As a global engineering firm operating in many of theworld’s most dynamic but also some of the most volatileregions of the world, NEM Energy B.V., part of the

Siemens Group, has to apply its combination of innovation andprecision that characterises its product suite and approach toproject delivery to its treasury management activities. Managingrisk is a particular challenge, which has to be assessed andmanaged at an individual project level. In this article, Bert vander Donk, Treasury & Risk Manager discusses how NEM usestrade instruments in combination with other approaches to help

by Bert van der Donk, Treasury & Risk Manager, NEM Energy B.V.

Innovation and Precisionin Managing InternationalProject Risks

manage collections risk that derives from both individualcustomer credit risk and wider political risks.

Treasury background

NEM is a global business, and although the number of customerswith which we work is limited due the specialist nature of ouractivities, these are located in all parts of the world. Similarly, wework with suppliers and subcontractors globally. Like mostengineering companies, the majority of our treasury activities relate

NEM Energy B.V.

Established in 1929, NEM Energy B.V. (‘NEM’) is a globalleader in heat recovery steam generators (HRSGs),industrial and utility steam generators and relatedequipment. Since 2011, NEM has been a fully ownedsubsidiary of Siemens AG, operating on a stand-alonebasis. The company is headquartered in Leiden, theNetherlands, and employs around 550 professionalsacross 25 agencies and 7 offices globally, with HRSGsinstalled in 6 continents.

Like most

engineering

companies,

the majority

of our

treasury

activities

relate to

individual

projects.

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With a

project-based

approach to

treasury

managing

credit risk is

a major

activity.

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to individual projects. We manage each oneindependently, which includes financing,risk management and cash management.Each project has its own cash flow profile,with different timings of cash inflows andoutflows according to the project, but eachproject should be cash-neutral whenconsidered on an aggregate basis. Ingeneral, projects do not need to be financedexternally, as projects that have a negative

cash position can typically be financedthrough surpluses in other projects. Inaddition, as part of the Siemens group,liquidity is centralised on a group basis,which enables further access to internalfinancing if required. As a result, cashmanagement is relatively straightforward.

Banking partnerships

We have three core banks with which wehave a close relationship. A major aspectof this relationship is the bank’s ability toprovide guarantee facilities, and supportin a correct and precise drafting of thewording of the trade instruments appliednext to efficient execution. For example,it is a common requirement that weprovide performance and warranty bondsto customers. In addition, we work withan insurance partner to provideguarantees. With a project-basedapproach to treasury, however, managingcredit risk is a major activity. Not only dowe focus on managing our risk to eachindividual counterparty, but political riskis becoming a more significant issue thanin the past. Emerging markets and theMiddle East are particularly challengingwhere credit reference information maynot be readily available and where thepolitical situation may be opaque andfast-changing. The use of trade financeinstruments 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 LCsand dealing with incoming guarantees andstandby LCs. We work with banks that canconfirm (standby) LCs in particular. Withthe growing importance of political risk,and the cost of insuring this riskincreasing, we need our banking partnersto share some of this risk. This enables usto adhere to our internally set credit riskmanagement policy. We prefer standby LCs over bank

guarantees for three key reasons:Firstly, if we need to issue a guarantee to

a customer, the use of standby LCs istransparent as it is always conductedaccording to recognised universal practices.Secondly, a LC always has an end date.

As such you are not dependent on anyrelease-action of the beneficiary. In casethe latter abstains from such action, thefacilities remain blocked while theunderlying contract is already dulyperformed. Therefore the fixed end date isparticularly important to us.Thirdly, a standby LC offers better

security on incoming payments, as if acustomer pays late, we can make ademand for payment under the standby LCby simply sending the overdue invoice andstatement to the bank. This assists withcash flow forecasting by improving thepredictability of collections.

Partnership with ING

“ING and NEM have enjoyed a relationship that extends for more than a decade with aparticular emphasis on trade finance instruments encompassing LCs and Bankguarantees. In addition, the bank has a comprehensive banking relationship with thewider Siemens Group, particularly focused on servicing the Group’s Europeanoperations.As a complex, global engineering business solution provider, NEM requires trade

finance solutions that are specifically designed to meet NEM’s credit , political risks and- to a lesser extent – cash management guidelines associated with each projectincluding standby LCs. The latter instruments are commonly used in the United Statesand Latin America, and at a global level in the oil and gas sectors in particular. InEurope and Middle East, bank guarantees are typically used. However2, NEM has takena less conventional approach and preferred to select trade instruments according toeach individual scenario. It is an important part of our service offering at ING to beable to offer solutions that meet the individual cash and risk management needs ofeach of our customers, and the projects in which they are engaged, fulfilling the role ofa true partner bank.”

