VIII. TRADE AND PROJECT FINANCING A. Banking System Prior to the Velvet Revolution in the Czech Republic in late 1989, the banking system had been organized with a single, central bank whose sole function was to provide resources to state owned firms as needed to meet the central plan. Aside from the central bank, there were several institutions which provided specialized financial services. Ceska Sporitelna, or the Czech Savings Bank, held over 90 percent of individual deposits. Postovni banka (Post Bank) also accepted individual deposits, with outlets located within post offices. Ceskoslovenska Obchodni banka (Czechoslovak Trade Bank) handled trade finance and international commercial transactions for the government. Zivnostenska banka (Business Bank) managed international payment operations, and had a branch in London. Investicni banka (Investment Bank) provided capital to state-owned firms. In 1990, a new banking system was initiated by the formation of new bank, Komercni banka (Commercial Bank) to receive the loan portfolios and deposits of the central bank, thus divesting the central bank of its commercial functions. The central bank role was redefined to concentrate on monetary policy and bank supervision. In 1991, the Banking Act and the State Bank Act were passed. These laws define permitted activities and provide the framework for the formation of new banks and issuance of banking licenses by the central bank. Through 1992, over 36 banks had commenced operations. The Banking Act provides for universal banking where commercial banks carry out investment banking and brokerage activities in addition to traditional commercial transactions and lending, subject to the issuance of a license by the State Bank. This is quite different from American banking practices, but closely resembles European banking law. The State Bank controls application requirements, minimum capital and reserve requirements and is in charge of bank supervision. Banking supervision is a new concept, and initial bank examinations are just starting to be carried out. The result of universal banking is that clients can obtain brokerage, investment advisory and underwriting services from the same institution that handles their deposits and provides them with loans. However, many of these services are new to Czech banks and the full benefit of efficient, integrated service is likely to be several years away. Foreign banks can take two forms, being either representative offices or full-fledged branches. The representative offices can offer advice and inform clients of services available through the parent bank, but are not authorized to perform services such as opening accounts or lending. The branches can handle any transactions authorized by the parent bank. The Banking Law requires that all foreign banks having branches in the CR agree to take over the assets and liabilities if the branch experiences financial problems, effectively guaranteeing the financial health of the branch. Thus far, foreign banks in the Czech Republic have been concentrating on international payments services, and transactions with Western clients. Foreign banks have had stricter requirements than Czech banks with regard to collateral, documentation and interest rates. Combined with reluctance to take on high risk start- up business plans, the result has been minimal lending by foreign banks. There are several challenges to the development of the financial sector in the Czech Republic, related both to the starting point for its development and specific Czech circumstances. These challenges relate to human resources, outdated and inadequate computer systems and dearth of products to meet customer needs. An immediate test of the banking system is its ability to deal with bad debt to state-owned firms and developing countries. To aid in this effort, the government has funded, through the National Property Fund, an institution called the Konsolidacni banka or Consolidation Bank. The purpose of this bank is to help clean up the balance sheets of formerly state owned financial institutions by buying up low quality assets at a percentage of their face value, thus removing them from the books of the banks. Although far from insuring the health of the financial sector in itself, this process has generally been regarded as successful in providing the newly privatized banks with a chance to compete in the financial services market. Due to lack of computerization, there is no nationwide checking system and banks do not offer checking