SA Diamond and Precious Metals Regulator 2012 Annual Report

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Mineral Resources and Energy

14 November 2012
Chairperson: Mr F Gona (ANC)
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Meeting Summary

The South African Diamond and Precious Metals Regulator (SADPMR) presented its 2011/12 Annual Report. Its biggest challenge was that the budget allocation of R39.4 million by National Treasury was R29.2 million less than its request, and in fact the budget had been capped at around this mark for the last three years, despite the increase in expenditure. The SADPMR had managed to obtain permission to retain an accumulated surplus of R23.1 million to address the shortfall and other capital projects. In the 2011/12 financial year, the SADPMR had reintroduced service charges to assist in augmenting their budget deficit, whilst other achievements included introducing marketing of polished diamonds, with tenders planned for the fourth quarter, and improvement of inspections in the industry. Apart from the funding, other challenges included inadequate access to funding for emerging businesses, the fact that access to rough diamonds was dominated by financially strong buyers, and limited access to markets for polished diamonds by small beneficiators.

Members raised concerns on the reaction of the industry to the service charge, but heard that this was something negotiated with the industry, and it was in fact more beneficial to cut down on the costs of insurance. They were worried about the declining numbers of diamond cutters and polishers, which had occurred after the creation of the SADPMR, which was supposed to boost the numbers. They asked for clarity on the beneficiation, and asked why larger players were able to obtain access to more rough material. They were told that there was overall shrinkage in the industry as a result of decreased demand.  Members asked about the impact of illegal mining, and raised complaints about the favoritism that seemed to be offered to the more developed countries, in the Kimberley process. They wondered also if stolen stones were entering the country from Zimbabwe, and asked what would happen to diamonds confiscated by the police. Comment was requested on the outlook for the State Diamond Trader, as a result of De Beers moving to Botswana, and asked how diamonds would be purchased.

Members voted to adopt the Report. They then briefly discussed the oversight visits, which would be held in Eastern and Western Cape from November to January, visiting sand and stone mines.

Meeting report

South African Diamond and Precious Metals Regulator (SADPMR) 2011/12 Annual Report 
Mr Simon Sikhosana, General Manager, South African Diamond and Precious Metals Regulator, apologized for the absence of the Chief Operating Officer of the entity, who was on a trip to Zimbabwe with the Minister. The board had just been appointed the previous month and had not yet held its first meeting.

He noted that the policies of the Regulator (SADPMR or the Regulator) had been
reviewed and aligned to the Public Finance Management Act (PFMA) requirements, and relevant financial systems and controls were established and correctly implemented. The audit report for 2011/12 was unqualified.

He stated that the Regulator submitted a budget request of R68.6 million to National Treasury via the Department of Mineral Resources (DMR or the Department), but the final allocation was R39.4 million, leaving the Regulator with a shortfall of R29.2 million. National Treasury was requested to grant permission for the Regulator to retain an accumulated surplus of R23.1 million in order to address the shortfall and other capital projects and this was approved.

The revenue generated in-house decreased by 0.1% to R7.978 million, from R 8.811 million in the previous year. The actual expenditure for the year under review was R60.3 million.

Mr Sikhosana set out some achievements in the year. The service charges were reintroduced with effect from 1 May 2012, and R10.4 million in revenue was generated in September 2012, which would assist in augmenting the budget deficit. The SADPMR had also introduced marketing of polished diamonds and planned tenders for polished diamonds would be held during the fourth quarter. He stated that inspections within the diamonds and precious metals industries had improved significantly.

He then outlined the challenges. Over the past three years the grant had been capped at R39.8 million per annum, although the cost of operations had been increasing in order to meet the service delivery demands. Funding from DMR had also not increased to cover operational costs. He added that access to funding for emerging businesses was still a problem. Access to rough diamonds was dominated by financially strong buyers and access to markets for polished diamonds by small beneficiators was limited.

Mr H Schmidt (DA) asked how the issues on slides 5 and 6 had been addressed. He also noted that after promulgation of the second Amendment Act in 2005, SADPMR had gone from over having over 3 000 diamond cutters and polishers to less than 500. He said that there would be no need for a diamond Regulator if there were less diamond cutters and polishers, and the figures were particularly of concern since the Regulator was supposed to help people working in this industry. He asked if the SADPMR was responsible for this decline, and what it was doing to address it.

Ms B Tinto (ANC) asked for details on the entity’s workforce. She also wondered why there were no reports on any bursaries.

Mr J Lorimer (DA) asked how the industry had reacted to the service change.

Mr Lorimer wanted to know how many small beneficiators there were, and more details around the marketing of polished diamonds. He also enquired as to the cost.

A Member asked what would be done about the fact that access to rough diamonds was dominated by financially strong buyers.

The Member congratulated the Regulator for achieving an unqualified audit report but urged to aim for a clean audit report. The Regulator function was still quite new in this industry and he wondered if the Regulator had yet found its feet in exercising responsibility.

