State Diamond Trader & South African Diamond and Precious Metals Regulator on their 2009/10 Annual Reports

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Mineral Resources and Energy

22 February 2011
Chairperson: Mr F Gona (ANC)
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Meeting Summary

The South African Diamond and Precious Metal Regulator presented its 2009/10 Annual Report. The presentation addressed matters outstanding from the previous meeting. All matters had been resolved for which the Committee expressed appreciation. The SADPMR had received an unqualified audit opinion. There were matters of emphasis of which irregular expenditure to the amount of R 2.7 million was the most important. The Committee approved the Annual Report without objection.

Members asked question about the irregular expenditure and the circumstances under which it occurred, and why no disciplinary measure was taken other than a written warning to the official responsible. Members asked to what extent the SADPMR delivered on its core business. Members also asked questions about the staff complement and its vacancy rate.

The State Diamond Trader also achieved an unqualified audit opinion from the Auditor-General. The most prominent action the SDT took during the year under review was the development and implementation of the Interim Sales Strategy. This was an emergency measure to create a cash flow and create liquidity in the entity when it faced the real possibility of having to close shop, because of a lack of funding. This strategy involved the buying of rough diamonds from producers and selling it off at a fast rate at a profit margin of 4%. It sold to many different clients, but its priority was businesses owned by historically disadvantaged South Africans but this was a very slow process given the economic recession. The entity was insistent that a funding model was urgent and Treasury had to provide this in the Medium Term Expenditure Framework. The Interim Sales Strategy was successful, but it was a survival strategy. The manner in which it operated, did not give priority to start-ups.

Members questioned in depth to what extent historically disadvantaged South Africans benefitted from the SDT’s work and the approach it should take in trying to obtain funding, what stage the SDT staffing would stabilize, the influence of rand-dollar exchange rate fluctuations on diamond trading, as well as the Interim Sales Strategy. The Committee was satisfied with the SDT on all levels except the issue of funding. The Committee would engage with the Ministry to find out what it wanted done. The Interim Sales Strategy would last until the fully fledged Diamond Strategy was in place.

Meeting report

The Minister was in a Cabinet meeting and the Deputy Minister was called to an unplanned meeting at Tuynhuis. Both tendered apologies.

South African Diamond and Precious Metal Regulator (SADPMR) presentation
Mr G Rapoo, SADPMR CEO, said that this report had been compiled at a critical time when the Regulator was taking over from the old South African Diamond Board. There were still policies in place that did not comply with the Public Finance Management Act (PFMA). While not using this as an excuse for the incidents of non-compliance to the PFMA, it would explain the position that the Regulator was in. Since taking over as CEO, in 2010, he had been reviewing and changing many policies, aligning them with the PFMA, and instituting the required systems and controls. This process was still underway.

During the last meeting between the Regulator and the Committee, the Regulator was instructed to embark on certain tasks in order to address the irregularities that existed at the time.

There was a finding of irregular expenditure which was a failure to advertise the internal audit and consulting services. The Auditor-General recommended that the Regulator tendered a request for ratification from the National Treasury as prescribed by the PFMA. This was done and the deviation from the tender process was approved on July 2010. The Chairperson of the Regulator was informed of this via the Department of Mineral Resources (DMR) and the documentation confirming the ratification process was received by the Regulator. This matter had been resolved completely.

The second incident of irregular expenditure was the irregular expenditure on the opening of a bank account which was shared with the DMR, of which the Regulator was a state-owned entity. The recommendation of the Auditor-General was that the Regulator had to pay the unspent portion of the sponsorship amount into the relevant revenue fund and also close the account. By the time the Regulator reported to the Committee, the account had been closed, but the Members did not understand what had happened to the funds in the bank account. The bank account was closed on the 18 March 2010, and the remaining funds were distributed according to the instructions of the Department of Minerals and Energy.

The third issue was non-compliance with legislation because of failure to keep a risk assessment register. The Auditor-General’s recommendation was the risk management register had to be prepared according to the Regulator’s risk management plan, and had to be regularly reviewed and updated. The risk assessment register had been established, approved by the Board on 27 May 2010, and was regularly updated.

For the financial year (FY) 2009/10 the SADPMR received an unqualified audit opinion from the Auditor-General. There were however emphasis of matters, the first one being that during March 2010, errors were discovered in the figures for March 2009. The figures were restated and corrected, and the overall financial statements were revised accordingly.

The second matter of emphasis was irregular expenditure to the amount of almost R 2.7 million, because proper tender procedures were not followed. The official responsible was given a written warning and the necessary applications for ratification to the Accounting Authority had been made as required by Treasury Regulations. The Regulator was still awaiting a response.