accounts. This is expected to be rectified over the next year or two, although several banks have indicated the desire to pass over checking accounts and move straight into debit cards. Debit cards allow payments to hit bank accounts directly without the time and space consuming use of paper required by checking accounts. However, debit card systems require reliable computer connections between vendors and the banks' computer systems. While desirable, this will take time. Komercni banka has taken the lead in developing a banking card system and other banks are following suit. On the operations side, most payments are made by bank transfer. Cash is rarely used. Computerized systems are being implemented to speed up payments and transfers, which have been troublesome in the operation of the new securities markets. Transfers even within banks used to take days, but have now been whittled down to a more reasonable day for internal bank transfers, few days for domestic transfers and less than a week for international transfers at most major banks. Modern computer systems will permit banks to get a better handle on both their loan portfolios and deposit profiles, allowing for improved management. Identification of market niches and new services which will be valuable for customers will follow. B. Foreign Exchange Controls Affecting Trading Czech crown is internally convertible, but not fully convertible outside of the country. All payments in hard currency are made against invoice, in full, if the Czech company paying the invoice has enough Czech crowns to cover the transaction. The only exception to this is large payments to cover purchases of aircraft or other very large sales, where buyback and offset are still commonly used. C. What Is General Financing Availability Generally, smaller Czech firms have difficulty arranging financing. Sales of U.S. goods up to $30,000 - $50,000 are common; above this threshold some American firms complain that small Czech businesses cannot afford or cannot secure financing. D. How to Finance Exports/Methods of Payment The Czech government is in the process of founding a local Export- Import bank. Most Czech firms are familiar with common terms of payment--letter of credit, cash in advance, etc. Most will not opt to use a letter of credit, however, due to its prohibitive cost. Common are prepayment or partial prepayment with cash on delivery or net 30 days terms. E. Types of Available Export Financing and Insurance The U.S. Export-Import Bank has lines of credit at major Czech banks, and provides insurance through its FCIA program in the United States. See below. 1. The U.S. Trade and Development Agency (TDA) is an independent U.S. government agency which promotes U.S. exports for major development projects in middle-income and developing countries. TDA funds feasibility studies, consultancies, training programs, and other project planning services related to major projects. Consultancy contracts funded by TDA grants must be awarded to U.S. companies. U.S. involvement in project planning helps position potential U.S. suppliers of goods and services for follow-on contracts when these projects are implemented. TDA has been very active in the Czech Republic in the environmental, telecommunications, energy, information management, and food processing/packaging industries. Contact: U.S. Trade and Development Program, Mr. Geoffrey Jackson, SA-16 - Rm. 309 Washington, DC 20523-1602; Tel. 703-875-4357; Fax 703-875-4009. 2. The U.S. Export-Import Bank promotes the export of U.S. goods and services through a variety of loan, guarantee, and insurance programs. All of its programs are available for the Czech Republic. Contact: Mitchell McCauley, Loan Officer, Export - Import Bank of the United States, 811 Vermont Ave., NW, Washington, DC 20571; Tel. 202- 566-8990 or Fax. (202) 377-7998. 3. The Overseas Private Investment Corporation (OPIC) is a self-sustaining, U.S. government agency which promotes growth in developing countries by encouraging U.S. private investment. OPIC's key programs are its loan guaranties, direct loans, and political risk insurance. For Eastern European countries, OPIC also offers an Eastern European Growth Fund, designed to match OPIC funds with private venture capital to finance new business; the Small Business Loan Guaranty Program; and an environmental investment fund. Contact: OPIC, 1615 M Street, NW, Washington, DC 20527. Tel. 202-457- 7183; Fax 202-223-3514. F. Project Financing Available (Lending from Multilateral Institutions and Types of Projects Supported) 1. The U.S. Government offered foreign assistance to the Czech Republic since 1990 in the areas of privatization and economic restructuring; banking and finance, environment, health care and medical services, housing, telecommunications, and energy efficiency. AID programs are currently being phased down. Contact: Mr. Jim Bednar, USAID Czech Republic, U.S. Embassy Prague, Tel. (42/2) 2451-0847. 