State Diamond Trader Strategic and Annual Performance Plans 2013

NCOP Economic and Business Development

21 May 2013
Chairperson: Mr F Adams (ANC, Western Cape)
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Meeting Summary

The State Diamond Trader briefed the Committee on its Annual Performance and Strategic Plan 2013. It noted that it was mandated by the state to promote, transform and grow the local diamond beneficiation industry. To achieve these objectives, the State Diamond Trader had set itself the targets of implementing a marketing and industry promotion strategy, establishing collaborations with skills development institutions, facilitating capacity building for Historically Disadvantaged South Africans and small beneficiators, as well as contributing to developing a regional trading hub. A Schedule 3B government business entity established in July 2007, under the Diamond Second Amendment Act (No. 29 of 2005), the State Diamond Trader did not receive funding from the state and had to acquire loan funding from the Industrial Development Corporation via a revolving credit facility to continue trading. The entity had to make profits from its diamond sales to build up financial reserves to sustain itself.

The State Diamond Trader was now in a position to purchase the 10% representative sample from all but the largest producer in South Africa without requiring loans or pre-financing from its clients. Staff had been seconded from the Department of Mineral Resources and De Beers, but now the State Diamond Trader had its own permanent employees together with four seconded from De Beers. For three years the State Diamond Trader had implemented its special training programme in diamond sorting and evaluation. The programme had resulted in some being employed at the State Diamond Trader, while others were still in training. Several programmes to build the capacity of Historically Disadvantaged South African clients had been implemented.

The State Diamond Trader described its budget estimates for the 2013/14l year as “conservative” because of poor financial performance the previous year, 2011/12. A decline of revenue from 2010/11 to 2011/12 was due to the State Diamond Trader purchasing a lower percentage of the production available as a result of the unsustainable rises in prices at producer level. As the State Diamond Trader did not have an allocated budget, it had had to rely on its reserves and its Industrial Development Corporation loan account to try and fulfil its objectives of skilling its staff and building capacity for historically disadvantaged South Africans and small clients. The State Diamond Trader had plans to establish partnerships with industry stakeholders to help achieve its objectives. It foresaw a net income loss of R9.8 million for the 2013/14 year. This was the first time the State Diamond Trader had budgeted for a loss, but the figure could always be reviewed if the market improved.

The success of the State Diamond Trader depended on the impact it made in ensuring transformation in and access to the diamond beneficiation supply chain for historically disadvantaged South Africans and small, medium and micro enterprises. The key need was for a funding base and the State Diamond Trader hoped that the Committee would assist.

Members were concerned about the State Diamond Trader’s declining finances and shortcomings in its operations and questioned its location. It should be relocated to Kimberley. Members asked whether bonuses had been paid to staff while the State Diamond Trader had gone from a profit to a loss. Did the Auditor-General audit the State Diamond Trader? To what extent had the State Diamond Trader contributed to job creation? How was the State Diamond Trader going to repay the amount borrowed from the Industrial Development Corporation? Why did the State Diamond Trader export only to import again and why did it not support local entities? Why had it not employed experienced people who had lost their jobs or who were unemployed?  The Chairperson was worried that the State Diamond Trader was too friendly with De Beers. He would rather have the State Diamond Trader receive its money from the fiscus. The Committee also needed to assist with the finalisation of State Diamond Trader’s sales, marketing and implementation plan, and help align its business strategy and strengthen its organisational capacity.
 

Meeting report

State Diamond Trader (SDT) Annual Performance and Strategic Plan 2013: briefing
Ms Futhi Zikalala, CEO, SDT, briefed the Committee on the organisation’s performance plan for the coming financial year. The entity was mandated by the state to promote, transform and grow the local diamond beneficiation industry. To achieve these objectives, the SDT had set itself the target of implementing a marketing and industry promotion strategy, establishing collaborations with skills development institutions, facilitating capacity building for Historically Disadvantaged South Africans (HDSA) and small beneficiators, as well as contributing to developing a regional trading hub. A Schedule 3B government business entity established in July 2007, under the Diamond Second Amendment Act (No. 29 of 2005), the SDT did not receive funding from the state and had to acquire loan funding from the Industrial Development Corporation (IDC) via a revolving credit facility to continue trading. The entity had also been forced to make profits from its diamond sales to build up financial reserves to sustain itself.

Ms Zikalala said that the SDT had attained a gross margin of 5% by buying and selling diamonds, but that the ‘fluctuating trading cycle’ sometimes caused it not to achieve this figure. The successful application of the Interim Sales Strategy meant that the State Diamond Trader was now in a position to purchase the 10% representative sample from all but the largest producer in South Africa without requiring loans or pre-financing from its clients. Staff had been seconded from Department of Mineral Resources (DMR) and De Beers, but now the SDT had its own permanent employees together with four seconded from De Beers. For three years SDT had implemented its special training programme in diamond sorting and evaluation. The programme had resulted in some being employed at the SDT, while others were still in training. Several programmes to build the capacity of historically disadvantaged South African (HDSA) clients had been implemented (slide 10).

