South African Diamond and Precious Metals Regulator & State Diamond Trader Strategic and Annual Performance Plans 2013

Meeting report

South African Diamond and Precious Metals Regulator (SADPMR) Strategic Plan for 2013/2014
Mr Simon Sikhosana, General Manager: SADPMR, outlined the Medium Term Expenditure Framework (MTEF) Plan for the SADPMR from 2013 to 2016. 
The Regulator’s first strategic objective was to ensure competitiveness, sustainable development and job creation in the diamond and precious metals industry. The target was to implement 250 licences annually -- 750 licences in total -- between 2013and 2016. The initiatives of the SADPMR were to implement the Broad Based Empowerment Charter and Beneficiation Strategy.  Skills development initiatives would also be developed for the diamond and precious metals industries.

The second objective was to ensure effective transformation of the diamond and precious metals sectors. Four transformation progress reports would be evaluated annually over the 2013- 2016 timeframe -- 12 reports in total.   
The third strategic objective was to ensure industry compliance with legislative requirements. Compliance inspections and audits would be conducted on an annual basis. Added to that, the Diamonds Act and all other related legislation would be implemented in order to enforce compliance.
The fourth objective was to ensure equitable access to resources for local beneficiation. The number of polished diamond tenders would be facilitated, and the number of beneficiators accessing the Diamond Export and Exchange Centre (DEEC) would also be monitored.  DEEC services would be marketed efficiently and local beneficiation would be promoted by allocating certain viewing rooms for beneficiators.  These initiatives would enhance local beneficiation and trade, and enhance diamond beneficiators’ access to diamonds and other resources.
The last strategic objective was to improve organisational capacity for maximum execution of excellence. The Kimberly Process Certification Scheme (KPCS) would be implemented, as well as the KPCS statutes and related legislation.

SADPMR Strategic Plan 2013/14
Mr Sikhosana said the programmes under the strategic plan for 2013/14 were as follows:

• Programme 1 – Diamond Trade
In order to improve the organisational capacity of the organisation, international trends and local diamond prices would be monitored regularly. This would also ensure the fair market value of diamonds and precious metals.

• Programme 2 – Regulatory Compliance
Effective transformation of the diamond and precious metals sectors would be ensured through the implementation of legislation and processing of licence applications, as per legislative requirements. Provisions of Section 8 of the Export Levy Act would also be consistently applied, while existing precious metals beneficiation licences would be reviewed, and those which were not being used for beneficiation purposes would be investigated. Prospective new entrants would also be assisted to obtain licences/ permits in the precious metals industry. Various skills development initiatives would also be facilitated.

• Programme 3 – Administration
Some of the key activities under this programme were: to ensure the implementation of the Human Resource Plan, to communicate the SADPMR policies and programmes among internal and external stakeholders, to ensure the implementation of the Master System Plan (MSP) and to implement finance and supply chain policies, procedures and guidelines.

Mr Sikhosana said the budget for the 2013/14 financial year was R67.8 million, and this amount would be increased by R3 million every year until the 2015/16 financial year.  The allocation from the Department of Mineral Resources (DMR) was R43.3 million, and this amount would increase by about R2 million until the 2015/16 financial year.   SADPMR would cover whatever shortfalls they encountered. Some of the challenges faced by SADPMR were a shrinking budget, declining diamond and precious metals industries, complexities with regard to the beneficiation of precious metals and the lack of, and/or inadequate access to, rough diamonds by beneficiators.  Some developments, however, were the increased trade transactions of unpolished and polished diamonds at the Diamond Export and Exchange Centre, and strengthened relations between the Regulator and the diamond and precious metals industries.

The board was taking the transformation plan seriously and had established a special transformation team through the Licensing Committee to develop special strategic mechanisms, as an intervention to address the areas where there had been little improvement. The plan was to address job creation, increase access to rough diamonds by beneficiators, and skills development.

Discussion
The Chairperson thanked Mr Sikhosana for the presentation and asked what the SADPMR’s relationship was with the DMR -- what kind of regulation and licensing processes were there?

Mr Sikhosana replied that the DMR was responsible for production, while the SADPMR was responsible for sales. When it came to beneficiation, DMR was the policy maker, while SADPMR was responsible for the implementation of these polices.

The Chairperson asked whether the SADPMR followed the licensing processes given by the DMR.

Mr Sikhosana replied that in production, SADPMR would follow the licensing processes outlined by the DMR.   When it came to the diamond dealing licensing process, however, the SADPMR operated independently.

