Innovation and Precision in Managing International Project Risks
by Bert van der Donk, Treasury & Risk Manager, NEM Energy B.V.
As a global engineering firm operating in many of the world’s most dynamic but also some of the most volatile regions of the world, NEM Energy B.V., part of the Siemens Group, has to apply its combination of innovation and precision that characterises its product suite and approach to project delivery to its treasury management activities. Managing risk is a particular challenge, which has to be assessed and managed at an individual project level. In this article, Bert van der Donk, Treasury & Risk Manager discusses how NEM uses trade instruments in combination with other approaches to help manage collections risk that derives from both individual customer credit risk and wider political risks.
NEM is a global business, and although the number of customers with which we work is limited due the specialist nature of our activities, these are located in all parts of the world. Similarly, we work with suppliers and subcontractors globally. Like most engineering companies, the majority of our treasury activities relate to individual projects. We manage each one independently, which includes financing, risk management and cash management. Each project has its own cash flow profile, with different timings of cash inflows and outflows according to the project, but each project should be cash-neutral when considered on an aggregate basis. In general, projects do not need to be financed externally, as projects that have a negative cash position can typically be financed through surpluses in other projects. In addition, as part of the Siemens group, liquidity is centralised on a group basis, which enables further access to internal financing if required. As a result, cash management is relatively straightforward.
We have three core banks with which we have a close relationship. A major aspect of this relationship is the bank’s ability to provide guarantee facilities, and support in a correct and precise drafting of the wording of the trade instruments applied next to efficient execution. For example, it is a common requirement that we provide performance and warranty bonds to customers. In addition, we work with an insurance partner to provide guarantees. With a project-based approach to treasury, however, managing credit risk is a major activity. Not only do we focus on managing our risk to each individual counterparty, but political risk is becoming a more significant issue than in the past. Emerging markets and the Middle East are particularly challenging where credit reference information may not be readily available and where the political situation may be opaque and fast-changing. The use of trade finance instruments is therefore an essential aspect of our risk management approach.
We rely on our banks heavily for the issue of letters of credit (LCs), standby LCs and dealing with incoming guarantees and standby LCs. We work with banks that can confirm (standby) LCs in particular. With the growing importance of political risk, and the cost of insuring this risk increasing, we need our banking partners to share some of this risk. This enables us to adhere to our internally set credit risk management policy.