There were other legal and regulatory requirements that the SADPMR did not fulfill, the first of which were not having documented and approved internal policies and procedures to address planning, implementation, monitoring and reporting in order to measure performance and progress. This deficiency was addressed by drafting a procedure manual which stipulated how these functions had to be performed. The Auditor-General would confirm this in the audit report for 2010/11.

The second matter was that members of the Accounting Authority (that is, the Board) had to declare their business interest to the Accounting Authority in any matter before it in terms of Section 50(3) of the PFMA. Ten members had not declared their interest. All members of the Accounting Authority have declared their interest for the 2010/11 Financial Year.

The third matter was that, contrary to the Diamonds Amendment Act of 2005, penalties were not charged for the late submission of J-Registers during the year under review and the previous one. Billing procedures were started for both years and were ongoing. The responsible official had received a written warning.

The fourth matter was that two audit committee members were remunerated at a rate above that approved by the Minister. Audit committee members appointed from outside the public service, based on their expertise, could be remunerated according to Regulation 3.1.6 read with Regulation 20.2.3. of the National Treasury Regulations.

Mr Johnson Mthethwa, Chief Financial Officer: SADPMR, said that in overview the Financial Statements showed (page 97 Annual Report) that the revenue of the Regulator had decreased by 25%. The overall operational costs decreased by 16% compared to the previous year. The annual surpluses of the Regulator had decreased from R 19.5 million in 2007/08 to R 5 million in 2009/10. This was due to the grant received by the Regulator from the state being capped at R 40 million. The budgets approved for the last two financial years, were both more than R 40 million. The Regulator had to make up the difference with internally generated revenue. This clearly posed a threat to the Regulator as a going concern.

The spending on the compensation of employees had more than doubled since 2007/08. Spending on goods and services tripled from 2007/08 to 2008/09, and then halved from 2008/09 to 2009/10. The total budget went from R 54 million in 2007/08, to R 65 million in 2008/09, to R 48 million in 2009/10.
The challenges were firstly, ever-increasing operational costs, while the grant from Treasury was capped at R 40 million.

Another important challenge was limited viewing rooms and general capacity, and this contributed to the challenge of access to an adequate supply of rough diamonds. These challenges were in the process of being addressed, because more viewing rooms were being built and other diamond producing African countries had indicated interest in making use of these facilities when they became available.

Other challenges were court cases challenging the amendment of the Diamond Act, access to funding for emerging businesses, competing with financially strong buyers for rough diamonds, and access to markets for polished diamonds for small emerging companies. This industry was run along the lines of pure capitalism, which meant that the big players in the field monopolised access to rough diamonds as well as markets to sell polished diamonds, leaving no space for beneficiation. The SADPMR had a plan to market the polished diamonds of emerging companies through the internet, but more about this strategy would be revealed at a later stage.

On the shortage of operational funds, the Diamond Board used to charge levies for dealers to use their trade centres, and this practice existed globally. The SADPMR did not charge for the use of its trade centres, which was something that needed to change, because it cost the state a huge amount in insurance fees and security. This issue was discussed with Treasury and Treasury asked what provision was made to compensate for the cancelled levy, and the answer was that there was no compensation. The SADPMR had to re-institute the levy in the interest of its own global competitiveness.

Mr H Schmidt (DA) referred to the section in the Annual Report on Irregular Expenditure of R2.674 million spent in a manner that did not comply with the Public Finance Management Act (PFMA). Under the remedial action taken, page 79 of the Annual Report said no action was taken except the individual responsible was given a written warning. Considering the amount involved, this penalty was too lenient and he asked the presenter to comment.

Mr E Lucas (IFP) felt that the people responsible for PFMA non-compliance were treated too leniently. The disciplinary action had to reflect the seriousness with which the state regarded non-compliance to the PFMA.

Mr Rapoo replied that no action was taken, because at that stage when the Annual Report was drawn up, no action had been taken. Subsequently, after receiving the audit opinion, the person received a written warning.

Mr Rapoo replied that Mr Lucas made comments, rather than asking questions. He noted the need for more drastic disciplinary steps. He was only reporting on behalf of the Board. As he reported, the Board was still awaiting approval.

Mr Schmidt referred to page 65 of the Annual Report where the report referred to Trade and other Receivables from exchange transactions that amounted to R 1.767 million in 2010 and R 671 725 in 2009. On the other hand, Cash on cash equivalents at the bottom of the page was R23 million in 2010 and R63 million in 2009. Why?

Mr Mthethwa replied that it was because of estimates by the auditors. They had to estimate the value of the penalties that had not been charged for the late submission of J-registers and came up with a figure of R 725 000. This figure they said had to go into the Debtors balances. There was also an increase in interest due to SADPMR which had not been paid by the banks at the end of the FY, from R 218 000 to R388 000, which was added into that total as well. This explained the huge jump.

