Sierra Leone’s Presidential Beneficiation Visions: A Reality Test
November 29, 07Sierra Leone plans to join the diamond beneficiation craze that is already redefining the diamond scenes in the southern African countries. Ernest Bai Koroma, the country’s new president, made one of his first policy statements in which plans were announced to introduce new laws governing the diamond trade ensuring that most of its stones are polished before being exported.
"We have not benefited as much as we should have from our mineral resources and that is why we are going to ... put in place a mining policy that will ensure that we move away from having low returns," Koroma reportedly stated. The president didn’t say how it would be achieved.
Two years ago, this writer testified before the Consultative Committee of the Law Reform Commission, which was already looking into changes that were needed in the marketing arrangements to facilitate diamond cutting in the country. Elsewhere in Africa, such as in Botswana, Namibia and South Africa the governments needed to make a deal with De Beers, which was basically a single seller of virtually most or all of the diamond output in these countries. It took decades.
However, after De Beers agreed to embrace beneficiation wholeheartedly, it “recruited” its major international manufacturing clients to deliver on these governmental aspirations. In Botswana, all 16 factories are owned by DTC International clients; in Namibia, eight out of the 11 factories to be supplied by the local DTC are controlled by DTC International Sightholders. In South Africa, the picture isn’t much different.
The current mining and marketing arrangements in Sierra Leone are not conducive for a similar “fast track” transition to beneficiation – and no policymaker, as enthusiastic as he may be, should underestimate what it will take to secure a polishing industry in Sierra Leone. There is no external partner that can deliver a parade of the world’s finest manufacturers to put up shop in Sierra Leone. To the contrary. Isolated attempts by foreigners made in recent years to establish commercially viable polishing operations failed - not only because of the absence of enabling legislation, but mostly because local exporters have little incentive to sell diamonds to factories. And importing the needed rough from other countries is as illogical as it is insane.
Companies that invest in manufacturing in Sierra Leone want guaranteed access to rough at economically competitive prices. Interestingly, the only time in the long diamond history of Sierra Leone when a viable polishing factory operated was when the marketing of the output was mostly through a near-single-channel marketing mechanism.
In 1968, Maurice Tempelsman of Leon Tempelsman & Son’s, established the Sierra Leone Diamond Company, a small diamond cutting and polishing factory in Freetown, which featured some 60 work benches (and had polishing, cutting and sawing departments). Each worker was able to process approximately 60 stones per day in “stars and halves.” The rough was mostly of small goods – the goods, which today, are almost solely manufactured in low-labor-cost countries such as China and India. The plant was operational for some 15 years and closed in 1984.
Why was the plant “economically viable” in these years? Subsidies! The Central Selling Organisation of De Beers supplied stones (mostly melees) through an associated company (Dicowarf) at a considerable discount. To assist the factory further, Dicowarf agreed to repurchase all the stones the cutters were unable to cut, and this amounted to approximately 25 percent of the goods supplied. The factory eventually closed despite these advantages, mainly because mining output dwindled. Since then, the marketing system has changed - and no attractive manufacturing case could be made.
President Koroma finds himself in a far more disadvantageous position than his predecessor Siaka Stevens, who ruled the country in 1971-1985. Today, there is no governmental ownership of the artisanal and mechanical diamond mining operations; today there is no government ownership of rough marketing organizations. There are a few dominant players who derive no commercial advantage from polishing domestically. Moreover, though official production is now in the range of $125 million a year, the country still loses up to double that amount through smuggling or undervaluation. Taxation is kept at minimum precisely because smuggling is almost impossible to prevent.
President Koroma inherits a sad reality: the government’s income from its mineral wealth is negligible. Ostensibly, the government collects three percent export taxes (from alluvial diggings) and five percent mining royalties (from industrial-size operations). The government relies heavily on license fees as a mechanism for revenue collection. Part of these taxes is used to pay diamond valuation fees.
If the government’s (net) total income from its huge mineral wealth is in the range of $5-$7 million, there is absolutely no way in the world the government could even dream of subsidizing or incentivizing the establishment of diamond factories. As it doesn’t control the marketing system either, it also has no or little leverage over mining companies or diggers in a way the Namibian, Botswana or South African government can exert pressures. Therefore, if local cutting factories need subsidies, incentives or “attractively priced rough” to make the manufacturing internationally competitive with highly efficient low-labor-cost countries such as China or India, this “subsidy” would have to come from the private mining and marketing sector.
That’s not likely to happen on a voluntary basis. Does it mean that the new president’s beneficiation aspirations are destined to fail? No, I am not saying that – it all depends whether the president can foster the political will and encourage what needs to be done on the legislative side, and that he is able to enforce the rules which he will set.
Good Governance is an Essential Prerequisite
Good governance is still rather weak – in the country in general, and in the diamond sector in particular. The president himself has said that fighting corruption will become his highest priority. Good governance is an essential prerequisite for any diamond sector reform to succeed. Economists recognize that high levels of corruption are often associated with lower levels of investments and growth. Furthermore, they reduce the effectiveness of laws and regulations and encourage people to operate in the informal (parallel, black) economies. Such high levels of corruption create serious market distortions – and only the more unscrupulous win.