Mr J Lorimer (DA) asked where the imported diamonds came from, and whether they were being cut in South Africa. What was the competitive advantage of importing diamonds and cutting them locally?

Mr R Sonto (ANC) asked what the comparison was between imported diamonds and locally produced diamonds, seeing that diamond production was shrinking.  Did the service charges keep SADPMR afloat?  What did the job creation plan translate to -- were the jobs being created within the entity or outside it?   Who were the main respondents to advertisements on the tendering system -- who were the people who had the greatest interest?  Did the tendering system address the transformation process?

Ms N Khunou (ANC) asked how legislation and inspection were being used to enforce transformation. What licensing processes were there and how were they being incorporated into the inspection process?  With regard to entrepreneurship, she referred to the Virginia project of diamond cutting, which had been implemented in 2000.   The project aimed to train people and equip them with diamond cutting skills.  How far had the project progressed?

Ms N Ngele (ANC) asked how the SADPMR was planning to create more jobs, when demand in the diamond and precious metals industry was going down.

The Chairperson asked whether the Master Systems Plan (MSP) was linked to the present Information and Communications Technology (ICT) system being developed by the DMR. How would security be optimised? Where did the budget for the MSP come from? She asked whether the SADPMR had a discretionary fund for skills development, and whether skills development included only internal staff, or people outside the entity as well.  Why were diamond resources going down -- was it because there were no more diamonds, or was it because there was a lack of skills to mine more diamonds?  How was beneficiation being ensured within the country?

Mr Sikhosana replied to the question on imported diamonds, and said the quality of imported diamonds was quite high. Although South Africa exported low quality diamonds, the diamonds which were being produced were being exported in high volumes. India had a competitive advantage over South Africa because it produced and polished small diamonds. South Africa, on the other hand, produced and polished big diamonds, but did not have the capacity to cut and polish smaller diamonds.

Ms Nombulelo Mkhumane, Chairperson: SADPMR, said the Minister was busy working on a plan to improve the country’s capacity in diamond cutting and polishing.  A project plan was already in place and some of the issues would be discussed in the upcoming jewellery summit. Currently the education system was very limited in terms of diamond cutting skills.  The Department was, however, working with higher training institutions to improve these skills within the education sector.

The Chairperson said the SADPMR’s approach needed to be more user friendly in order to increase production.

Ms Mkhumane replied that the SADPMR would need to come back and give a more detailed brief on its plans for increased production. It was important that the Committee understood the history and the background of the diamond industry, so that Members could have a more holistic understanding of the industry as it stood and the plans SADPMR had in place in order to move forward more positively.

Mr Sikhosana replied to the question on shrinking diamond production, and explained that De Beers used to be the biggest producer of diamonds until they sold their production rights to various other companies. This had affected production negatively.  Added to that, the demand for diamonds had dropped globally for economic reasons, and this had contributed to the drop in production. On the question on service charges, he said services charges kept the entity afloat and covered all shortfalls experienced by the entity. On job creation, he said the focus was on creating jobs externally through beneficiation and licensing.  There were different respondents to the tendering system, with both big and small companies competing to get the tenders. In some cases, big and small companies would form partnerships, as smaller companies had the advantage of being able to cut small diamonds. On compliance and inspection, he said compliance inspections were for insured licences.  In a three-year cycle, all licence holders would have been inspected, so fronting would easily be dealt with.

Ms Khunou asked how many licenses had been issued and of these, how many had undergone inspections.

The Chairperson asked whether new tender applicants also needed to apply for licenses.

Mr Sikhosana replied that 1 700 diamond licenses had been issued and 1 200 for precious metals. Inspections were only for active licence holders; some licence holders were not active, and therefore they did not undergo inspections.

Mr Sonto asked how long the licences were valid for.

Ms Khunou asked about active and non-active licence holders.   What mechanisms were in place to assist the inactive companies, seeing that some companies were inactive due to capacity or skills shortages?  A system needed to be put in place to improve and to level the playing field within the industry, especially for new entrants.

Mr Sikhosana replied that the licences were valid for a period of five years, after which license holders needed to apply for renewal.  The companies which struggled to stay afloat were identified, and they would be linked up with relevant people within the industry for any assistance they might need. However, for inspection and monitoring, priority was given to active companies.

An official from the DMR said there were a number of initiatives which were in place for skills development.   Most applicants were not skilled enough to run profitable companies. However, through the government diamond evaluator, licence holders received some training and mentoring, especially for loan applications. Most new entrants lacked skills, so the DMR was developing a curriculum to ensure that new licence holders were well equipped to thrive in the industry.

