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A key business lesson from the pandemic
What lessons has big business learned from the coronavirus pandemic and what does it need to become in order to survive?
Alexey Erokhin, head of the Far Eastern branch of EY (Ernst & Young), one of the world's largest audit and consulting companies, answered EastRussia's questions.
- Alexey Vladimirovich, in the corporate report, EY calls 2020 the year of "updates and transformations". What was it like for the business in general, and for your company in particular?
- Obviously, 2020 was not an easy year for business. New challenges arose, companies were forced to adapt and change, even to simply continue to exist. However, only negative factors cannot be taken into account. Under the pressure of the situation, many companies have invested in technology development, and some types of business have even received an impetus for development. Thus, according to a study conducted by EY at the end of 2020, 61% of business representatives surveyed see the challenges of 2020 new opportunities.
According to a study by EY and Forbes Insights, large Russian business was better prepared for the crisis compared to global participants in the Forbes 2000 list, moreover, 100% of domestic companies expect their business to grow during the next three years... Negative and pessimistic forecasts came true only partially. For example, according to EY, at the end of the first and the beginning of the second quarter of 2020, Russian banks expected a decrease in net profit by more than 20% and a decrease in the return on equity to 10%, while in fact, net profit decreased by only 6%, and the return on equity turned out at 16% versus 20% in 2019... Of course, serious changes in the business of our clients could not but affect the activities of our company. However, according to EY's FY2020 Global Report, revenue growth has slowed down slightly, remained positive и accounted for 4.1% by 2019... If we talk about Russian indicators, then according to the traditional Expert RA rating, we took first place among the largest Russian audit groups and networks for the 7th time, with a 10% increase in revenue in 2020. As for the transformation, our experience allowed us to build the process as flexibly as possible, using different formats, including remote ones. Therefore, I can say that we were ready for an unexpected and abrupt transition to online. If we talk about services, now there is a high demand for large transformation projects such as technological transformation and optimization of business processes, tax issues related to international taxation, risk management issues, and, of course, audit are also in demand.
- The year 2020 has shown how dangerous it is to underestimate the likelihood of force majeure. And what a difficult situation the companies of the transport, tourism and other industries are in. What do you think the pandemic has taught business?
- The quick negative changes associated with the restrictions introduced to combat the pandemic really hit transportation, HORECA and the entertainment industry in the first place. At the same time, some catering establishments have restructured their business model, switched to online delivery of products, and thus reduced the negative impact. Flexible and, in a sense, innovative thinking, the use of modern technologies and solutions have become important for business. Naturally, not all types of businesses can be transferred online. That is why companies were forced to start more actively managing their risks and reducing costs. Retention of qualified personnel has become a priority. In the harsh conditions of the pandemic and restrictions, many affected companies would find it difficult to cope without government support. In general, the new situation that has arisen due to the pandemic has allowed the management of many companies to identify weaknesses and identify areas for development and improvement. Thus, according to a study by EY, 95% of Russian companies expect that the greatest changes will occur in the field of personnel management, corporate strategy and culture (63%) and innovation processes (63%)... Willingness to change, relying on qualified personnel and the ability to assess risks and transform the business in accordance with market needs are the most important lessons of the pandemic.
- How did the pandemic affect business transformation in Russia?
- The new reality dictates new methods of business management - according to a survey of senior executives conducted by EY and Forbes Insights, 63% of Russian companies are preparing to increase spending on transformation of their activities. Among the key tasks of transformation are the reallocation of resources and the allocation of new significant investments. At the same time, Russian companies plan not to change the structure of their business through mergers and acquisitions or changes in the management block, but to invest in new technological solutions and begin a comprehensive business transformation, and without cutting costs. The ability to comprehensively take into account geopolitical risks, readiness for digitalization and the introduction of breakthrough innovations are the necessary competencies for the development and increase of business resilience in the face of uncertainty. Interestingly, 54% of Russian companies participating in the survey believe that the problems of climate change and environmental protection are also directly affecting the solution of the tasks of transforming their business. The most important qualities of a leader-conductor of change for Russian leaders are openness, innovative thinking and management many continuous transformations in the company.
- How have business requests changed during the pandemic (among your clients)?
- Our clients began to pay more attention to the formation of corporate strategy in the face of constantly changing external factors, issues of risk management, as well as to new methods of working with personnel in a “remote” mode. According to research, conducted by RBC and SAP, 53% of the respondents noted that it was necessary to rebuild the processes of personnel management, 51% - marketing. The issues of digital transformation and sustainable development have become significant. Due to the pandemic 76% of large Russian companies accelerated business transformation process. As information and data have become an integral part of doing business, data analytics and data protection are now also important to customers. A RUSSOFT study published in October 2020 showed that for 70% of Russian companies, the issue of data protection is a major cybersecurity issue... Besides, a lot of attention on the part of clients is paid supply chain management... According to EY forecasts, the global economic recovery after the pandemic will look like a saw with small local falls and subsequent growth, which will require companies flexibility, ability to quickly recover and quick response.
