Honeywell, as part of its growth initiative in the Middle East, has targeted Iraq, where the rapidly expanding oil industry, which provides more than 90% of government revenue, is spearheading the Iraqi economic recovery.
The use of cash, with all its inherent risks, is widespread in Iraq and the banking systems to support Honeywell in the country were inadequate or non-existent. Furthermore, the changing or inconsistent banking rules in Iraq, issued by either the Central Bank of Iraq or the Ministry of Finance, can often cause delay and confusion. Therefore, implementing banking facilities to the standard required meant that Honeywell EMEA Treasury needed to exercise an even higher level of agility than usual.
The Trade Bank of Iraq (TBI), established in 2003, originally to finance trade deals and replace the oil-for-food programme, is owned by the Iraqi government but operates as a commercial bank with a virtual monopoly on letters of credit (LC’s) for government purchases, which gives it a good deal of political leverage over the Iraqi government. Public sector imports are normally secured through LC’s issued through TBI and, for smaller contracts (under $4m), issued through selected private Iraqi banks.
The TBI’s processes are not robust – it can take months for LC’s to be processed through local banks.
“Our choices for a cash management bank in Iraq were rather limited,” explains Ciar Timon, Senior Regional Treasury Manager.
Until late 2013, the best option was an international bank with a local partner, and Honeywell’s initial plan was to set up banking arrangements using the same structure as it had used for its Delaware company, but using Bank of Baghdad as the local bank instead of TBI. However, in June 2013, it was advised that Standard Chartered Bank (SCB) was opening branches in Iraq.
“We selected SCB as our partner bank and we are now in the process of opening bank accounts for both divisions of our Central Iraq legal entity and will shortly commence a similar exercise for the Erbil entity,” says Timon.
A new bank guarantee credit line of $80m has been established with SCB, which has already obtained agreement from the Iraqi Ministries of Electricity and Oil to accept BGs issued directly by SCB.
As for bank mandates, “Honeywell’s amendment instruction formats, already used in other Middle East countries, have been accepted by SCB,” says Timon.
Best practice and innovation
It is evident that Honeywell Treasury’s proactive support of the company’s One Honeywell High Growth Regions strategy, and enthusiastic communication and co-operation between all involved parties, are key to the successful implementation of workable banking processes and Treasury’s ongoing support of Honeywell’s businesses in Iraq.
Implementing the solution in a country like Iraq, which is still quite politically and economically unstable, has comparatively high transaction costs and which is one of the most complicated countries in the region for routing LC’s, is quite an achievement.