CHAPTER 12

According to the White Paper Government’s policy is to create a stable macro and regulatory environment conducive to economic growth and development, in which global investment is encouraged. It is the Government’s intent to conduct regulatory and promotional activities in a transparent and efficient manner, and to regulate the mineral industry to meet national objectives and bring optimum benefit to the nation. Government involvement in governance will be focussed on efficient and cost-effective resource management.

Ų The Diamonds Act was introduced to provide for the establishment of the Diamond Board, for control over the possession, the purchase and sale, the processing and the export of diamonds and related matters.

Ų In a statement made by the Minister of Minerals and Energy on
1999-05-05, regarding an investigation into a dispute concerning certain functions of the GDV, it was indicated that Government has been concerned about several issues relating to the South African diamond industry for quite some time. The Minister concluded that in order to realign diamond legislation with the Constitution and Government policy as well as to remove practical problems such as a lack of clarity and conflict of interest, the Diamonds Act will be reviewed in its entirety.

The role of the Diamond Board with reference to the creation of growth and development of the local industry and with reference to the role of the Diamond Board in the control of diamond imports need to be assessed. The composition and funding of the Diamond Board are further issues that need to be investigated.

Two Section 59 agreements, with the largest producers have been in existence for some years, in terms of which the companies may export rough diamonds free of export duty, on the condition that clients in South Africa are supplied with sufficient diamonds. In the case of De Beers all special stones (10,8 carats and above) and fancy colours are held in stock for South African sightholders only. The agreement came about as a result of the decline in local production of suitable unpolished diamonds for the local cutting industry. South African sightholders and others now have the advantage that South African unpolished diamonds are incorporated in a London selling mixture at the CSO, suitable to their needs, from which they are supplied. Another advantage of the Section 59 agreement is that Category 3 diamonds (mainly small diamonds), which are unsuitable to process in South Africa, and are of insignificant value to the local industry, are now exported, absorbed and utilised in India, giving an extended life to marginal South African mines.

Because of duty free exports of unpolished diamonds via the Section 59 agreements and through the Diamond Bourse, very little export duty has been levied since 1986. It is arguable whether export duty should be levied or not. It is noted that the Greeff Commission of Inquiry into the Diamond Industry (1973) recommended that export duty be abolished and that a loss in revenue can be recovered from an increased income tax.

The concept of free trading in unpolished diamonds should be compared to the present system, where possession and dealing in unpolished diamonds is only allowed with the necessary licences and other control measures. Proposed free trading in unpolished diamonds was recently rejected in Namibia.

Following the dispute referred to above, clarity needs to be identified on the functions of the GDV and the manner in which values of diamonds are assessed.

To conclude, Government is in favour of open and inclusive governance, including opportunities for parties and individuals to constructively engage Government on matters of common concern, before new legislation is finalised.

The Government has in recent years made a special effort to review and modernise the South African mining and minerals policies and legislation. Against this background the Government has since published the White Paper which, for example, proposes easier access to mineral rights and prospecting information, measures to encourage the exploitation of mineral deposits by small-scale miners and individuals from historically disadvantaged groups, as well the development of environmentally sound practices in mining.

South Africa is one of the world’s largest diamond producers, whilst diamond mining still constitutes and indispensable part of the country’s mining and minerals industry and contributes profoundly to regional development by providing employment and enhancing the overall economic well-being of local communities. The South African Government is presently undertaking a reform of the laws governing the mining and minerals industry and proposals for reform call for, amongst others, the maintenance and promotion of a stable legal and fiscal climate, the prevention of hoarding of mineral rights and the sterilisation of mineral resources, State ownership of mineral rights to encourage access to mineral rights and recognition of the State as custodian of the nation’s mineral resources for the benefit of all. New mining legislation is presently being developed which is to be used as the main instrument through which the Government’s policies towards the mining and minerals sector, as demonstrated in the White Paper will be formulated and implemented. The aims are clearly to enable South Africa to meet its quest to compete internationally in the mining world and to introduce greater social equity into society.

