Diamonds and Taxes Are Forever

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Legislation introduced by the government to boost the country's diamond processing industry could instead result in a massive drop in investment, employment and production across the sector, critics of the new law have claimed.

Under the terms of the latest draft of the amended Diamond Act, a State Diamond Trader (SDT) would be established that would require miners to first offer their rough diamonds to the SDT, which would be authorised to buy 10% of all locally mined diamonds and then and sell them on to South Africa's diamond cutters and polishers.

In order to access the required expertise for such an operation, South African mining giant De Beers, which owns 45-50% of the world's rough diamond production, has agreed to provide the skilled staff needed and to run the SDT for three years, at no cost to the state.

The government also proposes putting in place a 5% duty on raw diamond exports, on top of the existing 8% royalty levelled on all sales, as an incentive to strengthen the sector's domestic gem cutting and polishing activities, known in the industry as beneficiation.

South Africa is responsible for 17% of the diamonds that made their way onto the international market last year, making it the world's third largest producer in terms of value and fifth by volume. In 2006, diamond sales earned South Africa $1.5bn. However, the country is currently only a minor force in the upstream beneficiation sector.

Minerals and Energy Minister Buyelwa Sonjica is expected to use a speech in May to announce the schedule for the implementation of regulations for the SDT. According to industry experts, all of the legislation and new regulations will come into effect by September at the latest. If it does, it will not be with the blessing of many in the mining industry.

Speaking at the IQPC Diamonds Africa 2007 conference in Johannesburg on April 23, James Allan, the head of consulting firm Allan Hochreiter, said the new law would be the death of small and marginal mining operations. He predicted it would cost the jobs of up to 5000 employees in the industry, more than 20% of the present workforce and reduce output by up to 30%. Allan also warned that the new laws could even promote diamond smuggling, something that plagues some other African gem producers.

"These would be unintended consequences of the amendments to the Diamond Act," Allan said.

In its present form, the new law would do little to put South Africa in a position to challenge leading gem processing countries such as India and China, said Allan. Instead, he proposed that South Africa follow India's lead and create an export processing zone, invest in modern technology and cut taxes on the industry as an incentive for growth in the beneficiation sector.

"The chances of South Africa competing with India's cutting industry without such changes will be slim," Allan said.

Defending the new legislation, Louis Selekane, the South African Diamond Board's chief executive, told the conference that the 5% levy would be imposed only on those producers who did not comply with the requirement to offer their rough diamonds to the STD first.

South Africa has to reverse the trend of selling 90% of its raw diamonds overseas, he said.

Another facet of the debate over the government's plans, first floated in 2005, is the uncertainty on the part of investors in the diamond cutting and polishing sector, over whether the provisions of the legislation allow for full independence and if it will indeed come into force.

On April 24, Kombadayedu Kapwanga, the managing director of LLD Diamonds Namibia, which operates Africa's largest diamond cutting and polishing plant, said that the company was pushing ahead with plans to open two gem-processing facilities in South Africa. However, delays over the passing of the legislation postponed the investment, Kapwanga told a press conference in Johannesburg.

LLD has proposed to build two processing facilities and employ 2000 staff, which would double the number of those working in the cutting and polishing industry.

Kapwanga questioned whether there would be a conflict of interest in having De Beers as both a player in the diamond market and running the SDT for the first three years of its existence.

"There is a conflict of interest if you let the cat look after the milk," he said.

South Africa's powerful mining lobby still hopes it can get some of the provisions of the new Diamond Act watered down or removed altogether from the legislation. However the government has noted its determination to put the law into practice in its push to increase employment and the skills base of the country's labour force.

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