VIII. TRADE AND PROJECT FINANCING The Banking System South Africa's well-developed banking system resembles Britain's system rather than America's and is composed of three key elements: the South African Reserve Bank (the country's central bank) , private sector banks (commercial banks, merchant banks, and general banks), and building societies. The legal distinctions between commercial, merchant, and general banks have eased in recent years, and South Africa's major bank holding companies typically own several banks geared to various clienteles. Four major banking groups dominate the industry and control an estimated 80 percent of total banking assets. These groups include Amalgamated Banks of South Africa (ABSA), First National Bank of Southern Africa, Nedcor, and Standard Bank Investment Corporation. Banking institutions are regulated by the Banks Act of 1990 which stipulates compliance with specific prudential requirements regarding capital, cash reserves, liquid assets, and large exposures. South African banks are currently required to maintain a capital-to-risk weighted asset ratio of seven percent; this ratio will be raised to eight percent in 1995. Foreign Exchange Controls Exchange controls are administered by the South African Reserve Bank (SARB)'s Exchange Control Department and through commercial banks that have been authorized to deal in foreign exchange. All international commercial transactions must be accounted for through these "authorized dealers." SARB Exchange Control Division P.O. Box 3125, Pretoria 0001 Telephone: (27 12) 313-3911 Fax: (27 11) 313-3197 Currency: The monetary unit of South Africa is the rand (R), which is divided into 100 rand cents (c). South Africa maintains two types of currency, the commercial Rand and the financial Rand, for which different rates of exchange are quoted. The financial Rand is used as a non-resident investment currency and is discussed in Chapter VII. The commercial Rand is used for international trade transactions. Financing Availability South Africa's sophisticated financial sector has some 15 commercial banks that can provide overdraft facilities and thirteen merchant banks that can provide short to long term credit. Only banks deemed to be "authorized dealers in foreign exchange" can handle foreign trade payments. There are 32 foreign banks represented in South Africa, including Bank of Lisbon, French Bank of Southern Africa, the South African Bank of Athens, and Banque Commerciale Zairoise; and at least ten more have submitted applications to establish operations in the country. Key areas of business for foreign banks include trade finance, letters of credit, foreign exchange activities, and services to offshore investors. A number of European finance and development institutions are opening offices in South Africa such as the European Investment Bank and the United Kingdom's Commonwealth Development Corporation. Methods of Payment Letters of Credit or documentary credits (DC) -- as they are called in South Africa -- are the customary way to finance imports into South Africa. Documentary credits are documents issued by a bank on behalf of an importer in favor of a beneficiary, usually the exporter. The most commonly used documentary credits are irrevocable credits and confirmed irrevocable credits. If the exporter is concerned about the reliability of the importer only, he should use an irrevocable DC. If the exporter is also concerned about the standing of the issuing bank and/or the standing of the importer's country, he should use a confirmed irrevocable credit. In South Africa all credits issued are subject to exchange control regulations and where necessary, a South African import permit. South African exchange control regulations stipulate that payment of imports can only be effected by authorized banks against submission by their customers of documentary proof that the goods were imported into South Africa as evidenced by invoices and shipping documents stamped by South African customs. An exception is when South African banks have opened documentary import letters of credit in favor of foreign exporters. Payment in those instances may be effected against presentation by the exporter of invoices and shipping documents to the foreign negotiating bank before the goods have arrived in South Africa (but after they have left the United States). If credit is available, payment will take place upon presentation of the documents. The method of payment can be by teletransmission or by airmail depending on the reimbursement clauses. The advising bank should, if possible, be the same bank as the exporter's bank. If the exporter's bank is unknown, however, the South African bank will advise the credit through a correspondent bank known to it in the United States and, if possible, in the exporter's