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I am deputy editor at The Banker, a Financial Times publication. I joined the magazine in August 2015 as transaction banking and technology editor, which remain the beats I cover. Previously I was features editor at Profit & Loss, an FX and derivatives publication and events company. Before that I was editorial director of Treasury Today following a period as editor of gtnews.com. I also worked on Banking Technology, Computer Weekly, and IBM Computer Today. I have a BSc from the University of Victoria, Canada.

Thursday, 29 August 2013

UNifying cash management in conflict zones

May 2013

Operating in war-torn countries on a daily basis would be a challenge for any company, but what if it is your raison d’etre? Pedro Guazo Alonso, Director of Finance at the United Nations (UN), gave some insight as to the UN treasury’s specific cash management challenges at EuroFinance Miami 2013.

Not surprisingly, the United Nations (UN) has a complex corporate governance structure, which in turn translates into a complex organisational and business model. The highest governance body is the General Assembly, made up of 196 countries members on a co-operative basis with each member having one vote. The only organisation that has more members is FIFA, the international football association. In addition to the General Assembly, there are four principal organs, including the Security Council, which is responsible for peacekeeping missions.

Each year the UN receives money to carry out its operation from each member based on a percentage of the member state’s GDP – this totals around $15 billion. Half of the money is allocated solely for peacekeeping operations – today there are 30 peacekeeping missions in countries experiencing social unrest. All the money, which comes in within the first 30 days of the year, is earmarked from the outset to more than 300 different projects across the world.

“As you can imagine, we are not exempt from bad collectibles,” said Pedro Guazo Alonso, Director of Finance at the UN, as not all countries submit their payments in time. Therefore, the finance department has an accounts receivable (AR) team that reminds members to pay; otherwise they will lose their voting rights in the General Assembly. “Some countries are faced with very difficult economic conditions and they can’t pay, so there is a clause that allows them to keep their voting rights if they can show they don’t have the means to pay.”

All the money is collected in US dollars and half of the UN’s expenditure is in US dollars, with 20% in euros, 15% in Swiss francs and the rest distributed in a basket of more than 30 currencies. “These are really soft currencies that are extremely difficult to hedge,” explains Alonso. “The other way to hedge these currencies is to take US dollars, convert to the local currency and buy local securities, but in many of these countries there are no securities, let alone a central bank.”

It is also difficult to convert money into local currency and deposit it in a local bank because the counterparty risk is too great. “So we keep the money in US dollars and then distribute it to the local offices in lump sums of a month’s expenditure,” said Alonso, “in order to control counterparty risk.”

The UN has 50,000 employees, 20,000 suppliers and more than 100 million beneficiaries. There are two levels of employees: national staff members, who are paid in local currency; and professional staff that are paid in US dollars.


Cash management challenges

The UN has one principle when it comes to cash management: it tries to rely on the formal financial system wherever possible. It has zero balance accounting (ZBA) in three global banks, which covers approximately 65% of its needs. For the other 35%, the UN has more than 400 bank accounts distributed around the world in local and regional banks; but, as previously indicated, it doesn’t place more than one month’s expected expenditure in these accounts.

However, some of the countries that the UN is working in don’t even have a central bank, so for those countries the UN treasury provides petty cash and cash-at-hand in the local offices. “We also support new technologies and use mobile payment companies, rechargeable e-wallets and cash remittances,” says Alonso. “Although cash remittances are not attractive for us, in some cases we need to use them. In some areas, like sub-Saharan Africa and the Philippines, mobile payments has been extremely successful. Everyone has a mobile, but only a small proportion of the population has a bank account. They have jumped a whole generation, going directly from a cash-based society to mobile payments, skipping over credit and debit cards.”

He outlined four lessons he learned when developing a cash management strategy:
  1. Choose your bank like you are “choosing the Sherpa” to take you trekking through the Himalayas. “Trust them and pay them well, but make them compete once in a while to see if they got older or if they got wiser.”
  2. Evaluate alternative technologies and the needs of your employees and suppliers. “Sometimes it is easy to sit in New York and say ‘I will only use the financial system and make payments every 30 days using SWIFT, and you will have to open an account here.’ That works for 65% of the operations we do, but for the other 35% you have to adopt the local infrastructure and practices. They are reliable and cheap, and it also fosters economic development in these countries.”
  3. Do not be afraid to talk to authorities, because your money and the jobs you are creating are very important to them.
  4. Always have a plan ‘C’, which stands for cash. Unexpected things can happen, so always be ready to bring cash into your operations.


Banking relationships in war zones

How does the UN choose its banks at the local, regional and global levels? The UN issues requests for proposals (RFPs) almost every three years for the global and regional agreements, whereas the local agreements are done on an as-needed basis because they can quickly change ownership or even disappear in unstable conditions. In addition, legislation can change overnight, such as in Cyprus. Even though the UN has immunity, its accounts were also frozen for two months and it was forced to lobby the government to get its $2m in deposits out of the country.

Another example is Syria. When the conflict began, the UN’s global bank exited the country and the local bank was about to disappear as it gradually ran out of capital. Yet the UN still had to support 400 international staff and more than 1000 national staff in the country. “We didn’t know what was going to happen in the next three to six months, because the country’s infrastructure was quickly collapsing,” explained Alonso, “so we decided to take advantage of the local bank’s presence and pay our staff’s salaries three months in advance, randomly distributed in five days using different timings. These are the types of things we have to deal with.”

Alonso said that overall the UN’s banks have been very supportive through difficult times, and told the story of one global bank that went with the UN into Afghanistan when there were no banks there, in order to help establish its whole financial operations in the country.


Secure investments

As the UN receives $15 billion per year, which runs down as the year advances, it has very conservative investment guidelines. Its three mandates are:
  1. Protect capital.
  2. Protect liquidity.
  3. If possible, achieve some return.
The UN treasury manages all investments internally, so it doesn’t use asset managers. It has three portfolios separated by maturity: one to three months; three months to 2.5 years; and 2.5 years to five years. Its strict treasury policy means that it is not allowed to invest more than 15% of its cash in the latter portfolio, and can’t invest in any instrument that doesn’t have a short-term investment rating of A or AA for medium- or long-term.

“The problem with these restrictions is that we end up buying Treasury bills (T-bills). So we bought T-bills from the Ex-Im Bank in Norway, then a re-evaluation occurred and we lost about 40% of the investment,” said Alonso. “It is not optimal to buy only T-bills. We should diversify and modernise the management of our investments, taking a bit more risk but with a higher return.”

From his past experiencing as a market maker in the structured and asset backed securities market, Alonso added a few more lessons to consider:
  1. Assess if your company is better and cheaper than the asset managers.
  2. Decide how to invest the money by carrying out an asset and liability management (ALM) analysis.
  3. Rely less on credit ratings agencies – they have been given the power to decide where a company's money is placed, but they aren’t necessarily giving an adequate risk-adjusted return on portfolios.
At the end of the day, it’s all about risk management. Because the UN is making decisions based on risk assessment all the time, it is very important to communicate the risk levels to the governing bodies, according to Alonso. “We are operating in very risky environments but that doesn’t mean we don’t have to calculate the risk. We need to understand the risk involved in what we do, as well as the risk of not doing anything.”

This insight was first published on www.treasurytoday.com

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