Setting up a Cash Management System in Qatar: a Treasurer's Story
When Peter Graham was hired to manage the treasury of a large company based in Qatar, he came across many challenges in the form of the local banking infrastructure, the cash-based culture and the unregulated realms of FX. In this article he describes how he went about setting up a cash pooling system, improving bank relationships and implementing a treasury management system.
In the middle of the second war in the Arabian Gulf I decided to accept a job offer there. I had always wanted to work and live overseas at some point in my career, but the Middle East had not usually leapt to the top of the list when considering where to go. Even less so when the war had started only a few months earlier. But the job was in the State of Qatar, known most for either its hosting of the US forces in both Gulf wars, or as the base for the Al Jazeera news network. Upon investigation, it seemed that actually Qatar was really a pretty safe place to be and was not very close to Iraq either. I therefore decided to take the plunge and accepted the role of treasurer where I was to introduce best practice to the treasury function in one of the larger local companies.
Between 1916 and 1971 Qatar existed as a British protectorate. Oil was discovered in the 1940s, bringing wealth to the country in the 1950s and 1960s, and in 1971, Qatar was to join the other emirates of the Trucial Coast to become part of the United Arab Emirates. But both Qatar and Bahrain decided against the merger and instead became independent nations.
During the late 1980s and early 1990s, the Qatari economy was crippled by a continuous siphoning off of petroleum revenues by the ruling emir, but in 1995 he was overthrown by his son, the current emir Hamad bin Khalifa Al Thani, in a bloodless coup. The new emir lifted press censorship and instituted a number of other liberal reforms, and also started Qatar on the road to becoming a force on the international stage in a variety of areas. Oil and natural gas revenues enable Qatar to have one of the highest per capita incomes in the world now.
Qatar did not develop as early as some of its neighbours such as Dubai, Abu Dhabi and Bahrain because of the problems already mentioned, and this was to prove to be the single most influential factor in the job itself.
The company itself is one of the largest in the country, which had only a few years before been partially floated to the public. It enjoyed a monopoly position within the country, and although this is due to change, the monopoly status allowed it to build up huge cash reserves. I had worked at one other company before with no debt on its books, but this was on a totally different scale.
The job specification therefore required a reasonably heavy emphasis on investments as well as the ‘standard’ treasury roles. Whilst I was on a very steep learning curve finding out about the world of investments though, I concentrated on the following areas you would expect in a re-engineering – policies, cash management, risk management, systems and procedures.
The treasury policy as it existed was very rudimentary compared to those I had been used to seeing. The ‘treasury’ function as it stood was little more than a glorified cashiers department, dealing with collections and payments for the vast majority of its time. As an example, the policy statement on foreign exchange was along the lines that ‘the company will hedge foreign exchange exposures’. No mention of things such as which types of exposure it will hedge, how far in advance it will cover, what the permitted instruments are, what the permissible credit risks were, and so on.
As far as the bank account structure was concerned, relatively minor things such as account opening or closing had to be done by the CEO. Furthermore, the CEO had to sign off on every single payment made, and if it reached a certain threshold it would have to go to the Chairman who was never on the premises. All in all, there was a level of bureaucracy the like of which I had never even imagined let alone seen.
However, certain factors should be taken into consideration to put things properly into context. Firstly, the reason that a number of expatriates such as myself were brought in was because the company had undergone a far-reaching analysis by a large consultancy in the previous 12 months, the purpose of which was to identify the main areas of inefficiency in the business so that it could address and redress those problems in order to prepare for the imminent competition. Secondly, the company had existed since its inception as a government owned and run business, and it had existed quite happily with all the inefficiencies and bureaucracy one might normally associate with civil entities everywhere. Lastly, the culture can at times be wary in the acceptance of change, and, not to say that it is good or bad, the fact is that the country had remained very conservative and static until the coup in 1995.
The policy that I drew up was therefore reasonably conservative, certainly risk-averse, and it did address a raft of issues which most treasurers would consider standard fare, but clearly had not been considered by the company previously.
Cash management was next on the list. The company had three main banks but also utilised every other bank based in the country, mainly out of necessity since that was where customers paid their bills.
My initial idea was to implement a system of daily zero-balancing through SWIFT transfers, but this proved prohibitively expensive. We therefore performed an analysis of the optimal frequency for sweeps to occur, by bank, depending on the average balances held. Apart from the banks, there were a number of other places people could make their payments, for example at company provided collection centres in the shopping malls, and later on came the provision of an online payment facility.
One of the biggest inefficiencies came from the fact that overwhelmingly the most popular method for customers making their payments was in cash. This again was a cultural inheritance. Direct debits were virtually unheard of and there was only limited use of cheques and credit cards. Another mini project was implemented to try to minimise the amount of cash and cheques held at the 14 collection premises overnight, primarily by outsourcing the custody and depositing into bank accounts to a security agency. This was not exactly rocket science, but the number of committees which had to meet and the number of authorisations required internally turned this into a four month process.
