Globally Demanding: Cash and Liquidity Management in the Infrastructure, Real Estate and Building Materials Sector
By Mark Eastwood, Global Sector Head – Infrastructure, Real Estate and Building Materials (IRB), Global Liquidity and Cash Management, HSBC
Treasuries in the Infrastructure, Real Estate and Building Materials (IRB) sector1 operate against an extremely demanding backdrop. Globally dispersed operations, multiple project-speciﬁc operating entities, high entity turnover and multiple diverse regulatory environments are just a few of the challenges they face. Nevertheless, as Mark Eastwood, Global Sector Head – Infrastructure, Real Estate and Building Materials (IRB), Global Liquidity and Cash Management at HSBC explains, there are various ways in which leading IRB treasuries are successfully managing despite these conditions.
The IRB sector consists of multiple interlinked and interdependent sub-sectors that have major economic signiﬁcance. A recent report by PWC and Oxford Economics2 estimates that global infrastructure spending will hit USD9trn per year by 2025, up from USD4trn in 2012.
In view of the acknowledged link between infrastructure spending and GDP growth3, this increase potentially represents a major global economic stimulus.
There are a number of macro factors providing tailwinds and helping to drive this projected rise in infrastructure spending. Increasing population (including a rising middle class element), urbanisation growth and demand for faster transportation are just some examples, plus wider westward investment ﬂow from Asia and the Middle East4. Internationalisation of the RMB and China’s Belt and Road Initiative (BRI) are clearly also important factors here. For instance, the broad range of markets connected by BRI, coupled with an expanding middle class population and increasing life expectancy, is driving investment demand for efficient transportation systems.
The distribution of the projects driven by these factors is not only extremely diverse, it is also increasingly focused on emerging markets and those considered developing economies. (For example, India is currently building 30km of roads per day5.) This ongoing transition is a major issue for IRB treasuries, as some of the jurisdictions involved will be relatively unfamiliar in terms of payment infrastructure, regulation and business practices. In this demanding environment, a trusted banking partner with an extensive geographic footprint becomes ever more fundamental to ongoing success.
Funding, payments and cash management
In addition to conglomerates (see sidebar), this geographic dispersion of projects poses similar challenges to the four other IRB sub-sectors. These include maintaining visibility and control over funding and defunding requirements. Then in some regions there are practicalities such as payroll, where (given the high number of expatriate blue collar workers typically involved in construction projects) the practice can often be for employees to be paid with cheques or physical cash rather than by bank transfer.
The interconnected nature of the sub-sectors within the IRB sector can have major ramiﬁcations for treasury. For instance, given the common accounting practice of realising expected project proﬁts upfront, any delay in the earlier phases of a project can potentially lead to cash ﬂow implications for a corporation not due to be involved until the later phases. While this contractor may have no responsibility for the delay, it may ﬁnd that bank appetite to continue funding the unexpected cash ﬂow gap in the meantime is reduced. Therefore, maintaining the tightest possible control over corporate cash and liquidity management is critical, so days payable and days sales outstanding (DPO and DSO) need to be highly optimised to maintain tight control over working capital levels.
IRB sector treasuries’ ability to deliver under these conditions is heavily inﬂuenced by their choice of bank. Global connectivity, coupled with deep domestic capabilities, are key themes for the wider IRB sector, so a suitable banking partner will need to have a global physical presence coupled with the commensurate global connectivity. Furthermore, in view of the potential cash ﬂow impact of delays elsewhere in the project chain, that bank will also need to have a long term relationship-based approach and close understanding of the client DNA. Finally, major corporations in the construction space will have multiple projects around the globe at various stages of maturity. At any one time this results in a range of differing funding and working capital requirements. Covering all these funding bases globally requires a partner with a strong balance sheet.
Dealing with geography
As alluded to above, Infrastructure and Construction companies are challenged by the diverse geographies of their operations, but also by the shifting nature of those geographies. For instance, with a signiﬁcant diversiﬁcation drive underway across the traditional oil-rich Gulf states, investment in infrastructure and real estate is focusing not just on the home market but also westwards into Europe and North America. Therefore, substantial amounts of capital are moving from East to West into real estate or funding infrastructure projects – in addition to the impetus created by China’s BRI already mentioned6.
Given the global nature of operations for clients in this growth sector, it is perhaps unsurprising that M&A activity also throws up some major cross-border challenges, especially where European or North American corporations are buying emerging market assets. Certain aspects of these deals – such as combining treasury operations, transitioning authorised signatories and organising new bank account and liquidity management structures – can be a major headache for treasuries who may be several time zones away from the asset being acquired. Again, choice of banking partner(s) can make a difference here, not just in terms of network coverage, but also in agility and the ability to focus and co-ordinate activity and coverage to a single local point of contact for treasury, often under time-pressured conditions. This ensures that treasury has a comprehensive picture as structures are brought together, with the ability to combine business as usual with future-prooﬁng the expanding entity.
1 Within GLCM at HSBC, the IRB sector consists of fi ve subsectors: infrastructure, real estate, building materials, support services and conglomerates.
2 https://www.pwc.se/sv/off entlig-sektor/assets/capital-project-and-infrastructure-spending-outlook-to-2025.pdf
4 “Rapid Urbanisation”, PwC 2016