Interaction with the Minister of Minerals & Energy on SCOPA 62nd Report 2005: SA Diamond Board

STANDING COMMITTEE ON PUBLIC ACCOUNTS (SCOPA)
12 June 2007
INTERACTION WITH THE MINISTER OF MINERALS AND ENERGY ON SCOPA 62^ND REPORT 2005: SOUTH AFRICAN DIAMOND BOARD

Chairperson: Mr N Godi (PAC)

Relevant documents:
Scopa 62^nd Report 2005: South African Diamond Board (Appendix 1)
Business Report news article (Appendix 2)
Diamonds Act 29 of 2005

Audio Recording of the Meeting

SUMMARY
The Committee had intended that the meeting should bring closure to issues pending since 2005. The attendance of the Minister of Minerals and Energy was therefore considered crucial. Meetings had been postponed a number of times as a result of the Minister’s non-attendance, and the Committee was becoming despondent about the delay in reaching finality.

The export of diamonds without the payment of export duties was a point of contention, particularly as local beneficiation was government’s main objective. The Diamond Act made it clear that diamonds should only be exported once local avenues have been exhausted, but the conclusion of an agreement between De Beers and the Diamond Board had led to the export of tons of diamonds. There was no documentary evidence of such an agreement between De Beers and the Diamond Board. The only evidence that existed pertains to a Board resolution taken in 1992. There was a request for De Beers to be summoned to appear before SCOPA, so that the matter could be clarified.

MINUTES
Ms A Dreyer (DA) expressed her dissatisfaction at the absence of the Minister. She did not want the Committee to create the impression that non-attendance was viewed lightly. In the past, meetings with the Minister had been postponed on a number of occasions, and with a wide range of excuses from the Minister’s office. This should have been the last of the series of efforts to engage the Minister. Some people had heard the night before that the Minister would not be attending, but the majority had only been informed that morning. If the Minister had given timeous notice of her non-attendance, the meeting could have been postponed as its main purpose was to hold discussions with the Minister herself.

Mr D Gumede (ANC) said that it was unfortunate that the Committee was not informed well in advance, but that the matter on the table was whether or not the accounting authority could account fully with regard to the matter before the Committee. If the accounting authority present could account fully in the absence of the Minister, they should be allowed to do so. If the Committee was dealing with stewardship of the Department, the correct accounting authority of the Department was indeed present. The Chairperson of the Diamond Board was also present, and he was the correct accounting officer for the Diamond Board. If any member of the delegation was of the view that they could not account for certain matters, they should say so. If the intended discussion pertained to changes in policy, the meeting could not proceed without the Minister. However, if the matters to be discussed did not relate to changes in policy direction, the delegation present could provide an adequate account.

Mr E Trent (DA) said that he did not feel the delegation could account for the most crucial issues.

Mr Sandile Nogxina (Director-General, Department of Minerals and Energy) said that he would like to submit two apologies. The first apology was for his absence from the previous hearing, due to circumstances beyond his control. His absence was definitely not out of disrespect, as he had a high regard for parliamentary committees, and many people could attest to this.

Mr Nogxina said that he also wished to extend an apology on behalf of the Minister, Ms Buyelwa Sonjica, who had taken ill during last week. He regretted that the Committee was not informed in time.

The Chairperson said that the meeting was being held from 09h00 to 10h00 because the Minister’s office had indicated that she would be available during this specific time. He did not want to spend too much time on discussing the Minister’s non-attendance, and the Committee should proceed with interaction with the delegation.

Mr P Gerber (ANC) said that there were certain matters that had been dangling in the air for a long time, and that finality was desperately needed. He referred to a briefing document from the Minister and said that diamonds valued at R820 million were sent to London. This shipment was not accompanied by payment of export duties. There was no documentary evidence from the Diamond Board stating that it had authorized such a large shipment. If one took the basic weight of a carat, then it would be 3.99 tons of uncut diamonds that had left the country. The export of uncut diamonds had come to about R1.8 billion each year, but this amount had risen to R4, 6 billion in 1992.