Mr Mthethwa replied, on the Cash on cash review by referring to p 51 of Annual Report. Just below note 8 in the middle of the page, there was an entry termed ‘Purchase of Financial Assets’ with the value of R45.6 million. This was a new jargon term used in financial circles. If money was invested in the bank, it was called buying financial instruments. Cash was not lying in accounts not generating interest. It was invested in specific instruments. Money was taken out of the cash into that fund.

Mr Schmidt asked what the SADPMR had done to ensure beneficiation and what measurable outputs it had achieved?

The Chairperson commented that Parliament expected the Regulator to play quite a serious and vigorous role in promoting, in particular, the previously disadvantaged to enter the industry. When looking at page 11 of the Annual Report, it stated that there were 853 new diamond dealer applications and 673 licences issued. Was this during the year under review or the whole period of the existence of the SADPMR? This reflected the pace of beneficiation.

The Chairperson continued that according to page 13 of the Annual Report, the number of licences issued in 2009/10 had decreased. The graph showed that 33 applications were received, 30 applications were in progress and 3 licences were issued. The same scenario repeated itself in the area of diamond research. Six applications, four in progress and two issued. Was this due to a lack of appetite on the part of the disadvantaged? The same scenario repeated itself in the field of precious metals. The SADPMR seemed to be faring badly in these areas. The Committee wanted to understand these figures in the context of the role of the Regulator and its brief to promote the participation of the disadvantaged in the diamond and precious metal industry.

The Chairperson referred to page 15 where the Annual Report reflected that 2 828 035 carats of unpolished diamonds were received and 1 784 318 carats were suitable for export. He wanted to know what role these numbers played in local beneficiation.

Mr Rapoo replied that beneficiation was a challenge. Beneficiation was a requirement of the law, but the economic downturn had a bigger influence on the sale of diamonds than it had on the sale of precious metals. The Beneficiation Strategy was still being consulted and negotiated at this stage. Once finalised, it would empower the SADPMR to be more robust in implementing the law.

Mr Lucas said access to markets had to be addressed urgently, because without access to markets and without returns, emerging businesses in the diamond industry might as well close up shop.

Mr M Sonto (ANC) commended the Regulator that it came back to the Committee with answers to the question the Committee posed in the previous meeting. He wanted clarity on ‘Remedial Actions Taken’. One instruction was that they had to pay the unspent portion of a sum of money into the relevant revenue fund. He wanted an explanation of that.

Mr Rapoo thanked Mr Sonto for his positive comment about the SADPMR coming back with answers. On the repayment of the outstanding debt, this was done in conjunction with DMR. SADPMR approached DMR. There were other outstanding debts that the DMR wanted SADPMR to settle with this money, which was done. There was a letter, which had been forwarded to the Committee, in which the DMR set out how the money had to be dispensed with.

Mr Sonto said that he had the impression, from the ongoing process of charging for late submissions of J-Registers, that the late submissions were allowed to happen, in order to get revenue from fines. He asked whether it would not be better to tighten the process up so that there would be no late submissions.

The Chairperson referred to page 14 of the slide presentation where it dealt with J-Registers. Under the heading of ‘Remedial Action’ it said that the records were being updated and that the billing process had started. How much money was lost and was it recoverable?

Mr Rapoo replied that it was a requirement of the law that if a J-register was submitted after the seventh day of the following month, a penalty had to be paid. SADPMR had to implement the law. The penalty was instituted to force clients to submit J-Registers on time.

Mr Rapoo replied that the next audit would reflect how much money was lost by not charging penalties on the late submission of J-Registers. On the Minister’s approval, an adjustment was made from what was supposed to be paid and what was actually collected. In the next meeting, what was an over-payment, was adjusted.

Mr C Gololo (ANC) asked exactly how many vacancies there were in the Regulator.

Mr Lucas suggested that the Regulator wait until it was out of its financial troubles before it started to fill posts.

Mr Rapoo replied that some of the capacity challenges had been addressed. When he assumed his duties in February 2010, the staff complement stood at 79. It was 97 currently and would increase to 115 with the new infrastructure development. The SADPMR was wrestling with National Treasury, through the DMR, with the operational deficit. The SADPMR wanted to use some of the funds that it retained that had been earmarked for capital projects, for operational projects. If it could be allowed to do that and re-introduce levies, it would manage to function and be competitive internationally.

He continued that the Annual Report stated its capacity as it was in 2009. Many of the issues had been addressed in 2010.Currently most posts were filled and more had been created.

Mr Gololo asked for details about its agreement about training with the Chinese.

