Treasury management: An African perspective

Received (in revised form): 5th March, 2007
Barry Wolde Yohannes, Celtel International BV, Scorpius 2, 2132 LR Hoofddorp, The Netherlands

Barry Wolde Yohannes
is Group Treasurer of Celtel International at its global headquarters in Hoofddorp. A Dutch citizen of Ethiopian origin, he has more than 24 years' worth of corporate treasury experience, having held senior European treasury and financial management positions at Hewlett Packard, Omron Europe and later Seminis-Monsanto before joining Celtel in May 2004. He was educated in Africa, Europe and the USA, and holds an MSc in international relations and politics as well as an honours MBA in finance and international business.

Abstract:   The paper discusses the challenges of treasury management in Africa and argues that in spite of an environment of insufficiently developed financial markets, limited corporate banking services, and restrictive foreign exchange regulations, efficient cash and risk management is not only achievable but can in fact serve as a core competitive advantage for corporates in Africa. Starting with cash management, cornerstone for best practice treasury in Africa, the paper touches on subsidiary cash forecasting, payment systems and modalities, foreign exchange and interest rate exposure management, and corporate finance issues specific to the African continent. The author advocates dynamic treasury model, which should take into account not only the African macroeconomic framework but also an assessment of the particular business model in question. In Celtel's case, for instance, more priority is given to cash management, corporate finance, tax and foreign exchange exposure management than on credit management, simply because most business is conducted on pre-paid basis. In an environment where financial risks are relatively greater than in the west, and treasury tools for managing those risks are limited, essential qualities for the African treasurer are pragmatism, resourcefulness and creativity' the latter not to be confused with corruption.

KEYWORDS:   challenges of treasury management, interest rate exposure management, competitive advantage, foreign exchange, cash management, dynamic treasury model

   The prospect of investing in sub-Saharan Africa is still unimaginable to most businessmen. Africa is all too often considered a continent of impossibly difficult markets, where famine, war, AIDS and corruption preside. Moreover, the regulatory environment can be stifling, logistics can often be a nightmare and infrastructure insufficiently developed. It is thus understandable that investors tend to be cautiously sceptical towards assertions of profitable business ventures in Africa, let alone the notion that good treasury management can indeed play a crucial and value-added role for those multinational corporations operating there.


   And yet, Celtel's impressive success in Africa is testimony to the fact, that with a sensible, disciplined and pragmatic approach, combined with the right business model and a fitting range of product or service offerings, the returns of private investments in Africa can indeed be extremely rewarding. However, the risk of the profits eroding rapidly and liquid assets becoming impaired can be quite high without strong treasury control and working capital management suited to the African business reality.
   Celtel, which was acquired by MTC Group of Kuwait in May 2005, for US$ 3,4bn, was formed as a private sector business to focus on telecoms infrastructure, and is now

© Henry Stewart Publications 1753-2574 (2007)   Vol. 1, 1 000'000   Journal of Corporate Treasury Management

recognised as an essential driver of development in Africa. As The Economist recently reported concerning a study on Africa by Professor Waverman of London Business School:

'Plenty of evidence suggests that the mobile phone is the technology with the greatest impact on development. A new paper finds that mobile phones raise long-term growth rates, and that their impact is twice as big in developing nations as developed ones.'1

It is very unfortunate that the enormous difficulties of conducting business in Africa commonly overshadow the brighter aspects of great business opportunities in this enigmatic continent:

  • The continent has a hugely unmet demand for goods and services, coupled with almost non-existing competitors ' offering sizable margins for those who dare.
  • Africa has plentiful resources, creativity and entrepreneurship in the informal economy ' which can be harnessed to the benefit of both the region and the foreign investor.
  • Economic growth in Africa is high and forecast to remain so for the next decade relative to the rest of the globe. Accelerated by a commodity boom and the cancellation of debt, gross domestic product growth in sub-Saharan Africa is expected to grow by about 9 per cent in a decade or so.
  • A number of regional organisations, both public and private have been established, helping streamline and facilitate sustainable economic development in Africa.