It is encouraging that the new Minister of Mines, Alhaji Abubakarr Jalloh, has indicated that he will review all mining contracts in the West African state to try to clean up corruption and cheating. "We're not going to allow our minerals to be a curse to us," Jalloh told Reuters recently. Let’s hope that Minister Jalloh recognizes that mining contracts are only a small part in a greater imbroglio.
Changing the Domestic Market Arrangements
Under current law, miners and diggers are allowed to sell rough diamonds to licensed exporters – and only to exporters. There is no secondary market trading in rough diamonds. If a cutting industry in Sierra Leone is to be sustained, some type of local rough diamond trading mechanism must be created. With the production mainly coming from some 200,000-300,000 artisanal miners and some mechanical operations, no single supplier can provide well-sorted, more-or-less homogenous parcels in a sufficient volume to support manufacturing operations.
In the past, excess (not utilized or utilizable) rough was sold back to De Beers; this is not likely to be a workable formula in the future. The suggestion has been made that South Africa would be an appropriate model for Sierra Leone to adapt, where all local production ought to be put for sale at a local bourse before it can be exported, and where a para-statal agency sells rough to factories. The key issue, however, would be pricing. [Though operational, the South African State Diamond Trader has yet to find the financial resources to sustain a $150 million annual operation.]
Why would any miner or exporter sell domestically at prices that are below the price they could fetch in the Antwerp or Israeli markets? Overseas buyers coming to Sierra Leone expect to buy at below the Antwerp market price, as they need to cover their expenses, their taxes and other fees, their travel and insurance, their courier costs, etc. So it is only logical and fair that local values are below the Antwerp levels. Why would any exporter forfeit the extra margins they are collecting by selling through their Antwerp affiliate offices?
The South African solution of imposing a meaningful export tax wouldn’t work in Sierra Leone. As long as the country seems unable to prevent illicit mining and smuggling, higher export taxes would be counter-productive and official exports (and the associated revenues) would decline.
The president will have to intervene in the domestic market – and that is no easy task. Based on the current laws, the diamond marketing regime is fairly free and competitive, open to any person that wishes to buy and export diamonds. The government has issued some 2,500 diamond mining licenses and the total officially declared production ends up in the hands of a limited number of players. In practice, the market is dominated by two major diamond exporters and a number of smaller companies. In addition, some diamond mining companies export and market their own production. The fact that the export scene is dominated by a few (ethnic Lebanese) players could be turned into an advantage – if the new president secures their cooperation. But that is in no way a foregone conclusion.
The president’s diamond challenge is two-fold: first of all, the government ought to find ways to dramatically increase its own revenues from the diamond mineral wealth, and, secondly, in that context, it also has to create conditions for competitive beneficiation to share the benefits of the diamond wealth more widely.
Those familiar with internal discussions on marketing options know that the Endiama- and Ascorp-type exclusive buyer arrangements, which are in effect in Angola, enjoy some support in Sierra Leone. There are also officials who would greatly welcome a return of De Beers as sole buyer of the alluvial production. We would like to caution the president to think twice before considering the re-introduction of a monopoly buying system.
However, the “threat” of doing so, might provide the president with considerable leverage in dealing with the current “quasi-monopolists” in the export sector. It must be realized that any attempt to “force” private miners to sell either to a single buyer or at non-attractive prices to domestic factories would quickly backfire.
What Sierra Leone’s diamond sector needs more than anything else are more serious players in the exploration and prospecting of diamonds. As the mining community knows very well, companies come in, spend money on exploration programs, and when they fail to find commercially viable deposits, they move out. Conditions must be created that make it appealing and interesting for foreign investors to explore for new deposits in Sierra Leone.
In a transparent regulatory environment, investors should know that when they find diamonds, they can market the goods in the best possible way – and it must be by their own choice. Forcing these companies to sell their diamonds (or most of their diamonds) to a domestic entity (either public or private) to facilitate beneficiation will become a deterrent to investments in exploration and mining.
Like in southern African producing countries, Sierra Leone’s government has the right to decide how it wants to manage its mineral wealth and how to optimize the benefits to society at large. Domestic trading in either rough or polished, the supplies to domestic manufacturing, the taxation (or non-taxation) of polished exports, the transfer-pricing mechanisms between mining and manufacturing, are all issues to be addressed in the beneficiation-enabling legislation.
The enactment of laws, however, is the easy part. Avoiding undesired consequences, and to be able to subsequently implement these beneficiation policies are the true challenges. Unlike the fast transition in southern African producer countries, in Sierra Leone, it will take much longer to provide foreign manufacturers with a compelling reason to set up a plant in the country. But every cutting center development starts with an initial resolve to go down the beneficiation road. President Ernest Bai Koroma has given the signal. Let’s wish him well.