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back to index backEUROtalk February,  2005

Mind the money

With the EU's eastward expansion, shouldn't managing cash in central and eastern Europe be a lot easier than it is?


For western Europe's corporate treasurers, the adoption of the euro in central and eastern Europe (CEE) can't happen soon enough. Not only will the euro's arrival in countries like Poland, Hungary and the Czech Republic help reduce the exchange-rate turmoil facing their companies. It should also make getting liquidity out of the region much easier and much cheaper. On top of that, as treasury centralisation gathers pace, group treasury can expect much better control over how its companies in the east are managing their balance sheets.

But why wait?, asks Lee Taylor, European cash manager of Coca-Cola Hellenic Bottling Company (CCHBC). It might be five years, it might be ten years before some countries are ready for the ‘dream of Europe, she says. So while nothing will beat the euro's arrival in improving CEE cash management, there are things that treasury departments can be doing now.”

The €4 billion, Athens-based bottler of Coca-Cola products certainly isn't waiting around. A year in preparation, a new cash management structure went live in November to enable liquidity in six currencies—four from the CEE region, plus sterling and the Swiss franc—to be physically moved and zero balanced” into an account opened by Deutsche Bank in London. The currencies are converted into euros via a swap instrument by 2pm every day to provide a net euro position for CCHBC's group treasury.

Sure, getting the pooling up and running took plenty of legal and financial due diligence. But the list of benefits more than makes up for it. For starters, Taylor explains, it's the first step towards providing group treasury with centralised access to liquidity, allowing excess cash from one part of the company to fulfil funding requests from another, and much faster than before. The structure has also brought much more discipline to local cash management by requiring each participating country to provide head office with cash flow forecasts, both one week and one month into the future. Then there's the cost-saving element: We've been able to eliminate the use of local overdraft facilities as we have better margins with the pool,” says Taylor.

CCHBC's feat is enough to turn many treasurers green with envy. Few western companies are entirely happy with their treasury strategies in the east. The legal framework has changed considerably since the fall of the Iron Curtain, but the situation cannot yet be compared to western European standards,” says Eva Schwarz, head of international cash management at Bank Austria Creditanstalt in Vienna. This is the challenge treasurers are facing—and this is, of course, the banks' opportunity to come up with adequate solutions.”

CFOs will soon find out whether treasurers and bankers are rising to that challenge. According to Rosemary Leahy, head of transaction bank for the CEEMEA region at ABN Amro in Amsterdam, finance chiefs have seen how their treasurers have used new technology, banking structures and shared service centres to improve service levels of western European treasuries. Now, they want the same in eastern Europe,” she says. But for the time being, is that just a pipe dream?

Pushing the boundaries

Not quite. The goal is straightforward enough. What most companies have lived to do is to centralise liquidity in regional treasury centres,” says Susan Skerritt, a New York-based partner at consultancy Treasury Strategies. In the CEE countries, that certainly wasn't possible five years ago because of various regulatory restrictions and so on, and in some countries, it's still unclear whether it's possible. You have to go country by country.”

So companies have begun to do just that, streamlining CEE account structures, centralising cross-border treasury and payment flows where they can, and setting up domestic cash pooling structures. They want not only to meet the risk, but also to maximise the return in countries that—let's face it—up to now have been very maverick [in enabling companies to move their liquidity around],” says ABN Amro's Leahy.

But the pace of change isn't as fast as many corporates would like. The big show-stopper for the region's treasury managers are legal, fiscal and regulatory barriers in individual countries. That's not to say there haven't been big changes, though.

The tipping point, according to Schwarz of Bank Austria Creditanstalt, wasn't the EU's enlargement last May, but rather the foreign-exchange liberalisation that happened in the run-up to enlargement. Hungary, the Czech Republic and Slovakia led the way, followed by Poland and Slovenia. Until then, she says, companies were basically satisfied with receiving end-of-day account information while intra-day or online information wasn't a must.” No longer, she says.

In the meantime, a whole host of limitations on currency convertibility, foreign-currency holdings and local-currency accounts of non-resident entities have been lifted. That's led to the steady growth in companies in CEE countries being able to use domestic cash pooling and other cash and liquidity management techniques that are common in the west. (See box below.)


Another big rule change involves a recent EU directive requiring that the cost of a euro cross-border transfer be identical to a euro domestic transfer if the amount is below €12,500 (€50,000 in 2006) and a handful of other criteria are met. What is generally not known, says Philippe Lambrecht, general manager of international cash management at KBC Bank in Brussels, is that the directive already applies to central Europe for cross-border euro transfers initiated from western European countries in the EU or to cross-border collections received from central Europe. Exporting companies in the CEE region can make substantial savings by switching to the euro as their invoicing currency,” he says.

To be sure, treasurers would like to see even more changes like these. Stamp duty, for one, still gets treasurers grumbling, particularly if they have a lot of bank deposits in Poland. A company in Poland has to pay stamp duty in the 0.2% to 0.5% range on inter-company deposits that it holds, so it's losing 20 to 50 base points on its deposits,” explains Lambrecht. That doesn't make it very attractive to implement zero-balancing in Poland.”

Can't always get what you want

Treasurers also lay part of the blame on their banks for the slow evolution of CEE cash management. As Adrian Rodgers, director of Arc Solutions, a finance consultancy based in the UK, observes: Take the consistency that we've been seeing in [western European banking] since the euro's arrival and turn it on its head.”

A common gripe heard among treasurers, for example, is that companies often receive unreliable or unclear data from their banks, causing delays for payments and invoice processing. Another complaint is that banks aren't offering the products that their clients want. You'd like to think your bank could provide you with all the things that you take for granted in western Europe,” says Annette Owen, global cash and banking manager of BAT, the £26 billion (€37 billion) UK-based tobacco firm, which currently operates treasury shared service centres in Singapore and London.