Jean Bonnet, Senior Consultant Trade Finance Services at ING

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Proactive risk management

We review the commercial and riskconditions of each project regularly andevaluate the instruments that are in placeto protect our risk. This includes bothguarantees that we issue, and those thatwe receive from our suppliers, includingsuspension of force majeure clauses andclear delivery statuses. If we determinethat our political risk is high, we liaisewith sales teams to manage processessuch as warehousing carefully tominimise trapped cash that may bevulnerable. We also clearly specifypayment conditions in the customercontract, e.g. what would happen to thecontract in the event of the countrybecoming subject to an embargo. Thesesame terms are included in the LC whichshould mirror the contract. To ensure thatthis is the case, we draft the LC at thesame time as contract negotiations.

Precision and flexibility

We typically work on a relatively smallnumber of high-value projects, so we donot need to deal with a large volume oftransactions. As every project is unique,so too is each LC. This makes the use oftemplates and automated processes moredifficult than in a more standardisedenvironment, so each LC is managedindividually. Not all customers are willingto issue a LC, in which case we transactbusiness under open account, but this

applies in only a few cases where wealready have a trusted, proven businessrelationship for which internal creditlimits are put in place. Even in thesecases, we still need to mitigate politicalrisk through credit insurance or acombination of insurance and exportcredit agency financing. In some cases,such as in the case of a recent project inIran, it was not possible either to insureour risk or obtain an LC. In this instance,we constructed the payment schedulecarefully so that we always receivedmore cash from the customer than thecosts we had incurred, including futuresupplier commitments.

Tailor-made solutions/ orusing the right instrumentin each situation

Based on our experience of managing riskin emerging and/ or politically volatilemarkets, it is important to consider thefull range of instruments that areavailable, and leverage the rightinstrument in each situation. This is notlimited to bank or insurance solutions: asan exporter of capital goods, we haveworked with the Dutch ECA verysuccessfully. The basis of a tradeinstrument should always be thecustomer contract which sets theconditions for delivery, payment etc. Thegreatest difficulty in this respect is thefinal payment which may be assumed tobe due after a certain period as opposedto being linked to a specific projectdeliverable. LCs have proved particularlyvaluable for our business, not least asthat a customer’s ability to an LC

demonstrates its financial viability andgood banking relationship. In instanceswhere using an LC or standby LC is notfeasible, political or credit risk insuranceshould be considered.Risk is not limited to customer

payment performance: supplier risk isalso a major consideration, bothindividually and from a wider politicalrisk perspective. To manage this, we visitour suppliers and subcontractorsregularly and assess their financial andoperating conditions. There are insuranceproducts available, such assubcontractor’s default insurance, andconstruction wrap-up insurance in theUS, but these allow the pass through ofrisk, as opposed to mitigating risk, andcurrently we do not use these products,although we may consider doing so inthe future.Maintaining effective communication

between NEM and our banks is essentialin order to ensure that trade instrumentsmeet our needs exactly and are draftedcorrectly. These banks also add value bysharing their expertise derived fromworking with a variety of companies withcomparable risk management needs.Similarly, we work closely with internalsales, procurement and logistics teams tounderstand and mitigate our risk. Thisinternal and external dialogue, based oncommon objectives is essential tomanage risk and transform credit andpolitical risk to performance risk. Projectdelivery is more closely in our control andan area in which NEM excels, so we areleveraging our strengths, whilstminimising potential areas of weakness inwhich we have less control. �

Bert van der DonkTreasury Manager NEMEnergy B.V.

Bert van der Donk is Treasury Managerof NEM Energy B.V. in the Netherlands.He joined NEM Energy in 1998 as

Project Controller. After two years Bertmoved into treasury responsible for setting up a TreasuryDepartment which supports the international exportcontracts and global sourcing practices of the company.Bert is in charge of bank relation management, cash

management and market risk hedging. His function alsoincludes documentary trade finance, ECA-covered financing,credit and political risk insurance and guarantees.Before joining NEM Energy, Bert held the position of

Finance Manager with the engineering company Articon BVand before that he worked for some 22 years with the DutchConstruction Company Ballast Nedam, where he heldpositions in the Netherlands and for10 years as expatriate inBahrain, Saudi Arabia and Qatar.

Jean BonnetSenior Consultant Trade Finance Services at ING

Jean Bonnet, Senior Consultant Trade Finance Services at ING,started his banking career as management trainee after whichhe subsequently fullfilled roles as Treasury & cashmanagement consultant, relationhip manager Trade &Commodity Finance, head of commercial risk trading, global head loan syndication(emerging markets & TCF focus) as part of Debt Capital Markets, regional headMidCorporates, relationship manager Corporate Clients and since 2010 in it’s presentrole focusing on large/ global clients with a Dutch footprint.Jean graduated from University Nijmegen law school with further

postgraduate and management education followed at a.o. Free University ofAmsterdam (incl. commercial finance) and Insead.

As every

project is

unique, so

too is each

LC.

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