Mr Sikhosana said that SADPMR’s Master Plan was not linked to the DMR’s ICT plans.  The entity was still trying to be linked up with the DRM’s ICT plans and was also communicating with the South African Revenue Services (SARS) for taxes on imports and customs. The ultimate plan was to link SADPMR’s Master Plan to that of the Department.

The Chairperson asked whether the licensing process was a physical one, or whether it was done electronically.

Mr Sikhosana replied that the licence application process was a physical one.
An official from the DMR said that in terms of production, imports and exports, South Africa sold its diamonds at a fair market value and this explained why there was an increase in exports.  South Africa exported about 85% of its diamonds. It also received an influx of imports from neighbouring countries, such as Zimbabwe, which looked to South Africa to market and sell their products.   De Beers had moved its offices from London to Botswana, because of its infrastructure, so South Africa was strategically placed to capitalise on this to improve the local benefits of the diamond trade.

Mr Sikhosana replied to the question on Virginia, and said the SADPMR was not aware of such a project.

The Chairperson said the Virginia project was more of a training centre. The problem with the centre was that people were only being trained, and most were not being employed afterwards. The intention was that these trainees would be able to open their own shops after the training, but this was not taking place.

Mr Sikhosana said mining companies were being engaged because the aim was not to create employees, but to create entrepreneurs. The Regulator was therefore in communication with various players in the finance sector to establish a hub where highly skilled people could buy their own diamonds and sell them at fair market values.

The Chairperson said the DMR had talked about opening two schools of excellence to focus on skills development within the industry. Would these schools focus solely on addressing the skills shortages within the mining sector?   As it stood, this was not the case.  What types of precious metals were being produced, and what were they being used for?  What were the issues surrounding the precious metals industry?

Ms Khunou asked how the precious metals industry was being regulated.

Mr Sikhosana replied that the board had approved a transformation plan. Internship programmes were also available in an attempt to promote entrepreneurship. Diamond polishing and cutting trainees were being placed in the relevant field in order to promote better job creation opportunities. New entrants were well monitored.

Ms Irene Tshifura, Chief Financial Officer: SADPMR, said the Master System Plan had been budgeted for, looking at the models which needed to be enhanced such as the tendering system, recording of sales, the financial system and branding. The plan had been budgeted for as a capital project for the current financial year.

The Chairperson asked whether SADPMR members had the right to walk into any diamond cutting and polishing shop and inspect it. Did the entity have a school under its name? 

Ms Mkhumane replied that the SADPMR did not have a school under its name. The SADPMR was currently drawing up a curriculum with the Mining Qualifications Authority (MQA) to develop an agreed curriculum. The entrepreneurial aspect was of most importance, where practical skills would be incorporated into the curriculum, through a small-scale mining fund, by the DMR.  New entrants were thus being channelled into receiving relevant qualifications.

The Chairperson asked whether the SADPMR was involved with the dumping of waste along river banks. How were such situations being addressed?

Ms Mkhumane said waste dumping was mainly a DMR matter.

Presentation: State Diamond Trader (SDT), Strategic Plan 2013/2014
Mr Phakamisa Zonke, Chief Financial Officer: State Diamond Trader (SDT), said the SDT had been formed in 2007, and despite the economic challenges which it faced during its inception it had managed to ensure its commercial position and had built up about R40 million in reserves. It was important to note that the SDT had never been funded through the national fiscus since its inception, but had managed to deliver on its mandate of ensuring access to rough diamonds for local beneficiators.  
An appropriate governance structure had been set up, with a board which was in office for a period of five years. A new board had taken over on 1 October 2012.  During the five year period, the SDT had managed to develop young people through the De Beers School for practical skills training.  These trainees then came back to the SDT for employment after the training.  Newly developed policies and procedures had also been successfully implemented. The SDT was also one of the few entities which had received an unqualified audit report for five consecutive years.

Some of the challenges it had faced over the years had been the economic recession of 2008/9,
the lacklustre performance of the world economy, initial persistent disagreements with producers, clients inability to raise funds and poor marketing capabilities, which stunted industry growth, and the SDT’s funding modes.  The organogram had also not been fully implemented, and key strategic positions had not been filled.

The SDT had not been able to purchase the full 10% of local production available to it due to a lack of demand for rough diamonds, the poor global economic situation, the suitability of mine production for beneficiation, a lack of agreement on what constituted “fair market value” and a lack of appropriate funding.  Going forward, the SDT had agreed to align its goals and outcomes with those of the approved Beneficiation Strategy of South Africa.