Mr Rapoo replied that the Regulator did not have an agreement with the Chinese. He asked Mr Gololo to direct his question to the DMR or the State Diamond Trader.

The Chairperson said that firstly, the Committee had never seen the SADPMR chairperson leading his delegation. It was the second or third Annual Report presentation where the SADPMR chairperson was represented by proxy, and it did not augur well. Whatever the circumstances were, he was accountable to Parliament and had to act accordingly.

Mr Rapoo replied that the message would be taken to the SADPMR board chairperson.

The Chairperson referred to page 8 of the Annual Report, where attendance of Board Meetings were indicated, Mr M Mabuza never attended. The same went for Mr Rapoo. He demanded to know why.

Mr Rapoo replied that Mr Mabuza‘s arrangement was supposed to be on rotational basis with somebody else from the DMR. There was a representative from the DMR in the meeting and he would take the message back that the Committee was unhappy about Mr Mabuza’s attendance. It also reflected negatively on SADPMR. Mr Rapoo said that his name was not supposed to have been on the list, or it should have said not applicable next to his name, as he was not a board member at that stage. He became a member later.

The Chairperson said that he wanted to join those who commended the SADPMR team on resolving and reporting back on the outstanding matters. He also congratulated the SADPMR on its unqualified audit opinion. It reflected the amount of work that went into the SADPMR getting its house in order.

On page 11 of the slide presentation, under the heading  ‘Remedial Action Taken’,  he did not understand the last bullet point that said ‘necessary processes for the ratification of the violation have been submitted to the Accounting Authority as required by Treasury Regulation 16A6.4.’ He asked how long ago this had been submitted. Was the Accounting Authority not taking too long? They were supposed to come back and indicate rejection or acceptance. It was unacceptable that it was still unresolved.

The Chairperson referred to page 15 of the slide presentation to ‘Non-adherence to Requirements’: two employees had been paid more than the Minister agreed to paying them. The amount was not quantified. Could the amount be made known? Could the money be recovered? Did SADPMR procedures allow this to happen?

Ms J Ngele (ANC) also referred to the two audit committee members that were overpaid. The Regulator could not say it was nothing. The pay depended on how many days the people worked.

Mr Mthethwa replied that the extra fees paid to two audit committee members were not supposed to be recovered from them. There was not a big difference between what was supposed to be paid and what was paid.

Mr Kerwin Rana, SADPMR Non-Executive Director, commented on the request for condonation for the irregular expenditure of R2.6 million spent according to page 79 of the Annual Report. R2.1 million, the bulk of the expenditure was spent on an external technical advisor. Due to the nature of the skills required, and because it was essentially the renewal of an existing contract, applying due process would not have changed the outcome. That was why no disciplinary steps were taken. The condonation in terms of the Treasury Regulation was granted, but the Board was clamping down on instances of non-compliance to the PFMA and it would not be tolerated.

Mr Rapoo said that the focus was on the non-adherence to the requirements of the law and not on the amount. The amount was of lesser importance.

The Chairperson said that the issue of impairment of investment had to be explained. The SADPMR kept on complaining that the DMR only allocated R40 million to it for the last three years, but yet it showed a healthy balance sheet and a surplus of unspent funds. Was the SADPMR under pressure to save? For the financial year under review R5 million was unspent. Treasury would want to know why the SADPMR wanted more money if it could not spend its allocation. Was the SADPMR cutting down on its functionality in order to stay within the R40 million budget? In this case it would impact negatively on service delivery. In the Financial Report of the SADPMR, it showed some investment. Treasury would not increase the allocation if an entity had reserves. The CFO needed to unpack the situation. The SADPMR did not show a deficit. If it was a private entity, it would have been a viable going concern.

He continued that among the Challenges on page 20 of the presentation, Limited Capacity was listed as one. The SADPMR have conducted some inspections, but those were quite limited. Yet the presentation stated that the SADPMR had addressed the challenge of a shortage of capacity. It was expected that the Regulator had to be out there in the industry, checking compliance to the legislation that governs the industry. So, in terms of regulating and checking for compliance, the Regulator was not fulfilling its brief.

Mr Rana replied on the capping of funding to the Regulator at R40 million, that there was a dynamic tension between the Regulator being competitive through reducing the cost of doing business in diamonds and precious metals, and the Regulator sustaining itself. This was the conundrum that the CEO was faced with. It needed to waive the fees and the levies in order to create a nurturing environment for emerging business to function in, but, how did it then sustain itself? That was why the old Diamond Board charged fees and generated large incomes, which had been built up over time. It was these very reserves that the Regulator used to reduce fees, but the reserves were running out and the current model was unsustainable.