The role of small-scale diamond mining in the context of regional development, should not be underestimated and apart from financial gain, Government realizes that there is also a social benefit in small-scale mining in terms of producing rural income and employment. Small-scale diamond mining in particular, is already undertaken on a sizeable scale in South Africa and it is the Government’s intention to encourage and facilitate the sustainable development of this sector in order to ensure the optimal exploitation of small mineral deposits and to enable this sector to make a positive contribution to the national, provincial and local economy. Through the recently established National Steering Committee of Service Providers to the Small-scale Mining Sector and the Department of Minerals and Energy operating as co-ordinater, financial assistance will be provided to operators for acquiring supplies and equipment, technical assistance and advisory services on practical mining problems and training is to be offered. At regional level, Regional Small-Scale Mining Committees were established to streamline regulatory and administrative procedures, to provide small-scale miners with information on mineral rights and mineral deposits and to look specifically at environmental issues affecting the small operators.

The mining industry is coming under closer scrutiny than in the past and it is necessary for the Government to be aware of the environmental requirements which affect this sector. As stated in the White Paper, Government, in recognition of the responsibility of the State as custodian of the nation’s natural resources, will ensure that the essential development of the country’s mineral resources will take place within a framework of sustainable development and in accordance with national environmental policy, norms and standards. To control the environmental affects of mining, South Africa has already developed a set of environmental laws and regulations, but Government will also pay much greater attention to consultation with interested and affected parties to ensure public participation in the decision-making process and the audi alteram partem (hear the other side) rule shall apply to all decision-making. A consistent standard of environmental impact management will be applied and maintained, irrespective of the scale of the mining operation and special attention will be afforded to the education and the provision of guidelines for mining entrepreneurs concerning environmental management, especially for small-scale miners. In addition, the principles of Integrated Environmental Management (IEM) will be applied to environmental management in the mining industry and multiple land use will be adhered to in planning decisions and contending options will be assessed and prioritised on economic, social and environmental grounds.

Judging from the various submission received by the Commission, there are diverse opinions on the subject of illegal diamond buying (IDB). On the one hand, there are persons and institutions that support the legislation for the control of trading in unpolished diamonds, as well as for IDB to be a statutory offence. On the other hand, there are those that support limited legislative control over the diamond trade or a total abolishment of control.

There is no doubt among some of the major stakeholders in the diamond industry that controlled marketing of diamonds is vital for the country and that it should remain a criminal offence for anybody who is not specifically licenced for the purpose, to possess or deal in unpolished diamonds. When a revision of the Diamonds Act is considered in time to come, the issue of IDB should be given careful consideration. Diamonds are small and extremely valuable and according to the report of the Greeff Commission of Inquiry into the Diamond Industry (1973) the theft of diamonds which is still causing a direct loss of revenue to the State, was one of the main reasons that illicit diamond buying was made a statutory offence.

The concept of trapping in law enforcement has always been a questionable subject, but those persons in favour of this practice argue that if well-established safeguards are observed, trapping has a legitimate and important place in crime prevention. There is, of course, still fairly widespread belief among certain stakeholders in the diamond industry that the legislation to control theft of diamonds, is aimed at restricting the production of diamonds in the interests of one particular mining group’s orderly marketing policy.

It is unknown to the Task Team whether the insertion of section 252A in the Criminal Procedure Act of 1977, during 1996, dealing with the authority to make use of traps and undercover operations and to obtain evidence of the commission of an offence, has had any significant improvement in the procedures which are followed by the SAPS in attempts to combat illicit diamond buying and trade.

