Diamonds Amendment Bill: hearings

Meeting report

MINERALS AND ENERGY PORTFOLIO COMMITTEE
10 October 2005
DIAMONDS AMENDMENT BILL: HEARINGS

Chairperson: Mr E Mthethwa (ANC)

Documents handed out:
Diamonds Act, 1986
National Diamond Marketing Ltd presentation
National Diamond Marketing: The Company
Rosecut Diamonds presentation
SA Diamond Producers presentation
Master Diamond Cutters Association of SA presentation
Rough Diamond Dealers Association of SA presentation
Submission list [1-30]

SUMMARY
National Diamond Marketing (NDM) presented its view that subsidising any one segment of the diamond industry through the Diamonds Amendment Bill [B 27 – 2005] would result in the collapse of producers and other players in the downstream industry. Members interrogated NDM’s commitment to social development and the transformation of the diamond industry.

Rosecut Diamonds supported the removal of obstacles to the local beneficiation of diamonds, such as Section 59 agreements that allowed for the duty-free export of rough diamonds.

The South African Diamond Producers (SADPO) questioned whether the exclusion of foreign buyers from the local diamond industry would affect the price of diamonds at local trading centres. SADPO also provided details of the decline of the alluvial diamond industry.

The Master Diamond Cutters Association of SA recommended that more industry organisations should be represented on the State Diamond Trader Board, and suggested that the reduction of the 15% export duty on rough diamonds would discourage illicit trade.

The Rough Diamond Dealers Association of SA suggested that representation on the SA Diamond Regulator and State Diamond Trader should be expanded.

Krochmat & Cohen Diamond Cutting Works claimed that SA diamond cutting companies could only be competitive in the international market by obtaining foreign finance and expertise. Krochmat & Cohen suggested that Section 64 of the Act should be amended to allow local diamond producers to export diamonds when this was economically necessary. Members questioned Krochmat & Cohen’s strict separation of business from government’s obligations to its citizens.

Finally, Diamond Merchant expressed its view that there should be free trade in the diamond industry.

MINUTES

National Diamond Marketing briefing
Mr M Karp (National Diamond Marketing) briefed the Committee on NDM’s company philosophy as it related to the objects of the Diamonds Amendment Bill, and NDM’s ‘roadmap’ for the future of the SA diamond industry. NDM operated alongside four partner companies, employing more than 2000 workers, and also made sales by tender for another 50 to 75 producers. NDM’s company philosophy was that any producer should be able to obtain the highest possible price for their product in a free market system. The partners in NDM should be able to obtain the highest possible prices for their rough diamonds according to international market values.

One of the objects of the Diamonds Amendment Bill was the establishment of a State Diamond Trader to promote local beneficiation of South Africa’s rough diamonds. However, NDM held that subsidising any one segment of the diamond industry at the expense of producers would result in the collapse of producers and other players in the downstream industry. Thus the Bill was ‘fatally flawed’. NDM suggested that local buyers and cutters should enter into partnerships with international manufacturers in order to advance local beneficiation and polishing. Overseas diamond manufacturers would provide local beneficiating entities with finances and advanced skills, thereby empowering black entrepreneurs to bid on international markets.

Discussion
Advocate H Schmidt (DA) noted that the Committee had already agreed to the objects of the Bill. The NDM presentation showed the influence of globalisation as it made the SA diamond industry dependant on the international diamond industry. He asked how NDM would resolve the tension between government intervention in the diamond industry and free market enterprise. This question was not answered.

Ms S Ngaleka (ANC) enquired whether the NDM philosophy that producers should have the right to obtain the highest possible prices for their products would put entrepreneurs at a disadvantage. She also asked whether all the roleplayers in the diamond industry had equitable access to resources. Mr S Louw (ANC) commented that the majority of the population had been kept out of the diamond industry for many years, and therefore the Bill should facilitate transformation in the industry. He asked how the NDM would advance transformation in the diamond industry and how it was supporting and empowering its employees.

Mr Karp replied that the ‘spirit’ of the Bill was to bring rough diamond resources into the hands of previously disadvantaged persons. However, ‘not every previously disadvantaged person who wanted to enter the diamond industry possessed the necessary skills to succeed in the international market’. The aim of the NDM roadmap, which was currently in use, was to ‘fast track’ previously disadvantaged persons into the diamond industry and to provide them with skills and financial resources. Although there were only 2500 skilled cutters and polishers in the country, overseas diamond manufacturers would bring more skilled workers into the country if the NDM roadmap were followed.

