Operating in the Middle East creates certain challenges for treasurers. Walter Van Den Broeck shares his thoughts based on his experience of heading up the regional finance function for global corporation CH2M. Ben Poole reports.
"It was a fairly straightforward career path," says Walter Van Den Broeck, regional finance director MENAI at CH2M, reflecting on how he came to work in finance. Having a Master’s degree in economic sciences, his working life started off in accounting, gradually progressing to finance and administration management roles either for joint ventures or for national operations. "It was when I got into the finance side of things that I really started to touch on treasury," explains Van Den Broeck.
Fast forward to the present day, he has been with CH2M for almost eight years. "My current role is in many ways much the same as when I joined, except that today it is more operationally driven," he says. "At the beginning, CH2M was setting up operations in the Middle East and so my role was more driven by setting up operational processes, compliance and regulation to support the business. Today, it involves partnering with the company's verticals to drive the business results and improve profitability."
CH2M is a global engineering firm with operations in more than 50 countries worldwide. While the corporation has a regionalised treasury function, with centres in Canada, Europe, the US, the Middle East, Asia‐Pacific and Latin America, the main management and control functions are held by the central corporate treasury department based in the US. "The regional treasury function is very much transactional, while the corporate treasury function drives the banking relationships, the global facility management, compliance management and bank account management," says Van Den Broeck. "In order to maintain an efficient, global treasury operation, the centre and regions work in close coordination on a daily basis."
At CH2M, there is a lot of focus on treasury skills. "We only want to attract talent that has either a treasury qualification or relevant treasury experience before they can effectively work in our treasury departments: holding an appropriate degree is an absolute must for management level, but more flexibility can be applied for lower-level positions. Similar to accounting, where employees are required to have an accounting degree, treasury employees generally have a treasury qualification. Exceptions can be made for people who have either skill sets and work habits that make them quick learners or who have clear experience and expertise from prior roles in treasury, but we would ensure that they are willing to or in the process of achieving a treasury qualification. A treasury qualification is a quality stamp on your résumé in this business."
One immediate consideration that treasurers need to take into account when doing business in the Middle East is that, alongside conventional banking, Islamic banking is also significant. In Islamic banking, many of the products are very similar to those in conventional banking, but the underlying structure is materially different in that the bank and the customer work on the basis of an underlying asset. "This is something that could be attractive for certain sectors, particularly if you are in the field of manufacturing, import and/or export, or even in real estate development, for example, where you deal with physical assets," says Van Den Broeck. "In this respect, Dubai has announced its intention to become the largest global hub for Islamic banking."
The variety of banking partners that companies deal with in the Middle East is similar to other parts of the world. Most large global banks have a footprint in the region. Equally, there are local or regional banks that are either listed on the financial markets or are semi‐public entities. "The local banks can really be split into two types," explains Van Den Broeck. "There are those that operate on a country‐specific or increasingly regional basis, particularly around the Gulf Cooperation Council [GCC] countries. We are also seeing banks that are starting to expand internationally with the intent of becoming global players. Treasurers coming into the Middle East could find regional banks that effectively allow them to operate globally without having to use corresponding banks."
While some local banks have a country or regional focus, others look to expand internationally, meaning that the level of compliance to international regulations can vary slightly. Banks that are expanding beyond the Middle East tend to be more compliant with international regulations and therefore have a similar approach to international banks – such as know your customer due diligence when, for example, arranging facility agreements. Banks that remain limited to country‐specific or regional operations do not always follow international procedures as deeply.
"The contrast between the two different approaches of local banks highlights itself in areas such as bank guarantee wording," says Van Den Broeck. Contractors or engineering companies often have to accommodate standard guarantee templates that may have been developed many years ago and do not always provide the unambiguous wording expected under the latest international regulations.
Using, in such cases, an international bank, or a local bank that follows international regulation, can pose difficulties when it comes to obtaining a bank guarantee in its original wording while, at the same time, the client is unlikely to accept changes to their terms. As a result, international banks may perceive an apparent lack of clarity in proper terminology and in legal or contractual references as leading to greater risks, whereas local banks can find it easier to accept that.
"This is where international corporations such as ours need to diversify and expand their banking platform to local banks in order to ensure continued access to banking facilities that provide us with maximum financial flexibility.”
When looking at how the Middle East is transitioning to a modern economy, it is hard to imagine the region moving forward as a whole at the same pace. On the one hand, Dubai is clearly the most advanced city in the Middle East. As financial centres, Dubai, having set up the Dubai International Finance Centre (DIFC) as a free zone, and Bahrain are currently the largest players in the Middle East, having attracted most, if not all, of the large international banks. “However, other regional countries are showing signs of quickly developing their financial sector," says Van Den Broeck.
The regional development of the financial sector is driven from different angles. Firstly, international banks that have set up in DIFC are expanding into other regional countries through branches; driving higher levels of compliance in these other countries. Secondly, the local banking structure in the region as a whole is evolving as the GCC moves towards a more open market, thereby allowing banking institutions to work cross‐border. This means they are going to have to bridge the gap between their compliance and regulation divergences.
"Generally speaking, the financial sector in the region is not yet as developed as Europe or the US," says Van Den Broeck. "However, we are seeing a move towards a stricter approach towards compliance and regulation."
Treasurers should be aware that, over the past two years, we have seen an important increase in international regulations affecting the region. As I do not expect to see a reduction in international regulation, treasurers will have to face an increased administrative burden and be ready to address that.
FX is clearly an important issue to address. Mitigating FX risk through live hedging structures can differ depending on the type of business you are in. Construction and engineering tends to be fairly risk averse, but at the same time projects can be multi‐year, so having the right FX approach in place can make a difference to the bottom line of your project.
Treasurers naturally want to reduce the cost of capital, and an important element to this is making sure you are getting paid on time. Managing your client payment terms and your outstanding accounts receivable is important.
To be successful, I find it important to surround myself with the right people who may even have a better knowledge than I do in their specific domains. Being able to get the best out of your group members and have them work as a team is vital to building a successful treasury function.
Ben Poole is a freelance business journalist.