Dancing to the Local Beat

by Yosymar Vasquez, Head of Treasury Latam, AkzoNobel

Following Jarno Timmerman’s article in edition 235 of TMI, in which he described AkzoNobel’s approach to treasury centralisation in Asia Pacific, we turn to Latin America (‘Latam’). With business operations in eleven countries (Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guatemala, Panama, Peru, Uruguay, Venezuela), Latam is an important region for the Group. In this article, Head of Treasury Latam Yosymar Vasquez describes some of the challenges and progress so far in achieving visibility and control over cash in the region.

Key Points

• AkzoNobel has a global treasury structure based in the Netherlands and with regional treasury hubs in other major regions
• The author describes the operations of the Latam treasury centre based in Sao Paulo, which has around 30 bank relationships
• The Latam treasury has embarked on a major project aimed at optimising visibility and control over cash, involving both in-country cash pooling and concentrating cash regionally, where possible
• The project has started in Brazil and is being extended to Argentina and other countries, with the aim of completion by the end of 2016

Treasury structure

We have a global treasury structure at AkzoNobel, with a group treasury team based in the Netherlands with regional treasury hubs in other major regions. In our Latam treasury centre, located in Sao Paolo, we are responsible for implementing global policies whilst also sharing our local, ‘on the ground’ expertise with group treasury, therefore providing a bridge between AkzoNobel locally and globally. We look after all treasury services in the region, but payments, collections and credit are handled through our financial shared service centre (SSC) or by local finance teams. Consequently, we are able to take a more strategic role, such as streamlining processes, managing bank relationships, and understanding new opportunities as both the business, and the market and regulatory environment in which we operate, continue to evolve. We use SAP as our treasury technology platform, and we have designed our infrastructure to be bank independent as far as possible.

Bank relationships

We work with our global banking partners concentrating collections, payments and payroll wherever possible, but there is no single global bank that provides universal coverage across the region. Consequently, we also appoint local banks that offer a strong local footprint and depth of capability in each country for activities such as collections, and tax payments. This local presence and expertise is vital given the regulatory complexity and speed of change in each country, and the diversity of payment systems.

As a result, we currently maintain around 30 bank relationships in Latam. Many countries have multiple clearing systems, and there is no regional uniformity in the use of formats. Furthermore, the use of cash and manual payment methods is widespread. These issues all present obstacles to efficiency and automation, so we rely on both our local and global banks, as well as our expert treasury team in the region, to optimise our financial and operational efficiency, whilst complying with internal policies and external regulations. [[[PAGE]]]

Controlling cash

One of the difficulties of working with a large number of banks is achieving visibility and control over cash. We aim to centralise cash wherever possible at AkzoNobel so that we can manage our liquidity needs more effectively, whether by country, regionally or globally as appropriate, and manage risk. This is particularly important  - and challenging - in Latam given FX and interest rate volatility in many countries, high inflation, and regulatory, market and cultural diversity. With a business extending across eleven countries, we need to manage multiple currencies, which are often subject to exchange and capital controls, with strict central bank regulations and reporting requirements. Fiscal policy, which is constantly changing, also frequently prevents cash centralisation, either by prohibition or significant tax and legal implications.

Understanding challenges, leveraging opportunities

Despite these obstacles, we have embarked on a project to optimise our visibility and control over cash. The first step is to achieve in-country (domestic) cash pooling wherever possible, both in local currency and USD; however, it is not possible to hold USD accounts in countries such as Brazil and Colombia, and although it is theoretically feasible in Venezuela, there are onerous restrictions. Similarly, there is withholding tax payable on intercompany loans in countries such as Chile, Uruguay, Colombia, Peru and Venezuela which impacts on the feasibility and value of regional cash pooling solutions.

With business operations in eleven countries, Latam is an important region for the group

The second step is to concentrate cash regionally wherever possible. All eleven  countries in which we operate permit offshore bank accounts, but there are restrictions on cross-border transfers in most cases, with the exception of Chile and Uruguay. There are also extensive central bank reporting requirements, particularly in Brazil and Argentina, and restrictions that effectively ‘trap’ cash in-country. For example, in Venezuela, 60% of export revenues may be held by the company offshore and those funds can only be used to make payments relevant to these exports while the remaining 40% must be sold to the central bank.

A blueprint for cash centralisation

We have worked our way through the various domestic and cross-border regulations and come up with a proposal that we are now starting to implement. For domestic cash management and payroll we will work with two banks: one for Brazil and another for six countries. We still have to find out a partner bank for the remaining four countries.   We will continue to work with local banks as well, however, and we need to bear in mind that it can be expensive to transfer cash to and from these banks to the core bank, such as in Argentina and Colombia.  Our cash pooling structure involves combining both zero balancing and notional principles: for example, in Brazil, offshore accounts cannot be used in a physical cash pool, but can be included notionally.

Given that Brazil is our largest country in Latam by revenue we have started here. The arrangement includes zero balancing domestic pooling, and an offshore account into which we concentrate export funds. This account is then included in a notional pool. Fund transfers between local legal entities are treated as inter company loans, and are therefore subject to withholding tax and tax on financial operations (IOF). We are now starting to work on Argentina, where domestic cash pooling is achievable across accounts in the same currency, and anticipate completing the project by year end 2016.

This will complete a long and extensive process of evaluation and exploration, but we recognise that as regulations and market conditions change, we will need to constantly review and refine our cash and liquidity management structures in the region. The outcome, however, is highly significant for the AkzoNobel group, in that we are achieving far better visibility of our cash balances in each country, an essential first step in an efficient treasury strategy, and centralising these wherever possible.