The Chairperson interjected that the point of the hearings was to address the objects of the Bill, and Mr C Morkel (DA) added that the NDM presentation did not address the Bill specifically. Mr E Lucas (IFP) pointed out that the majority of white diamond traders did not possess technical skills. The aim of the Bill was to give historically disadvantaged persons the opportunity to enter the diamond industry through local beneficiation of rough diamond resources.

Mr C Molefe (ANC) observed that NDM had not responded to Mr Louw’s question on the transformation of the diamond industry. NDM’s presentation was unsatisfactory as it was silent on the matter of including historically disadvantaged persons in the diamond industry. The Bill should assist with transformation and provide for the training of employees in the diamond industry.

Mr Louw commented that if the current tender process for the sale of rough diamonds were continued, the local polishing industry would close down due to the export of rough diamonds. There should be a diamond trading centre where both foreign temporary permit holders and local beneficiators could purchase rough diamonds.

The Chairperson said that NDM were taking the lack of capacity for polishing in the SA diamond industry for granted and were not considering how this situation could be improved. The NDM ‘roadmap’ should take into account the historical factors that had prevented black population groups from acquiring skills in the diamond industry. Mr Karp responded that NDM represented diamond producers and miners, all of whom had Black Economic Empowerment (BEE) partners. The aim of the NDM roadmap was to expand the number of roleplayers in the downstream diamond industry.

Mr Louw pointed out that NDM had addressed the economic advancement of the diamond industry, yet was silent about their social responsibilities. How would NDM contribute to social development in the Northern Cape, for example? He noted that mining companies experienced delays in obtaining permits as they were not complying with the BEE shareholder percentages stipulated in the Minerals and Petroleum Resources Development Act. Companies should comply with BEE regulations without resorting to fronting.

Mr Karp responded that NDM were currently discussing their social responsibility programme with the provincial department [I can only assume that this is the provincial department that deals with the mining industry?]in the Northern Cape. NDM had suggested the establishment of a development trust in Northern Cape communities, for which they would need the support of local municipalities and the provincial department.

The problem for mining companies attempting to comply with BEE regulations was that the financing of BEE was not a priority for financial institutions. Therefore mining companies had to finance their partnerships with BEE companies. The Minerals and Petroleum Resources Development Act made provision for three kinds of permits. The mining permit could be obtained for a piece of land 1.5 hectares in area. However, this was an insufficient area for mining activities, and so BEE companies were able to obtain mining permits without being able to proceed further. This gap in the legislation allowed for BEE fronting.

Mr Morkel suggested that the Committee should consider which aspects of the diamond industry should be addressed through amendments to the Diamonds Act, and which aspects could be dealt with by amendments to the Minerals and Petroleum Resources Development Act. The Chairperson stated that the gaps in the legislation that allowed for BEE fronting should be closed. What were NDM’s recommendations regarding the 15% export duty on rough diamonds? (This question was not answered).

Mr Karp explained that the mining of alluvial diamonds was an inconsistent process that entailed variances in income for producers. The NDM roadmap would allow producers to remain ‘incentivised’, while also allowing previously disadvantaged persons to buy rough diamonds at market prices.

Rosecut Diamonds briefing
Mr E Roos (Rosecut Diamonds) outlined the potential impact of the Diamonds Amendment Bill on the current industry situation. There was currently only a small group of 2000 local manufacturers as the duty-free export of the majority of SA’s rough diamond resources reduced the local beneficiation of rough diamonds. Rosecut Diamonds supported the removal of obstacles to local beneficiation through the Bill. These obstacles included: Section 59 agreements that allowed for the duty-free export of rough diamond resources, and ‘downstream marketing’ which compelled manufacturers to become involved in downstream industries over and above their manufacturing commitments.

The current regulation of the diamond industry was ineffective in promoting local manufacturing. Equitable access should be allowed to SA’s rough diamond resources through the appointment of a State Diamond Trader to supply rough diamonds to local manufacturers. Rosecut Diamonds also recommended the regulation of the export of rough diamonds through the retention of the 15% export duty.

Discussion
Advocate Schmidt observed that Rosecut Diamonds’ presentation was not premised on the link between the local and international diamond markets. The Bill addressed not only the accessibility of rough diamonds but also their market value. He queried how Rosecut Diamonds’ submission would affect the price of rough diamonds.

