State Diamond Trader, South African Diamonds and Precious Metals Regulator, Petroleum Agency South Africa on their 2011 strategic plans

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Mineral Resources and Energy

27 June 2011
Chairperson: Mr F M Gona (ANC)
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Meeting Summary

The State Diamond Trader, South African Diamonds and Previous Metals Regulator and the Petroleum Agency South Africa presented their strategic plans for the 2011/12 year. Presentations included the goals and challenges of these bodies. Problems with funding and reporting were raised by all three entities.

The State Diamond Trader and the South African Diamonds and Precious Metals Regulator were interrogated about the Kimberley Process, especially the Chairperson of the State Diamond Trader’s alleged importation of diamonds from Zimbabwe. Other issues such as beneficiation and the day-to-day running of these entities were raised.

The salient issue of ‘fracking’ in the Karoo was raised by Petroleum Agency South Africa who briefed the Committee on what steps were being taken on the issue, especially the balance between ensuring environmental integrity and economic development. The status of the Agency was also queried, as it reported to two ministries.

Meeting report

State Diamond Trader (STD) presentation
Ms Futhi Zikalala, Acting CEO: State Diamond Trader, outlined the organisation’s mission, as well as strategic goals which included ensuring that the organisation was sustainable and profitable, ensuring efficiency and professional management, promotion of efficient governance, and ensuring constant access to rough diamonds.

Ms Zikalala noted that in order to stabilise operations, a human resources plan had been implemented from 18 February 2011. Challenges to the SDT included securing state funding, run-of-mine purchasing and availability of goods for increased local beneficiation. Only 6% of the diamonds purchased locally were of sufficient quality for local beneficiation groups. Additionally, there was a tax burden considering the lack of financial contribution by the state.

Highlights included the fact they had eight trainees currently being trained, especially considering the SDT’s limited resources. The SDT viewed diamond trading as a growing industry. Clients had grown from 34 to 60 in 2010/11. There was also facilitation of training for clients which was ongoing.

Mr Gololo (ANC) asked about the SDT’s tax burden. Was tax 28% irrespective of profits involved?

Ms Zikalala replied that the SDT was taxed as a normal corporate entity.

Mr Gololo asked for the criterion used for training. How were trainees recruited?

Ms Zikalala replied that adverts were national and did not specify diamond producing areas. However the medium used to advertise positions reached those areas, for example Kimberley.

Mr Schmidt (DA) asked if the activities since February 2011 had been completed, specifically related to trading in diamonds with South Africa’s neighbouring countries.

Ms Zikalala commented on relations with diamond producing countries in Southern Africa - which was as reflected in the SDT’s presentation.

Mr Schmidt asked if there was an Act that dictated the trade in diamonds with South Africa’s neighbouring states.

Ms Zikala noted that according to the Diamond Amendment Act, the SDT could buy diamonds from any diamond producing country.

Mr Schmidt asked if the SDT had imported diamonds from the Marange (Zimbabwe) region. Particularly whether the Chairperson of the SDT, on behalf of the SDT, had imported diamonds from that region?

Mr Schmidt noted the Kimberley Process with relation to the importation of diamonds from Zimbabwe. Allegations in the media were that the integrity of the Kimberley Process would be affected by the stance of South Africa, particularly in the Marange region. Mr Schmidt looked at the administrative decisions of the Kimberley Process, which he quoted. The allegation was that there were no Kimberley Process decisions that allowed for the import of those diamonds.

Ms Zikalala answered that Board members were all in some way involved in the diamond industry. The SDT chairperson, Advocate Linda Makatini, was involved in the diamond industry. Conflict of interest was declared annually and at each Board meeting. The SDT was aware that the chairperson, or her company, had imported diamonds from Zimbabwe. This had been declared by the chairperson. On 19 March 2011 the Kimberley Process chairperson had made an administrative decision to accept diamonds from Marange, after which Ms Makatini had imported the said diamonds. Ms Zikalala added that there were specific areas in Zimbabwe, including Marange, from which it was acceptable to import diamonds. This was ratified at an inter-cessional meeting of the Kimberley Process held in Democratic Republic of Congo on 23 June 2011.

Ms Zikalala added that a political decision had been made to import diamonds from Zimbabwe. If the SDT was able to, it would have been able to import diamonds from Zimbabwe. However, the SDT had not imported diamonds from anywhere in the world. Any private sector company in South Africa who wanted to import diamonds from those compliant areas, could do so.