The Chairperson said that the SADPMR cited access to funding for emerging businesses as a challenge. Whose responsibility was it to stand surety for the emerging operators? Khula Enterprises, the SADPMR, the IDC, SEDA etc? Could the SADPMR not assist these emerging operators to get funding through one of the many state-established agencies that had been established to finance and nurture emerging businesses. Or were they left to fend for themselves in the mining industry, that was known to be a risky and full of challenges?

Mr Rapoo replied that the core business of the SADPMR was not mining but beneficiation. The DMR core business was mining and the DMR used to have a facility to nurture emerging mining operations. Recently the SADPMR had had an engagement on the matter of cutting and polishing. The SADPMR had to explore this further.

Mr Rapoo replied that the number of licences issued for the year was under review. He acknowledged that the numbers included applications in process. The picture currently would be very different from what it was then, in 2009. The organisation was going through a transitional period then.

Mr Rapoo replied that the decreased number of licences was because of the economic crunch 2008-2009. Many cut-and-polish sites closed, because of that. Mines closed down, production went down and as a result beneficiation went down. The SADPMR together with the State Diamond Trader had to look at ways to better the situation regarding beneficiation.

He thanked the Chairperson for commending the SADPMR on returning with answers and on the unqualified audit opinion. He committed to upholding standards in that regard.

Mr Mthethwa said that an amount of R 10million was invested into the Diamond Origins Project, which was run by the sister company to SADPMR, Mintech. This experimental project tried to determine whether there were distinguishing characteristics for diamonds from inside the RSA and how they differed from diamonds from outside the RSA. This process was supported by the DMR and was in line with the Kimberley process. This project was supposed to start yielding results after 3  to 4 years. As no royalties came back after 3 to 4 years, it was felt that the investment had to be impaired.

The Chairperson asked whether the R10 million would be written off or recalled.

Mr Mthethwa replied that once the cash-flow of the SADPMR had been re-created, the investment could be resuscitated.

The Chairperson noted that the representative from National Treasury and South African Police Service (SAPS) had resigned from the Board. He felt that those two organisations played a key role within the context of the diamond industry and asked why they have not been replaced. He asked whether these entities had lost interest.

Mr Rapoo replied that the Board wrote many letters to the Minister to approach these organisations to fill the vacant positions. The Minister had approached the respective organisations, to no avail. He did not know whether they had lost interest. The two entities did not have a choice. They were obliged to have representatives on this Board. That was why there was an audit finding that National Treasury and the SAPS had to have representation on the Board. The non-cooperation from those organisations was a point of frustration.

The Chairperson stated that those bodies had to have representation on the Board. He asked whether the Mr Rapoo had raised it with the Deputy Minister.

Mr Rapoo replied that himself and the Board Chairperson went to see the Drector General. The DG promised to act. He was still awaiting the DG’s response, a few weeks later.

Mr Rapoo came back to the investment alluded to earlier. Re-investment approved was approved for specific capital projects. The organisation desperately needed operational funding. It needed to be operationally active.

The Chairperson commented that there was a marked improvement. The Regulator had achieved a clean audit report. There was a program to work on the matters raised by the Auditor-General, including Matters of Emphasis. He called on the meeting to adopt the report.

The report was accepted without objection by the Committee.

Mr Schmidt enquired whether the Regulator had been called to appear before the Standing Committee on Public Accounts (SCOPA) on the grounds of its 2009/10 audit opinion.

The Chairperson replied that if SCOPA called the Regulator, it would communicate with the Committee in one way or another, so the Committee would be aware of it.

State Diamond Trader (SDT) presentation

Ms Futhi Zikalala, SDT Acting CEO, accompanied by Ms Linda Makatini, Board Chairperson, delivered the presentation. She said that the previous time that the SDT met with the Committee, taxation matters had been discussed at length. This presentation  would focus on the Annual Report, in other words, the state of things at the end of March 2010 and at the end of July 2010 after the Auditor-General’s Report.

One area that had been a source of concern for the Auditor-General in the 2008/09 financial year was the continued existence of the SDT as a going concern. This concern gave rise to Point 1 under the heading ‘Achievements’ in the presentation: Interim Sales Strategy. This had been developed with the Board. It consisted of the SDT buying stock in order to sell to clients, or pre-financing using its own resources to buy production. It resulted in improvements in the turnaround time for stock. The revenue of the SDT had been increased and the interest payable decreased. By the end of the 2009/10 financial year, rough diamond stock was nil. The gross margin improved from R1.8 million to R12.8 million, that is, from 1% to 4%.

The SDT made more purchases and sales. It had increased three-fold from the previous year. It increased the participation of Historically Disadvantaged South Africans (HDSAs) and decreased sales to non-HDSA clients.

