Department of Mineral Resources litigation update: State Diamond Trader 2012 Strategic Plan

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Mineral Resources and Energy

23 May 2012
Chairperson: Ms F Bikani (ANC)
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Meeting Summary

The Department of Mineral Resources briefed the Committee on the litigation in which it was currently involved, and outlined the main cases, some of which were finalised and others still pending. The Department noted that most of the litigation concerned Motion Court proceedings, and explained that these were matters in which claims were made, for the court to decide on the facts set out in the documentation. Other matters were judicial reviews of administration decisions in regard to the consultation processes, prospecting and mining rights and environmental approvals. There were also some civil claims. The Department had implemented measures to address the challenges that it was facing, and indicated that the introduction of the South African Mineral Resources Administration system provided for the continuous improvement and strengthening of internal processes and guidelines. There was also increased engagement with stakeholders. Members asked about the cost of the litigation to the State, noted that the figure of R3.8 million in 2010/11 did not include the costs of the State Attorneys, asked about the outcome of the Foresti case and the status of the AgriSA case. Members noted that the impact of the cases on investments could not be known, since in one case the merits had not been argued, and also noted that transitional provisions of the Mineral and Petroleum Resource and Development Act were being argued at the moment. Members also asked what the Department would do to address long-overdue matters.

The State Diamond Trader (SDT) presented the 2012/13 Strategic Plans to the Committee. This entity had been in operation for five years and had 92 registered clients, selling to about 60 clients each year, and helping to develop its smaller clients. It aimed to ensure continued sustainability, to be an efficient and professionally managed organisation, to promote efficient governance and to ensure access to rough diamonds. The strategic outcomes to support these goals were outlined. It was noted that it was developing and maintaining trading relations with other African diamond producing countries, enforcing compliance with legislation on trading, and doing training for its own staff and the broader market. It aimed to increase the number and value of sales to historically disadvantaged South African (HDSA) clients, and would, in order to do this, review its trading policies, as well as train 10 HDSA clients per annum. SDT outlined the steps it was taking to achieve sound administrative systems and good compliance. It aimed to ensure that all producers declared their production cycles, inspected rough diamonds produced in South Africa, and purchased up to 10% of total South African production in value and volume. SDT had no recourse to public funding and had to innovate constantly to ensure its sustainability.  Members asked what happened to those trained by SDT, and whether SDT managed to have them absorbed into the market. They questioned whether the SDT had replaced the former State Diamond Board, the numbers of cutters and polishers with whom it traded, how many clients it had sold to in the last year, and why so many diamonds were being exported. One Member questioned the wisdom of sourcing rough diamonds from other countries, and the effect of Botswana on the industry, whilst another believed that SDT should not be entering other countries but concentrating on internal operations only. 

Meeting report

Department of Mineral Resources litigation update
Mr Pieter Alberts, Head Legal Services, Department of Mineral Resources, presented a summary of the litigation in which the Department of Mineral Resources (DMR) was involved, listing the prominent cases and outlining the challenges faced in regard to this litigation. He told the Committee that most of the matters had been dealt with on Notice of Motion proceedings, stating that in these, the applicant would approach the Court with a written notice setting out the case, and asking the Court to make a determination upon it. He also noted, however, that applications had been made for judicial reviews of administrative processes, such as the consultation process, the granting or refusal of prospecting and mining rights and environmental approvals. DMR had also been involved in some civil actions, where the plaintiffs issued summons claiming damages or debt recovery. The last form of litigation in which the DMR was involved were expropriation claims, in terms of Item 12 of the Mineral and Petroleum Resources Development Act, No 28 of 2002 (MPRDA).

The prominent cases in which the DMR had been involved included:
Foresti vs The Republic of South Africa
AgriSA vs Minister
Sishen Iron Ore vs Minister and ICT
City of Cape Town vs Minister and Others
Bengwenyama vs Minister and Others

The first two cases were directly related to the transformation agenda of the MPRDA.

Mr Albert explained that the DMR had implemented some measures to address the challenges that it was facing in regard to litigation. The introduction of the South African Mineral Resources Administration system (SAMRAD) had provided for the continuous improvement and strengthening of internal processes and guidelines. The DMR also continued to evaluate and assess current internal and external capacity constraints and requirements. There was also engagement with stakeholders at the level of the Mining Industry Growth, Development and Employment Task Team (MIGDETT).

