Published: January 01, 2014
Leading construction group VINCI has recently embarked on a flagship project to centralise cash in Europe and optimise bank connectivity. Despite a decentralised culture, treasury has worked collaboratively with banks and subsidiaries alike to develop a robust, secure and automated cash and treasury management solution that meets its current and future needs as the business continues to evolve. In this article, Jean-Michel Harlepin, Treasurer, Vinci Finance International, describes some aspects of the journey so far and highlights some of the challenges and opportunities that cash centralisation has presented.
Our treasury function at VINCI has two major responsibilities: to finance the VINCI group and centralise cash for non-French entities. Our target is around €1bn cash balances. Our aim is to maximise the available cash to manage working capital requirements across the group and minimise our reliance on borrowings. We have a small team of only four people, so it is essential to achieve a high degree of automation to manage the full range of activities for which treasury is responsible in an efficient and controlled way. As a result, a priority for VINCI is to maintain state-of-the-art systems that are closely integrated with external counterparties and the wider business.
When I joined VINCI three years ago, cash management was largely decentralised, which was consistent with the structure and culture of the group. However, we recognised that centralising cash would enable us to meet the financing needs of the group more effectively, manage our counterparty risk and address audit concerns regarding the visibility and control over cash. In particular, we needed to be able to prove that the cash we were reporting was available to the business. With a compelling business case, we had a clear management mandate for centralisation; however, we had the flexibility to decide on the best way to achieve this. In particular, we needed to balance the need for cash management efficiency whilst working with VINCI’s panel of relationship banks.
Before embarking on our cash centralisation project, we needed to implement the right legal framework both internally and externally, such as setting up cash management agreements with group entities as well as contractual agreements with our banks. We have rigorous legal requirements that were not easy for all of our banks to accept, so this took time. However, some of our banks, such as UniCredit, demonstrated a high degree of flexibility and recognised the value of a long-term relationship with VINCI. Consequently, although it was a lengthy process, ultimately we established contractual arrangements that gave us confidence in the quality of the solutions that were being delivered and our ongoing relationship.
Once we had done this, setting up cash pools to centralise cash progressed quickly. UniCredit was one of the main banks with which our subsidiaries in Germany had a relationship and we already had liquidity management solutions in place at a local level. We were able to combine these local cash pools (and develop additional ones) with cross-border cash pooling, sweeping balances into a header account in Austria which is then managed by treasury. This solution includes entities in Germany and Austria but also countries in Central and Eastern Europe such as Slovakia and the Czech Republic. We use zero-balancing wherever possible so that we maintain full control over cash within treasury. IBOS agreements are in place to enable cash to be swept between banks, as opposed to having to manage liquidity separately in each bank. This is important for a group such as VINCI that has a small treasury team.
While cash pooling is straightforward in principle, there is a range of challenges that need to be addressed. As well as an often lengthy contractual process with banks, it takes time to work with subsidiaries (particularly those that are cash-rich) to explain the benefits of cash pooling at a group level and reassure them that their cash remains available and accounted for in their books.[[[PAGE]]]
In order to achieve our cash visibility and control objectives, we needed to improve our bank connectivity so that we could access information and manage accounts securely and efficiently. While business units use electronic banking systems for the relevant banks, we recognised that SWIFT is the industry standard for high-availability, secure, multi-bank connectivity, so we have now implemented SWIFT in group treasury. We retrieve MT940 messages from our relationship banks and integrate this information into our TMS for cash positioning and reconciliation. We also use SWIFT for treasury payments (MT101 messages).
Not only does our new cash pooling and bank connectivity solution support our existing organisation, but it also accommodates entities that we may add in the future. Cash is now more readily available at a group level and we are able to manage our liquidity and counterparty risk more easily. The benefits are not restricted to group treasury: our subsidiaries typically achieve better yields on surplus cash (with approved entities) and lower financing rates by investing and borrowing through the cash pool rather than going to the market directly. As cash sweeps are fully automated, there is no impact on subsidiaries’ day-to-day activities which has also been important in selling and delivering on the concept of cash pooling. Furthermore, implementing the project has also had a positive impact from a rating agency perspective given that we can now prove that cash balances are accessible and subject to stringent counterparty risk controls.
Our key relationship banks such as UniCredit have contributed very positively to the project by offering efficient solutions and practical advice. As a French business, we typically maintain relationships with French banks, so it has been interesting for us to develop a close relationship with a non-French bank and source new ideas on how to manage our cash effectively. UniCredit has delivered on its operational excellence objective and met our expectations fully, enabling it to become one of our key partner banks in Europe.
We are close to finishing the cash centralisation project in Europe, with a few final tasks to complete in the Czech Republic, at which point we can expand our focus on other regions. Consequently, we are now reviewing the feasibility of cash pooling in more challenging countries such as in Asia. Our experiences in Europe have been very valuable in helping us to structure cash pooling solutions for our business. As we have found, while cash pooling is straightforward in theory, as banking solutions are available and cash pooling can be managed through a TMS, the reality of setting up these solutions may be more complex. A clear management mandate is essential, as is taking the time to explain the concept to subsidiaries.
Treasurers are rarely in a position where they can make decisions unilaterally, and must instead work collaboratively with both internal and external counterparties to come up with solutions that meet the needs of all stakeholders. Setting up a cash pool solution, with an in-house bank supporting it, has also changed treasury’s relationship with subsidiaries in that these are now our customers and we have a responsibility to make sure that we understand and respond to their ongoing cash and treasury management needs. The journey has been a very positive one so far, and from a personal perspective, a satisfying one by collaborating with both banks and subsidiaries, and establishing more regular dialogue and relationships that bring treasury closer to the business.
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