Mr Phakamisa Zonke, CFO – Consultant, SDT, described its budget estimates for the 2013/14l year as “conservative” as it had been influenced by its poor financial performance the previous year, 2011/12 (see graph, slide 11). The entity had recorded a revenue of R433 million in 2011/12 compared to R810 million in 2010/11. The entity recorded a net margin of just over R15 million in 2011/12, compared to just over R30 million for 2010/11 (see graph, slide 11). This decline of revenue [of 47%] was due to the State Diamond Trader purchasing a lower percentage of the production available as a result of the unsustainable rises in prices at producer level. As the SDT did not have an allocated budget, he had had to rely on its R40 million reserves and its IDC loan account to try and fulfil its objectives of skilling its staff and building capacity for HDSA and small clients. The SDT had plans to establish partnerships with industry stakeholders to help achieve its objectives. He had foreseen a net income loss of R9.8 million for the 2013/14 year (slide 15). He said this was the first time SDT had budgeted for a loss, but the figure could always be reviewed if the market improved.

Ms Dolly Mokgatle, Board Chairperson, SDT, said she hoped the Committee now had a deeper understanding of the role of the SDT. The success of the SDT depended on the impact it made in ensuring transformation in and access to the diamond beneficiation supply chain for HDSAs and small, medium and micro enterprises (SMMEs). She cited the example of the mining industry which had ensured transformation “from usage to beneficiation”. She emphasised that the key need was for a funding base and she hoped that the Committee would be able to assist.

Discussion
Mr K Sinclair (Cope, Northern Cape) said the SDT’s declining finances and shortcomings in its operations were of serious concern. He asked whether De Beers staff were really seconded to the organisation to assist its staff with skills training.

Ms Zikalala replied that newly qualified staff could not be expected to acquire all the knowledge in three to four years and that was why it seconded the De Beers contractors. Already it had experienced the benefits of this training through a marked improvement in the skill levels of its employees. She added that buying and selling diamonds was a lifelong skill.

Mr Sinclair questioned the location of the SDT. He said the SDT should be relocated to Kimberley where its people could benefit.


Ms Zikalala replied that the issue of relocation was one for the Minister to respond to. She admitted that in terms of the logistics of moving diamonds, it probably made sense to be more centrally located.

Mr Sinclair said the Northern Cape’s Kimberley International Diamond and Jewellery Academy (KIDJA) was currently embroiled in controversy with diamonds bought for it having been stolen. He asked how SDT aimed to empower KIDJA.

The Chairperson said that the case of the stolen diamonds was sub judice and that Ms Zikalala could not be expected to comment on it.

Ms Zikalala said that SDT had met with KIDJA and told it that it could become a partner. KIDJA needed to have, among other things, a beneficiation licence, a factory and its tax clearance certificates.

Mr B Mnguni (ANC, Free State), asked how the SDT was going to repay the amount it loaned from the IDC.

Ms Zikalala replied that it had never defaulted on its credit repayments to the IDC, which was why it was now able to negotiate a better interest rate.

Ms B Abrahams (DA, Gauteng) asked why the SDT exported only to import again. Why did it not support local entities?

Ms Zikalala replied that it supported a local company called African Romance and offered it diamonds. She said she needed to find out what happened since its intervention.

Ms Abrahams asked why the SDT had not employed experienced people who had lost their jobs or who were unemployed.

Ms Zikalala said that those people had probably moved on to other industries. She also refuted the claims that SDT had contributed to the decline in the industry since it arrived on the scene, saying that it had, instead, offered more of a supportive environment in terms of supply.

Mr D Gamede (ANC, KwaZulu-Natal), asked if the SDT was audited by the Auditor-General (AG) even though it did not receive funding from the state. If yes, what had been his report?

Ms Zikalala replied that it was audited by the AG, as well as its internal auditors. It had never received a qualified audit.

Mr Gamede asked to what extent the SDT contributed to job creation.

Ms Zikalala replied that beside the jobs created through its training programme, there were also jobs created by its clients.

Mr Sinclair asked whether bonuses had been paid to staff with the entity having gone from a profit to a loss situation.

Ms D Mokgatle replied that no one had received bonuses.

Conclusion
The Chairperson said the best support this Committee could give the SDT was to assist it with a funding strategy and to get government to fund it. He was worried that SDT was too friendly with De Beers. He would rather have SDT receive its money from the fiscus. The Committee also needed to assist with the finalisation of SDT’s sales, marketing and implementation plan, and help to align its business strategy and strengthen its organisational capacity.

The meeting was adjourned.
 

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