Continuing our popular series of interviews with senior figures in the world of treasury and finance, this month talking to Marc Navalon, Group Treasurer, AGBAR.

As group treasurer, for what are you responsible within AGBAR?

I am chief of the corporate treasury department in AGBAR, which we set up in January 1999. As group treasurer, I have responsibilities in three main areas:

1. Cash management.

2. Risk management.

   This is mainly financial risk, but from time to time I have to manage some other business risks as well.

3. Funding.

   I am also responsible for funding through the capital markets.

How is the treasury structured?

There are four of us in the central treasury department. I have two treasury assistants – one has responsibility for the capital and derivatives markets and the other is responsible for cash management and managing our domestic bank relationships. Our fourth member is the secretary.

AGBAR Group has more than 200 companies. The core business activities are drinking water – including water collection, supply and integrated services in cities and towns through concessions and rental agreements – healthcare insurance, liquid and solid waste treatment and automobile services. Other areas of activity include construction and engineering, maintenance and electronic trade services. This complexity implies that as well as having a central treasury department, each of the five main business divisions in the group has a senior treasurer. That senior treasurer is directly responsible for the treasury activity within that division. I meet with these five senior treasurers every two months as a treasury committee.

How does this structure work in practice?

Although in general terms within the group we have a strong culture of decentralisation, in finance the divisions see us in the central treasury department as experts and we do give advice and help to those who need it. In recent years, this help has included internal long-term loans funded by our bond issuance.

Although we do not try to impose anything on any of our divisions, I would like to underline that I am convinced that, in treasury, centralisation tends to work better than decentralisation. With that in mind, we are preparing to increase the role of the central treasury department, with respect to that of the divisions.

Risk management – how do you measure and manage currency and interest rate risk?

First, I would like to emphasise that as a group we have a very conservative approach to risk. Our role as the treasury is to protect the results of the group, rather than to generate profits ourselves. As a result, we use derivatives for hedging exposures rather than for taking positions with a view to generating income for the group.

As I mentioned, the risks that we face are primarily financial – currency and interest rate risks. Of these, currency risk is now more important than interest rate risk in terms of its impact on the group’s profit and loss account. This is the result of a large investment that we made in 1999, when we bid for the company providing water management services in the Chilean capital, Santiago. This bid was financed in euro, rather than in the local currency (the Chilean Peso). As well as this significant investment in Chile, we also have investments in many other Latin American countries (including Argentina, Brazil, Colombia, Cuba, Mexico and Uruguay) and also in the United States.

Bank relationships – with over 200 subsidiaries, how do you approach the issue of appointing banks?

For me, the issue of managing bank relationships is both key and complicated. Banks like to project themselves as experts in the majority of products that a corporate will need to use, whereas in practice this may not be the case.

In order to save us time it is very important that the bank understands our approach to derivatives and financing. Because banks are made of people, the key to a good bank relationship is to find the right people. If we can find the right people, then a lot of the work has already been done.

Domestically, there has been a lot of change in Spanish banking. In Spain there are now only two big domestic banks with international presence (BBVA and BSCH) followed by a number of medium-sized banks. This has made negotiating with banks much more difficult as the number of banks offering the necessary range of services has shrunk.

The subsidiaries face different pressures. Because of the nature of our business and the fact that we have made a number of acquisitions, there is a very long list of banks with which we have had relationships. Although we have spent the last few years trying to reduce the number of banks with whom we relate, this has not been that easy. Because our main businesses are selling water and waste management services, we have municipalities as our customers. For commercial reasons, this makes it difficult to try to remove a relationship in a particular area. So, although we have reduced our number of banks to a core of about half a dozen, there still remains a long list of banks with whom we have very localised relationships.

So we are faced with a paradox. It appears that we have a long list of banks with which we can do business. But we need our banks to provide us with a package of financing and other services, whereas many of the smaller banks can provide only some of those services. This means that, in Spain, we really only have two or three realistic banking partners.

