Shell - learning from mistakes

A global center where all treasury activities of a multi-national company can take place is very attractive in theory, but as Shell found out, in Asia, a regional treasury center works out better.
The case for setting up a centralized operation for treasury activities is certainly attractive. Benefits include the pooling of expertise in one location, resulting in better control over information and capital flows, improved risk and liquidity management, and a reduction in funding, foreign exchange and transactional costs. For multinational companies, the benefits and savings can be significant, but there are limits. Asia, with its plethora of financial standards, regulations, clearing systems, time zones and currencies, just to name a few, can be a bewildering region to manage. Often the answer points to a regional treasury centre set in Asia itself.

In the case of Shell, a treasury centre was set up in London in December 1997 for the purpose of centralizing the treasury activities of the group's European entities. The following year, a decision was made to run treasury activities for Shell's Asian entities also from this location, but this wasn't good enough. "That was really valid on a global scale," says Jan Hussmann, general manager, Shell Treasury Center East (STCE), referring to the initial global treasury structure. "We started with London with the plan to centralize all treasury activities, short-term money market, foreign exchange and risk management. We tried to service Asia from London for a year or so, and quite frankly, we failed. The reason is that, coming from a very decentralized structure, we had a lot of independent operating companies and there were a lot of things that were simply not possible due to time zone differences. So the solution was to have a treasury centre in the region, servicing the region," he concludes.

Shell's Regional Treasury Center (RTC) in Singapore, the STCE, began operations in May 2000 and serves 20 customers (Shell entities) in 10 countries. The centre manages approximately $20 billion and 700-800 transactions per month. STCE provides the participating Shell entities with foreign exchange services, handles money market transactions and centralizes foreign exchange risk management. JPMorgan Treasury Services is Shell's primary cash management services provider. This enables treasury balances throughout the region to be centralized and accessed through one bank, providing an effective solution for liquidity management. STCE currently uses Sungard's Quantum and JPMorgan Risk Metrics as risk management software.

There have been many benefits for Shell entities in Asia. "We can leverage on the triple A rating of the group, thereby enabling us to compete with the pricing of local banks,” Hussmann points out. "This way, we retain the float of the spread on an in-house basis instead of feeding banks with that." Hussmann adds that STCE is able to offset withholding tax with the centre's taxable income. This is possible due to the centre's status as a Finance and Treasury Center (FTC) under Singaporean regulations. Geographic relocation to Asia has also meant foreign exchange and money market activities for same-day value has been made possible.

Enhanced control of foreign exchange activities is another plus for Shell. "We think that foreign exchange trading should be centralized and provided for in one central location. We hope that better controls can be obtained with a treasury centre taking care of foreign exchange from one central location," says Hussmann. One expensive mistake that illustrates the importance of this point took place in 1992, when Showa Shell Sekiyu, a Japanese oil refiner and distributor that was 50%-owned by Shell, lost Y125 billion ($1.024 billion) due to $6.4 billion worth of speculative foreign exchange contracts.

So far the decision to set up the RTC in Singapore has been well worth the trouble. "When we started we had several hundred million of deposits flying around the region within the different countries and with various local banks, and several billions of loans as well. By cutting this down and maintaining the spread in-house, the centre is paying off," explains Hussmann.

But centralizing treasury and convincing Shell entities around the region to come under the central umbrella was not an easy task. "At the beginning we really struggled with the buy in because it is not mandatory for the operating companies to join the treasury centre," Hussmann admits. "The treasury centre firstly had to be able to compete on pricing and compete on services. So far we have at least been able to match the pricing of the banks."

This focus on working capital management and going head-to-head with banks in relation to providing funds is a trend that many large multinationals have been heading towards for sometime. Ricky Kaura, vice president, JPMorgan Treasury Services, says this inevitable trend is an opportunity for banks to change with the times. "This is something that multinationals have been leaning towards for some time. We are looking at a trend of MNCs focusing on working capital management. We know that with proper management of working capital, significant cost savings can be realized. We realize that this is happening and it is about finding a position for us and to ensure that we are providing value."

Providing the right technology infrastructure is one important card that overlaying banks such as JPMorgan have to play in RTCs. "From a banks’ perspective, it is about having consistent platform infrastructure in multiple regions. Shell has three global centres [the latest set in Houston] and the philosophy is to link these centres up, both from an operational and an automation perspective. With liquidity management, for example, we are enabling the movement of funds and building structures that support the treasury centres with a minimum of fuss," finishes Kaura.

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