Treasury Management -
An African Perspective

by Barry Wolde Yohannes, Group Treasurer, Celtel International

The problems faced by Celtel's treasury in the domain of cash management are in many ways similar to but in some ways quite different from those of an enterprise operating in either the US or Europe. While the objectives remain the same, the processes and tools are heavily influenced by a predictably different and challenging economic and business environment - which is by no means uniform throughout Africa. Treasury issues become even more challenging for firms who have part of their shareholding and corporate structures located outside of Africa. We will take a look at some aspects of treasury management in the area of working capital and corporate cash management, from Celtel's perspective.

Accounts receivable
   An interesting aspect of Celtel's business model is the fact that most sales are pre-paid, consisting of pre-paid scratch cards and SIM cards. Consequently, unlike other businesses, receivables do not constitute a major working capital investment for Celtel.
However there are a few sales and revenue sharing areas in which some form of credit based transaction comes into play. These are the post-paid, roaming and interconnect areas.
   Post-paid constitutes the provision of mobile services to few local clients such as corporate, on delayed payment terms. As with the traditional credit function, this involves the establishment of credit policy, along with planning, organising, directing and controlling all aspects of the credit function.
   Roaming revenue on the other hand is more dependent on the expertise, reliability and flexibility of data clearing houses rather than in-house treasury expertise. And lastly the optimisation of interconnect revenue sharing is more a function of overcoming inter-carrier billing challenges in investing in reliable interconnect systems, models and agreements. Thus the latter two really belong more in the domain of operations rather than treasury.

Undoubtedly, cash and paper based payments are prevalent in the African economies in which Celtel operates. As such, mitigating those payment method specific risks becomes essential for local treasurers, probably more so than in Europe. While the long-term objective is to eliminate cash payments from the disbursement process, this goal will not be achieved easily and until sufficient progress is made in the electronic based payment systems (such as wire transfers and ACHs), which are still in their infancy in Africa.
   Moreover reliability and efficiency of many of these countries' paper based systems is impaired by a not too efficient postal and cheque clearing systems.
   Cash handling controls, physical safe keeping and guarded transport of cash as well as regular verification and reconciliation of the amount of cash on hand achieve high importance in the daily cash management process.
   Capital expenditures associated with continuous network rollouts throughout Africa, result in significant amounts of international payments - both in terms of volume as well as the number of transactions. While most major banks in Africa are now members of SWIFT, international payments from some of these countries still tend to fall prey to settlement related risks, be it systemic, temporal or sovereign. In addition, related bank charges can be punishing.
   Having a global bank with fully-fledged branches in the countries one operates can help streamline the international payment execution process. An alternative would be to channel major international payments  to  foreign  suppliers   through   central

treasury on behalf of subsidiaries in Africa and to subsequently charge the intercompany current accounts. This has the advantage of minimising bank charges as well as disbursement float.

An additional challenge to the African treasurer is foreign exchange - or rather the lack of it. Fortunately forex availability for spot conversions has recently improved due to increased dollar or euro inflows from exports of primary commodities such as oil.
   Celtel makes much use of natural hedging against exchange rate fluctuations by means of local currency loans whenever possible. As would be expected, the derivative market is still underdeveloped in Africa, even though there are banks who can offer proxy solutions - customised to one particular market or zone in Africa, such as the CFA zone.
   There are two distinct, euro- based monetary unions in West and Central Africa still functioning today - providing exchange rate peg to the euro with full convertibility. (See table 1)
   In East Africa such union does not exist , even though the East African Customs Union protocol signed in Arusha in 2004 could be considered a very small, yet encouraging step towards economic integration of Kenya, Tanzania and Uganda. However currency union does not seem achievable in the foreseeable future.

Cash collection and

Most widely used are over the counter deposits of currency and cheque receipts from dealers and

shops at the various POS locations throughout the country.
   Here again the use of major local banks with widespread regional branch networks can greatly facilitate the cash concentration process into one main account. The use of payment cards is very limited mainly due to a very high interchange fee associated with this type of payments. Pre-authorised cheques are sometimes used but really not prevalent.
   Automatic seeping of surplus funds from the operations to corporate treasury is not yet achievable, mainly because of exchange controls, involving permission requirements for cross-border transactions, restrictions on inter-company financing that may affect the creation of pooling structures and the existence of other local regulatory considerations. Nonetheless, manually instigated regular remittances of surplus funds in the form of dividends, management fees, intra-group loan (re) payments and treasury deposits - remains a primary objective of Celtel's cash concentration policy.
   Celtel's African operations strive to maintain the net target cash balance dictated by working capital needs.

If at the end of a forecasting period the level of surplus cash, net of amount earmarked for disbursements and net of float is higher than the target balance, the difference would be up-streamed to the holding account, provided transfer amounts are sizable enough to justify bank transfer charges.

Cash forecasting
As with all companies, African or non-African, the cash budget reflects the firms' operating budget which specifies planned revenue and EBITDA. In addition to the long-term and medium-term cash forecasts, the short-term (twelve week horizon) cash forecasting exercise is geared towards the provision of data that will help with operational control and performance of the group cash management process. It remains the most valuable treasury tool for anticipating funding requirements. It provides Group Treasury with the information to predict, with a reasonable amount of accuracy, the ending cash position for a given week and to identify imbalances between cash inflows and outflows in order to minimise borrowings and avoid simultaneous borrowing and investing activities.

Treasury management

The Internet can be considered a huge success in Africa and web based treasury tools can function optimally if performance can be boosted to compensate for the low African bandwidth. In fact, Celtel is in the process of implementing a web based treasury system, (AvantGard - Integrity), with the objective of

optimising subsidiary bank account balance reporting as well as reporting of liquidity forecasts.
   In summary, the African business environment remains exciting and full of challenges and potentially rewarding for investors. Good treasury practice can certainly add much value to the business if only because cash can turn out to be the most valuable and yet the most risk prone asset for investors. ¤