Constructing Convenient Banking

Construction companies are helping to rebuild the global economy. While the west views the renewal of its ongoing infrastructure as a catalyst for recovery – witness the infrastructure spending at the core of The American Recovery and Reinvestment Act, designed to re-start the economy – the east views infrastructure construction as a key tool for growth.

Certainly, infrastructure can be a key factor in determining a country or region’s economic competitiveness. Construction companies are, of course, a vital element to the core infrastructure that shapes and defines urban landscapes – metro lines, skyscrapers, stadiums, universities, airports and other physical geology – and, as a result, contribute directly to the growth of a city. Having this infrastructure gives developed markets an advantage in terms of their physical assets and is, in part, the reason they are deemed ‘developed’.

Given this, emerging market countries view investment in the construction of infrastructure as the key to development. Indeed, the shift in economic power from west to east is changing the landscape for emerging market construction companies, allowing some regional names to evolve into global players. Indian technology, engineering and construction company Larsen & Toubro (L&T) is at the forefront of this drive – having expanded its operations beyond the subcontinent by opening a Middle Eastern headquarters in the United Arab Emirates (U.A.E.).

Making Cash Last

Clearly, the growth of emerging market construction companies is not without barriers. The challenging economic climate, as well as the advent of regulatory proposals such as Basel III and Solvency II, are both constraining liquidity and limiting corporate access to funding. Given this, it is more important than ever for construction companies to enhance cash management practices, and to make the injections of capital they do receive last throughout the duration of the project lifecycle.

Infrastructure financing throws up key transaction banking issues for growing construction companies. When awarded a project, construction companies are injected with advance money designed to see construction through to a specified milestone – usually over an intensely short period of time.

For the CFOs and treasurers of construction companies, three themes therefore stand out: the need for control, visibility and efficiency of the systems they use to manage cash. They want to know where their company’s cash is at any given time, who the company’s counterparties are, how their cash is collected, and the risks inherent in the company’s processes.

Access to data is also important. Without aggregated information, construction companies cannot make effective and informed decisions and therefore cannot continue to prosper in what is an increasingly competitive environment.

End-to-end Project Solution

Larsen & Toubro is one of India’s largest private companies. Taking advantage of the opportunities in the U.A.E., its hydrocarbon division was awarded projects in Abu Dhabi in early 2011 valued at approximately $100 million. However the projects came with significant bonding, letter of credit and receivables financing requirements, besides cash management process.

Given this, the company was keen to avoid working with multiple banks that would manage different solutions – instead choosing to streamline its accounts to make processes as simple and as convenient as possible. Multiple banking relationships would mean that a project’s cash management would have to be decentralized, which means data is divided, visibility is low and the processes difficult to monitor and control – leaving the company blind to error and vulnerable to risk.

Having fewer banking relationships to manage meanwhile reduces administrative effort, cuts costs and lessens risk. It simplifies visibility over global cash positions, and it helps form thoughtful pooling structures that allow quick action in volatile environments. Operating all processes from a single account also centralizes data, making it easy to access.

Building a Solution

To achieve this centralization for its U.A.E. headquarters project, L&T looked towards the project financing initiative – launched by Citi in the first quarter of 2011 – designed to provide end-to-end solutions throughout a project lifecycle. The company gained access to products such as guarantees/letters of credit, receivables financing, FX flows, cash management and project accounts were utilized as and when it suited L&T.

“A breadth of transaction banking solutions and holistic solutions were available to us – right through the project lifecycle from the start-up phase to construction, commissioning and completion of the project,” says D.K. Nanda, finance head for L&T’s hydrocarbon division. “All this was from a single efficient account, making the process as convenient as possible.”

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