Diamonds Amendment Bill: Department Response to submissions

Meeting report

MINERALS AND ENERGY PORTFOLIO COMMITTEE
17 October 2005
DIAMONDS AMENDMENT BILL: DEPARTMENT RESPONSE TO SUBMISSIONS

Chairperson: Mr E Mthethwa (ANC)

Documents handed out:
Speech by Minister of Minerals and Energy, Ms L Hendricks
Department Response to Issues Raised at Public Hearings
Diamonds Amendment Bill [B27-2005]

SUMMARY
The Minister of Minerals and Energy addressed the Committee about the Bill which was aimed at providing equitable access to diamonds for the majority of South Africans who had been denied this in the past. The Department then provided a response to the issues raised at the hearings. It said that "non-negotiable" were the restructuring of the current South African Diamond Board, the establishment of the State Diamond Trader and the Diamond Export and Exchange Centre, the non-distinction of " cuttables " from "non-cuttables" and the duty on export of rough diamonds.

Members asked questions on the following topics: the proposed Money Bill, the role of the state in the free market, the question of opening up the State Diamond Trader to outside investment, the accessibility of the industry to small scale producers, the desirability of having De Beers as a partner and the issue of "cuttables" versus " non-cuttables".

MINUTES

Introduction by the Minister of Minerals and Energy
Ms L Hendricks introduced the Department's response by highlighting the media interest and attention that the hearings had recorded and stated that because the issues were important to many South Africans, the government could no longer put a hold on these matters. The Minister stated that there were diverse opinions and views on the Bill. She observed that even though African countries had large combined production of diamonds, they were no where near to being diamond centers. There were many myths associated with the industry as to why it was not economically viable to cut and polish diamonds in South Africa and why diamond producing countries should only concentrate on producing, leaving the down-streaming to other countries. The Minister reiterated that there was no guarantee that there would be no job losses if the Bill were not passed. The Minister stated that the objectives of the Diamond Amendment Bill were for South Africa to drive the beneficiation of diamonds, and as one of the largest producers provide for the local supply of diamonds to ensure that diamonds were beneficiated in SA. It was furthermore to ensure that cutters and tool makers obtained regular supplies of unpolished diamonds and to create more jobs in the beneficiation of diamonds locally, thereby cushioning the impact of job losses anticipated upstream.

The Minister stated that the government could not compromise on its obligations which were: - the restructuring of the current South African Diamond Board, establishment of the State Diamond Trader, establishment of the Diamond Export and Exchange Centre, non-distinction of "cuttables" from " non - cuttables" and the duty on export of rough diamonds

She believed that these amendments would guarantee equitable access to diamonds to the majority of South Africans who were denied this in the past. The Minister believed they were transforming an industry that had remained the same for a very long time and by doing so they intended to diversify the SA mining sector to ensure its long-term sustainability.

Department Response to Submissions
Mr. A. Mngomezulu, Deputy Director - General presented the Department’s response to issues raised at public hearings on the Diamond Amendment bill. He stated that the purpose of the Diamonds Amendment Bill was to increase equitable access to rough diamonds for manufacturing, to increase participation throughout the value chain to create jobs and to make South Africa a significant international diamond beneficiation centre.

Mr. Mngomezulu raised the issues of three definitions which were: - expansion of dealer to combine dealing and beneficiation in one license, irreversibly treated diamonds would be defined separately in section 56, and the changing of the term "parcel" to "container".

Further amendments were in Clause 4 and 5 in which the objects and functions of the Regulator with regard to precious metals would be dealt with in the Precious Metals Bill.

In terms of Clause 6, he stated that the members of the Board of the regulator would be increased to a maximum of 16 with 2 members representing the diamond industry and two members representing the precious metals industry.

Clauses 10 and 17 allowed for a two-thirds majority of members of the board to call for meetings.

In terms of Clause 12, the regulator should not be entirely state funded and should be allowed to raise funds for developmental projects.

On Clause 17, the representation by dealers on the Board of the SDT was dealt with as well as the representation of investors and SDT funding.

Clauses 19 and 24 dealt with the conditions of sale and export of unpolished diamonds by holders of beneficiation licenses.

Clause 26 (e) dealt with the reduction of the term of a temporary permit from 1 month to 1 week.

Clause 26 (f) dealt with the selling of rough diamonds by means of tender at Trading Houses to everyone.

Section 29 dealt with the fact that no reference was to be made to premises.

Section 32 dealt with the increase of the period of validity of a diamond dealer's license from 3 to 5 years.

Sections 40 - 43 would be reinstated and Clause 26 made provision for a special permit to sell diamonds under prescribed conditions.

Clause 48 made provision for the offering of all diamonds at the DEEC before export.

Section 39 allowed for an appeal procedure to be included in the Bill.

Section 58 would be reinstated because it allowed cutters and beneficiators to export unpolished diamonds.

Clause 59 contained a change in the word "volume" which had been corrected to read ‘value’ and it stated that the SDT would purchase a representative sample of a production cycle by caratage and value. It also stated that the SDT would exercise flexibility to accommodate small-scale producers.

Section 63 dealt with exemption from export duty of diamonds offered at the DEEC but not purchased.

Section 64 dealt with deferment of payment of export duty that would be provided for in the Money Bill.