Mr J Lorimer (DA) asked what the litigation had cost the State, and how many judicial reviews had been conducted. 

Mr Albert replied that in the 2010/11 financial year, the DMR spent R3.8 million on legal costs.

Adv H Schimdt (DA) pointed out that the cost of the State Attorneys was not included in this figure, so the Department of Justice also would be able to calculate another part of the answer on the cost.

Adv Schmidt asked on what grounds the Foresti case was withdrawn. He also asked, in respect of the AgriSA matter, if the main exception had been finalised.

Mr Alberts replied that there was never a settlement in the Foresti case. Some of the proceedings were also confidential between the parties, so very little detail could be given, other than what was deemed to be in the public domain. He responded, in respect of the AgriSA matter, that the main exception had been finalised, and the case was taken on appeal. That appeal was still pending.

Mr M Sonto (ANC) asked what consequences the withdrawal of the Foresti case had on South African investments.

Mr Alberts replied that the tribunal did not really decide on the merits of the Foresti case, so the impact of the case could not yet be established. The general view was that the outcome of this case should not deter or negatively affect the investment climate. However, it was also difficult to determine whether the circumstances giving rise to this dispute were likely to arise again in the future, because the merits of the matter had not been dealt with and a final decision taken.

Mr Sonto asked what the situation had been when the new Act was passed, and whether any sections of the previous legislation remained in force.

Mr Alberts explained that when the MPRDA had come into force, it did protect security of tenure, in that there was the possibility to convert from the old to the new order rights. This transition was currently being argued before the courts. The pronouncement of the court in the matter was going to be very instrumental on what developed in future.

Mr Sonto asked, in the City of Cape Town case, whether the Constitution or the municipal ordinances would have greater authority.

Mr Alberts responded that overall, the Constitution was superior to municipal ordinances. However, the Constitution gave certain powers to local authorities to decide on certain matters. In respect of the use of land, the court had found that a proper balancing of these powers had to take place.

Mr Sonto asked why the DMR did not sue companies that were carrying out over-prolonged and long overdue prospecting.

Mr Alberts noted that both these issues fell under the general compliance situation, and DMR was looking at them and addressing the challenges.

State Diamond Trader Strategic Plan 2012/13
Ms Futhi Zikalala, Chief Executive Officer, State Diamond Trader, presented the 2012/13 Strategic Plans to the Committee. She noted that the State Diamond Trader (SDT) had been in operation for five years and had 92 registered clients. The SDT sold diamonds to an average of 60 clients annually, and provided support to its small clients. The SDT was currently working on inspecting and purchasing from small producers and diggers and had plans for further growth and support for its clients.

She noted the four strategic goals, namely: to ensure continued sustainability of the SDT, to be an efficient and professionally managed organisation, to promote and uphold efficient governance, and to ensure constant access to rough diamonds.

Seven strategic objectives were derived from the four main goals, as follows:
-To improve profitability of SDT operations to ensure its sustainability;
-To facilitate support to SDT clients;
-To develop and acquire appropriate Human Resource capacity;
-To develop, implement and maintain systems, procedures and controls in line with the Public Finance Management Act and other applicable policies;
-To develop and maintain trading relations with other African diamond producing countries;
-To improve positive relations with stakeholders, to access better quality goods;
-To enforce compliance with the legislation on trading matters.

Ms Zikalala outlined the key activities, measures and targets of the various objectives (see attached presentation for full details)
She the highlighted some specifics. In relation to improving the profitability of SDT operations and ensuring its sustainability, the SDT intended to improve the stock turnaround time, in line with SDT stock holding policy, to maintain gross margin rates, to review and streamline operational expenditure, and to increase the number and value of sales to historically disadvantaged South African (HDSA) clients. It would, in order to achieve this, improve general efficiencies and review its trading policies.

Under the objective of facilitating support to SDT clients, the key activities included facilitating technical and business management training, providing market intelligence and facilitating access to finance. SDT would conduct market intelligence briefings and increase the number of trading clients. The SDT had a target of training 10 HDSA clients per annum.