In the sphere of regional co-operation within the South African Development Community (SADC), Government’s intention, as stated in the White Paper, is to encourage co-operation on mineral and mining matters amongst the countries of the southern African region and to base that co-operation on the principle of mutual benefit. It is to devise policies to enhance South Africa’s capacity to contribute to the development of the region and the objective will be to achieve an equitable balanced and mutually beneficial order in southern Africa

The proposals by De Beers and the SAPS regarding possible amendments to the control and regulation procedures contained in the Diamonds Act and in related legislation, should be investigated and the merits thereof given consideration when the said Act is in the longer term reviewed in its entirety to bring the country’s diamond legislation in line with the Constitution and Government policy, as well as to remove practical problems, such as a lack of clarity in certain matters and conflict of interests, as was envisaged in the media statement made by the former Minister of Minerals and Energy on 5 May 1999.

De Beers exports its full production of Category 1, 2 and 3 unpolished diamonds to the CSO. The South African production is mixed with all the desired qualities from other parts of the world. Unpolished diamonds from these mixtures, sold by the DTC to the 18 South African sightholders are all imported from the CSO.

Ų The dealer sights, being Diamdel and B & E Diamonds CC, both supplying the non-sightholders, being the vast majority of dealers, cutters and polishers.

Ų The production of smaller producers and small scale miners at approved premises.

An essential feature of the marketing and pricing policy of the CSO is to maintain stability in the price of unpolished diamonds.

Although no complaints about the availability of suitable unpolished diamonds were received from the sightholders, many of the dealers and cutters being non-sightholders complain about the availability of suitable unpolished diamonds at realistic prices.

The general feeling amongst the main producers and cutters of the local industry is that the market system of the CSO, where the major portion of the diamond production is channelled through a single central sales outlet, is in the interest of international stability in the unpolished diamond market. Prices of unpolished diamonds have shown a steady and sustained pattern of growth over the recent years. Contrary to that, the severe fluctuations in the gold price have caused a very turbulent phase in the local gold mining industry, resulting in instability and decline.

The main producers of unpolished diamonds and the sightholders of the CSO are of the opinion that the supply of suitable unpolished diamonds to the local industry is sufficient. However, the majority of dealers and cutters complain about the availability of regular and suitable supply of unpolished diamonds that can be profitably processed, a view supported by the Diamond Workers’ Union. These complaints need to be investigated following certain recommendations made in the submissions. One of the suggestions was to offer that portion of the production of the State-owned Alexkor Ltd, suitable for the local industry, on the Diamond Bourse. Currently the Alexkor Ltd unpolished diamond production is purchased by Dicorp, in terms of an agreement between the parties concerned (Confiscated unpolished diamonds are purchased in terms of the same agreement).

Imports of unpolished diamonds have become an important source of supply for the local industry. The Diamond Board suggests the inclusion of a Chapter on imports in the Diamonds Act. Consideration should be given to the improvement of the import system at the borders and at international airports.

State revenue is collected through diamond mines’ income tax, royalty payments in respect of mining leases on areas where the State holds the mineral rights, and export duty. The total fiscal revenue over a period of 17 years amounts to only 5,8% of total diamond sales, according to the Department of Finance and this amount may not represent a sufficient compensation for the existing opportunity costs in respect of alternative resource use.

Government revenue from export duty is almost non existent since 1986, when the present Diamonds Act came into operation. Some parties are of the opinion that export duty should be scrapped because the diamond industry is the only industry in South Africa subject to export duty.

Employment levels in the local diamond processing industry have dropped from a peak in 1989, in the financial rand era, to a low of approximately 1 500 employees presently. Various participants are of the opinion that the reason for this sad situation is an insufficient supply of suitable unpolished diamonds to the local processing industry. According to De Beers the manufacturing industry is highly competitive, and because diamonds are “portable” they can easily be moved to the cutting centres were skills are highest or where labour costs are lowest.

The Department of Finance is presently investigating the issue of export duty on exports of unpolished diamonds and it may be advisable to investigate the whole tax regime in the diamond industry. It must of course be borne in mind that except for the direct taxes, the diamond industry provides jobs resulting in indirect taxes and also contributes to the development of local communities.