Clause 67 allowed for a 20 percent fine for difference in valuation.

Section 93 dealt with a deletion of levies for the running of the SA Diamond board. Other issues dealt with were that the Bill would not distinguish between "cuttables" and "non-cuttables". There would be VAT on imports and the development of a BEE charter and scorecard were provided for. The Bill allowed for research on the diamond industry, but it would not provide for offsets for producers who provided diamonds directly for beneficiation. Finally, it provided for guidelines for diamond pricing and the MPRDA was being amended to cater for both turn around times for granting licenses and the size of mining areas.

Discussion
Adv. H Schmidt (DA) stated that the Department had not really changed anything in the Bill and in substance it was the same; the only exception was the change in representation on the SDT. He asked why the Department had not dealt with the export duty or conducted a proper cost benefit analysis of the industry prior to the Bill. He emphasized that the DA would oppose the Bill in its present form. He further stated that the Department would be going through unchartered waters and he got the impression that the current state of the diamond industry in South Africa was unknown. He questioned what percentage of diamonds local manufacturers was using and why there were no figures from the South African Diamond Board. He continued that South Africa could not be compared to the Indian model and when government entered the free market they were placing themselves in a bind.

Mr. S. Louw (ANC) stated that he differed with Adv. Schmidt and welcomed the Department’s input whilst listening to all the concerns of the industry. He welcomed the issue of accessibility in an industry that had been a closed shop. His serious concern was that the offer by De Beers to partner would lead to a situation where De Beers played the role of big brother. He believed that all diamond role players should be treated equally. He stated that the production side was too rigid and there were disadvantages for small-scale producers. He welcomed the Bill and its debate in the National Assembly in November.

Mr E Lucas (IFP) stated that he had serious problems with the proposed Money Bill and up to this point that Bill was not "up and running". He requested an assurance from Treasury on this matter.

The Chairperson stated that the effect of opening up the State Diamond Trader to outside funding could increase the possibility of corruption.

Mr. A Mngomezulu replied that the FRIDGE study served as a guideline in the compilation of the Amendments to the Diamonds Act.

He stated that in terms of statistics on the cost of labour per carat, South Africa was not comparable with India because they were cutting at a cost of 15 dollars per carat. SA was cutting at about 30 to 35 dollars per carat. He said that technology would improve in terms of cutting the small stones that they were presently not able to add economic value to.

He stated the Department had advertised in the local and international media to find out the intentions of people interested in coming to South Africa to carry out fabrication. There was a total of 104 people who had displayed interest, of which 10 were new international companies interested in investing in South Africa.

Adv. S. Nogxina, Director-General stated that the concern they were getting into an insecure dispensation was incorrect. They had tried to legislate for a transitional environment and had not wanted to put themselves in a legislative straight jacket.

He stated that with regard to the issue of the percentage of state participation, the need for the Department to be flexible was very important. It was tried and tested economic principle that where the market had failed, the state had to intervene in order to correct the situation.

Adv. Nogxina said that there was an anomalous situation in the market where South Africa, which was one of the largest producers of diamonds, had a very small cutting and polishing industry and the private sector was allowed to do this for years. The state could not allow a situation where the private sector was left alone and it did nothing to change the situation. Therefore the state had intervened in the market to facilitate but not to compete, and the state had not placed itself in a bind by entering the market.

Mr. E. Lucas (IFP) said the majority of the people were in favour of change in the diamond industry but the industry must be preserved and not destroyed. He was concerned that, if we stopped exporting those diamonds we could not cut in this country, there would still be a market in India for them.

Mr C Morkel (Independent) stated that his question about statistics had been incompletely answered and there still remained a need for a further cost benefit analysis and a regulatory impact assessment. He wanted to know at what point an assessment would be made that the market had achieved enough for transformation and that state intervention was no longer required.

Adv. Nogxina stated that a cost benefit analysis was not a requirement for legislation. He continued that the Department would like to have an economic impact analysis of this law. He stated there were a number of issues like the percentage of production that had to be submitted that would be determined by the market. He stated that as they went about implementing the law, they would do these types of economic assessments.

He stated that with regard to the regulatory impact assessment, the State Law Advisers did this when they certified a Bill and there was therefore no need for a further regulatory impact assessment.

The Deputy Minister stated there were people who did not want transformation in the industry and they could expect delaying tactics. One of the key objectives of this Bill was to open access to the industry. She emphasized that the industry had to transformed and that all the concerns would be listened to, but they would be unable to satisfy everyone.

She stated that this Bill would assist in finding out what was "uncuttable". If there were such a thing as uncuttable, it would be exported. She stated that she had met traders from Belgium who could not buy diamonds from South Africa and they had been waiting for years for the industry to open up to get access to rough diamonds for their trade.

Ms. N. Mathibela (ANC) stated that she was impressed with what the Deputy Minister had said and that the need existed for foreign role players to bring their technology to South Africa.

The Chairperson summed up that the role players from the industry were not adversarial and that the main issue was one of change and the dire need for access to rough diamonds. The government could not allow a situation where job creation in the value chain would be abandoned because of opposition to the Bill. He further stated that there was no reason why different rules should be applied to this industry.

The meeting was adjourned.