The pros and cons of centralising treasury

Treasurers and CFOs face a number of issues as they streamline their treasury activities.
Victor Penna, J.P. Morgan
Victor Penna, J.P. Morgan

With its high economic growth rates and burgeoning trade flows, Asia-Pacific may appear to be the Promised Land to European and US multinational corporations (MNCs) as their home markets continue to stagnate, but the region’s jurisdictional idiosyncrasies bring their own challenges for treasurers, CFOs and financial controllers. Foreign exchange (FX) controls and the multitude of currencies and standards can work against the smooth running of treasury operations, especially as these companies try to improve their liquidity management and cash visibility.

For many firms an obvious solution to ease the cash bottleneck is to make better use of working capital through centralising treasury operations. “Most organisations want visibility and control over their liquidity,” said Victor Penna, head of regional solutions and advisory team, Asia Pacific, J.P. Morgan treasury services. “They might have a lot of debt facilities but also a lot of cash locked up in different markets and locations. A quick win is to centralise and get control of that liquidity, and pay down any debt or redeploy those funds for use in the firm.”

In addition, having cash in one place means monitoring all types of risk – including FX, interest rate, counterparty, liquidity, settlement and systemic risk – becomes more straightforward. “The other important issues [for treasurers] revolve around the evolving regulatory environment and the implications for how a company can utilise and move its cash, what regulations allow, and tax issues which arise from operating a centralised treasury structure,” said Penna.

Centralising treasury may not be the best solution for all businesses. When firms are embedded in local markets and their local operations enjoy a relatively high degree of autonomy, it may make more sense for treasury to adopt more of an oversight and policy role. But for MNCs with more complex multi-jurisdictional networks, a full in-house banking model within a regional treasury centre is often the preferred option. Some MNCs have set up such centres in mainland China from where treasurers can manage liquidity for the rest of Asia, even though the mainland market itself is highly restricted and cash cannot easily be moved offshore.

For finance controllers, there are also more practical advantages to a regional treasury centre, including deeper relationships with banks. “After we centralised our treasury centre, banks started to give us much better services in Singapore and became much more accommodating than in the past, though local branches may not have appreciated us centralising business away from them,” noted Koo Nguang Siah, senior vice-president and group financial controller at Cerebos Pacific.

Centralising treasury operations typically goes hand-in-hand with more focused banking relationships to gain better control over liquidity. A regional banking model also ensures economies of scale and high levels of operational and client service. “With a single banking provider, a company can benefit from an automated liquidity structure as funds will flow more easily on a single banking platform between different jurisdictions,” said Penna. “For their part, banks are looking to provide integrated payables and receivables solutions to help drive straight-through processing wherever possible. If a treasurer can optimise collections and reconciliation, for example, it can help improve working capital and ultimately the financial position of the firm in question.”

However, companies that have specific collection needs in one country, have credit relationships with local banks or that have in-country requirements that cannot be covered by any single bank, may well parcel out services between different banks.

In China, for example, it is very rare for an organisation to use just one bank. While this model can still be efficient if the company has an adequate technology platform or is concerned about counterparty risk, from a service perspective it can be inefficient and makes it harder to manage liquidity. 

Regulatory headaches

If many large firms are choosing to centralise treasury operations, the process is not without its challenges. SOS International, which provides emergency healthcare, medical services and security assistance across the globe, is in the process of centralising payments in two shared service centres within the next twelve months or so. “We have a very centralised cash management system as all 27 alarm centres [which provide on-the-ground medical, security and logistics] are linked by a central database,” said Tan Lee Thong, general manager group finance at the firm. “But since we are not able to pool as freely as we would want in some countries because of restrictions, in those cases we still have to apply more traditional methods such as dividends.”

Additionally, tight FX controls in key markets such as India and China mean centralising liquidity away from individual markets can make unexpected payments in certain markets more complicated. “It will usually take some time to transfer cash to the country from your central pool,” said Damian Glendinning, Lenovo vice president and treasurer. “You can solve this by arranging local credit lines — but the sum of all the local credit lines quickly becomes a large number, as you have to provide for the worst case scenario in each location. The reality is that you are very unlikely to have the worst situation at the same time in each country. But the banks face significant regulatory issues in trying to have a single, multi-country credit line with instant dynamic allocation across national boundaries.”

So spare a thought for the region’s CFOs, treasurers and financial controllers as they wrestle with the difficulties of doing business in Asia. Regardless of the complexities of their operations, they are there to serve the wider needs of the company and must play the cards they are dealt. “Over-complexity is a challenge, but treasury is a specialist value-adding service function,” said Manuel Vázquez, regional treasurer at Nestlé Asia Pacific, whose treasury operations are centralised into five regional treasury centres worldwide. “It is not a perfect world for a treasurer when there are a lot of regulations, entities and currencies, because you face different currency and counterparty risks. The dream of all treasurers is to have your balance in one currency, but you need to be ready to operate in a world that is less than perfect.”

 

This story was first published in the Corporate Treasury Yearbook 2011 supplement to the June 2011 issue of FinanceAsia magazine.

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