The impact of the Interim Sales Strategy was that it eliminated finance costs, it eliminated the accumulation of stock, and it improved the revenue and gross margin and had the ability to accumulate capital as a result of the profits achieved.

During this financial year, the SDT saw 5 765 001. 54 carats worth of diamonds, valued at US $ 616 893 943 during 90 inspections. The diamonds were supplied by nine different producers.

A total of 29 purchases were made from six producers: 474 366.30 carats were bought at a cost of R 317 727 999.98 (41 886 245.84 US$). The average rate was 7.59. All the carats bought were sold again and R 12 790 306.25 was made, representing a 4% profit, up from the 1% profit generated in 2008/09.

In FY 2008/09, 20 clients had more than 50% HDSA ownership, 11 had 26-50%, 7 had 1-25% and 30 had no HDSA ownership.

In FY 2009/10, 18 clients had more than 50% HDSA ownership, 3 had 26-50%, 8 had 1-25%, and 5 had no HDSA ownership.

During the year under review, 2009/10, the SDT sold to 34 clients. 4 were large to medium clients, 15 were mandate clients, in other words, the small-client base, not all HDSA, within which most beneficiation clients fell and 13 were niche clients. There were no Private Public Partnership (PPP) clients. Through the Interim Sales strategy, the SDT was able to sell to two companies that had beneficiation licences and were operating factories.

The SDT had 14 Board members. It had 4 board committees: Executive, Trading, Finance and Audit Risk Management Committees. The Board and its committees met at set intervals during the year and provided strategic leadership.

The SDT had an Acting CEO and Company Secretary seconded by the DMR, a certain percentage of staff seconded by De Beers, 4 members of staff employed on contract, and a consultant CFO. An audit was conducted between April and July 2010 for the year under review. The Auditor-General’s Report indicated full compliance and the audit opinion was unqualified.

Mr H Schmidt (DA) asked what the term ‘Gross Margin’ meant. He asked what the improved gross margin from R 1.8 to R 2.8 million could be attributed to. He was not sure whether the presenter wanted the methodology of the SDT to be revisited, or whether she was happy with the methodology.

Ms Zikalala replied that ‘Gross Margin’ was the margin achieved before any other considerations. It was related to gross profit and was used when calculating finance costs associated with loans. The improved gross margin for the year was despite the economic crisis, because the crisis was in play during this period.

Mr C Gololo (ANC) noted that the SDT dealt in US $. He asked what influence did the weakening of the US $ have on the business of the SDT.

Ms Zikalala replied that fluctuations in the US $ played a big role. The SDT watched it daily. It needed to make sure that the turnaround time was minimal. If the Rand / Dollar exchange became unfavourable, it could mean major losses. Maintaining a high turnover rate mitigated this to a large extent.

Mr M Sonto (ANC) said that the SDT had adopted a strategy that seemed to have yielded good returns. Was there any reason why it was still “interim”? How long would it still be interim, while it seemed to be an effective strategy? How did Point 5 play itself out - increasing participation of HDSAs in local diamond beneficiation, while decreasing it in some respects? He wanted her to explain it in terms of the table on page 30 of the Annual Report.

Ms Zikalala said, on the Interim Strategy, that at the beginning of the financial year, things were really bad. There had been the possibility of the agency shutting its doors. It had to come up with an emergency measure to keep the agency running in order to provide rough diamonds to the industry. The Interim Sales Strategy was formulated. It had timeframes. It was called ‘interim’, because the Board management was looking to see what results it would yield and what would its impact be on the Trader. It was given six months to prove whether it would work or not.

Ms Zikalala said that the Interim Sales Strategy was born out of trial and error. It was an innovative way of doing business. After two years, perhaps ‘interim’ did not apply anymore. It was still being implemented. There were different processes happening at shareholder level. The Interim Sales strategy was making sure that the SDT would be found trading, when everything else came together eventually. There had been a gradual increase of the HDSA component in the client base over time.

Mr Sonto asked whether there was any indication of when the staff complement of this agency would be stabilised, that is, properly arranged and constituted. The staff was either acting, or seconded with one or two permanently employed. Had it been appraised whether the current staff could be funded by entity itself?

Mr Sonto said that the presentation stated that the Accounting Authority had 14 Board members. What was the current state?

Ms Zikalala replied that there were still 14 Members. There were still no representatives from National Treasury or the SAPS.

Ms Zikalala said that the problem of having seconded staff and no permanent staff was linked to the precarious financial situation it found itself in The SDT was very nervous during the economic downturn. It could not hire permanent staff. Currently, the Board was more confident. The Service Level Agreement (SLA) with De Beers would expire within two years. This financial year the SDT put in place measures to train staff. Within two years there would be a full staff complement. There was hope the financial situation would improve. The figures did not remove the need for funding.

