Infrastructure Firms Re-engineer Their Treasuries for Global Shift

By Joseph Neu

Treasurers look to build infrastructure to support their firms’ emerging market growth.

A meeting sponsored by BNP Paribas last month with select treasurers from the Engineering and Construction (E&C) sector shed light on how multinational treasuries should prepare for a profound shift to key emerging markets as primary sources of growth. No strangers to supporting projects in remote corners of the globe, treasurers in the E&C space are as likely to be setting up treasury infrastructure to support major new projects as they are new foreign subs. Thus, they are well versed in erecting treasury support infrastructure rapidly with projects in difficult new markets. Treasurers from other sectors can follow their lead as their firms scramble to pursue growth outside of the slower-recovering developed world.

SHIFTING GLOBAL GROWTH EXPECTATIONS

BNP Paribas’ North American Economist Brian Fabbri opened the meeting with data to support the story line that multinationals, along with everyone else, will have to come to terms with not having the US (and US consumers) be the principal driver of global growth. Instead China, developing Asia, and other emerging markets will have to pick up the slack. While they have been first to pull out of the recession (see table below), they are not yet in a position to power global markets as forcefully as the US has in the recent past—so both the extent and source of growth expectations need to be adjusted.

In Mr. Fabbri’s view, China, which is showing marked increases in domestic demand aided by effective stimulus measures, is the leading candidate to be the locomotive for the global economic train. Plus, as it has the most excess capital to deploy, China and Chinese firms and investors will play a growing role across the global economy, so a strategic plan for doing business with China becomes a bigger priority. But this is a trend that E&C firms and their treasurers are already seeing in the nature of their new projects.

BUILDING UP INTERNATIONAL TREASURY

The most obvious response to this trend is to build up international treasury expertise for this next wave of globalization. Even in the E&C sector, some firms have been less focused on supporting business in sub-Saharan Africa than they have been in building parking lots across town. This mindset must change. If they don’t have a strong, centrally controlled global treasury function, they certainly need one now. Plus they need, in addition to an experienced treasurer, an experienced international treasury AT. Among their first projects are likely to be:

• Building out non-domestic cash pools. Given the priority all firms are placing on internal capital utilization in the wake of the crisis, ensuring regional and global cash pools are working to improve intercompany liquidity management outside the US is top of mind.
• Get a treasury system of record. Hand in hand with the increasing globalization of cash and intercompany liquidity management is a system with robust enough functionality to allow real-time management of the flows. Plus, a system that can interface with all the pool header accounts to give treasury visibility and control over liquidity on a global scale.

  Some at the meeting had not reached critical mass to abandon bank-provided liquidity management systems. However, as soon as a firm has adopted a single enterprise platform that can provide feeds on payments and collections and a single GL interface, it is probably time to overlay a global treasury management system.

• Integrate treasury with new business operations. As new business operations become more involved in high-risk growth areas, the more valuable it is for treasury support infrastructure to be there with them. If treasury is involved in business discussions and integrated into their decision-making processes, it can help educate them on the currency, credit (see sidebar below) and operational risks before they become unmanageable.

E&C firms are much more inclined to identify these risks before business is even awarded and take steps to mitigate them in project plans and related contracts before the exposures are created. Through creative sourcing and risk-sharing agreements, moreover, risks that are difficult or expensive to hedge with financial contracts—e.g. emerging market currency risk—can be taken care of without them.

• Position risk mitigation as a value-added tool, not a mandate. One of the keys to successful business support programs in critical areas like risk management is to position risk management tools as something the business managers, including the salespeople, see as a value add, not a compliance mandate.

  As one treasurer at the meeting explained: “If they see risk mitigation as something that can help them close a sale, they are more likely to take steps to identify and understand the risks as well.” This way treasury is there to help the business connect the dots and recommend actions, rather than struggling to identify all the risks the business is creating.

• Push banks to help. Banks are clearly part of treasury’s global infrastructure, but they are also trying to respond to the same trends they are pointing out to their MNC clients. Thus, treasurers should not be shy about pushing their banks to offer more and better services in the difficult growth markets. Most treasurers, for example, are looking for major global banks to offer competition to local banks serving local needs such as payments, credit and L/Cs. Accordingly, when credit group banks come asking for additional business to justify credit commitments, point to local needs in international markets and see what they can do.

ANOTHER ORDER OF MAGNITUDE

While not new, E&C firms with their international treasury build-ups are clearly indicative of changes that will affect everyone with the realization that US and other developed world markets are no longer going to be their focal points. Whereas most organizations change their management structures, strategies, and their treasury functions once more than 50 percent of revenues come from outside their domestic markets, change of another order of magnitude is coming as the major portion of this revenue comes from outside the developed economies.