Job and wealth may be created by producing diamond mines, but definitely not in the local processing industry, where only 1 500 people are employed, including a number of employees not even involved in the actual processing of diamonds. The new Government policy as indicated in the White Paper has addressed the issue of beneficiation, and implementation of the policy will hopefully have a positive effect on the situation.

In various submissions the importance of bringing the South African diamond industry in line with other diamond centres is emphasised, thus creating a level playing field. Some contributions suggest a free and open trade in diamonds, with limited Government intervention.

Government’s policy includes to ensure continuing competitiveness of the minerals industry, which has to compete against developed and developing countries.

It has been observed that the diamond mining industries of South Africa and Russia have much in common, with a monopoly in diamond mining and marketing in both countries. Both countries produce a significant quantity gem quality diamonds. Furthermore, both countries have relatively small diamond processing industries, and both Governments are determined to see the expansion of diamond processing in their countries. Russia plans to phase out import duties on diamonds and other tax burdens. Domestic manufacturers have the right of first refusal on gem quality unpolished diamonds produced. Russian manufacturers complain of a lack of suitable rough diamonds as these are exported, a similar complaint as heard in the South African industry. However, because of a lack of information it is not practical to use Russia as a model for South Africa. The Russian industry has always been under State control and private initiative to develop a manufacturing industry was never allowed.

Labour costs in Israel are higher compared to South Africa. Israel is not a diamond producer, but is an important gem quality diamond polishing centre in the world, and is also gradually becoming a major trading centre. In 1996 approximately 7 700 workers were employed in some 600 factories. Challenges in the Israeli industry are improved technology and the purchase of sufficient suitable unpolished diamonds.

India is the world’s largest manufacturer of cheap and small polished diamonds. The main suppliers of the unpolished diamonds are the CSO and Argyle. Many of South Africa’s production of small unpolished diamonds is absorbed in India through the CSO. The Indian industry employs some 700 000 workers. Low labour costs, the use of modern technology and a favourable financial structure assisted to develop the manufacturing industry of this non-diamond producing country.

Other main cutting centres are Belgium and the United States. Antwerp in Belgium is the main trading centre of the world. The cutting industry in Antwerp specialises in better quality goods of medium size. New York in the United States specialises in the high quality goods, because of high labour costs. Not many workers are employed in their processing industry.

Australia produces about one-third of the world’s annual production with most diamonds being industrial and near gem. The country favours independent marketing. Australia does not have a well developed processing industry.

Main producers in Africa are the Democratic Republic of Congo, Botswana, Angola and Namibia. It is interesting to note that none of these countries have important processing industries, although a few factories are operating in Botswana, Namibia and Mauritius.

Looking at workers employed in the diamond manufacturing industries, countries not discussed previously such as Thailand, China, Sri Lanka and Malaysia all employ more people than the South African processing industry.

To conclude, South Africa had a disadvantage in international markets because of political reasons until recently and where these facts no longer apply, the Government’s policy as indicated in the White Paper should be considered to be implemented to develop the local processing industry.

According to submissions received London is regarded as the leading unpolished diamond distribution centre, being able to receive most of the world’s diamond production, supply cutting centres, promote jewellery and access financial institutions. Approximately 94% of South African diamond production is exported to the CSO and imports from the CSO supply South African sightholders from the London mixture.

Major producers and major representatives of the processing industry appear to be in favour of the single-channel marketing system through the CSO because of the fact that the system has created price stability on the rough diamond market over a long period. Furthermore, the system makes it possible to absorb diamonds of little value to South Africa, mainly small, near gems to be absorbed in major cutting centres like India. As mentioned previously, South African sightholders have the advantage that the South African production is mixed with desired quality diamonds from other countries in the London mixture from which they are supplied.

The Greeff Commission of Inquiry into the Diamond Industry (1973) expressed a similar view, also recommending at the time that regarding production of diamonds at Alexander Bay, Government’s connection with the CSO was desirable.