Mr Schmidt replied that the Kimberley Process chairperson, according to his knowledge, had no power to decide. Was there a unanimous decision by the Kimberley Process as opposed to a decision by its chairperson?

The Committee Chairperson noted that there was an administrative decision that had been made by the Kimberley Process. Compliant mines in areas in Zimbabwe were administratively decided to be acceptable to the Kimberley Process. He commented that there needed to be a briefing session on the Kimberley Process for the Committee, especially whether such an administrative decision was legal or not.

Ms Bikani (ANC) commented that the presentation seemed vague and abstract and unimpressive. There was little sense of development and improvement in the SDT.

Mr Bikani noted that previously De Beers had seconded staff, and wanted to know if this was still the case.

Ms Zikalala replied that this was still the case. However in October 2012, it was envisaged that the eight trainees would take over from these seconded employees.

Ms Bikani asked if there was further information about the SDT’s Audit Report, especially if tax was being paid.

Ms Zikalala noted that tax had been paid and the last Auditor General’s report did not raise issues related to tax, other than about roles and responsibilities surrounding that.

Ms Bikani wanted to know what the SDT funding model was and wanted an explanation of that model with relation to the SDT strategy.

Ms Zikalala noted that National Treasury and the Department were being engaged. In the growth of the business of the SDT, turnover had increased, and the gross profit was R36 million in the previous year. This had enabled the SDT to fund its strategy to an extent. Operational expenditure was just over R12 million in the previous year, so gross profit was able to fund the SDT strategy.

Ms Bikani asked what percentage of diamonds were beneficiated locally.

Ms Zikalala replied that local beneficiators specified that 85% of the diamonds procured by the SDT were not suitable. Only about 6% of those diamonds were actually cut and polished in South Africa. Larger companies helped improve this figure to about 7% of diamonds beneficiated locally.

Ms Bikani asked if time frames mentioned in the SDT’s presentation, especially the submission of a compelling business case, had been met. Had these aspects been completed?

Ms Zikalala apologised to the Members because the column labelled 2010 should have been labelled 2011. The business case had been submitted to the Department, which was analysing it.

Mr Schmidt asked if the strategic plan was aligned to the Millennium Development Goals, and national policies on job creation.

Ms Zikalala replied that it was important for the SDT to be profitable, which would allow it to promote employment and jobs.

The Chairperson noted that there was no quorum, so adopting the strategic plan was set aside.

SA Diamond and Precious Metals Regulator (SADPMR) presentation
Mr Levy Rapoo, SADPMR CEO, outlined the background, purpose, vision, mission and values of the SADPMR. There were five strategic objectives:
▪ To ensure competitiveness, sustainable development and job creation in the diamond and precious metals industry;
▪ To ensure effective transformation of the diamond and precious metals sectors;
▪ To ensure equitable access to resources for local beneficiation;
▪ To ensure compliance with legislative requirements,
To improve organizational capacity for maximum execution of brilliance.

Challenges for the SADPMR included a shrinking budget allocation; a declining diamond industry; the complexity involved in beneficiation, for example where intellectual property was held by countries such as Germany and Japan in metal development; lack of access to rough diamonds by beneficiators; and gaps in legislation which the Department was working on, as well as litigation. Recently the SADPMR had won some court cases.

Mr Schmidt commented that there should be an increase in beneficiation along with increased turnover (as mentioned by the State Diamond Trader). Did this translate to increased beneficiation?

Mr Rapoo replied that increased activity did not necessarily result in increased beneficiation. This was a problem that the organisation was dealing with.

Mr Schmidt asked if there had been an increase in diamond polishing workshops or centres, such as the current one in Kimberley?

Mr Rapoo responded that a project was underway with the Deputy Minister and the Department. The problem was often obtaining rough diamonds in these areas. During the recession, production of rough diamonds declined which had impacted on these workshops. Training was being targeted through using the existing industry and the social responsibility of that industry to help train people.

Mr Schmidt commented on the minute keeping by the SADPMR, and asked if it was true that the Minister had changed the minutes related to Ms Makatini’s ‘parcel’. Did the Minister influence the recording of the Minutes?

