Internal Audit, Risk, Business & Technology Consulting

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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

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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.

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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.

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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.

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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.

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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.

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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

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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

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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

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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.

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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.

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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.

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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

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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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ContactsCory Gunderson Managing Director +1.212.708.6313 cory.gunderson@protiviti.com

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