Neighbouring countries like Namibia and Botswana also market their unpolished diamond production through the CSO.

However, suggestions have been made that ways should be examined by Government to encourage the formation of a common market of diamond producing countries, having a possibility of making new sources of supply available to the South African industry.

The main concern addressed in the various submissions involve the situation in South Africa where the country is one of the larger diamond producers in the world, exporting approximately 10 million carats per annum, and in this process rapidly diminishing its own natural resources. Being one of the larger producers of diamonds, one would anticipate a buoyant local diamond processing industry, whilst in actual fact the local processing industry has been declining over the last 10 years, now employing only approximately 1 500 workers.

In respect of mineral beneficiation, the aim of Government’s policy will be to develop South Africa’s mineral wealth to its full potential and to the maximum benefit of the entire population. Government, therefore, will promote the establishment of secondary and tertiary mineral-based industries aimed at adding maximum value to raw materials.

Regarding mineral marketing, the policy will be based on market principles. Government’s role will be supportive and intervention will generally be limited to addressing market failures. Barriers to mineral exports will be removed and market development by producers will be encouraged.

If South Africa’s situation is compared to a country like India, producing no diamonds, but employing approximately 750 000 workers in its diamond cutting industry, the question arises whether the existing measures to exploit and develop the South African resources in the best interest of the local industry are efficient.

The present situation may be satisfying the main producers, but certainly not the local industry.

All proposals aiming at improvements in beneficiation and marketing in the diamond industry will be considered when Government’s policy is implemented. The Section 59 agreement between the Diamond Board and De Beers was renewed in February 1998 and the Diamond Board now encourages sightholders to comply with the spirit of the agreement in that they manufacture their sights in South Africa and do not export these sights.

It is worrying that, according to the following figures obtained from the Diamond Board, the number of carats cut in South Africa by local cutters is declining each year since 1989 -

Year	Carats cut
1989	1 500 000
1990	1 200 000
1991	1 100 000
1992	680 000
1993	680 000
1994	571 000
1995	439 860
1996	419 699
1997	394 412
1998	261 252

The continuing decline in the value of the rand may be a contributing factor as to why the processing industry is declining.

Various amendments to the Minerals Act have been suggested, inter alia dealing with administration of State-held mineral rights in order to improve optimal exploitation of South Africa’s diamond resources. These have all been referred to the Drafting Committee on the New Mineral Legislation for consideration.

Mining activities at Alexkor Ltd are currently being restructured and sensitive issues regarding the management contract, financing and the Alexkor Board are presently being dealt with. The feasibility of setting up its own diamond cutting factory will be investigated by the Company.

A priority of Government is the development of the small-scale mining sector which is important for the optimal exploitation of the smaller diamond deposits.

In order to enhance international competitiveness most participants are of the opinion that the following areas need to be addressed:

The largest diamond producer identifies three main international competitive threats to South Africa, being apparently the marketing system of diamonds in Russia, the new emerging producer Canada, and preferences for industrial synthetic diamonds. The response to these apparent threats is further exploration, including marine exploration, enhancement of existing mines and improved international marketing.

Other suggestions have included the possibilities of subsidies to cutters, discounts on small diamonds and an improved financial structure. Some parties feel that the policy in respect of imports of unpolished diamonds should be revised.

Government wants to ensure that the industry remains competitive and will undertake and promote research, technology development and technology transfer that will stimulate the optimal development of the country’s resources in the longer term. In Chapter 3 of the White Paper it is emphasised that Government’s policy is to encourage, support and facilitate human resources development in the mining and mineral industry and to rectify the position of previously disadvantaged workers.

All suggestions and proposals aimed at enhancing the competitiveness of the local industry made by the various parties will be considered when Government policy is implemented.

The importance of the National Steering Committee of Service Providers to the Small-scale Mining Sector has previously been referred to and the Committee will address training for small-scale miners.