The company established a Belgian Coordination Centre (CICC) in 1984. We speak to Jean-François Caillol, Treasurer from Solvay CICC.

How is treasury organised within Solvay?

Within Solvay, the corporate treasurer has global responsibility for treasury, although the corporate treasury and the coordination centre have different roles.

1. The responsibility of Corporate Treasury is to provide the Group with the necessary external financing at the best conditions. It also manages financing-related risks.
2. In the framework of the Group’s strategy, the Coordination Centre (CICC) is active in intra-group financing and in the management of the group’s foreign exchange transactional risk. Within the CICC, there are two main activities:
   • A factoring and credit-management activity.
   • An in-house bank activity.

There are about thirty people working within the CICC. We process about 40,000 contracts a month within the CICC. Of these, between 20 to 30% require foreign exchange contracts, which are generated automatically. This requires a powerful system that needs to be operating twenty-four hours a day, seven days a week, justifying the employment of dedicated IT experts.

How are you held accountable?

Under the current legislation, the CICC is only permitted to work for Solvay companies within clear rules. We operate not as a profit centre, but as a business support centre. As a result, we are not only judged on the CICC’s cash performance. We are allowed to take a limited exchange rate risk, but within very strict limits. For example, if we reported an abnormal exchange profit, this would suggest that we had taken too much risk.

Our main responsibility is to give a service to our customers. This means that we have to do what our customers require. If our customers are not satisfied with the service, then we will hear about it.

I report directly to the managing director of the coordination centre. At the beginning of every year, I am set routine objectives and development objectives. An example of a routine objective is the measurement of the satisfaction of our customers, which we assess in a number of ways including by completion of a customer questionnaire.

At the same time, we try to develop new services. For example, we have developed an intranet platform to improve communication with our subsidiaries. They can ask for transfers and submit requests for loans and foreign exchange contracts via the intranet. This has a number of benefits:

• It eases the workload in both the subsidiaries and the CICC
• It shortens any delay inherent in processing these requests
• It minimises the risk of the transaction not being executed.

In essence, the CICC is a service provider and we are assessed as such.

How do you perform the CICC’s functions?

As I mentioned, we have two main activities – factoring and credit management and the operation of the in-house bank. In all cases, centralisation is the key word.

The factoring and credit management activity processes all payables and receivables, including all cross-border and intragroup transactions. The purpose is threefold:

1. To centralise risk.

   The factoring activity will guarantee both the rate on a cross-currency transaction and payment. Once the payables and receivables have been centralised, it is relatively easy to hedge the net foreign exchange exposure.

2. To centralise knowledge of customers.

   Because all payables and receivables are centralised, we can concentrate our knowledge of our customers. We can set credit limits for those customers centrally. This eliminates the risk of one subsidiary continuing to extend credit to a customer that has caused credit management problems for another subsidiary.

3. To centralise payment.

   There are a number of benefits. We avoid the need for large numbers of people making payments in each country. Fewer cross-border payments need to be made.

The in-house bank is the first element in our cash pooling structure. All entities within a particular country have an account with one local bank. Within each country, all these accounts are pooled on a daily basis to an account held in the name of the lead entity in that country. The CICC has a relationship with the lead entity. We then ensure, again on a daily basis, that the accounts held by each lead entity are zero, whether by funding the shortfall or collecting the surplus. This minimises the number of cross-border payments within the structure. There is only one payment between the CICC and the lead entity in each country on any one day. This structure can work for all currencies for which it is possible to make a transfer on same day value – namely the euro which is our main currency.

This in-house bank structure allows us to centralise all the cash with the CICC on a daily basis, such that nothing is left in the countries.

What do you do with any cash surpluses that you collect?

The short-term surpluses are coherent with the average volatility of the daily needs of our entities. We place any surpluses on bank deposit. The maturities of these deposits will depend on our cash flow forecasts. However, since our framework is short term, we only need short-term cash flow forecasts (from 2 weeks to a month). Obviously the forecasting needs of the corporate treasury are on a longer term basis. We do not use money market funds as we are prohibited from doing so by the coordination centre rules.

How do you transact your foreign exchange requirements?

We have our foreign exchange position updated every fifteen minutes. At the moment, we continue to work by telephone. Whilst we are not against using portals, we are not eager to start doing so for a number of reasons. These include:

• We still want to work with a number of different banks. As a result, we do not want to use a single bank portal.
• There are also risks associated with using internet portals. This is not an internet risk as I am sure that the portals are secure. The problem is the associated counterparty risk. It is difficult to set dealing limits with the different banks that we want to transact with. In addition, it is difficult to monitor the amount of business that we do with each of our banks.
• Some argue that the real benefit from using a portal comes from straight-through processing. However we already enjoy the benefit of straight-through processing from the IT system that we use.