Mr Nogxina said that the root of the problem being faced could be found in the interpretation of the provisions in Section 39 of the Diamonds Act. Section 63 of the Act was clearly designed as a carrot-and-stick mechanism to encourage diamond producers to fulfill their obligations in terms of local beneficiation. Section 63 further required producers to offer their diamonds to local cutters. If there was no buyer, the producer would have to enter into an agreement with the Diamond Board, subject to the provisions of Section 39 of the Act. According to this section, once the Board is satisfied that the efforts aimed at local beneficiation had been exhausted, the Board could then allow for the diamonds to be exported without the payment of export duties. However, the Act itself did not describe the formalities on how agreement should be entered into between the parties concerned.

Mr Nogxina said that examination of the Board records showed that some of the agreements, from 1998 up to 2004, were indeed written up in accordance with the provisions of Section 39. The Department could not, however, lay its hands on any copy of such agreements before 1998. The closest thing that was found was the Board resolution of 3 December 1992. Interestingly, this Board resolution contained what appear to be the terms and conditions of a new agreement which was entered into between the Board and De Beers. It was in terms of this Board resolution that all unpolished diamonds produced by De Beers would be exported free of export duties.

Mr Gumede asked whether the South African Revenue Service (SARS) was not concerned by the non-payment of export duties.

Ms C Smit (Specialist Tax and Legal Advisor, SARS) said that SARS has no legal standing on the issue, as it has never been mandated to collect export duties on uncut diamonds.

Ms Smit that the law did not give precise and specific directions on how diamonds should be offered locally, and confirmed that it was not clear on the nature of agreements to export diamonds.

Mr Nogxina said that the lack of clarity in the Bill with regard to these issues had led to attempts to tighten up the law. The Diamond Export Levy Bill, which was initially called the Beneficiation Bill, was currently before Parliament for consideration.

The Chairperson asked for an account of diamonds that appeared to have been looted out of the country by De Beers.

Mr Trent said that the Committee should refrain from terminology such as “looted” as the issue being discussed was a legal matter.

Mr Gerber compared the situation to what took place in Namibia in the period just before its independence, when uncut diamonds were also exported for stockpiling.

Mr Nogxina said that an untenable situation had arisen. Section 3 of the Diamonds Act enjoins the Minister to appoint a Board whose members were mainly drawn from the diamond industry, which the Board was supposed to regulate. A clear conflict of interest has been created where the referee and the player was one and the same person. Several legal opinions have been sought on the matter, and a number of investigations have been carried out in relation to the provisions of Section 39. In June 2001, the Chairperson of the Diamond Board was given a specific mandate from the Minister to clean up the Board, in light of the conflict of interest aspect.

Mr Nogxina said that the Committee could summon any entity to appear before it. The Committee should therefore summon De Beers, and request a copy of the new agreement that was entered into between De Beers and the Diamond Board.

Mr Abbey Chikane (Chairperson, Diamond Board) said that he had personally written to De Beers, who had replied that there were no agreements prior to the resolution of December 1992.

Mr Trent said that there was clearly no documentary evidence of an agreement, and that the entire matter was based on a resolution taken at a Board meeting. He was uncertain whether or not a Board decision is legally binding.

Ms Dreyer said that the Committee should request a copy of the Board minutes.

Mr V Smith (ANC) said that De Beers must be held to account. He repeated the call for De Beers to be summoned to appear before the Committee, and added that perhaps the Minister of Finance should also be present at the meeting.

The Chairperson said that the way forward had to be determined without delay.

The meeting was adjourned.

Appendix 1:

Sixty-Second Report of Standing Committee on Public on Public Accounts: South African Diamond Board, dated 14 September 2005:

1.        Introducion

The Standing Committee on Public Accounts, having heard and considered evidence on the Annual Report and the Report of the Auditor-General on the financial statements of the South African Diamond Board (Board) for the year ended 31 March 2003/ 2004 tabled in Parliament and reffered to it, reports as follows:

2.        Investigation relating to the export and sale of diamonds in terms of the Diamonds Act, 1986 (page 29-31 of the annual report)

The Committee noted with concern the significant weaknesses highlighted in the audit report with regards to the export and sale of diamonds. The following issues were raised:

a.        validity of exemptions given under section 63 of the Act to diamond producers and dealers by virtue of agreements entered into in terms of section 59 of the Act;

b.        limited documentation for Section 59 agreements;

c.        the drastic decline in export duties;

d.        differences and disputes between the Government Diamond Valuator (GDV) and the SA Diamond Board relating to the role and functions of the GD; and

e.        The length of time the above issue remain unresolved.