2. Czech-American Enterprise Fund: A 60 million dollar venture capital fund to promote the development of the private sector and to support the implementation of policies and practices conducive to such development. This fund is designed to provide loans and equity investments, feasibility studies, technical assistance, insurance guarantees, and other help to a variety of small and medium-sized businesses and agricultural concerns. A foreign partner is not required, but the fund looks favorably on U.S.-Czech joint ventures. The Czechoslovak fund was legally established during spring 1991 with directors in the U.S. And the Czech and Slovak Republics. It has now been split into separate funds with a common president resident in Prague. Contacts: In Prague, Mr. Paul Gibeon, Blanicka 28/1008, 120 00 Prague 2; Tel. 42-2-2424-7046; Fax 42-2-2424-6048. In Washington, DC contact the Czech Fund at 1620 Eye Street, NW, Room 703, Washington, DC 20006. 3. The World Bank (IBRD) and International Finance Corporation (IFC) are planning technical assistance loans for Eastern Europe. This money will focus on environmental infrastructure, telecommunications, and transportation infrastructure. Among the technical assistance loans would be monies for an enterprise fund to help local Czech firms negotiate joint ventures or restructure. Contact: Senior Country Operations Officer, The World Bank, 1818 H Street, NW Washington, DC 20433, Tel. 202-473-2970; Fax 202-477- 0710; Tlx RCA 248423 Ms. Janice Mazur, U.S. Department of Commerce Procurement Liaison Officer to the World Bank, telephone (202) 482-4332 or (202) 458-0118; Fax (202) 477-2967. Mr. Vikas Thapar, Chief of Mission, International Finance Corp., Husova 5, 110 00 Prague 1; Tel. 42-2-2440-1402. 4. The Multilateral Investment Guarantee Agency (MIGA) is part of the World Bank group. Its purpose is to encourage foreign investment in developing countries by providing investment guarantees against the risks of currency transfer, expropriation, war, and civil disturbance, and breach of contract by the host government; and by providing advisory services to developing member countries on means of improving their attractiveness to foreign investment. Contact: Mr. Leigh Hollywood, Vice President, Guarantees, Multilateral Investment Guarantee Agency, 1818 H Street, NW, Washington, DC 20433, Tel. 202-473-6168, Fax 202-477-9886, Telex RCA 248423. 5. The European Bank for Reconstruction and Development (EBRD), a new multilateral institution, began operations in London during spring, 1991. The bank's capitalization of 12 billion dollars supports annual lending of about 2.4 Billion dollars per year. EBRD supports private sector development, environmental clean-up, and infrastructure development in Eastern Europe. The U.S. capital subscription to the EBRD totals 1 billion dollars over 5 years. U.S. companies are eligible to compete for and bid on all EBRD-financed projects. Contact: Mr. Tom Kelsey, EBRD/Senior Commercial Officer, Office of the U.S. Executive Director, One Exchange Square, London EC2A 2EH, U.K.; Tel. 44-71-338-6000 or 338-6569; Fax 44-71-338-6487. 6. European Union (EU) funding for environmental projects in Eastern Europe: the EU allocated about 39 million dollars for the Czech and Slovak Republics in 1990. Contact: Mr. Philippe Bourel, Division for International Affairs, Directorate General for Environment, Nuclear Safety, and Civil Protection (DG-XI), Commission of the European Union, Room 10/248, 45 Avenue d' Auderghem, 1040 Brussels; Tel. 32-2-235-3851; Fax 32-2-235- 5665. G. List of Banks with Correspondent U.S. Banking Arrangements Citibank Mr. Karl Swoboda, General Director Evropska 178 160 00 Praha 6 Tel. (42/2) 333-4111 Fax. (42/2) 316-4793 Komercni Banka Mr. Jaroslav Kroh, International Dept. Na prikope 33 114 07 Praha 1 Tel. (42/2) 2422-9324, 2422-9361 Ceskoslovenska Obchodni Banka Mr. Pavel Kavanek, Chairman Na prikope 14 115 20 Praha 1 Tel. (42/2) 233-2000 Fax. (42/2) 2422-5049 Zivnostenska Banka Mr. Jiri Kunert, Chairman Na prikope 20 113 80 Praha 1 Tel. (42/2) 2412-1000 Fax. (42/2) 2422-5140