What are the main difficulties that you face?

The main problems that we face are regulatory rather than due to the legislation that surrounds the operations of the Coordination Centre. This legislation makes it reasonably transparent and clear as to what we are allowed to do and what we are not allowed to do. For example, whenever we generate a price for a subsidiary, we have to do so at ‘arm’s length’ and the spreads have been fixed through an advance pricing agreement with the authorities. We simply work within these rules.

Different fiscal and legal issues in different European countries mean that we cannot develop the processes outlined earlier in exactly the same way in each country. Withholding tax, central bank reporting requirements and the different treatment of resident and non-resident accounts are examples of the factors that make developing a common set of processes difficult.

In addition, the different banking systems and payment methods employed in the different countries also cause problems. For example, the fragmented Italian banking system has caused us many problems in the past, although this is easing now. At the same time, there are important differences between countries for the payment methods; cheques for example remain used in some countries, whereas in Belgium payments are more likely to be made by electronic transfer.

In Eastern European countries, some problems have been even more difficult to overcome. For example, until recently the Polish Zloty and the Hungarian Forint were not convertible. Although there have been improvements, there is still a range of different laws that apply throughout Eastern Europe. These legal differences mean that there is no single answer to these problems. This means that we have to get legal interpretations before evaluating the costs and benefits of each possible solution.

All of these factors mean that we cannot develop a common set of processes in Europe, let alone the rest of the world. Instead we have developed a target scheme, which we work towards implementing as well as we can within the constraints that apply.

Has the introduction of the euro reduced these problems?

Yes, it has. Progress since the introduction of the euro has been fantastic. For example, pressure from the European Commission to end the higher price on cross-border electronic transfers in euro has been important. However it is important to recognise that, despite this progress, there are still significant constraints.

There is also pressure on the banks. As a result of the simplification of some of their products and this pressure from the European Commission, they are earning less from fees. This comes at a time when conditions are difficult for the banking sector globally.

How do you manage your bank relationships?

The bank relationships are not driven by the CICC. The transactions we initiate – swaps, foreign exchange – are only a part of the business banks do with Solvay.

As a result, our global bank relationships are managed at the group level by the corporate treasurer. As a company, we do not want to have too many banks. This is because we want to be able to ensure that the banks that we do use can generate enough return from our relationship.

Our two main banks are Fortis Bank and Deutsche Bank. We have another ten banks in our core group with which we do significant business. Any business with these banks is still awarded on a competitive basis – just because they are in this group, it does not mean that they can charge any price that they like. However we are not restricted to these banks. We will use niche banks to provide certain services in certain countries, when our core banks cannot.

Because we want to provide a return to our banks in exchange for their commitment, we will evaluate our relationships with them periodically. If we find that a bank is earning a lower return than expected given their commitment, we will endeavour to do more business with them in the future.

We see commitment as a long-term phenomenon. This means that we do not look for short-term bargains, but rather for the ‘win-win’ deal. For instance, if a bank makes a mistake on a foreign exchange contract, then we will not seek to exploit that mistake. Rather we will allow the bank to recover its mistake. This is part of building trust in the relationship, which is crucial to the long-term commitment.

How do you use technology within the treasury?

We do not see ourselves as a front runner, however we do want to keep up to date. One illustration of this is the development of the treasury intranet platform which allows us to communicate with our subsidiaries. Finally Solvay is running SAP. Treasury links into the Solvay ERP platform.

We want to use technology to bring us closer to our customers, whether these are internal customers or Solvay customers.

What do you see as your next challenges?

We need to continue to provide a professional service to our customers. We are in competition with the banks because of the arm’s length pricing. We also have to provide a similar level of service to that offered by banks. For example, the intranet enables us to provide our internal customers with bank statements whenever they are needed in a format that the entities want them. As the banks continue to develop new products and services, we need to match them to maintain the quality of service that we provide. Although no Solvay entity is allowed to transact foreign exchange directly with a bank (except in special circumstances), this policy would be more difficult to justify if we did not continue to offer the same level of service as that offered by the banks.

We have a good structure to our treasury, based on the factoring activity and the in-house bank. Centralisation of treasury and our integration into the group as a whole enables us to add value to the services that we provide to our customers.