Having heard and considered the views of National Treasury, SA Diamond Board, the Department of Minerals and Energy and the Auditor-General, the Committee is of the view that this matter has been unduly prolonged.

The Committee is aware of the many administrative initiatives to resolve these issues but notes the failure of these to produce positive result.

The Committee therefore recommends that:

a.        the relevant state institutions initiate legal proceedings with a view towards resolving the section 59 exemption in question – a special meeting should be convened by the Auditor General for this purpose within 30 days after this report has been adopted by Parliament;

b.        the Board ensures that all South African produced diamonds be valued in SA on a fair market basis;

c.        the Board strengthens its efforts to increase local beneficiation of SA diamonds; and

d.        the Board confers with the Department of Minerals and Energy to finalise and implement the new legislation.

The Committee expresses its disappointment at the inadequate representation from the Department of Minerals and Energy at the hearing and insists that future representation be at an Accounting Officer level.

Conclusion

The Committee requests the Board to furnish it with a progress report covering all the above-mentioned issues within 60 days after this report has been adopted by Parliament.

Report to be considered.

Appendix 2:
Business Report news article June 13 2007: MPs challenge De Beers over mysterious exports
By Michael Hamlyn

Cape Town - MPs are considering whether to call De Beers to give evidence to the financial watchdog committee on public accounts on how it came suddenly to export huge numbers of uncut diamonds shortly before apartheid officially ended and the new democratic government came to power.

The committee was told yesterday that the export of uncut diamonds each year amounted to about R1.8 billion, but that in 1992 there was a sudden spike to R4.67 billion. But the Diamond Board said it had not been able to discover a copy of any agreement allowing the export of diamond without payment of the export levy.

It had no copy in its files, according to Abbey Chikane, who chairs the board. And when the board wrote to De Beers asking for the company's copy, all it received was a copy of a board resolution on the subject.

The chairman of the committee, Themba Godi, asked: "Where is the agreement that allowed De Beers to loot the diamonds out of the country?"

ANC MP Pierre Gerber referred to what happened in Namibia just before that country's independence, when uncut diamonds were similarly exported to be stockpiled in London, in what the MP called "a scorched earth policy".

The committee will consider the possibility of legal action against the company to recover the unpaid levies. The levies arise from clauses in the Diamond Act that require that gems be first offered to local polishers or cutters before being exported. Offering the diamonds locally allows the diamonds to be exported free of the 15 percent levy.

But Catinka Smit of the litigation department of the SA Revenue Service told the committee that the law was very imprecisely drawn. It did not, for example, specify in what way or how often the diamonds should be offered locally. Nor did it prescribe what form an agreement to export should take. It could even be a simple oral agreement, she said.

The director-general of minerals and energy, Sandile Nogxina, told MPs that the imprecision of the act encouraged the government to draw up a new bill that would tighten up the law. That bill, which was first to be called the Beneficiation Bill, has now taken the form of the Diamond Export Levy Bill before parliament.

The bill lays down specific terms under which uncut diamonds should be offered to local cutters and polishers.

De Beers spokesperson Tom Tweedy said uncut diamonds were exported when an equivalent amount of diamonds were imported, and when the diamonds themselves were not of sufficient quality or size to make it worthwhile cutting them here. "Local cutters are more expensive than those in India or Asia."

He later said: "De Beers keeps a record of its agreements and we are happy to assist the board should it require copies of agreements that we have." An agreement in section 59 of the Diamond Act "has been an evergreen agreement, which is reviewed annually by passing a resolution, unless there are material changes in any of the terms or technical details".

This had happened last year, when particular types of diamond were added to a section that deals with specials, which are diamonds of a colour, size or type of a higher value reserved for South African diamond cutters and not exported."