city. Quotations and Terms of Payment: American exporters should offer quotations based on the f.o.b. value at the port of export. As a general rule, such quotations should also include a statement of the actual charges for freight and insurance plus any additional charges to the port of delivery. Quotations are usually in terms of the currency of the country of origin. The terms of payment for imported goods vary according to the type of buyer and the buyer's access to capital. Large organizations such as the government or mining companies tend to transact business on a sight-draft basis, while small companies tend to operate on documents against acceptable terms. Payment between 80 and 120 days after acceptance is most common, but terms may vary between 30 and 180 days. For larger orders of capital equipment, longer terms are often required. It is advisable to ship on a letter of credit, sight letter of credit, or 30 day letter of credit basis that the importer can use as a negotiating instrument to expedite the payment transfer. Payments for shipments made on an open account basis will have a lower priority for foreign exchange, possible delaying payment to the exporter. The payment transfer can be affected within 24 to 48 hours after the importer presents a valid import permit and proper documents to his or her bank. Foreign Exchange for Import Purchases Generally, the South Africa Reserve Bank's Exchange Control Department does not provide foreign exchange in payment of imports prior to the date of shipment or dispatch of goods to South Africa. When South African authorized dealers of foreign exchange open documentary import letters of credit in favor of foreign exporters, payment is effected against presentation by the exporters of invoices and shipping documents to the foreign negotiating bank before the goods have arrived in South Africa. Foreign currency payments for imports may only be made against the following documents: (a) received for shipment bills of lading; (b) on-board bills of lading; (c) air waybills of lading; (d) parcel post receipts; (e) carriers' receipts or railroad bills of lading giving title to the good and evidencing dispatch to a port for shipment to South Africa; or (f) arrival notifications issued by Ellerman and Bucknall (Pty) Limited, Safmarine Limited, and the Transatlantic Shipping Agency (Pty) Limited. Foreign exchange may be provided for advance payments not exceeding 33 1/3 percent of the ex-factory cost of capital goods to be imported provided that 1) South African banker is satisfied from the production of documentary evidence supplied by the overseas manufacturer that the order would otherwise be refused, 2) that such payment is normal in the trade concerned, and 3) the importer has applied to the South African Reserve Bank and the application is justified. The first shipment from a new supplier, the lack of availability of the imported equipment, or its superior quality to what is available in South Africa, are all examples of conditions for proper justification. Higher payment amounts (millions of dollars) are less likely to receive pre-payment permission. Foreign exchange may also be provided on a cash-with-order basis to cover the cost of permissible imports within the limit of R5,000, but authorized dealers must satisfy themselves by the subsequent production of the usual documentary evidence that the exchange provided has been used for the purposes stated and that the goods have been imported into the Republic. Authorized dealers must in due course insist upon the presentation to them of original bills of entry import or local parcel post receipts as evidence that goods, in respect of which transfers have been effected in terms of the above rules, have been received in South Africa. Such documents will also be boldly stamped "Exchange Provided." The date of the exchange transaction should be inserted under the stamp and, in the event of a part payment, the amount concerned should be stated. Customers are advised to retain the stamped documents for at least two years for inspection purposes. Air Shipments The South African Reserve Bank amended the payment procedures for imports consigned by air in March 1992. The new regulations allow the South African importer to obtain foreign exchange to meet import payments for goods consigned by air on a cash-on-delivery basis before the goods are cleared through customs. The documentation required for this transaction is a copy of the relative air waybill bearing an original stamp with the words "For Exchange Control Purposes Only" and dated and signed by a member of the South African Airfreight Forwarders Association. Inquiries may be addressed to: Airfreight Forwarders Association The Secretary Private Bag X8, Aukland Park 2006 Telephone: (27 11) 974-5375 Fax: (27 11) 