The Chairman of the Board, Mr Steve Phiri noted that the minutes were a true reflection of the meeting on 4 May. He had not been in contact with the Minister nor the Deputy Minister about this issue.

Mr Gololo asked if any lessons had been learnt from other countries like Japan in terms of beneficiation of metals.

Mr Rapoo replied that engagement with Germany and Japan had begun.

Mr Gololo asked what the criteria were to give licences for beneficiation.

Mr Rapoo replied that a person must have SARS and police clearance. The applicant also needed premises in which to operate. Subsequently the applicant was assessed in terms of documents and the premises would be inspected. Various licensing officers were involved. Legislation had to be complied with.

Ms Bikani commented that the trends of this presentation were similar to the SDT, which were both vague and did not give clear indications of developments and challenges. For example, the budget and funding was mentioned as a challenge, but how were budgets being augmented by the SADPMR?

Mr Rapoo responded that there were engagements with National Treasury to allow the SADPMR to levy small charges to help defer costs. Insurance was a major cost to the SADPMR.

The Chairperson asked for more information about including other countries. Did this involved importing diamonds from other countries? If so, did the organisation have funds available?

Mr Rapoo noted that the tender system was unique to South Africa. Mr Phiri added that they were in discussions with the Minister about creating a free-trade zone to facilitate diamond trade in South Africa.

The Chairperson asked about the inspections the SADPMR conducted. Was the organisation adequately capacitated?

Mr Rapoo noted that the SADPMR had 13 inspectors which were enough.

The Chairperson commented on the problems involved in beneficiation, especially in platinum. If beneficiation were not possible, would South Africa remain an exporter of platinum?

The Board Chairperson, Mr Phiri, commented that the SADPMR was still waiting for a beneficiation strategy from government, a legislative framework was required to promote economic development. Also big producers such as Angloplats supplied large users and this chain needed to be broken.

Mr Schmidt commented that the value chain was very difficult to break in platinum. There was a beneficiation strategy document, which Mr Schmidt thought was dated 8 June, which the Committee needed to discuss.

Mr Rapoo commented that if Parliament legislated for the purpose of beneficiation then this value chain could be broken. Government should not be hamstrung by whatever agreements already existed.

Mr Schmidt criticised the SADPMR by noting that figures were not forthcoming from the entities involved. Statistics were very difficult to come by which made oversight difficult.

Mr Phiri stated that those figures, especially those based on beneficiation, existed within the SADPMR. The Annual Report would reflect these. Mr Piri confirmed that the SADPMR was the body that kept these figures.

Mr Rapoo commented that mining production figures were not regulated by the SADPMR, only export and import figures. The SDT also had records. The Annual Report would also contain this information.

The Chairperson pointed out that the Minister had submitted the Department’s proposed strategy for beneficiation to Cabinet which needed to be discussed.

There was no quorum to adopt the SADPMR strategic plan.

Petroleum Agency South Africa (PASA) presentation
The CEO of the Petroleum Agency of South Africa (PASA), Mr Mthozami Xiphu, outlined the organisation’s strategic role, vision and mission. The PASA strategy map outlined the goals of the agency, which were:
▪ Ensuring responsible oil and gas production;
▪ Promoting exploration of oil and gas in South Africa;
▪ Ensuring preservation of and access to data;
▪ Ensuring a strategic, focussed and sustainable organisation;
▪ Ensuring a secure and enabling work environment;
▪ Ensuring financial viability.

The current threats and opportunities to PASA included:
The threats and opportunities to PASA included:
▪ Current financial reserves were to deplete by 2013/2014 as a result of changes to legislation;
▪ Limited operations, for example, surveys had had to be cancelled as a result of limited funding;
▪ Difficulty in appointing new staff resulting from the aforementioned lack of funds and requirements of the Agency to be frugal. Staff were also only employed on a contact basis of between one and two years.
▪ The Extended Continental Shelf Claim (ECSC) project funding for the final phase has been delayed. A further request for funds had been made in order to complete the project. Administrative and legal hiccups hade resulted between the Department of Energy and Treasury which had resulted in delays. Bridging funding had had to be provided.
▪ Establishment legislation, namely that there was no Act of Parliament to establish the Agency formally, which has caused a delay by Treasury. Legislation was being drafted to directly establish the Petroleum Agency which would hopefully be completed within this financial year.
▪ Shale gas exploration. Agencies involved would not compromise on the environmental impacts of hydraulic fracturing techniques. However this was still a huge opportunity

Mr Schmidt commented that PASA had a funding concern. Its function lay within the Department of Mineral Resources. Mr Schmidt mentioned funding by means of the “Equalisation Fund”. He noted the difference between the comparative and competitive advantages of South Africa mentioned in PASA’s presentation. Could Mr Xiphu clarify?

