Taking a Regional Approach to Centralisation
Most multi-national corporations (MNCs) operate a central treasury at corporate headquarters, but also establish regional treasury centres.
These regional treasury centres have tended to be relatively autonomous – for example, it has often been the case that a regional treasury centre runs software different to that used at head office. And regional treasury centres may also have discretion over how relationships with subsidiaries are managed, and how much is centralised, depending on company and regional culture, business needs and – the question under discussion here – what is and is not possible in the different markets and jurisdictions.
But the trend is certainly towards more centralisation – and in particular, standardisation – of treasury activity across a company’s operations worldwide. To give a very practical example, we now see group treasurers requesting standard account opening procedures, managed out of head office, for accounts in all jurisdictions.
This renewed drive to treasury centralisation certainly owes something to the ever-more competitive nature of business and the need to manage operational costs and working capital as efficiently as possible, enterprise-wide. But the primary impetus is the current requirement for increased control. This control imperative is a reaction to the increasing demands of regulation (Sarbanes-Oxley, for example, introduces explicit responsibilities for boards, audit committees and management) and of more enquiring boards and shareholders. So, for example, we see treasurers looking to have control and visibility not only of the balances as reported to head office, but of local accounts, and local investment policies.
Although only a handful of companies have so far established global treasury centres, this may yet prove the shape of things to come for the majority of multi-nationals.
But in the meantime, centralisation of treasury and operational cash management at a regional level can be challenge, especially where companies are looking to bring less developed markets into regional structures.
It is beyond the scope of this article to provide a detailed analysis of individual market limitations and/or opportunities. The following is a broad checklist of some of the most frequently encountered challenges, as well as some opportunities.
Across Asia, Latin America and central and eastern Europe, we see that lesser-developed markets are often highly regulated, limiting the ability to centralise activity into a single centre. For example, Taiwan, Thailand and Korea do not allow offshore accounts in local currency; in Latin America, debit taxes and withholding taxes are prevalent; in Romania and Russia the tenor of offshore investments is limited to 360 days and 180 days respectively. In Turkey, regulations surrounding disguised capital make it necessary to keep balances of different entities separate, while non-local currency accounts going overdrawn will attract a 3 per cent RUSF tax over principal.
Central bank reporting may also be onerous in these markets, requiring large amounts of documentation (in China, for example).
Regulatory restrictions often result in MNCs having liquidity trapped in local currencies that are difficult to centralise and/or repatriate. This is the case in China, Korea and Taiwan. However, in China, recently introduced multi-party entrust loans are a welcome innovation, making it possible to apply the principles of notional pooling to funds held within China.
In Latin America, MNCs certainly face significant challenges in trying to concentrate cash on a North American or European model, creating the frustrating position of having surpluses (surplus cash earning zero returns) in some places, while requiring funding in other places (expensive bank funding). One solution is to put US dollar and local currency balances (converted to US dollar) in an offshore location and establish a notional pool structure. By holding US dollar cash pools offshore, companies can optimise their Latin American subsidiaries’ liquidity and funding needs and benefit from the off-setting surplus.
Although some central and eastern European countries have developed electronic payments markets (Poland, Hungary, Romania, the Czech Republic and Turkey), others, such as Russia, are paper intensive. Centralising payments and collections for these markets can be challenging.
In Asia, Taiwan is predominantly paper-based, and some other markets demonstrate a preference for manual processing and a reluctance to automate and/or outsource processes.
But as with more developed markets, working with a bank with good local presence that understands the nuances of local clearing systems and banking conventions, can achieve the desired results. It is worth noting that direct debits are used more within CEE and that these markets have started to leapfrog their OECD counterparts with regard to use of e-billing and other internet-based solutions.
When considering centralising one or more activities from a lesser to a developed market, the costs must always be weighed alongside the benefits. Will the disruption caused, along with technology or other development costs, infrastructure and resource costs be recouped through improved efficiency and/or control?
Treasury will certainly need to stay close to the markets in which it operates in order to fully understand, and benefit from, local payment practices and operating conditions. For example, operating controls and systems that are adequate in a developed market such as the US may be ineffective, inadequate or simply not feasible in a highly fraud-prone, high-risk environment.
In spite of such challenges, centralisation of operations in less-developed markets is becoming easier to achieve; the pace of change is rapid and opportunities to extend regional treasury structures are growing. Keeping in touch with local market developments and intelligence will be important.
José Franco, Liquidity Advisor, Central and Eastern Europe,
Joanna Cumming, Business Management, CEEMEA,
Perry Lau, Working Capital Head, Hong Kong, Working Capital, ABN AMRO.