Published: May 01, 2013
Gazprom Marketing & Trading (GM&T) has experienced considerable growth in recent years, necessitating the creation of a new treasury function in 2008. Since then, the new department has actively supported the rapid growth of the group adding to the scale and complexity of treasury’s activities. In this article, Michal Kawski, Head of Treasury, describes some of the ways in which the department has managed business growth over this challenging period, and established a framework to facilitate future expansion.
Our Global Treasury team was established in July 2008 in London, UK. Before this time, a limited number of treasury tasks were distributed across the company and liquidity management challenges were limited due to standard gas transaction settlement terms. As the scale and diversity of the group’s activities continued to increase, however, senior management recognised the need for a dedicated, specialist treasury function. The timing was very fortunate, as the global financial crisis had a significant impact on GM&T, with substantial volatility in gas prices, so treasury had an immediate job to do in managing the liquidity of exchanged-traded contracts. Cash flow forecasting and working capital management became a priority during a period when bank financing was hardly available for market newcomers.
The crisis emphasised the importance of a strategic treasury function, which has developed considerably since it was first established. Treasury has a broad remit to support group subsidiaries across funding, cash investments, cash, liquidity and working capital management, bank relationships, corporate foreign exchange and interest rate risk management. We also monitor incoming funds, manage margined positions and produce treasury performance reporting.
As an indication of the growth that GM&T has experienced, since 2008 we have increased our trading presence from 13 to 45 locations. The group has grown from fewer than 200 employees to over 900, with a 298% increase in cash assets. We now maintain around 175 bank accounts compared with around 25 in 2008 with an 11-fold increase in payment volumes and 90% increase in the number of trading documents managed.
To support the needs of a rapidly growing, dynamic business, treasury needed a highly flexible, responsive approach. As we were building our treasury from scratch, we had the ability to implement best practice processes and methodologies, such as cash flow forecasting and cash flow at risk. This also included agreeing working capital budgets for business units which helped to identify the funding gap accurately. Our approach is based on five key pillars: a detailed understanding of the business; a clear understanding of our underlying business risks and the market environment in which we operate; strategic planning; use of IT tools; and recruiting and retaining high quality personnel. By addressing each of these elements, we have been able to enhance the service we deliver to business units and protect the liquidity and risk position of the group.[[[PAGE]]]
We arrange regular meetings with business unit and regional heads to discuss treasury-related topics in the context of their business plan, so we can be as responsive as possible. Depending on the activities conducted by each business unit, we appoint a business partner for either cash management or liquidity management. Our cash management business partners (e.g., for regional GM&T business units) are responsible for daily treasury operations for transactions up to 60 days. Our liquidity management business partners (e.g., for power & gas, oil & LPG and clean energy segments) are responsible for medium- and long-term cash planning and capital allocation. We engage our business unit stakeholders actively in our strategic planning process and conduct both internal and external training to ensure a common understanding and expertise in treasury-related issues.
By understanding our business requirements clearly, we are able to map our treasury risks precisely. We have taken a systematic approach to identifying, monitoring and managing our business risks, including:
Liquidity risk, addressed by:
FX risk, focused on management of:
Interest rate risk, addressed by:
Long-term refinancing risk, addressed by:
Operational risks, by:
* Establishing processes and controls
* Straight-through processing
Looking at liquidity risk for example, we use statistical models to calculate our liquidity reserve, including market, operational and credit risk on top of our standard cash flows. This helps us to better understand our financing needs and manage cash position in turbulent times.
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By understanding the business and the risks that underlie our activities, we can define our treasury strategy, including cash flow profile, funding requirements, working capital budgets and funding requirements (figure 1). This in turn enables us to find ways of adding value to the business, such as devising an appropriate funding strategy, banking infrastructure and hedging optimisation which enhance our ability to achieve our business strategy. It is this constant refinement and desire to leverage treasury’s skills and activities that enables us to find new ways to add value to the business. Looking ahead, having centralised our treasury activities as an in-house bank we are considering developing treasury as a financial shared service centre.[[[PAGE]]]
We have implemented SAP across all locations globally which is integrated with the Treasury module to create a consistent, robust platform for treasury processing and reporting. This is integrated with 360T for electronic trading and SWIFT for payments transmission (figure 2). While it has been a major effort to implement a consistent infrastructure across the business, we now have a stable, robust platform that supports automated processes and controls, to which we can add new entities in the future. We have better visibility over our cash and liquidity positions, and by integrating our technology infrastructure with our cash pool, we can manage these positions more effectively. This is resulting in lower borrowing costs and a better return on cash investments.
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By developing a consistent framework across the business, we have been able to act as an in-house bank to our business units. The aim is to minimise external funding requirements and enable business units to borrow at a competitive rate. For example, we quote a rate based on the market rate and the cost of our credit facilities and alternative financing, which is better than business units would be able to achieve directly.
Lower cost of funding and the ability to leverage treasury’s specialist expertise have been important factors in encouraging group companies to embrace a centralised treasury approach. While some business units have been more reticent than others, we have been able to gain their trust through our understanding of their business strategy and proven commitment and expertise in delivering the treasury and finance solutions to support it.
As the business continues to grow, we recognise the importance of leveraging our existing centralised platform and structures to avoid fragmentation and maintain control over bank relationships, processes and risks. In addition to supporting continued growth, we are engaged in a range of initiatives in response to changing market conditions. In terms of financing, for example, these include implementing new rules for OTC derivatives (European Market Infrastructure Regulations – EMIR). These changes could have a substantial impact on the way that the margining process in GM&T will work, as well as on the pricing for some financial products. We are also seeking to leverage our IT infrastructure further, such as expanding our use of SWIFT for confirmation matching for FX, money market, interest rate transactions and letters of credit. We are also seeking to use SWIFT’s eBAM (electronic bank account management) solution for managing bank account information. SEPA is also a project on which we are engaged in 2013, including cash collection from our retail business via SEPA direct debits, which again will need to be integrated with SAP. Finally, we are constantly increasing our capabilities into areas such as cash flow at risk.
We have inevitably experienced some challenges bearing in mind the scale and speed of change. The most significant of these has been to inspire the trust and support of business units and senior management for a centralised treasury approach, which as we have discussed earlier, we achieved through proven capabilities, expertise and proximity to business strategy and risks. We are now finding that other business functions are seeking our advice on how to leverage the benefits of centralisation.
It was initially quite difficult to explain our decision to use SWIFT for payments and latterly a wider range of bank communications to senior management, as it is quite a technical project and we were a small treasury team when we first started to connect through SWIFT. Now SWIFT is widely recognised as being an integral part of our treasury infrastructure and provides us with the scaleability we need for the future.
Key to our success has been the final pillar of our treasury approach: the quality and skills of our team. We now have nine people in treasury across London, with a variety of experiences. We focus on developing potential, encouraging both internal and external communication and foster innovation and teamwork. We actively promote skills development through both on-the-job and formal qualifications, and hope to inspire a positive, encouraging work environment. By doing so, we are confident in our ability to find new ways to add value to the group and support GM&T’s ongoing strategy.
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