Export Credit Insurance Corporation of South Africa SOC Limited (ECIC)

1. Presentation to thePortfolio Committee on Trade and IndustryRollout of the Interest Make-up export incentive scheme Export Credit Insurance Corporation of South Africa SOC Limited (ECIC) 24 July 2013

2. Ecic representatives Mandisi Nkuhlu Acting Chief Executive Officer Tel: 012 471 3812 or 082 906 3705 MNkuhlu@ecic.co.za Lesego Mosupye Chief Risk Officer Tel: 012 471 3817 or 082 558 4106 Lmosupye@ecic.co.za

3. BACKGROUND ON THE IMU SCHEME • The Interest Make-Up (“IMU”) scheme has evolved since 1994. • The 1994 IMU Scheme was a Rand based scheme. • Given that most export transactions are priced and funded in US Dollars, it became necessary in 2003 to redesign the IMU scheme into a US Dollar based scheme. • Since then the IMU Scheme has been reviewed in 2007, 2009 and more recently in 2012 to benchmark it against international best practice and the prevailing market conditions (e.g. impact of the 2008 financial crisis on US Dollar liquidity and the cost of capital)

4. RATIONALE FOR THE IMU SCHEME • The nature of international competition in global trade entails at least three key elements: • Competition on the quality and price of goods offered by our exporters • Ability of our exporters to offer a technical solution and a funding solution as one package. • Funding solution speaks to the availability of long term finance for the foreign buyers to buy SA goods at competitive interest rates. • Availability of the Political and Commercial risk insurance capacity for the different host countries to unlock the provision of long-term finance.

5. IMU AND ECIC INSURANCE AS ONE PACKAGE • There are four key players in the South African export credit scheme. • Exporters/contractors who can produce quality goods or services that can compete internationally. • Financial institutions (banks or development finance institutions) who have access to US Dollar liquidity and risk appetite to provide long-term finance into cross-border markets (which may be viewed as politically more challenging than the domestic market). • ECIC political and commercial risk insurance to crowd in the financiers to go to markets and countries which ordinarily they would avoid. • Government funded IMU support (managed by ECIC) to ensure that the export credit loans are priced competitively.

6. LINK WITH SA CONTENT • IMU support is not offered on a stand alone basis. • IMU is linked to projects that are eligible for ECIC support. • The relevant eligibility criterion is that the exporter must achieve at least 50% SA Content under the export contract. • Effectively, IMU support and ECIC insurance support is tied to local manufacturing and utilization of SA technology and services to enhance the sustainability of existing jobs and the creation of new ones.

7. SOURCES OF IMU FUNDING AND THE SURPLUS FUNDS • The dti annual budget allocations/transfers. • Special IMU dispensation for the MOZAL transactions which had a formula that required IMU profits to be paid over to ECIC as part of the Interest Make-Up Fund. (“Mozal IMU Profits”) • Interest earned on the Surplus Funds sitting in the Interest Make-Up bank account. • The surplus funds have been utilised to cover sudden spikes in disbursements that exceed the annual budget allocation/transfers from the dti.

8. Funding of imu payments Inflation adjusted dti transfers and payments to financial institutions using 2013 prices

9. imu FUND account Inflation adjusted dti transfers and payments to financial institutions

10. Over the next 3 years the surplus funds in the IMU fund account will be depleted (this graph shows IMU payments incl. new business)

11. PARTICIPANTS AND THE BENEFICIARIES OF THE IMU SCHEME

12. BENEFICIARIES – EXPORTERS • Since inception, 65 export credit policies have been issued by ECIC • Out of these policies, 41 exporters were employed on projects that were supported by ECIC and benefited from the IMU scheme Some of these Exporters Included: • QStarTrading CC, Gauteng – SMT black owned • Omega Risk Solutions, Gauteng - SMT • Likusasa Trading CC, Gauteng • Veecraft Marine CC, Cape Town - SMT • Logichem Equipment Trust, Western Cape • Bell Equipment, Richards Bay KZN • SAAB Grintek, Gauteng • Bateman Engineering, Gauteng • JHI Properties, Gauteng

13. BENEFICIARIES – FINANCIAL INSTITUTIONS • Financial institutions receiving IMU support are • Industrial Development Corporation of SA Ltd • ABSA Bank Ltd • FirstRand Bank Ltd • NedBank Ltd • Standard Bank of SA Ltd (SBSA) • Investec Bank Ltd • CitiBank SA Branch • Standard Chartered SA Bank (SC) • HSBC Ltd SA Branch

14. TYPICAL TRANSACTIONCOPPER MINE IN ZAMBIA - LUMWANA Contract price: US$106 million Buyer: Lumwana Copper Mining Company Project: Engineering, procurement & commissioning of a copper mine & processing plant Main Contractor: Bateman Engineering based in Gauteng Goods and Services amounting to 88.2% of contract price sourced from South Africa More than 30 sub-contractors involved from all over South Africa for contracts worth R100,000 to R150 million

15. ECONOMIC IMPACT OF THE IMU SCHEME Over the period 2008-2012, the ECIC supported projects to the value of R13.9 billion

16. ECONOMIC IMPACT OF THE IMU SCHEME A significant amount of capital investment is destined for mining & infrastructure projects with Zambia, Zimbabwe & Tanzania being beneficiaries

17. ECONOMIC IMPACT OF THE IMU SCHEME R15.1 billion is estimated to have been added to the South African GDP

18. ECONOMIC IMPACT OF THE IMU SCHEME Over 55,000job opportunities are estimated to have been created/sustained

19. ECONOMIC IMPACT OF THE IMU SCHEME In line with IPAP objectives, R6.9 billion ofvalue added exports were facilitated

20. ECONOMIC IMPACT OF THE IMU SCHEME Approximately R4.0 billion was added to the national fiscus compared with R631 million paid out under the IMU scheme and net claims of R133 million that were paid by ECIC.

21. FEATURES OF THE NEW IMU SCHEME • It is an evergreen scheme. • May be reviewed every three years without interrupting its operation. • Loans with a shorter repayment period (e.g. 5yrs are much more cheaper than loans with a very long repayment term). • Smaller contracts which generally have shorter repayments will benefit from the cheaper interest rates under the new IMU scheme. • Fixed term interest rates are also available for big infrastructure projects that require long-term fixed funding.

22. OUTLOOK FOR THE NEAR TERM • The price competitiveness of the new IMU scheme will lead to increased utilisation. • The projected increase in the pipeline of projects and new commitments will stretch and exceed the current budget allocations made in the MTEF (Medium Term Expenditure Framework). • Given the two year lead time before the surplus funds in the IMU bank account run out, there is time and space to revisit the budget assumptions and future budget allocations.

23. Concluding remarks • The demonstrable positive economic impact of the IMU export incentive scheme creates a strong basis and justification for an increased budget allocation going forward. • The increased demand and improvements in the efficiency of the disbursements of the funds bodes well for the effective rollout of this export incentive scheme. • ECIC’s strong focus on the African continent makes the IMU export incentive scheme a critical component of the strategic interventions required to access new export markets on the continent. • It is important to diversify the country’s export basket and lessen over reliance on our traditional markets such as the EU.