974-5821 Types of Available Trade and Finance and Insurance The United States' Export-Import Bank and the Trade and Development Agency offer their programs to support U.S. trade and investment activities in South Africa. The South African government has a number of development agencies that provide project financing. With the lifting of international sanctions against South Africa, multilateral lending agencies will make their financing programs available to projects in South Africa. Export-Import Bank of the United States: The Export-Import Bank of the United States' (Eximbank) loan and guarantee programs are available to support U.S. sales of goods and services to purchasers in South Africa. Export credit insurance is available from Eximbank's agent, the Foreign Credit Insurance Association (FICA) Management Company, Inc.. Eximbank can provide financing for up to 85 percent of the U.S. export value. This financing is provided through guarantees to commercial banks or through direct loans. Eximbank's guarantee is irrevocable and covers 100 percent of commercial and political risk and 100 percent of principal and interest. Repayment terms range from one to ten or twelve years, depending upon the value of the sale or nature of the project. Eximbank also operates a Short-Term Insurance Program through its Bank Letter of Credit Insurance Policy. This program insures a U.S. bank against commercial and political risk. Export-Import Bank of the U.S. 811 Vermont Avenue, N.W. Washington, DC 20571-0999 Telephone: (202) 566-4490 Fax: (202) 566-7524 Export-Import Bank of the U.S. West Coast Office 11000 Wilshire Blvd, Suite 9103 Los Angeles, CA 90024 Telephone: (213) 575-7245 Fax: (213) 575-7428 Project Finance U.S. Trade and Development Agency (TDA): TDA provides grants to fund feasibility studies and other planning services for major projects which are economic development priorities of host governments. TDA-funded studies must be performed by a U.S. company or consortium. TDA projects must present an opportunity for substantial sales of U.S. goods or services relative to the cost of the requested assistance. U.S. Trade and Development Agency Africa Division SA-16, Room 309 Washington, D.C. 20523-1602 Telephone: (703) 875-4357 Fax: (703) 875-4009 Development Bank of Southern Africa (DBSA): DBSA was orginally formed in 1983 by the South African Government to fund development projects in the "independent" black homelands of Transkei, Ciskei, Venda, and Bophuthatswana. Today DBSA is expected to play a major role in mobilizing and providing loan finance and technical assistance for major development projects in South Africa and in neighboring southern African countries. DBSA membership is open to any country in southern Africa. It functions as a "banker's" bank, providing soft loans to governments, local authorities, development corporations, and nongovernmental organizations, which in turn make loans to individuals in bank-approved projects. DBSA's financial resources include share capital contributions from its members and loans obtained from financial markets. Grant aid from the South African Government comprises an important source of DBSA's funding. Development Bank of Southern Africa P.O. Box 1234 Halfway House 1685, Midrand Telephone: (27 11) 313-3911 Fax: (27 11) 313-3086 Industrial Development Corporation of South Africa, Ltd. (IDC): IDC's import finance scheme involves credit and guarantee facilities for local industrialists to finance the importation of capital goods and services. Impofin (Pty) Limited is a wholly-owned subsidiary of IDC which can conclude line-of-credit agreements with banks in most of the supplier countries to South Africa to enable South African importers to purchase plant and equipment on extended credit terms. The IDC recently established a special Black Economic Empowerment Scheme to make its financing programs available to black South African enterprises, entrepreneurs, and employer organizations. The scheme can provide finance for the creation of a new enterprise, the expansion of an existing enterprise, and the acquisition of control or a significant stake in an existing enterprise. Mr. Jan de Bruyn Senior General Manager IDC 19 Fredman Drive Sandton, P.O. Box 784055 Sandton, 2146 Telephone: (27 11) 883-1600 Fax: (27 11) 883-1600 Small Business Development in South Africa: For a comprehensive listing of organizations in South Africa that support small and medium business development, please refer to the OPIC/Department of Commerce publication entitled Africa: A Guide to Business Finance for U.S. Firms. African Development Bank: The African Development Bank (AFDB), headquartered in Abidjan, Cote d'Ivoire, is an international financial institution created by Africans in 1963 to promote the economic and social development of its member