One thing I was determined to push through however was the concentration of banking relationships. In essence, the company used the three main Qatari banks for its day-to-day cash management activities. This is a company which at the time was purely domestic and had only a medium level of transactions. It therefore looked like a prime target for a domestic banking tender by way of request for proposal (RFP). Along with the three incumbent banking partners I decided to include another (non-local) bank which had a presence in Qatar and one I had worked with much in previous roles.
The RFP asked a fairly standard set of questions but a lot of it was concerned with the systems capabilities as the company was using only paper bank statements when I had arrived. As it turned out, the non-local bank won the tender process on a straightforward score and tally basis, as would be expected from one of the biggest banks in the world with well established balance and reporting system credentials. However, for various reasons it was decided to go with the second placed local bank.
Initially I was a little annoyed by this decision as a lot of work had gone into the RFP and the international bank’s response was head and shoulders above the rest. However, both the company and the local bank were at similar stages of maturity and on reflection, there was a clear and justifiable rationale for both parties to develop and grow together as in the long run the country as a whole would benefit more. It also transpired that this RFP process was the first time it had been done in the country and one of the other large corporates followed suit shortly afterwards.
Tradition and religion requires the local population to cover themselves as much as is possible, in particular the women with their abaya, hijab and burqa combinations. It appeared that the same policy was employed by the company when it came to foreign exchange.
The existing treasury team was mandated to put FX cover into place for 12 months in advance of the exposure being expected to materialise, on a rolling basis. There were only two problems with this – firstly, the exposure forecasts were (and could only ever be because of the nature of the business) wild estimates of reality; secondly, the exposures were mainly denominated in SDR.
Fortunately, the Qatari riyal was pegged to the dollar, so it was easy enough to break out the SDR into its component parts. One of the banks had been prepared to quote SDR rates and to perform delivery in SDR. Upon analysis though, it appeared that the cost of the spread being suffered by the company by taking this route was a fair bit more than the additional costs of hedging the separate currency pairs. The latter policy was therefore implemented.
The bigger problem lay in the continual generation of huge mismatches between the hedge and the underlying, a result of ongoing misforecasting. This, combined with the fact that no ‘view’ was ever employed in the hedging decision process, proved to be very costly for the company. It can easily be argued that mechanistic hedging is no better than not hedging at all, as it puts the entity at the same level of risk in the event of adverse market movements. This process was therefore amended and the hedging horizon was made much shorter.
Upon arrival it quickly became evident that all treasury reporting was performed on spreadsheets. Most of the basic accounting entries for FX contracts, short-term deposits, and the various elements of the investment portfolio were at least recorded on the main accounting system, but of course this alone cannot facilitate good treasury management.
As mentioned previously, all of the bank statements were paper-based, although the company had taken the first steps to introducing the banks’ balance and transaction reporting systems (where one was available). There was one market information terminal in place but it was for the use of the investments function (which had not previously been aligned with Group Treasury).
My main priority was therefore to implement a treasury management system, something that no operation with treasury activities of any size can safely be without. The decision to select the treasury add-on to the main accounting system was made within the first two months of my arrival. The final go live of the system did not happen until after I had finished my contract and left, over a year later.
The now familiar problem of securing the necessary authorisations and all the other related bureaucratic hoops to jump through took at least three months. On top of this was the get-out clause used in seemingly every conversation I had – ‘enshallah’ (God willing). Curiously though, the root problem lay in the fact that it proved to be extraordinarily hard to slot the treasury module into the main accounting system, and that had been the main driver behind the decision to take the add-on rather than go for an off the shelf package.
The banking software was introduced relatively easily, but the benefits accruing from its introduction were of limited value given the limitations of the software itself. Again though, this was an area of the banking service very much in development and it is unrealistic to expect the functionality of systems provided by the world’s leading banks to happen overnight.
I was not clear what to expect when I arrived in the Middle East. My experience prior to then had been in companies and treasury functions that employed ‘best practice’ methods and leading edge technology.
It was not evident from what I saw that any companies except for the very largest employed a dedicated treasurer, but certainly that seems to be starting to change. To an extent, the development of treasury is helped or hindered by the relative maturity of the banking system, and my experience of Qatar at least was that there was a genuine desire to progress, but at times, as I myself found, obstacles were put in the way.
Even prior to the oil price rises there was a tremendous amount of liquidity around the Gulf states. It is crucial that the large corporates in the region continue to work closely with their local banks to grow together, but also to devolve responsibility to experienced treasurers to implement necessary change and demand the appropriate level of service from their banks.
The State of Qatar today is unrecognizable from the country it was 10 years ago. The capacity for change (and of course the cash) is not lacking. Sometimes however, the acceptance of change and transference of decision-making powers where necessary is simply not available. However, as anti-competitive barriers are lifted across the various industries and the companies involved start trying to compete on the world stage, corporate treasury functions will inevitably need to embrace best practice in order to help facilitate the country’s ambitions.