- What projects with the attraction of foreign investment in the Far East deserve attention? What are the FDI trends in the Far East market?
- Over the past 8 years, the share of foreign investment in the Far East has increased 16 times and amounted to 1 trillion 300 billion rubles, and by 2024 the volume of investments will grow 4 times and will already amount to 5 trillion rubles. Among the newest large projects in the energy sector is the joint complex of Rusatom Overseas and the French Air Liquide (a producer of industrial gases), within the framework of which it is planned to build an enterprise on Sakhalin for the production of 30-100 thousand tons of hydrogen per year. For such a volume, according to experts, it may be necessary to build about 500 MW of the installed capacity of nuclear power generation, which is estimated at 200 billion rubles.
According to the Ministry for the Development of the Russian Far East, the number of Far Eastern projects with Chinese participation has increased from 2018 to 29 since 59. The total volume of Chinese investments in these projects is $ 2,4 billion, which is 73% of the total volume of foreign investments in projects implemented in the Far Eastern Federal District. Also, in the future, it is planned to expand cooperation with Indian companies, within the framework of which possible projects for the supply of hydrocarbons from the Far East to India, as well as geological exploration, production and processing of oil and other energy resources, are currently being considered.
- In 2021, there are hopes for economic recovery and growth, and if so, which one?
- In its April forecast, the IMF improved estimates for the global economic recovery from 5,5% in January to 6,0% yoy (yoy) in 2021 and from 4,2% to 4,4% yoy year in 2022. According to the expectations of the IMF, the key driver of global economic growth in the coming years will be China, which will account for more than one-fifth of total GDP growth until 2026. According to the results of the study of investment attractiveness, which EY traditionally prepares for the St. Petersburg International Economic Forum, in 2021 foreign direct investment is expected to increase due to the emergence of deferred demand for the implementation of projects: 40% of respondents plan to develop or expanding business in Europe (including Russia), whereas at the beginning of 2020 this figure was 27%. According to a survey by EY and Forbes, business recovery will begin this year. 76% of respondents from Russia note that inmoderate growth possible revenue.
In the first three months of 2021, the Russian economy showed indirect signs of industrial growth. In particular, the rate of electricity generation increased by 1 quarter. 2021 by 4,9% yoy, while the manufacturing PMI was above 50 points throughout the quarter.In its April forecast for the global economy IMF has raised estimates of Russia's GDP growth from 3,0% expected in January to 3,8% yoy in 2021
- About three years ago, speaking about the sphere of public-private partnership, you noted that state and administrative institutions do not understand business. Is the situation changing?
- On the one hand, the situation is certainly changing, because, firstly, the market for PPP (public-private partnership) projects has grown and competence grows with experience, and secondly, training in the field of PPP has been popularized. On the other hand, there is a turnover in government structures of those personnel who have undergone appropriate training and gained experience working on specific projects with external consultants. As a rule, specialists leave for higher-paying jobs in business or consulting, since the demand for labor resources in this area is still high. To maintain competence within government structures, it is advisable to consider the allocation of PPP specialists to separate PPP centers for the consolidation of personnel and competencies.
- EY works with projects in the format of public-private partnerships, concessions. To what extent and in what areas are such projects in demand today? How do you assess the mechanism of the "Far Eastern Concession", which is now being actively discussed, based on its presentation to the business community by the Ministry for the Development of the Far East and the Arctic?
- EY supports both investors and the public sector. In the field of PPP, the range of services includes the development of organizational, legal and financial models of the project, support in negotiations, preparation of documentation: a private proposal or tender documentation, development or examination of a concession agreement or a public-private partnership agreement. In cooperation with the government, EY also participates in the preparation of regulatory legal acts necessary for the implementation of a PPP project. EY is mainly approached in connection with the implementation of projects in the areas of transport infrastructure, social infrastructure, as well as in the field of health. Recently, there has been an increase in interest in projects aimed at creating information technology objects.
The mechanism of the "Far Eastern concession" arose, inter alia, in connection with the exclusion of the possibility of installments within the framework of government contracts. At the same time, the region still needs an understandable way to implement socially significant projects with payment to the investor "in installments", in which the private party will create the infrastructure, and the public party will reimburse the agreed costs over a long period (20-30 years). In this situation, the state needs to carefully evaluate the financial model of the project in order for the project to be truly beneficial to both parties, not only in the short term, but also after decades. The mechanism of the "Far Eastern Concession" can work effectively with full support from the Ministry for the Development of the Russian Far East and the Corporation for the Development of the Far East, in which all the necessary decisions will be coordinated in a balanced and prompt manner. It is obvious that the creation of an investment accelerator and the definition of criteria for selecting projects for launching according to the “Far Eastern Concession” model is currently the primary task.