Treasury management in Africa is affected by a set of specific factors peculiarly influenced by a challenging economic and business environment, predictably different from that in the developed world. While the objectives of


good treasury practice are universal, the drive for efficiency in managing liquidity and financial risk in Africa can be severely constrained by the African regulatory environment and other macroeconomic limitations such as unavailability of funds from the general economy at any time.
   In general, treasury regimes, corporate banking services and the financial markets in sub-Saharan Africa are not well developed. While financial risks are high, the tools available to the treasurer for managing those risks are quite limited. The challenge for the African treasurer is to continuously assess the impact of the abovementioned constraints and adapt the treasury framework used to manage cash and other financial risks, generated by the business and the arena in which it operates.
This is easier said than done. However, despite the unfamiliar rules and regulations of developing African markets, with the right mix of pragmatism, creativity and resourcefulness, it is still perfectly possible to conduct efficient treasury operations in Africa, invaluable in streamlining the transformation of the previously mentioned healthy profit margins into an equally healthy cash flow.

The cash 'dilemma'
The central theme of any treasury operation in Africa is certainly cash, and its physical enormity can be staggering. Thus, cash management in its basic, simplest form ranks high among the functional priorities of the African treasurer. Cash and paper-based payments as well as collections are prevalent in African economies. As such, cash handling controls, physical safekeeping and guarded cash transportation, as well as regular verification and reconciliation of the amount of cash on hand, are highly important in the daily cash management process.

Mastering the skills and discipline needed for managing cash-associated risks is of paramount importance to the local subsidiary treasurer. In Africa, the most widely used methods of cash collection are over-the-counter

© Henry Stewart Publications 1753-2574 (2007)   Vol. 1, 1 000'000   Journal of Corporate Treasury Management

currency deposits and cheque receipts from dealers and shops at various point of sale (POS) locations. Celtel uses a concentration system to consolidate bank balances and other POS cash receipts into a single account (or a minimum number of accounts) so they can be most profitably deployed, eg to fund disbursements, pay debts or transfer funds upstream.
   In some African countries such as the Democratic Republic of Congo, Celtel uses socalled agents de transfert, third-party collection agents, who offer a local version of the Western Union style of operation. These agents have found themselves a niche market for the transfer and eventual conversion of local currency from remote areas where there are no banks.
   Authorised funds transfer methods that may be used include book transfers, cash placements (currency transported to the bank by secure physical means) and automated clearinghouse transactions where and when available.
   Celtel subsidiaries strive to maintain major accounts only with top banks located mostly in the capital cities ' banks with good and reliable international networks, so that transfers to headquarters do not suffer from float and foreign exchange inadequacy.
   When arrangements are made with a bank with regional presence for regular sweeping of funds to a central account, potential costs must be considered, including (but not limited to) funds transfer costs, borrowing costs, and opportunity costs associated with lost interest earnings. Automatic sweeping of surplus funds is not yet possible, mainly due to exchange controls involving permission requirements for cross-border transactions, restrictions on intercompany financing that may affect the creation of pooling structures, and other regulatory considerations. Nonetheless, regular manually instigated remittance of surplus funds in the form of dividends, management fees, intragroup loan repayments and holding treasury deposits remain the primary objective of Celtel's cash concentration policy.
   Celtel operations strive to maintain the net


target cash balance indicated by the Group's treasurer. If, at the end of any week, the level of surplus cash ' net of float and the amount earmarked for next week ' is higher than the target balance, any surplus sizable enough to justify bank transfer charges is immediately upstreamed to the holding.

Cash and paper-based payments are undoubtedly most prevalent in almost all African countries. To make matters difficult, however, the reliability and efficiency of many of these countries' paper-based systems is impaired by inefficient postal and cheque clearing systems. As such, mitigating the specific risks associated with these payment methods is essential for local treasurers, probably more so than in Europe or the USA.
   While the long-term objective is to eliminate cash payments from the disbursement process, this is difficult to achieve without sufficient progress in electronic-based payment systems and internet-based banking.
   Capital expenditures driven by continuous base station and network rollouts throughout Africa result in a significant number of international payments, both in terms of volume as well as number of transactions. While most major banks in Africa are now members of SWIFT, international payments from some of these countries tend to fall prey to settlement-related risks, be they systemic, temporal or sovereign. In addition, related bank charges can be punishing. Hence, careful selection of who to bank with ' if the choice is available ' can help overcome payment failures. Using a global bank with fully fledged branches in the countries one operates can help streamline the international payment execution process.