African countries. Founded with initial capital resources of USD 250 million, it has authorized capital today of over USD 22.3 billion. The bank belongs to the African Development Bank Group (ADBG) which also includes the African Development Fund (ADF) and the Nigerian Trust Fund (NTF). The AFDB makes loans to development projects in 51 countries in Africa. The ADB provides development financing on concessionary terms to the poorer African member countries. The NTF was established by the Government of Nigeria in 1976 to assist in the development efforts of the poorer ADB members. The ADFB has 21 non-regional members. The United States joined in 1982. CONTACTS: U.S. Department of Commerce Liaison Office to the U.S. Executive Directors Office African Development Bank Ave. Joseph Anoma 01 B.P. 1387 Abidjan 01, Cote D'Ivoire Tele: (225) 21-46-16 Fax: (225) 22-24-37 Office of Multilateral Development Banks U.S. & Foreign Commercial Service U.S. Department of Commerce Room H-1107 Washington, D.C. 20230 Tele: (202) 482-3399 Fax: (202) 273-0927 The World Bank: The World Bank, as of May 1994, does not have any projects in the pipeline, and awaits further consultation with the new South African government. The World Bank anticipates that there are five areas of potential future World Bank involvement in South Africa. These are trade and industrial reform to open the South African market and enhance competitiveness; land reform, focussing on research and extension services for small farmers and community development; medium sized enterprise development, possibly involving a franchise equity fund; education reform; and urban community development through the provision of essential services such as water, sewage, and garbage removal. Mr. Isaac Sam Chief of Mission World Bank Resident Mission in South Africa P.O. Box 41288 Craighall Park 2024 Telephone: (27 11) 325-0560 Fax: (27 11) 325-0580 The International Bank for Reconstruction and Development: The International Bank for Reconstruction and Development (IBRD), a member of the World Bank group makes long-term loans at market- related rates primarily to developing nations. The International Development Agency (IDA), the soft loan window of the World Bank, lends to the poorest of the development countries. Both the IBRD and IDA work to promote broadly based economic growth and frequently focuses on structural adjustment, sectoral reform and individual project lending and operate under the same set of procurement guidelines. Typically the World Bank does not finance the entire cost of a project. Rather, it finances the components of a project purchased with foreign exchange, which on average is about 40 per cent of the total project cost. Each project may cover a wide variety of sectors and can involve anywhere from one to hundreds of separate contracts providing export business opportunities for suppliers worldwide. CONTACTS: U.S. Department of Commerce Liaison to the U.S. Executive Directors Office International Bank for Reconstruction and Development 1818 H. St., NW Washington D.C. 20433 Tele: (202) 458-0118 Fax: (202) 477-2967 Office of Multilateral Development Banks U.S. Foreign Commercial Service U.S. Department of Commerce Room H-1107 Washington D.C. 20230 Tele: (202) 482-3399 Fax: (202) 273-0927 Africa Project Development Facility (APDF): The World Bank's Africa Project Development Facility (APDF) will be making its finance programs available to support medium-sized South African enterprise development. Enterprises which have a minimum annual revenue of R.5 million ($137,000) can apply. Mr. Alexander Keyserlink Director Africa Project Development Facility Washington, D.C. Telephone: (202) Fax: (202) United Nations Development Program (UNDP): The United Nations' Development Program (UNDP) is represented in South Africa. Mr. Lakhdar Brahimi Special Representative of the Secretary General Box 99-005 Carlton Center Johannesburg 2001 Telephone: (27 11) 331-2311 Fax: (27 11) 331-7411 Banks in South Africa with Correspondent U.S. Banking Arrangements ABSA (with Chemical Bank) Standard First National Nedbank (with Bankers Trust, Chase Manhattan, Chemical Bank, Citibank, and Morgan Guarantee Trust) Banks in South Africa with Correspondent Worldwide Banking Arrangements ABSA Bank Limited Bank of Lisbon International Limited Bank of Taiwan (South Africa) Limited Boland Bank Limited FirstCorp Merchant Bank Limited First National Bank of Southern Africa Limited French Bank of Southern Africa Limited International Bank of Southern Africa - S.F.O.M. Limited Investec Bank Limited Nedcor Bank Limited Rand Merchant Bank Limited Societe Generale South Africa Limited Standard Bank of Bophuthatswana Limited Standard Merchant Bank Limited The South African Bank of Athens Limited The Standard Bank of South Africa Limited UAL Merchant Bank