policies-populism.pdf.
“A Guide to Statistics on Historical Trends in Income Inequality,” by Chad Stone, Center on Budget and Policy Priorities, November 7, 2016: www.cbpp.org/research/poverty-and-inequality/a-guide-to-statistics-on-historical-trends-in-income-inequality.
An Economy for the 99%, Oxfam briefing paper, Oxfam International, January 2017: www.oxfam.org/sites/www.oxfam.org/files/file_attachments/bp-economy-for-99-percent-160117-en.pdf.
“The Pros and Cons of Basic Income,” by Trevir Nath, NASDAQ.com, April 12, 2017: www.nasdaq.com/article/the-pros-and-cons-of-basic-income-cm773398.
2017 Infrastructure Report Card, American Society of Civil Engineers, 2017: www.infrastructurereportcard.org.
“It’s Time for States to Invest in Infrastructure,” by Elizabeth McNichol, Center on Budget and Policy Priorities, February 23, 2016: www.cbpp.org/research/state-budget-and-tax/its-time-for-states-to-invest-in-infrastructure.
“Women in Tech: Addressing the Root Causes of Attrition,” by Virginia Smith and Dr. Gitanjali Swamy, WiT.Berkeley.edu, April 7, 2016: http://wit.berkeley.edu/docs/WomenInTech.pdf.
Where to Learn More
© 2017 Protiviti Inc. An Equal Opportunity Employer M/F/Disability/Veterans. PRO-0817 Protiviti is not licensed or registered as a public accounting firm and does not issue opinions on financial statements or offer attestation services.
Protiviti is a global consulting firm that delivers deep expertise, objective insights, a tailored approach and unparalleled collaboration to help leaders confidently face the future. Protiviti and our independently owned Member Firms provide consulting solutions in finance, technology, operations, data, analytics, governance, risk and internal audit to our clients through our network of more than 70 offices in over 20 countries.
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Continuing the Conversation
ContactsCory Gunderson Managing Director +1.212.708.6313 [email protected]
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