Mr Roos answered that local diamond prices were determined by the international market, and the price of rough diamonds was calculated from these prices. When the price of rough diamonds increased, small-scale local manufacturers were forced out of business. Advocate Schmidt confirmed that Rosecut Diamonds was not taking issue with the functioning of the international diamond industry as it affected the local industry.

SA Diamond Producers briefing
Mr M Lotter (Chairperson) introduced the South African Diamond Producers (SADPO) which represented alluvial diamond diggers in the Northern Cape and North West provinces and aimed to sustain the alluvial diamond industry. SADPO supported the local beneficiation of diamonds in SA as provided for in the Bill, but questioned how the exclusion of foreign buyers would affect local diamond prices at trading houses as diamonds ‘have a global price’. SADPO contended that traders could not obtain diamonds on the local market only as a result of not wanting to pay international market prices to diggers.

As a consequence of the shift from an open market to a tender-based system in 1999, the local diamond price had increased by 30%. Before 1999 local buyers and cutters were under-paying diggers and exporting alluvial diamonds at large profits, whereas tenders attracted foreign buyers who paid international market prices. The local alluvial diamond industry was a ‘niche player’ in the global market as it produced gem-quality diamonds that were sought after by international polishers, jewellery designers and manufacturers. However, between 2002 and 2005 the annual alluvial diamond production had decreased from 1 million carats to 550 000 carats, while the number of employees in the industry had dropped from 35 000 to 6000.

Discussion
Advocate Schmidt asked what SADPO thought the economic consequences of the Bill would be. Mr Morkel requested that SADPO make available the sources of the research findings that appeared in their presentation. He referred to the Minerals and Petroleum Resources Development Act and asked how possible amendments to this Act could alleviate the difficulties experienced by small and medium diamond mines in complying with regulations.

Mr Lotter agreed to make available details of SADPO’s research findings. He responded that local diamond producers needed to obtain international market prices for their products in order to continue their operations and they were concerned that they would have to ‘carry’ the 15% export duty proposed in the Bill.

Master Diamond Cutters Association of SA briefing
Mr M Temane (Master Diamond Cutters Association of SA) stated that, as a member of the Diamond and Jewellery Federation, the Master Diamond Cutters Association of SA (MDCASA) supported the Bill and the Government’s intention to transform the diamond industry. The Association offered the following recommendations on the Bill:

- more industry organisations should be represented on the State Diamond Trader Board proposed in Section 17(3)(b).
- a ‘more stringent version’ of Section 40 should be retained in the Act.
- payment received in accordance with Section 17(f)(3) should be in the form of state funds so that the South African Diamond Board could be seen to be independent and impartial.
- Sections 40, 41, 42, 43 and 64 should not be repealed.
- Section 58 should be re-instated as beneficiators could not cut and polish all diamonds produced locally.

The Department should resolve the issues of the 15% export duty on rough diamonds and dollar accounts, as the industry fluctuated according to the value of the dollar.

Discussion
Mr Lucas noted that all the presenters had mentioned the matter of the 15% export duty on rough diamonds and asked whether the Association could make a specific recommendation on what the export duty should be reduced to. Advocate Schmidt asked who the Association represented and when it was formed.

Mr Temane responded that the Association had existed for 62 years and employed the majority of local cutters and polishers. An indicator of the extent of beneficiation in the local diamond industry was the number of employees. Since the institution of the 15% export duty, few traders had paid this amount. If the export duty was reduced, ‘underground trade would be lifted above ground’ and illicit traders would lose their business. The reduction of the export duty would encourage more companies to make payment, yet this would still be difficult to monitor.

Rough Diamond Dealers Association of SA briefing
Mr E Blom (Vice-Chairperson: Rough Diamond Dealers Association of SA) (RDDA) explained that their submission aimed to assist with the practical implementation of the Diamonds Amendment Bill. The definition of a dealer meant the holder of a diamond dealers’ licence (according to Section 26(a) of the Act) who, as a primary beneficiary of rough diamonds, could provide commission work to diamond beneficiaries. Clause 32 of the Bill should be amended so that the renewal period for dealers’ licences was five years.

