South Africa is Still Waiting for the New Diamond Act
August 25, 05The South African diamond industry finds itself under a cloud of uncertainty – waiting almost a decade for a new diamond law to be enacted. The “old law”, the Diamond Act of 1986, became unconstitutional in the mid 1990s, when the Apartheid state collapsed and democracy was introduced. The current Act limits the possession of, as well as dealing in, rough diamonds and therefore inhibits opportunities for more beneficiation of diamonds in South Africa, says the government, clearly linking the absence of significant beneficiation to the fact that the industry was historically controlled solely by a small white economic elite. The Constitution of 1996 specifically outlaws discrimination and all the provisions in the Diamond Act which limited black people’s access to diamonds have thus become illegal.
During a visit to South Africa this week, I tried to clarify when the new Diamond Act would become effective but the consensus seem to be that it may still take a couple of months. The prolonged legal vacuum has led to some irrational conduct. For example, the Diamond Board of South Africa, the body that licenses the trade in diamonds, has issued close to one thousand dealer licenses to black people who lack any experience in diamonds, who possess little or no capital and who may have no clue about diamonds. At every monthly meeting of the Diamond Board, 60 dealers or so are formally approved, including at the most recent session. Why give licenses to people who are likely to lose their money because they don’t know what they are doing? A Diamond Board executive once explained to me that “every historically disadvantaged person has the right to get involved in the diamond industry – we are not allowed to refuse the granting of licenses.”
This is just one example of the problems caused by the absence of clear laws. Another example is the purchase of rough by foreigners who are not licensed. They pretend to act as “advisors” to black dealers who then purchase the goods and export them to the foreign party. Under the new law, these loopholes will be closed.
There are, however, quite a few issues that are not yet resolved. One of these will dramatically impact the operations of De Beers. It involves – in what is Section 59 of the old law – the ability of De Beers to ship almost all its diamonds to London and supply the 19 South African Sightholders with goods of the so-called London Mix. De Beers is making great efforts to make the South African government happy, but it remains to be seen whether its policies will be effective. This year, the Diamond Trading Company will supply to its 19 South African sightholder some US$670 million worth of goods, which is an increase of about 16% above its 2004 sales to the market of close to $580 million. These volumes are well above the level of so-called economically cuttable goods produced by De Beers in South Africa. De Beers hopes that, through assuring such large figures of goods to the domestic market, the government might agree to continue the arrangements under the new Act.
Because of the policies of De Beers there are now some 25-30 ‘large’ factories in South Africa which each employ between 5 and 20 workers. There are an additional 40-50 units, which employ only one or two workers.
The advancement of the domestic industry has become the central focus of the new Act. As the Act stands now, there is still the requirement that all rough mined in South Africa must first be offered to the domestic industry. Another provision revolves around the imposition of an export tax on all rough diamonds – which is expected to be set at around 5%. As it seems at the moment, there is little chance that the pressures will succeed in eliminating such a tax even though the South African treasury has expressed opposition.
De Beers has given an undertaking that it will make sure that all South African Sightholders will have an element of black empowerment. Future rough allocations will be linked in a scorecard to the progress made by the Sightholder in having previously disadvantaged people in the ownership, management and workforce of the company. This scorecard will also take into consideration the extent of business with black suppliers and other stakeholders.
From conversations in Johannesburg it is clear that everybody is unhappy with the prolonged period of uncertainty. All new licenses, for example, are now issued on a temporary basis to be renewed in a year. However, if the new law is enacted, all diamond dealing and cutting licenses will have an initial period of two years, after which they again have to be renewed. That even counts for long-term established companies. Of the 19 Sightholders, only two are truly South African companies without overseas ties. This situation is not considered ‘a happy one’ by some South Africans who would have preferred to see a truly South African industry. In addition, relations between many of the foreign partners and the local ones are often not as good as they should be. That is the result of partnerships that were not made in heaven but instead forged by a combination of political reality and the policies of De Beers.
De Beers’ situation in South Africa seems to be very complex. There seems to be an element of vengeance in the government policies. For South Africa’s historically disadvantaged majority, it is now “pay-back time” in which the government wants to settle the score with the diamond industry – mostly with De Beers. It would be too dramatic to call it warfare, but there certainly is a bitter battle going on between De Beers and the government – and, let there be no mistake, De Beers seems to be losing. In its very own original corporate “home country”, and a country in which De Beers still produces (by value) more than 90% of the diamonds, the conglomerate seems to have lost its ability to control its own corporate policy, to pursue its own best interests. Instead, it is responding to ever increasing government demands and, in the process, reluctantly accepts that its ability to “determine” the state’s diamond agenda has virtually disappeared. For almost a hundred years (with a few exceptions), the Oppenheimer family has argued that it was not economic to manufacture in South Africa and that government assistance to manufacturers is not a sustainable option.
Now De Beers is the diamond industry’s greatest “promoter” to attract Sightholders to South Africa. The perception of the depths of the commitment of De Beers may well determine how much the government will give in to De Beers’ demands for having no export tax and being allowed to send its goods to London. At this point, it is not clear how this issue will evolve. But we would certainly urge the government to expedite the completion of the legislative process and to get the new Act enacted. No act will make everybody happy but at the same time having no act is even worse.
Have a nice weekend.