Cash forecasting
In the context of cash management assuming a very central place for corporate treasuries in Africa, cash forecasting accuracy and discipline at both the operating company and corporate level becomes crucial for the operational control and performance of the group cash management process.

© Henry Stewart Publications 1753-2574 (2007)   Vol. 1, 1 000'000   Journal of Corporate Treasury Management

   In an environment where international fund transfers and cash repatriation are wrought with regulatory red tape and banking inefficiencies, good cash forecasting remains the most valuable tool for treasury, not only for identifying imbalances between cash inflows and outflows, but more importantly, to gain the necessary lead time for the legal and fiscal groundwork to support eventual cash repatriation, be it in the form of dividends, management fees and/or interest on shareholder loans.
   Celtel treasury has been very keen on cash forecasting, and to that end has invested in treasury tools to streamline the forecasting process. One such system is a subsidiary cashforecasting and cash-position reporting module within a treasury management system (Avangard Integrity), available to subsidiaries via the CITRIX platform. Each month the OpCo submit a rolling 12-month forecast, with the first three months split into 13 weeks (to give a more detailed projection for the immediate future period of three months), and a monthly cash ending position for the rest of the year. The abovementioned TMS system takes care of immediate and automatic consolidation of the local currency forecasts into a US dollar consolidated report.

Credit management
As discussed previously, an interesting aspect of Celtel's business model is 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.
   However, there still remain a few sales and revenue-sharing areas in which some form of credit-based transactions occur. These are the post-paid, roaming and interconnect areas. Post-paid constitutes the provision of mobile services to selected group of customers, such as the corporate and diplomatic segment, on delayed payment terms. As with any other credit management 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 clearinghouses rather than in-house treasury expertise.
   Finally, the optimisation of interconnect revenue sharing with other mobile and fixed line operators within the country is more a function of overcoming inter-carrier billing challenges, investing in reliable interconnect systems, models and agreements, combined with tact, diplomacy and creativity in dealing with both private operators and governmental institutions, including regulatory authorities concerning interconnect disputes. As a result of patient negotiations, it has been possible for Celtel to offset corporate tax payables against interconnect receivables, in situations of cash shortages experienced by governmental interconnect parties.

Foreign exchange
An obvious challenge for the African treasurer is foreign exchange and/or the lack of liquidity for the execution of spot conversions into convertible currencies. Luckily, due to the recent boom in commodity prices and an increase in foreign exchange inflows as well as reserves, the foreign exchange market in most African countries has improved significantly in recent years.
   Celtel operations are instructed to maintain minimum local currency denominated cash. All local currency collections, minus the amount reserved for planned local currency payments, need to be converted at spot into Celtel's functional currency, which is the US dollar.
   There are two distinct euro-based monetary unions in west and central Africa still functioning today, which provide an exchange rate peg to the euro with full convertibility.
   Celtel's revenues from any of the countries mentioned in Table 15 are affected by eurodollar movements, as XOF and XAF6 are pegged to the euro, while the US dollar is Celtel's functional currency. Euro-dollar fluctuations may thus significantly affect

© Henry Stewart Publications 1753-2574 (2007)   Vol. 1, 1 000'000   Journal of Corporate Treasury Management

earnings before interest, taxes, depreciation and amortisation (EBITDA), and can give rise to a poor interest cover in highly volatile environments, while possibly triggering debt- EBITDA ratios, thereby endangering financial covenants. Consequently, a derivative solution aiming to hedge euro revenues versus US$ pretty well fits the exposure management objectives with regards to the CFA 7zone operations.
   In addition to the CFA franc zone described above, a few southern African countries are in an exchange rate union with South Africa through the Common Monetary Area (CMA). Unlike the WAEMU or CEMAC8, the CMA is not a currency union per se, as national currencies are issued in each of its member countries (Lesotho, Namibia and Swaziland). However, these currencies are tightly pegged to the rand through a currency board type arrangement and exchanged at par. The rand circulates extensively in the CMA member countries and is legal tender along with national currencies.
   In east Africa, however, such monetary 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, full-fledged currency union does not seem to be achievable in the foreseeable future.
   The majority of countries in Africa are currently classified by the International Monetary Fund as having flexible exchange rate regimes.2 Outside of the abovementioned currency and the exchange rate unions, 11 African countries have opted for exchange rates pegged to the US dollar or the euro, 16


