Triple-Layered Cash Pool Providing China Three Gorges with Overseas Funds Control
CORPORATE RECOGNITION AWARDS
Best Cash Pooling Solution - Highly Commended
When it comes to demonstrating best practice in global cash management, state-owned enterprise is not necessarily the first port of call. But think again. As part of its ‘going global’ journey, China Three Gorges Corporation (CTG), incorporated in 1993 by the Chinese government, has deployed a multilayered pooling system that is a worthy recipient of the TMI 2020 Awards Highly Commended for Best Cash Pooling Solution.
Developed in partnership with Bank of China (Hong Kong) Limited, the solution perfectly supports CTG’s pathway to rapid growth in overseas investment and business expansion, ensuring full control of overseas cash and enhancing the efficiency of CTG’s treasury management outside of Mainland China.
Concentrating and expanding
CTG’s incorporation by the Chinese government has been part of the project to create a hydroelectric gravity dam spanning the Yangtze River, designed to tame the flood-prone river and to generate clean energy.
Today, the Three Gorges Dam is the world’s largest hydro-power station in terms of installed capacity, and CTG itself is now the largest clean energy group in China, investing and developing clean energy in more than 40 countries and regions in Europe, South America, Africa and Southeast Asia.
With the acquisition in 2011 of Energias de Portugal kick-starting CTG’s expansion into the European and South American markets, controlling overseas funds became a focus for the business, with the support of continued expansion very much in mind.
With such ambition to the fore, and driven by the need to achieve visibility and control through funds concentration, while creating a global cash management structure that retained the flexibility to fulfil local needs, CTG set about developing a solution, collaborating closely with partner, Bank of China (Hong Kong) Limited.
Practical view
The result was a treasury centre set up in Hong Kong as the header account of the Hong Kong and global cash pooling structure. In this three-layered cash pool, the base tier consists of settlement accounts in Europe, set up with individual zero-balance and minimum-balance sweeps.
From these, funds are concentrated into an offshore account of the Hong Kong treasury centre, located in Luxembourg. Funds are then swept into the ultimate header account in Hong Kong, using a manual process. For the Hong Kong cash pool, funds from Hong Kong entities are concentrated directly into the header account, using a daily zero-balance sweep.
To fulfil payment obligations of the pool sub-accounts in Hong Kong, a transaction-based downward sweep is set up, such that when a payment is initiated in any sub-account, funds will be pulled from header to complete that payment.
Global accounts are added onto the global online banking platform for the Hong Kong treasury centre to centralise enquiries and payments. Currently, the set-up consists of accounts from nearly 20 countries including Luxembourg, Portugal, Germany, Indonesia, the Philippines, Malaysia, and Brazil.
Optimisation with flexibility
The three-layered cash pool leverages double tax treaties between Hong Kong and Luxembourg, and between Luxembourg and other European countries, and treasury centre tax incentives in Hong Kong. The choice of cash pool header locations provides the optimal taxation structure for CTG.
While this is the model of choice for many organisations, the transaction-based downward sweep deployed by CTG is a rather special cash-pool capability that is not common in the market. It is a highly responsive solution where once a payment is initiated in a cash pool sub-account with insufficient funds, funds will be pulled from the header to that sub-account to enable the completion of the payment. Of course, as an additional control measure, limits can be set up for the downward pulling of funds.
What’s more, a hybrid sweeping set-up is used for CTG’s European cash pool, providing different sub-accounts with uniquely controllable flexibility. Various sweeping modes – such as automatic zero-balance sweeps, minimum balance sweeps, fixed amount sweeps, and manual sweeps – are all available within different sub-accounts within the same cash pool.
With CTG having worked with partner Bank of China (Hong Kong) Limited to develop and deploy a superior, flexible and multilayered cross-border pooling system, the TMI 2020 Awards Highly Commended for Best Cash Pooling Solution seems an entirely appropriate celebration of this clean-energy-driven treasury success story.