Mr Sikhosana replied that contracts entered into by the previous board were either renewed or had expired. He stated that tender and procurement processes were followed in advertising and renewing contracts. The reality was that the pool of diamonds in the industry had shrunk so the main problem was access to rough diamonds, with the result that diamonds were actually being imported. When the recession started in 2008, diamond demand had reduced, with a decline from a 15 million carat demand down to 9 million carat. If producers could get more diamonds, then cutters and polishers would have more access. In regard to access to rough diamonds, the SADPMR had approached producers to supply a certain amount of rough diamonds, specifically to small businesses. He added that the tender system was currently open.

He said that the shrinkage across the whole industry made it very difficult for the industry to transform as there was reduced demand for skills. The workforce had moved from 50 to 100, including interns. The SADPMR recruited graduates with related degrees in polishing, trained them for one year, and helped them get absorbed into the industry. The main concern was not that the SADPMR was losing skills, but the industry as a whole was losing skills because cutters and polishers were switching careers.

The service charges catered for operational expenses. SADPMR wanted to encourage beneficiation to encourage the industry, and decided that the charges would not be levied for polished goods, but rather on rough diamonds. A percentage of the value of the rough diamond was charged He said that if National Treasury did not increase revenue, then even if the industry increased beneficiation, it would shrink.

Mr Sibusiso Mandlazi, Finance Manager, SADPMR, added that when SADPMR decided to introduce the service charge, the board engaged with stakeholders to help find a way to initiate it.

Mr Sikhosana believed that the Regulator had found its feet. There was good traffic in the office, because said that they had found their feet. They had good traffic in their office because people were aware of the function of the Regulator.

Ms F Bikani (ANC) asked about what measures had been put in place to ensure that the Regulator was benefiting from the service charge. She also wanted to know more about what had been done to improve beneficiation in the country.

Mr Sikhosana said the service charge had been in existence for a while now, but had just not been enforced in the past. He said that he thought the entity could survive on it.

Ms Bikani pointed out that there was no legislation to ensure that the SADPMR had more options to sustain itself on a continuous basis.

Mr Mandlazi said that the industry had agreed, during the stakeholder discussions, that the regulator should not evaluate for free. The fee being charged for evaluation in South Africa was minimal.

Mr Sikhosana added that the industry had agreed to the charges because it paid a lot on insurance to transport goods to the Regulator’s office, whereas if the Regulator visited them, they only had to pay for the Regulator’s travel expenses.

Mr Schmidt said that from an economic standpoint, the big companies always had more overheads and their profit margins were greater than small companies. However, this explanation was at odds with this. He asked what exactly the problem was and why access to rough diamonds more expensive for small companies?

Mr Sikhosana replied that limited supply of goods led to high prices. He said he did not have specifics on how big companies made their profit, but thought that it might be due to economies of scale. Small companies could not give big discounts, like the larger companies.

Mr Schmidt said that big companies would send rough diamonds to other countries for cheap polishing. He suggested that some way should be found to prevent them from exporting or set limits to how much they could export. Some of these companies were not bringing value back to South Africa.

Mr C Gololo (ANC) asked about what was done with illegal diamonds after they were confiscated in South Africa.

Mr Sikhosana replied that once the South African Police Service (SAPS) had confiscated diamonds, they brought them to SADPMR to identify whether they were real or fake and to value them. SAPS would keep the diamonds until the case was finalised, then take the diamonds to Tender House, where they would be sold and the proceeds were sent to National Treasury.

The Chairperson asked what the Regulator saw as the future outlook for State Diamond Traders (SDT), as a result of the decision by De Beers to move into Botswana. He added that some countries were accusing the Kimberley process of being biased against some countries and favoring more developed countries, and he asked for comment on this point.

Mr Sikhosana replied that SDT was receiving less goods and it was easy for South African traders to move to Botswana to get goods into the country. He said that goods imported from Zimbabwe as a result of the Kimberley process had increased. He added that South Africa would have a good advantage if Zimbabwean goods improved in quality. He stated that trade between South Africa and Zimbabwe had improved and more was being imported from Zimbabwe than from the European Union.

Mr Lorimer said that $2 billion worth of diamonds were stolen from Zimbabwe, and asked if any of them had found their way to South Africa. He wondered how often the Regulator consulted with the SAPS. Illegal mining had been reported by police on the edge of Soweto, and he wondered how that was happening so openly.

Mr Sikhosana responded that no diamonds had entered the country through the SADPMR office, because it documented everything that came to the country, in terms of the Kimberley process. The Regulator and SAPS communicated about once per month. He was aware of the question about the Soweto incident but could not comment, as this involved gold mining and the Regulator dealt with diamonds. He stated that figures on illegal diamond mining were much lower but that SADPMR was working with the police to curb it. The Regulator said that they assisted the police with information because some of its refiners played a role in buying those minerals, although he could not say anything further as some of the information was classified. There were tender houses, where people could go to buy diamonds. However, foreigners could only go to Exchange Houses to buy diamonds. A case had been taken to court because this clause was criticised as unconstitutional, but SADPMR was confident that the Regulator would win.

Members voted to adopt the Report.

Other business:
Oversight Visit

The Chairperson noted that the Committee would need to divide its visits to the sand and stone mines in Eastern Cape, as it would not be possible to visit all in one visit. The oversight would take place either in the last week of December, in mid-December or after 17 January.

After the oversight visits to Eastern Cape, visits to sand and open cast mines would take place in the Western Cape. Some areas with high activity would be re-visited.

The meeting was adjourned.


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