According to Owen, BAT is planning to devote 2005 to analysing how it can extend its cash and liquidity management to the CEE countries as part of a larger group treasury objective to gain access to cash at the operating unit level. Owen's ultimate aim is to have cash and liquidity management in the CEE region—for BAT that includes Russia, Romania and Ukraine, among others—emulate the domestic and cross-border sweeping arrangements available in western Europe. She might have a while to wait.

We hear about solutions but they're very much on a country-by-country basis,” she says. Still, she considers BAT lucky. As we have a number of international banks that are keen to work with us, we've been able to test out different scenarios.”

As for the banks themselves, Owen has her doubts about one area in particular: alliance banking. She's finding a growing tendency among international cash management banks to team up with local banks in order to help them get better regional coverage. That sounds fine in theory, she says, but she's not convinced that important issues—such as IT compatibility between both banks and between them and BAT—are being addressed well. I've seen alliance banking in the past, and frankly the track record hasn't been good thus far,” she notes.

That said, she sees glimmers of hope. With banks such as Citibank, ING and ABN Amro, there are active dialogues taking place, and there's no shortage of information,” she says. I'm also noticing competition increase from our other European banks who see this as a good opportunity to increase their share of the BAT wallet.”

As the search for the best banking products and services continues, Owen has ploughed ahead with other projects. Notably, group treasury has worked on developing BAT's own local treasury expertise and bank relationship management. A lot of energy has gone towards visiting the local operating companies to understand their needs as well as promoting the benefits of BAT as a whole, such as standardised controls and increased buying power with banking providers,” says Owen.

One bank, one country

As at BAT, treasury management at Honeywell, the $25 billion (€19 billion) US diversified technology manufacturer, has moved higher and higher up the agenda. I want one bank per country,” declares Marie-Astrid Dubois, Honeywell's Brussels-based head of treasury. The reasons are simple: It improves control; it improves visibility.” She still has a way to go in Europe, but progress is promising. When I arrived at the company in 2002, we were working with more than 150 banks in EMEA; and now we're down to about 60.” In most cases, Honeywell tries to include the banks involved in its revolving facility in its core group of cash managers: We feel that it's important for them to have business from us outside the revolver.” High-quality electronic tools and good local service are also on her checklist.

But in paring down banking numbers, she's also mindful of not stepping on the toes of Honeywell's local offices. While the regional treasury centre in Brussels is responsible for bank relationships, mandates, inter-company loan hedging and the like, it also sets up cash pools and services for each of the local entities. So, like at BAT, Dubios says she's focused on the local entities: We need to understand the constraints from the legal, tax and treasury standpoints to make sure that what we're doing at the corporate level makes sense locally.”

In this respect, 2004 was a crucial year for Dubois's CEE strategy. That's when Honeywell parcelled out its treasury work in the region to three main banks—ABN Amro, Deutsche Bank and Citibank. By doing that we eliminated a large number of the smaller banks with not-so-good service or credit ratings.” Honeywell also took advantage of the changes to renegotiate service level agreements, not to mention fees. Since then, the transaction-processing fees Honeywell pays in the region have fallen by an average of 50%. Other efficiencies have been gained thanks to web-based tools and a software package called Quantum from SunGard, both of which enable automatic reporting of daily bank balances. Meanwhile, Honeywell's treasury team has also set up local cash pools in Hungary and the Czech Republic, and more are on the way—We decided that we want cash pools everywhere that we can,” says Dubois.

Going global

Undoubtedly much of the impetus for change has been the need for centralisation and standardisation, not just at a regional, but at a global level. Just ask Shell International, part of Royal Dutch/Shell, the £113 billion (€162 billion) Anglo-Dutch oil giant. A long-standing tradition at Shell was to run its operating companies as fairly autonomous entities, each with its own treasury operations. Starting in 1997, however, the firm transferred various foreign-exchange and money market activities from a number of operating companies into a treasury centre in London. The next stage was to slot treasury advisory, risk management and, finally, cash management into what has eventually become a global framework that today includes treasury centres in Houston and Singapore.

What we've set out to achieve is a global liquidity pool,” says Michiel Moolenaar, group central treasury manager at Shell International in London. The most efficient way of achieving that is by building an infrastructure based on a concept that we call the ‘primary bank'—that is, we have one bank per region to handle all cash payments and where possible, collections in that region. That's been our objective.” Western Europe is now complete; so, too, is Asia.

Easier said than done in the CEE region? You bet, says Joan Lynch, a member of Shell's cash management team responsible for the CEE project. When we were looking at the primary bank concept in Europe about four years ago, we wanted to include all of Europe,” she says. But it became clear that the project was just going to be too big and there were just too many disparities between the west and the east.” Now, however, Shell is ready to tackle its CEE treasury operations.

While treasury there will remain decentralised for the time being, Lynch says, there's been a big push to standardise their processes in line with global practices as much as possible. So, for example, when its request for proposal (RFP) went out to three banks in the CEE region (which eventually went to Citibank) in May last year, it included the same criteria found in other RFPs from Shell around the world, such as the need for straight-through processing of payment instructions and the use of open standards” for transferring data between the bank and Shell.

Greater standardisation. Easier centralisation. More liberalisation. Streamlined banking relationships. Shell International isn't the only company that can see the writing on the wall. John Fulton, CCHBC's group treasurer, says treasury management in the east will never be the same. We have a lot more flexibility, and a lot more options than we had just a few years ago,” he says. All that's needed now for it to catch up with western Europe, he adds, is a bit more time and good local advice. Plenty of patience is also not a bad idea.

Source: By Janet Kersnar, CFO Europe magazine - GAI

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