In Clauses 6 and 17 of the Bill, representation on the SA Diamond Regulator and the State Diamond Trader should be limited to South Africans only, and also expanded to 17 members in order to include interest groups like the RDDA and the trade unions. In 1987, the imposition of a 15% export duty on rough diamonds led to smuggling activities which could recur if the 15% export duty was re-instated through the Bill. The RDDA supported government’s attempts to provide for the importation of rough diamonds from other countries. However, the Bill did not allow for imported rough diamonds to be exported without incurring the 15% export duty.

Discussion
Mr C Kekana (ANC) asked how many cutters were employed in the local diamond industry. He also enquired what percentage of the diamonds produced in SA were beneficiated locally as 95% of the rough diamonds produced locally were cut in India. The Chairperson requested that Mr Blom clarify the imposition of the export duty on rough diamonds in 1986.

Mr Blom replied that 2500 cutters were employed in the local industry, which was starting to expand. However, a comparison of the SA industry with the Indian cutting industry was ‘unfair’ as India cut diamonds at $12 per carat due to cheap labour, whereas SA cut diamonds at $50-$75 per carat. When the Diamonds Act of 1986 was passed, the SA Diamond Board, in consultation with the diamond industry, implemented an export duty of 15% on rough diamonds. The Diamonds Amendment Bill should make provision for rough diamonds to be exported after entities in SA had been given the opportunity to buy them.

Krochmat and Cohen Diamond Cutting Works briefing
Mr B Gutkin (Krochmat & Cohen Diamond Cutting Works) sketched the state of the local diamond cutting industry. Only four diamond cutting companies had survived the change of government in 1994, and all new diamond cutting companies were foreign-owned. The only way that SA companies could become competitive in the international market was to attract foreign investment and foreign expertise. As SA did not make use of low-cost labour, it could not compete with the cutting and polishing industries of India and China.

Section 40 of the Act should be retained. Government should not ‘legislate against the sale of diamonds’, but should set a percentage of diamonds that could be freely sold. Section 64 of the Act should be amended to allow producers to ‘export diamonds temporarily when this was economically necessary’. Mr Gutkin cautioned the Committee that the concept of government buying and selling diamonds through the establishment of a State Diamond Trader was ‘unhealthy’ and could lead to corruption.

Discussion
Ms Ngaleka noted that Mr Gutkin was not putting forward an alternative to the establishment of a State Diamond Trader for the promotion of local beneficiation. She also queried what the rate of skills transfer was from foreigners involved in the diamond industry to local people.

Mr Gutkin claimed that the establishment of a State Diamond Trader followed the model of the Angolan diamond industry and ‘government involvement in buying and selling commodities leads to corruption’. There were currently 2500 highly-skilled personnel employed in the cutting and polishing industry, and these skills had been acquired within the last ten years. Although the SA diamond industry possessed the skills to compete with other high-cost production locations, 70% of the industry was funded by foreign companies and this foreign finance should be used to build up the local industry.

Mr Kekana reiterated that 95% of the diamonds produced locally were beneficiated in India. Although African countries possessed considerable mineral resources, these resources often did not benefit the citizens of these countries, and the Bill should take this into account. Mr L Greyling (ID) added that there seemed to be a problem with local dealers buying diamonds and then exporting them.

Mr Louw asked how the diamond industry should balance the need to generate money against the Bill’s emphasis on facilitating local beneficiation. Mr Morkel also observed that Krochmat & Cohen seemed to be opposed to government intervention in the diamond industry. How then would they respond to the objects of the Bill in the area of social responsibility? The Chairperson also emphasised that the imperatives of ‘pure business’ should be balanced with government’s obligations to its citizens.

Mr Gutkin answered that the primary responsibility of local businesses was ‘to build great businesses’ and that their social responsibility was to their employees. The local diamond industry was not conducive to the involvement of small and medium enterprises (SMEs) and SMEs should form partnerships with foreign companies.

The Chairperson interjected that Mr Gutkin was raising ideological issues by espousing a ‘market fundamentalism’ that claimed that government should ‘stand aloof from business’. On the contrary, government should intervene in the diamond industry to redress historic inequities.

Diamond Merchant briefing
Mr G Brown (Diamond Merchant) said that African countries had not benefited from the diamond industry and therefore the local industry should be opened up by allowing free trade and setting targets for local beneficiation. The funding of the South African Diamonds and Precious Metals Regulator should be through Parliament.

Discussion
Advocate Schmidt queried how the objects of the Bill would be fulfilled and the diamond industry regulated if the licensing of dealers was done away with. Mr Brown replied that, in his view, there should be free trade in the diamond industry.

The meeting was adjourned.