Ms Zikalala replied on the matter of inspections and purchases, saying the sum total of goods presented to the SDT by individual producers throughout the financial year was considered 100%.  This did not mean the total diamond production of South Africa for the year. The SDT would then purchase a percentage of production or sometimes did not buy anything if the quality was too poor.

Mr E Mtshale (ANC) asked her to say more about the figures on page 4.

Ms Zikalala replied by taking the entry of Alexkor as an example. Alexkor presented 32 318.66 carats to the SDT. This was the 100% referred to. Its value was R16 837 167. 99. It sold at 520.97 US $ per carat. There were 8 inspection sessions. The SDT purchased 9% of the 100% presented to it. The value was also 9%.

Ms Makatini added that the SDT would buy a percentage of what it had inspected. The rest it did not buy due to poor quality, or unsuitability. It was priced in US $.

Ms Zikalala replied to the question about HDSA ownership or BEE ownership of its 34 clients. 18 had more than 50% HDSA participation and 5% had no BEE participation. The Board agreed that clients at this level have to have HDSA participation, using the criteria that the SDT had set.

Mr Schmidt said that it was an important slide, because it portrayed its core business. If the focus was encouraging HDSA beneficiation, only 4% of its business was benefitting HDSA clients; 45% was sold to 1 to 25% compliant companies. The SDT had to consider whether it was successful in terms of its own evaluation, in other words whether it was achieving what it had set out to do. The figures reflected the reality, intended or not.

Ms Makatini replied that the Board was very aware of the figures, realised its implications and was constantly alerting management to the same reality. When there was stock available to sell, HDSAs were always the priority. Those HDSAs would not always be in the position to buy, in which case other clients had to be considered in order to maintain a turnover rate and generate revenue. Beneficiation remained a challenge. The Board had quarterly meetings with its stakeholders in order to remove obstacles to participation in the form of finance, lapsed licences or a lack of markets. HDSAs remained the priority.

Mr Sonto wanted more clarity on the process of beneficiation. Did it relate to individual employees and clients? According to the records for 2008/9, 30 clients had no HDSA component, but benefitted by 36%. Why did the SDT do business with clients that had no HDSA component? In 2009/10 the figure was reduced to 5 clients, but they benefitted by 0.3%.Why did they remain clients. Up to where does beneficiation stretch? Did it relate to previously disadvantaged employees, or did it relate to the number of disadvantaged communities members in the area where the client was mining.

Mr Schmidt referred to the slide that showed the breakdown of the clients of the SDT in terms of HDSA ownership. He pointed out that only 4% of the trade according to the Annual Report, went to the 18 HDSA owned clients. He questions the value of the beneficiation, if it’s only 4% of the trade.

Ms Zikalala was aware of the picture that the figures painted at face value, but she asked the meeting to consider the circumstances in which these figures were generated. These figures were the result of the previous year. It was the SDT’s first full year of trading. It started with a pilot. The SDT took clients irrespective of HDSA compliance. The Board then said that the HDSA ownership had to be watched.

HDSA ownership had to be proven and clients had to introduce themselves as HDSA. Some have submitted employee trust documents. Some have got partners and through their shareholder certificates have proved their HDSA status. At end of March 2010, it was still standing at 0.

Large and medium clients shut down as a result of the recession. There was an improvement in the sense that the client base became more BEE compliant over time. The Committee had to keep in mind that this was the very competitive diamond industry and the quality of the goods bought was of the utmost importance.  Often HDSA clients did not have the buying power of the bigger players, which meant that high quality gems had to be sold to companies that could afford them, which would often be non-HDSA clients. The SDT had to, through necessity, sell to a mixed bag of clients.

Mr P Dexter (COPE) said that the picture painted by the SDT was very rosy. He wanted them to state the critical challenges they faced

Ms Zikalala said that the SDT took advantage of the opportunity to take a positive stance instead of a gloomy one. This did not mean that there were no challenges. It still needed funding from the state. Funding would pay for operational costs which would make goods available to the SA market at a cheaper rate.

Building relations with the producers remained a challenge. Some producers were resisting the Act. There was the challenge of an increasing number of clients. Part of supporting the beneficiation industry was that the SDT had to supply constantly, which meant that the producers had to increase supply too. The SDT was accessing 8 to 9% of SA’s total production and had a target of 10%. There was a demand for more rough diamonds, thus the SDT could still increase its percentage and stay within the law. Despite measures to counter it, people found ways of taking rough diamonds outside the country. There was a need to inculcate the culture in SA that South African cutters had to feel that they could cut anything. There were challenges in that regard. Some goods were considered ‘Indian Goods’ which the local would not touch.

