Flaws in the state's diamond plan
The constitutional court has upheld government’s right to regulate how small diamond miners can sell their carats, despite their plea that this infringes on their freedom to trade and get the highest prices
The profitability of small diamond producers will be squeezed by a recent constitutional court judgment affecting the way they can sell their product.
According to one commentator, this is another example of how government claims to support small business and a free market but effectively puts them out of business by over-regulation.
The issue dates back to a lawsuit brought in 2007 by the SA Diamond Producers Organisation (Sadpo), which represents 200-300 small diamond miners operating mainly in the Northern Cape.
Sadpo objected to a newly introduced clause to the Diamonds Amendment Act, section 20A. The clause forbids anyone who does not have a licence that allows him or her to view, buy or sell diamonds from helping a licensee wherever diamonds are offered for sale (foreigners may not hold these licences). The only exception is at the Diamond Exchange & Export Centre, where foreigners can hold a temporary diamond buyer’s permit.
Instead of confirming that a section of the Diamonds Act is unconstitutional, the highest court in the land has upheld it
Under the Diamonds Amendment Act of 2005, local diamond miners have to offer their whole run of mine production to the State Diamond Trader, which can buy a representative sample of up to 10%, with the objective of encouraging local beneficiation. Miners can sell the rest to buyers licensed to be in possession of rough diamonds.
Section 20A was intended to outlaw a long-held practice of Sadpo members offering parcels of diamonds for sale at their premises in what are called tender houses. There licensed local buyers were advised on international pricing by nonlicensed foreign diamond experts, who were also likely to be the buyers of those stones.
Sadpo wanted section 20A declared unconstitutional because it conflicted with two clauses in the constitution: it infringed on producers’ right to operate a trade or profession, and on their right not to be deprived of property arbitrarily. It argued that prices realised at tender houses were a third higher than those small diamond miners would be able to get from selling only to local buyers.
The first respondent in the case, the minister of mineral resources, argued that tender houses were never lawful but operated through a loophole in the legislation, which section 20A addressed. The minister said this was necessary to promote local beneficiation of diamonds, eliminate illegal activities and enable SA to comply with the Kimberley Process Certification Scheme.
The Pretoria high court agreed that section 20A was unconstitutional on both grounds, and the matter was referred to the constitutional court to confirm the ruling. But instead of confirming it, the highest court in the land upheld section 20A in a unanimous opinion.
Judge Sisi Khampepe said no property was alienated, because the section did not interfere with producers’ right to dispose of their diamonds. Even if the presence of an unlicensed foreigner were necessary to determine a market price, it was impossible to quantify the loss Sadpo members said they were suffering, which they put at 30%. There was no legal protection for this method of sale.
Khampepe said the section did not interfere with miners’ freedom to choose a trade. It regulated the way they could sell, not their right to sell, and this regulation was related to a legitimate government purpose.
Sadpo declined to comment on the judgment. Mineral resources minister Mosebenzi Zwane welcomed the ruling, saying it would advance transformation and confirmed government’s authority to monitor the movement of unpolished diamonds.
Armand Greyling, a law and policy analyst with AfriBusiness, which supported Sadpo in its case, disagrees with the minister’s argument, and the court’s confirmation, that tender houses were illegal. If they were, he says, the minister could have lodged a criminal action or sent the police to close them down.
The main reason the state opposed tender houses was that it wanted to be offered these diamonds and did not want them to be sold to foreigners, Greyling says. As a result of section 20A, small producers are obliged to sell their diamonds only to local buyers or the State Diamond Trader. It is a restricted market and this means they will not be able to get the prices they could by selling through tender houses.
Though there is still an opportunity to reach foreign buyers at the Diamond Exchange & Export Centre in Johannesburg, in practice it is difficult and quite costly for small diamond miners in the Northern Cape to get there, Greyling says. With tender houses, the foreign buyers came to the miners’ premises.
Over the next few years these small miners are likely to have to cut costs and jobs, and some may close down. Their licence areas will be taken over by the larger mining companies, which is the opposite of what government claims to be encouraging.