have chosen a so-called managed floating regime, and the remaining nine have opted for an independent floating exchange rate regime.
   The distinction between pegged and managed floating evaporates rapidly, as most African governments and central banks lack both the discipline and the foreign exchange reserves to follow declared exchange rate policies, especially in the face of war, severe internal conflicts and general political instability
   Historically, the economies of most African countries in which Celtel operates are prone to experience highly volatile exchange and interest rates. Consequently, the need for managing both foreign exchange and interest rates risk (whenever possible) is a high priority.
   While the derivative market is still underdeveloped in most African countries, international banks can sometimes offer customised synthetic hedging constructions, involving local currencies such as the Nigerian naira, Kenyan shilling or the Zambian kwacha. Table 29 provides examples of foreign exchange/interest rate products available in some African countries.

Corporate finance
A number of related factors have constrained Africa's ability to tap both foreign and local currency markets to raise long-term finance for infrastructure. Most local financial markets have limited capacity to finance infrastructure projects in higher amounts. In most cases, guarantees and credit enhancements from DFIs and EXIM10 banks are needed to attract local currency debt. Another drawback is the low and often non-existent sovereign credit ratings.

© Henry Stewart Publications 1753-2574 (2007)   Vol. 1, 1 000'000   Journal of Corporate Treasury Management

It has been estimated that the countries that have obtained a foreign exchange debt rating of at least BB represent only 43 per cent of regional gross national income (GNI). In all other developing regions, the share would be more than two thirds of regional GNI3
   Despite this, Celtel has managed to raise approximately US$2.0bn in debt finance at the local level, through a number of optimally subscribed syndicated loans and local bond issues. However, it should be noted that the latter has been achieved only recently.
   In 2004, the major portion of Celtel's loan portfolio consisted of a holding company, ie Celtel International senior loan facility, placed with a syndicate of European and South African commercial banks together with a number of DFIs ' the latter also serving as socalled 'credit enhancers' (DBSA, EAIF11, Finn Fund, Coutts).
   The interest margins on the abovementioned facility was extremely high, ranging from tranches set at Libor +4% to Libor +12 %) ' reflecting the assumed risk associated with doing business in Africa.
   The rest of the borrowing at the holding level consisted of hybrid instruments, such as a mezzanine loan with warrants, arranged with FMO and EAIF and quasi-equity securities with IFC12, consisting of convertible redeemable preference shares and a private equity construction secured by an American


put option.
   At the same time, the total of all local loans by Celtel African subsidiaries was no more than US$70m in ten separate loan facilities. These were mostly US dollar denominated loans, securitised by pledge of assets, project fund retentions, political risk guarantee and sometimes limited recourse to Celtel International's shares. Most of the latter agreements also contained covenants restricting dividends, asset disposal and additional indebtedness.
   Factors that played a major role in the eventual change of Celtel's corporate finance strategy include the following:

  • In recent years, Celtel's African subsidiaries have shown significant revenue and EBITDA growth. By virtue of this EBITDA growth, Celtel's African subsidiaries have highly improved creditworthiness, which has enabled them to tap local branches of global commercial banks and domestic counterparts, instead of relying solely on DFI loans. DFI debt had become relatively less attractive for Celtel's African operations (expensive, restrictive and US dollar denominated), the latter effectively creating unhedgable foreign exchange exposure for the local entity.

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  • Loans at the holding level would be inefficient from a tax perspective if a nonoperating shareholding entity (such as Celtel International BV) does not generate profits and hence could not benefit from an income tax shield.
  • Withholding tax disadvantage when upstreaming interest on external loans.
  • An unfair benefit for the local shareholding partner (required by law in most African countries) regarding security and downside exposure.