SDT realised the need to develop and acquire appropriate Human Resource (HR) capacity, and therefore intended to review the HR plan, to implement policies and plans already in place, to ensure continuous capacity building for all personnel, and to review and monitor the training provided, to ensure that it was appropriate. The HR plan must respond to the SDT requirements, and skills gaps must be identified

SDT wanted to implement and maintain good administrative systems, procedures and controls, and would therefore look to improving its administrative processes, ensure quarterly internal audits, train staff on all policies and business processes, develop and approve an Asset Management Policy and maintain an asset register. It would implement and monitor approved procedures, tested internal controls and systems, ensure compliance with the legislative framework on assets, secured assets and the IT environment, and ensure good procurement procedures.

The key activities of the SDT to advance good corporate governance, legislation and policies would include making sure  that all audit and risk management committee meetings were held, and that statutory reports were prepared and approved. It would also conduct annual risk assessments, and respond to any audit findings. There would be compliance monitoring, and giving of guidance to the Board, submission of quarterly and annual reports, improving performance on systems and controls and risk appropriate mitigation planning.

As part of the duty of enforcing legislative compliance, the SDT aimed to ensure that all producers declared their production cycles, inspected rough diamonds produced in South Africa, and purchased up to 10% of total South African production in value and volume.

Ms Zikalala concluded that the SDT had spent its formative years creating capacity and developing skills. It was now instigating procedures to enable it to establish itself firmly in the diamond industry. The SDT had proved itself as a viable commercial operation, despite the very harsh conditions that had rocked the industry. Since SDT had no recourse to public funds, it had had to constantly innovate to ensure its sustainability. SDT aimed to continually improve on its competence during the year.

Ms N Ngele (ANC) said that the SDT was training a number of people, but asked what happened to them after training, and in what types of activities they would be involved. She wondered whether SDT would actually try to find a market for the trainees, and how many it would, itself, employ each year.

Ms Zikalala said that the SDT had two dimensions to the training it was doing. The first type was training for existing employees of the SDT, and the second leg of the training was more general, to train other young people in preparation for the industry. Some of these trainees were thereafter employed by SDT itself, whilst it also facilitated the employment and establishment of some of other trainees in the industry. Another dimension of training was training done specifically for clients and this was not geared specifically towards those trainees finding new employment.

Adv Schmidt asked said the impression was that the SDT had replaced the former State Diamond Board, which had a system that was heavily criticised. The stated purpose of the SDT was to ensure that there was broader access for the public. He wanted to know the numbers of cutters and polishers with whom the SDT traded, and what it was doing about the fact that most of the diamonds that were bought were exported.

Ms Zikalala replied that the SDT had not replaced the State Diamond Board, because that Board had in fact been replaced by the South African Diamonds and Precious Metals Regulator. The SDT was selling to a particular number of licensed clients, and it was not running tenders.

Mr Lorimer asked to how many clients the SDT sold during the last financial year, and what percentage of the sales went to the top three clients.

Ms Zikalala replied that in 2010/2011, the SDT sold to 60 clients. A sizeable amount had gone to the eight major clients, and here she was speaking not only of the value of sales, but also volumes. These clients were able to buy the very small diamonds which were not very marketable elsewhere.

Mr E Lucas (IFP) asked if the SDT was convinced that it was wise to go and source rough diamonds from other countries. He also questioned what effect Botswana had on the diamond industry currently.

Ms Zikalala replied that the SDT was still looking at going into other countries, and was testing the impact of this. The legislation actually provided that the SDT could buy from other countries, and it would continue to do this until it proved unproductive. The effect of Botswana in the diamond industry was going to be felt as the process unfolded, because South Africa and Botswana operated in two separate regimes and environments, but the exact ramifications of this were still being studied.

Ms B Tinto (ANC) asked how many jobs had been created by the SDT.

Ms Zikalala replied that there were challenges around the creation of jobs, as this was slow. Clients would create only one or two jobs, when requested by the SDT. It was, however, hoped to increase this number.

Ms Zikalala asked if the SDT had a record of diamonds that had been lost in the course of transactions.

Mr C Gololo (ANC) said that he was not in favour of SDT moving into other African countries. He felt that it would be preferable for the SDT to concentrate in South Africa. He cautioned of the risks of going abroad, and said that SDT could well lose some of its resources.

Ms Zikalala said that SDT was mandated by the legislation to attempt to move to foreign markets. This was still being tested. The results would inform the final decision as to whether this would be permanent.

Members agreed to adopt the Strategic Report presentation.

 The meeting was adjourned.


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