The SDT’s strategic objectives were to contribute to the growth of the local diamond beneficiation industry, to develop efficient means of marketing diamonds not suitable for local beneficiation, and to develop and acquire appropriate human resource capacity

Mr Zonke said that in 2012, the entity had not met its budget, with revenues standing at about R433 million.  Production had dropped, which meant that the SDT had had to realign its budget for the 2013/14 financial year to about R331 million. It had been challenging to achieve a 4% gross profit margin, and it had since become difficult to cover the operational expenditure of the SDT, especially when it came to filling key vacant positions in the organogram.  At the time of the budget approval, there was a budgeted net loss of about R9.8 million.

Discussion
The Chairperson asked why De Beers still remained the major diamond trader, when it had pulled out of the country to trade in Botswana.

Mr Zonke replied that De Beers was the largest player in the diamond industry, and although there were nine other producers of diamonds which traded with South Africa, De Beers still produced the most.  De Beers had also seconded skills to the SDT to provide support during its inception. Funding had always been one of the major challenges experienced by the SDT.

Mr Sonto asked whether the secondment by De Beers was not “match-fixing.”

Mr Zonke replied that at the formation of the SDT, there had been a lack of skills for core diamond valuation, so some employees from De Beers had been seconded to join the SDT for skills transfer and to help with getting SDT off the ground.

Mr E Mtshali (ANC) asked whether there were any schools for training under the SDT.

Mr Zonke replied that there were several schools for training.  The Oppenheimer Academy was one of them. In terms of the training arrangements, the first set of trainees had been paid for by the Academy, to assist the SDT with its funding challenges. These trainees were then retained by the SDT in an attempt to build up the SDT’s capacity. Two of these trainees had since been permanently employed as SDT Officers.

The Chairperson said the SDT was an entity of the state, and asked how viable it would be to have a state-owned mine, with a relevant model and skills development put in place.  The type of training provided seemed to be very expensive per learner, so the schools for training needed to be centralised in order to develop the necessary skills effectively within the mining sector.

Mr Zonke replied to the question on the SDT being turned into a state-owned mine, and said that from the industry perspective, each mine produced different types of diamonds. The challenge with the proposal would be to have the necessary variety required for local diamond beneficiation.  If the state owned a mine which did not produce diamonds that could be cut in South Africa, this would present a challenge. The SDT, as it stood, had access to a wide variety of diamonds from different sources. On the question regarding skills development, he said the SDT had since been able to pay for its own trainees.

The Chairperson asked how many learners the SDT trained annually.

Mr Zonke said between four and five learners were trained annually.

Ms Khunou asked whether the learners being trained were from historically disadvantaged communities. The gap between the second and the third economies needed to be bridged.

Mr Zonke replied that training was in two parts -- theory and practical. The practical aspect took between two and three years to complete, while the theory took about six months initially. However, in order to be a senior manager, a person would need about 15 years’ experience in the diamond industry. The trainees were from previously disadvantaged communities, and they were young people who had come straight out of university.

Mr Katenga said the reason why the SDT was not achieving its target of developing more entrepreneurs was because new entrants to the diamond industry were being trained to polish diamonds, and not to cut. There was also no curriculum which equipped people with the skills necessary to manage and run their own workshops. People also did not have the capacity to market the goods which they had produced because they had not been exposed to industries outside the country. The industry needed to work together to address these challenges. 

Ms Khunou said there seemed to be a lack of communication among the industry’s stakeholders. She asked how the SDT dealt with illegal diamond trading.  Was there anything South Africa could learn from the likes of India about small diamond cutting and polishing.

The Chairperson asked how accommodative the Mineral and Petroleum Development Amendment MPRDA Bill was in terms of inclusiveness.

Mr Katenga replied that some of the trainees were being placed in companies to learn the administrative and managerial skills needed to run companies.

Mr Sikhosana said every diamond which left the country was tracked. There were diamond traders in the Northern Cape and North West. Inspectors were sent to inspect these traders on a regular basis and the SDT was also working closely with the South African Police Services (SAPS) to regulate the diamond and precious metals industries.  There had been a decrease in illegal activities. On the question on India’s competitive advantage in the small diamond trade, he said the working conditions and salaries to which workers in India were exposed, were exploitative and would therefore never be accepted in the South African diamond industry.  With an improvement in technology, however, small diamond cutting and polished would be considered.

The Chairperson thanked the delegations for the presentations. She said the Committee was considering paying a visit to both the Regulator and the Trader. Proposed dates for these visits were 6 and 7 August, and 29 August. The Committee Secretary would correspond with the entities to finalise the dates.

The meeting was adjourned.