The model that Celtel ultimately followed is a mix of co-borrowings of holdings and operating companies, the former to be mostly utilised for business development and new licence acquisitions, and the latter mainly for network roll-outs and expanding existing operations. The accent has been on a minimum number of facilities, tax efficiency, commercial rather then DFI, and flexible in respect of future events such as initial public offerings and waivers.
   The abovementioned strategy has not only helped Celtel International replace part of outstanding shareholder loans with local financing, but has also helped in the natural hedging of local currency denominated revenues.
   Celtel Nigeria's recent conclusion of financial facilities worth $1.619bn (approx. 206,997bn Nigerian naira), is one of the most impressive corporate finance projects undertaken by Celtel. The deal, concluded in February 2007, has the sum of $1.43bn as syndicated facilities and $189m as bilateral facilities. The syndication of the facilities was highly successful, consisting of N125bn (U$984m) local currency facility arranged by Celtel Nigeria, with 13 Nigerian-led financial institutions and a US$450m foreign currency facility arranged and fully underwritten by Citibank N.A. (Citigroup) with 11 international banks joining, and an upsizing of both from their initial amounts of US$670m (naira equivalent) and US$350m respectively. The heavy oversubscription of the foreign


currency facility meant that the syndicate was able to accommodate a substantial reduction in a reverse flex based on the margin and commitment fees from the initially agreed terms. The US$ facility would be used to settle US dollar denominated Capex invoices of network equipment suppliers used in the construction of base stations and towers.
   Celtel's African experience in the domain of corporate finance clearly illustrates that that start-up ventures in Africa would initially face difficulties tapping the available liquidity of commercial banks, and would have to rely heavily on DFI and shareholder loans for longterm funding. However, as soon as the business gains in maturity (both in terms of revenue and profitability), a growing appetite by commercial banks for long-term debt financing of African subsidiaries clearly manifests itself. The latter, combined with the current readiness of DFIs to provide credit enhancement at very competitive margins, have to a degree facilitated present debt and equity financing in sub-Saharan Africa.
   The value of good treasury management in all of the above should be reflected in choosing the right balance between holding and operational loans, optimal tax structuring of cash streams related to the loan, the right mix of currency denomination based on a continent-wide conducted foreign exchange exposure analysis, the right combination of fixed and variable interest rates, and a proactive 'opportunist' ability to use the balance sheet and parent company leverage to negotiate the best possible terms and conditions.

'Any international business operating in sub- Saharan Africa needs to face the issue of corruption. Celtel's founder Mo Ibrahim had been rigorous in his and his company's stance against corruption. . . Celtel adapted a very strict set of values, the first of which is 'We are open, honest and transparent. We applied these values at all levels, from the shareholders and the Board

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to a handbook for every employee. When searching for shareholders, we sought institutions who could contribute expertise and guidance as well as money . . . and who were rigorous in ensuring that every Celtel investment and local partner passed their transparency scrutiny'. This rigorous stance against corruption is not drawn from a purely moral motive. As Mo explains '. . .it is good business practice. For corruption like blackmail is insidious. Once started it is very difficult to stop paying. Far better to pass up, as Celtel has done, a few business opportunities, which while superficially attractive, involve partners or governments about whom one has major doubts.' 4

As in the developed world, treasury management in Africa is a balancing act between effective liquidity and risk management and the framework of corporate guidelines within which the treasurer operates. This requires not only financial discipline but a moral stance not to fall prey to ethically dubious situations to achieve short-term gain through 'governmental favours'. Creativity and resourcefulness in treasury management, which are essential in Africa, should never be mistaken for corruption and fraud.


An integral part of this paper was presented at the EuroFinance International Cash and Treasury Management conference in September 2006, entitled 'Africa as a Springboard for Corporate Growth'. Some parts of the paper also appeared in TMI No. 142 (November 2005), under the same title and by the same author.


  1. The Economist (2005)14'The real digital divide', 10 March. The article reported on Waverman, Meschi and Fus15s (2005) 'The impact of telecoms on economic growth in developing countries, Africa: The impact of mobile phones', Vodafone policy paper series 2.
  2. Citigroup 16(2007) Research Paper ' Corporate Finance Presentation, December.
  3. Sheppard17, R., von Klaudy, S. and Kumar G. 'Financing Infrastructure in Africa', GridLines.
  4. Ibrahim18, M. (2006) 'Fighting Corruption the Celtel Way ' Lessons from the Frontline', World Bank, Development Outreach.
© Henry Stewart Publications 1753-2574 (2007)   Vol. 1, 1 000'000   Journal of Corporate Treasury Management