Temporary South African Pain Relief

When government regulators mess up – and especially when they know it – they may quietly welcome court intervention to assure that things will remain workable. That’s what recently happened with the South African Diamond and Precious Metal Regulator and the July 1, 2008, date for new licenses to go into effect for diamond traders and manufacturers.

Just a few weeks before the “New Order” license renewal date, it had been made clear that no license would be issued to any dealer or manufacturer who does not have a Black Economic Empowerment (BEE) equity partner. As such, many of the license applications, which had been made in the preceding months, would end up getting an automatic rejection. The negative scenario caused one trader, Paul Garrett Meyer, to seek intervention of the High Court of South Africa.

This instance showed how, sometimes, one man can make a difference. Garrett won – at least for the time being. The honorable Judge Jajbhay ruled that the Regulator must consider every application made before June 30, and during the weeks or months that it takes to consider the application, the applicant is allowed to continue to stay in business and trade as he did hitherto – without a BEE partner.

This ruling has immediately diffused a very explosive situation. It has created time for the parties to sit together and seek solutions. The BEE equity requirement has to be phased in over a five-year period in which 15 percent equity has to be sold to a BEE partner. Its beginnings may still be postponed or gradually be introduced. The Regulator has invited the industry to sit down with it to devise an industry-specific BEE charter. Such an industry-specific charter, however, will require an Act of Parliament to take effect. Until that happens, the Mining Charter will apply to the diamond industry.

The Regulator’s CEO, Louis Selekane, reminded the industry recently that BEE needs meaningful involvement of the partners. The essence of the relationship is what counts, and the Historically Disadvantaged South Africans must truly reap tangible economic benefits.

Meyer wasn’t the only one to go to court. One of the tender houses (National Diamond Marketing) also sought the court’s intervention claiming that the mechanism by which foreigners could participate in diamond tenders should be maintained as is. Under the previous regulation, a foreigner can seek the assistance of a locally licensed buyer and make the purchases through him. Here too, the judgment handed down allows temporary continuation of the status quo. This was initially seen as welcome news for the international community. Be careful, however, it is not!

The Regulator advised license holders that the court judgment only applies to the single tender house that applied for the order. In the meantime, Section 20A of the Diamonds Second Amendment Act of 2005 remains fully in force. That section says: “No license may be assisted by a non-license or holder of a permit referred to in Section 26(E) during the viewing, purchasing or selling of unpolished diamonds at any place – where unpolished diamonds are offered for sale in terms of this act, except at a diamond exchange and export centre.” Click here for temporary_buyers_licence_notice_to_clients_-_tl_1072.pdf.

Thus, the South African diamond industry is now waiting for a judgment by the Constitutional Court, which is considering a case brought by the alluvial mining producers. They want to continue to be able to sell to foreign buyers and they are unwilling to sell their hard-won output to the State Diamond Trader at less than “International Market Value.” The Constitutional Court has not sat on the matter yet. The pertinent papers have been served on the authorities, and parties are awaiting a trial date.

Similarly, the nation’s second largest producer, Trans Hex, is apparently maintaining the position of being willing to sell to the State Diamond Trader provided that it pays the same price that Trans Hex would get for its tenders. Indeed the transfer pricing between the miner and the State Diamond Trader is a problematic issue. (The whole State Diamond Trader organization may be based on sound concepts, and good people may be involved, but the outcome so far has been an unmitigated catastrophe.)

The cumbersome processes, which apparently need judicial intervention, are slowing down the entry of the “New Order” licenses. The delays provide the diamond industry and local and international stakeholders some breathing space. The players must use this temporary respite to make it unequivocally clear to the Diamond and Precious Metal Regulator that the industry will not waver in its (stated) commitment to support the transformation process.

Implementation of industry-wide BEE is not optional – it is the law, and it is economically, socially and morally the only way to go forward. It ought to be based on a dedicated and specific industry charter. Let’s hope the added time will be used wisely.

Have a nice weekend.