RAPAPORT... South Africa’s Parliament recently delayed processing the Diamond Export Levy Bill until next year so that the national treasury can draft the associated regulations relating to possible exemptions. The announcement came nearly two weeks after public hearings were held on the bill, which seeks to impose a 5 percent levy on rough diamond exports in an effort to promote local beneficiation. RDR talks with Keith Engel, the chief director of legal tax design in the South Africa Treasury, and Buyelwa Sonjica, South Africa’s minister of minerals and energy, about recent developments.
Rapaport Diamond Report: Can you explain the delay of the Diamond Export Levy Bill? Is it because of comments made at the public hearings?
Keith Engel: I don’t think the public hearings themselves really delayed us. There were certain issues dealing with exemptions that we were having trouble resolving and basically we felt that we needed a little bit more time. It was also a question of the parliamentary process. We didn’t give the Parliament enough time to effectively digest the bill. The Parliament wanted to make sure they had an opportunity to comment meaningfully. We figured let’s do it in a way that everyone’s happy and buy a little more time. The Treasury and the Department of Minerals and Energy (DME) have been in consultation and I think we are moving in a very good direction.
I think we just needed further consultations within the departments, with Parliament, as well as with the industry, to get those exemptions right. Frankly, we don’t look at the delay as a negative thing — we look at it as a positive thing. The key is to make sure that we meet the deadline, which I think is early February or early March. It might come up before then; we just have to get it on the parliamentary calendar. I think this delay is generally viewed as a positive thing, so I wouldn’t get hooked up on deadlines.
RDR: How will the new legislation — Diamond Amendment Act, Diamond Export Levy Bill — keep South Africa competitive for attracting diamond exploration and manufacturing in competition with neighboring countries?
KE: Think of the industry as a three-part value chain. You have producers who explore and extract the diamonds — that’s one part of the value chain. The second part of the value chain is refining the diamonds, i.e., polishing them, and then there’s jewelry, which is way up the chain. What we are trying to do with regard to that chain is to make sure that we encourage that second leg, the polishing, without disrupting the first leg. Remember, there’s a region of diamonds here — Botswana, Namibia, Angola and South Africa. It looks like Botswana is going to be the sorting center of the region. Our goal is to be the polishing center of the region. That is what the value-add that we are trying to do focuses on. And the key is to make sure that we do that and make sure that it doesn’t affect the producers very much. I think overall we are fairly competitive with our neighbors.
Buyelwa Sonjica: We continually show that the environment is investor-friendly. We have political stability and we continue to ensure that we will create an environment that will be friendly to investors. With regard to competition, we will always be in competition with our neighbors. We must always strive to ensure that we have a competitive advantage over other competitive countries.
RDR: There was recently a report saying that South African mining laws have caused companies to hold back on investing anywhere from R5 billion ($683 million) to R10 billion ($1.3 billion). Are you concerned that the act and the bill will be another burden that discourages investment?
BS: We agree that we’ve seen a decline in investment. The year 2004 saw an 11 percent decline in investments and 2005 saw a 16 percent decline. One reason for that is a stronger exchange rate. The second reason is related to high input costs, resulting in the profits of mining companies declining. That, in turn, led to some project suspensions.
As far as the new laws are concerned, I wouldn’t agree that it is the laws that have led to the decline in the private sector. That would contradict the increase in the applications that have been submitted by investors. We have seen 9,000 applicants showing interest and wanting to invest in South Africa. That makes us believe that our laws have been well received by the investors during the two years since 2004, when we started implementing the act.
Also, when there is a commodities boom, it doesn’t automatically mean an increase in investment. It doesn’t necessarily follow because that decision rests with the investors themselves. It may well be that the investors are enjoying the profits.
Since there has been an increase in the number of applications after we promulgated the law, for us it means that instead of the situation changing for the worse, it has become friendlier.
Article from the Rapaport Magazine - December 2006. To subscribe click here.