The Chairperson said that the meeting had to come back to what the agency of the State Diamond Trader was established to do. It had to look at the Act which stated the objectives. When reporting, the organisation had to report in terms of its objectives. This was not happening as expected. He was looking at funds needed by the SDT, separate from the role played by Regulator in giving it permission to perform certain functions. It had to receive funding from Parliament.

According to the Accounting Authorities Report on page 38 of the Annual Report, the performance of the SDT as a going concern had improved. The Committee agreed. When the SDT approached Parliament or the Treasury, for funding, it had to be based on a model. At what stage was that model? It had to take into account the staff complement of the SDT. The service level agreement (SLA) with De Beers was coming to an end. The DMR may also claim its staff back. In the report it stated that the SDT made submissions to DMR in order to be included in the Medium Term Expenditure Framework.

Ms Zikalala said that the business case had been submitted to the DMR and they had had engagements with Treasury. This received no reaction. She feared that the more money that was generated with the Interim Sales Strategy, the less of a priority the funding from Treasury would become. The Board’s feelings on the Interim Sales Strategy were that it was successful, but it was a survival strategy. The manner in which it operated, did not give priority to start-ups. Clients wanted to inspect the goods that they were buying. The interim strategy made it difficult. What management tried to do was: use the strategy to buy stock, so that clients could inspect the goods before buying them. It tried to balance the different interests. This situation favoured the experienced companies.

If the Trader got the funding, there would not be a need for the Interim Sales Strategy. The funding model was as urgent as it was the previous time when the Trader asked for it.

The Chairperson asked where the funding model got stuck.

Ms Zikalala said that it had been submitted to the DMR.

Ms Makatini said that the revised model was submitted to DMR. There was consistent engagement with the Department in terms of the way forward. It was still a work in progress. The continued engagement would yield a finalised model.

Mr Schmidt said that the SDT concept started off from the premise that the SDT would inspect the goods of a mine and buy 10% of the run of mine across the range of quality. Now it seemed that the SDT said that it only wanted 5% but better quality diamonds.

Ms Makatini said that the SDT still bought the run of mine, but bought it with a fair amount of certainty that it had a buyer for the goods.

Mr Sonto read from the response that the funding model was an unfinished product, that certain fora were still interacting with it, and it had not reacedh Treasury yet.

Ms Zikalala said it was submitted to Treasury. Treasury refused to grant anything. It was re-submitted. The SDT kept on asking.

Mr Sonto asked on what the grounds would Treasury refuse to fund a state-owned entity. He thought that perhaps the documents were unfinished. The Committee needed to be informed about the funding model in order to engage Treasury. It also needed the responses that Treasury had given to the SDT and the DMR.

Mr Schmidt asked how the SDT made a profit. Did the SDT have the physical facilities to deal with all the diamonds and money involved?

Ms Makatini replied that it had a set margin to implement. It bought and when selling, it had to make a 4% profit. It had an office, security and insurance to secure everything. The building was configured to provide a high level of security.

Mr Lucas was in great sympathy with the SDT. BEE companies were always under-funded and could not operate. The profit of 4% made no business sense. On page 4, 48 inspections yielded 1 carat in the case of Petra diamonds. De Beers had 6 inspections and yielded 10% carats. What was the rationale?

Ms Zikalala replied that the CEO was working with the producers. Goods came through per the mine. This was an area of contention with De Beers. When it produced goods to the Trader, it presented goods from all its mines all together. All other groups including Petra presented per mine.

The Chairperson said that the SDT had satisfied the Committee on all levels except on the funding model level. The Committee would have to engage with the Ministry to find out what it wanted done. Clear objectives had to be set. The Act was promulgated in 2005. The Interim Sales Strategy would last until the fully fledged Diamond Strategy was in place.

He asked the Committee to apply its collective mind to the Annual Report. He noted marked improvement. It had received an unqualified audit opinion. There was one matter of concern, which was not substantive.

He asked that the Committee allowed the parallel process to run, by which the diamond industry was taking shape. He asked the Committee to separate the two issues.

The Chairperson proposed the adoption of the Annual Report. He called upon the Deputy Minister to appraise the Committee on the broader issues of the Diamond Industry. In 2008/9 the Committee did not adopt the Annual Report, because the SDR was unable to establish clarity on important issues. In 2010 it had problems as a going concern. Now it was a fully fledged entity. They should separate the two processes and adopt the Annual Report.

The Annual Report was adopted without objection.

The Chairperson noted that the Northern Cape Committee Oversight Report had been tabled. It had to be read by committee members and would be discussed at the first opportunity. There was also legal opinion accompanying the report.

The meeting was adjourned.


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