2023-Public-Sector-Perspectives

The downside of such a decentralized approach is that it is often difficult for MoFAs to have visibility of local funds disbursement at a central level and accountability for spending is therefore restricted. By delegating cash management and payments and collections to local embassies, the potential for misuse of funds is increased. At the least, limited visibility into local accounts often means that they usually need to be overfunded, reducing the MoFA’s cash efficiency. The requirement to procure financial services locally and maintain multiple accounts at a variety of local banks around the world results in fragmented and inefficient processes. Local in- country banks are more likely to rely on manual transaction initiation or paper-based reporting, for instance. Such processes can result in delays to the timely delivery of funds to embassies across the world. That may compromise their ability to meet local payment obligations and consequently undermine embassies’ credibility and goodwill in host countries. In addition, costs associated with maintaining local accounts in each country can be high. Local cash management often results in high foreign exchange (FX) costs for cross-border payments, as local banks FX conversion rates are uncompetitive compared to global banks’. Risks are also increased as MoFAs’ operating budgets are vulnerable to exchange rate fluctuations. What MoFAs need As global inter-connectivity has advanced, helped by improvements in financial technology, the rationale for local management of embassy payments and collections has diminished. Over the past two decades, multinational corporates have taken advantage of these developments to reshape their treasury practices by centralizing cash management, payments and collections and optimizing, standardizing and automating processes in order to reduce administrative costs and enhance control. While a growing number of MoFAs are now following suit, many have yet to begin — or even consider — centralization. Typically, MoFAs have three core financial needs — cash management, payments and collections — which ideally should be addressed by a single banking provider in order to maximize the potential benefits. 1. Cash management: MoFAs need to have funds in the right place at the right time so that they can be used effectively and risks, including FX, can be mitigated. Centralized visibility and control, via a consolidated banking structure, is critical to achieving this goal. Ideally, embassies will maintain only a single account in each country for emergency purposes. 2. Payments: MoFAs need to make payments, relating to leases, services or payroll, in local currency on behalf of their embassies. Timeliness and cost (both in relation to the payment itself and any associated FX conversion) are key. For local payments, such as stationary, or for T&E, it can be convenient and cost effective for embassies and their staff to use commercial cards. 3. Collections: Embassies around the world process visa and passport applications and therefore need to be able to receive payments from individuals in a cost effective and convenient way (using local payment instruments, for example). These funds then need to be efficiently repatriated to the MoFA. An evolving mindset While embassies may be hesitant about giving up control of their finances, doing so can free up time for their core diplomatic mission. More importantly, financial decision-making power is not being lost. Local staff still get to determine key spending priorities and suppliers, for instance. The main change is that the approval and execution of the payments and collections associated with those financial decisions occurs at the center rather than in country. As many of the benefits of centralization accrue to government as a whole rather than MoFAs in isolation, it can be valuable for any initiatives to be developed by MoFAs alongside their colleagues in the ministry of 46 The Time is Right to Centralize MoFA Finances