Cash, Risk and Relationships: A Successful Approach in Africa
by R. Paul Davis LL.D., Group General Counsel, PacNet Services Ltd
PacNet Services Ltd (PacNet) has a very specific business objective: to facilitate small payments between businesses and consumers efficiently and consistently across the world. Africa is a key part of this strategy. Currently, we operate in 20% of African countries, which amounts to around 90% of our potential market, with particular strength in the Common Monetary Area in southern Africa (Lesotho, Namibia, South Africa and Swaziland). We also have regional representation in Egypt (North Africa), Kenya (East Africa), Morocco (Middle East & North Africa) and relationships in Gabon and Benin to support French-speaking Central and Western Africa.
Our regional approach to Africa demonstrates one of the most important issues for corporations considering opening or expanding their business on the continent. Africa comprises 54 countries, each of which has its own tax, fiscal and economic environment and unique cultural heritage. Consequently, foreign multinationals need to plan their strategy and operating practices for each individual market.
Criteria for doing business
Our group treasury function is based in Vancouver, Canada, with a supporting operation in Shannon, Ireland. We have two key treasury principles that shape the way we manage our cash, treasury and risk management activities: SWIFT access and currency convertibility.
SWIFT access for cash management efficiency
Cash management is impossible without accurate and timely access to data. To enable this, we use SWIFT to connect to our banks through Barclays’ MA-CUG (member-administered closed user group), which is one element of a long-standing and highly successful relationship. In emerging regions such as Africa, this is more problematic than in Europe or North America that have a more established financial infrastructure. Consequently, support for SWIFT is a major factor in our choice of banks when we extend our business into a new country. Banks will often claim that their proprietary technology provides equivalent capabilities to SWIFT, which may be valid in a single-banked environment, but not for a complex organisation like PacNet that needs to work with more than 500 banks globally.
Convertibility as business criteria
Our second priority is currency convertibility. If a currency is not freely convertible, we avoid the need for conversion wherever possible and hold cash locally until it is required. We suggest to clients that they hold cash in-country until it is required, as opposed to converting to base currency and then re-converting. This reduces their costs.
We also avoid repatriating funds wherever possible. We use cash locally where it is possible do to so, and set off amounts across customers to reduce local cash balances and avoid the need for cross-border settlement. In cases where we do need to transfer cash, we either automate the transfer through SWIFT according to predefined rules, or actively manage it in treasury.
Fundamentally, the ability to manage cash and risk effectively is a key consideration when deciding to expand the business into a new country. If we are not able to achieve these objectives efficiently, then it is unlikely that we will pursue an expansion strategy.