A member of the delegation responded that comparative advantages came first, and obviously included South Africa’s strategic reserves, followed by competitive studies and advantages.

Mr Schmidt wanted to know from where the ‘current reserves’ came.

Ms Olivia Mans, Chief Financial Officer at PASA, responded that there was a surplus from the previous years. The ‘depleted funds’ referred to came from licence and permit fees from previous years. From March 2010 those funds had gone directly to National Treasury. This resulted in uncertainty for the Agency going forward.

Ms Bikani noted that the dates had been changed, under the Strategic Objectives dealing with exploration and production of oil and gas in South Africa on page 4 of the presentation document.

Mr Gololo asked for clarity on business strategy objectives. What did the percentages indicate?

Mr Xiphu responded that those percentages were weightings.

The Chairperson expressed the view that both the funding model problem and PASA’s establishment legislation should have already been fixed by this time. What were PASA’s timelines in bringing the Bill to the Committee? What was the funding model agreed on with the Department of Mineral Resources?

Mr Xiphu responded that as long as its submissions had been made on the Bill that was all PASA could do as it was in the Department’s hands. There had been hiccups in the process. However the issue of funding had been discussed with the Department of Mineral Resources and was being followed up.

The Chairperson also noted PASA’s dual reporting to the Department of Mineral Resources and the Department of Energy. Was this being investigated and clarified?

Mr Xiphu explained that this was being addressed in the draft Bill that was being developed. Ms Mans added that PASA’s strategy formed part of the Department of Energy’s strategy. That did cause huge confusion for the Agency.

The Chairperson also asked when it was envisaged that the moratorium on shale exploration would be finished. How far down the line were investigations? The fine balance between economic development and environmental responsibility had to be adequately addressed. The example of Green Peace’s coal protest was provided because the protesters already had access to electricity. This was in opposition to the vast numbers of South Africans who did not have that access. Such a fine balance was a difficult thing to achieve.

Mr Xiphu stated that the matter was being handled by the Minister and the Department involved. However, the moratorium came in phases. Normally there was a first come-first served basis for exploration, however there was significant interest in these resources which allowed a structured applications process. All applications received had been put on hold awaiting the submission of a report to the Minister by the end of July. He assumed that this would not be the end of the process as there would be various stages to it. The environmental considerations would be tabled in this initial report at the end of July.

Ms Bikani commented that she did not understand their status as a government entity. She suggested that the Committee researcher look into PASA’s status as an entity and report back to the Committee.

Ms Bikani commented that it sounded as though there were more dangers than benefits to shale exploration. Were there other countries that had successfully developed a viable model?

A member of the PASA delegation answered that the United States used this ‘fracking’ process successfully, and it was used in South Africa for methane extraction. The United States had a very profitable programme.

Mr Xiphu reiterated the Minister’s comments that very strict environmental standards would be implemented. Taking into account water availability, water contamination and other factors, the Minister wanted to be advised as to whether ‘fracking’ could be applied in South Africa. Other jurisdictions that had run into problems with the process would also be looked at.

The Chairperson again noted that there was no quorum to approve PASA’s strategic plan.

Cancellation of the Committee Strategy Plan Workshop
The Chairperson commented that due to ‘administrative bungles’ the Committee Strategy Plan Workshop had been cancelled. The Committee Section administration had waited until the eleventh hour and had not acted on dates that had been proposed at the beginning of the year. The Chairperson had raised this issue with the parties concerned, including the Speaker of Parliament. The Chairperson also noted that the body in Parliament that dealt with training was absolutely ineffective. As part of Parliament, the Chairperson and Committee needed to deal with the inefficiency of this body.

Ms Bikani suggested the Committee confront the body responsible. Messrs Bikani, Schmidt, and Gonolo found it unacceptable that the workshop had been postponed as this adversely affected Parliament’s ability and role in oversight. The Chairperson noted that it was within the power of the Committee to call those responsible to account.

The meeting was adjourned.


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