Having said that, we have been investing in Latin America, as have the two Spanish banks (now the two largest banks in Latin America). As a result, they can provide us with significant help for our expansion into Latin America.

Cash management – what are the issues that need to be resolved for a company with operations in both Spain and Latin America?

In Spain, the banking industry is quite developed and automated. For example, we have been using standard Bank Account Numbers for some time. There are no big nightmares in cash management – for example, we operate notional cash pooling and cash concentration relatively easily.

We also pay our suppliers using ‘Confirming’, which is a BSCH-registered trademark. We can send a file of invoices to the bank, which the bank will then process. In addition, because payment terms in Spain are very long relative to Northern Europe (90 or 120 days), the bank will also offer invoice discounting to our suppliers. In practice, when the bank receives the instructions from us, it will send a notification to our supplier. This confirms that we have accepted their invoice and also offers to discount that invoice at attractive rates of interest.

In Latin America, cash management is more complicated. A much lower proportion of the local population has bank accounts. Whilst in Spain, our main method of collection is via the direct debit, this is not possible in Latin America. We have to build a varied network of collection points, using banks but also other points of collection such as supermarkets.

Does this mean that cash management is locally organised?

Given the differences in local practices, we think that local teams are in the best position to establish the most effective collection and payment processing systems. In the medium term, we are considering establishing some form of cross border cash pooling. However, at the moment, local regulations and fiscal requirements make this nearly impossible.

Once you have collected the cash in Latin America, what do you do with it?

Whilst we would like to bring it back to Spain, we have to look at the constraints of the local currency. In many ways, it is more feasible to keep the funds there, particularly if it means that the subsidiaries can become self-financing. Whether we can bring the cash back to Spain also depends on whether there are any constraints on the subsidiaries and, in certain Latin American countries, on the local authority’s attitude to tax.

You also mentioned that you have responsibility for funding. How do you approach this?

I manage our MTN programme, which we established in 1999 and through which we issue bonds on the Euromarket. The programme is worth €2 billion and we have issued €675m to date. We have used the programme to finance our foreign direct investments (in Chile and other countries) and also to replace some bank financing as well. It provides us with an opportunity to raise long-term financing which the banks are not in the best position to provide. The programme is very flexible – we can issue 5, 10, 15 and, given our excellent ratings (AA-, Aa3), even 30 year bonds. We have also managed to increase the average duration of our debt portfolio at a time when capital is becoming scarcer.

Our subsidiary in Chile has been able to issue bonds after our acquisition. The local bond market is very developed and it was successfully able to issue 5 year and 21 year bonds in very difficult circumstances on September 14^th this year.

In Argentina, the position is different. The bond market is not as developed, so most of the long-term funding comes from multilaterals – such as the IFC, the EIB and the Inter-American Development Bank.

How do you use technology?

I see technology as key for treasury – the role of the treasurer is in fact to manage information, not money. After all, I don’t touch bank notes at all!. We have Reuters at the central treasury and our major subsidiaries have a treasury management system – XRT Cerg Finance – which they use to improve the quality of information within the treasury and thus their daily management.

At the moment, we are considering what the technological structure of our treasury should be once we have increased its centralisation. There are now more alternatives than there were a few years ago – including the Internet and ASPs.

Do you use the Internet at all?

We use the Internet for research and for bank account reporting. We have been contacted by an FX portal, but we only conduct a small number of deals (not even one a day) and so have limited transaction risk. In addition, the deals we do conduct are not straightforward – for example, a three year, cross currency swap of Euro and Chilean pesos – and so the portal would not add significant value.

What is the most important issue for you in the immediate future?

In the immediate future we are moving towards a higher degree of centralisation. But centralisation is not a goal, it is a means. Our objective remains to add value to the group by improving our cash, risk and funding management and also by maintaining strong relations with other departments. Given the decentralised complexity of the group, it is vital to focus on properly managing this centralisation process.