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In the Mines: Making the Most of Sierra Leone's Rough Diamonds
Improving the Environment for Investors
Since the commercialization of diamonds began in the early 1930s, Sierra Leone has produced over 500 million carats of diamonds to support the world’s need for diamonds. The diamond fields of Sierra Leone are estimated to extend over an area of perhaps 3,000 square miles, bounded by the Sewa River covering stretches of towns including Bo, Kenema, Yengema, Koidu, Tongo Field, and Kono, and extending as far as Liberia. Diamonds are found in these extensive alluvial deposits, in underlying dykes and pipes, and also from source rocks on higher ground. These areas still hold millions of carats of diamonds.
A good number of major diamond mining corporations—notably the Sierra Leone Diamond Corporation, AmCam Minerals, African Diamonds, Rex Diamond Mining, Mano River Resources—have spent heavily to accrue their own alluvial deposits in Sierra Leone, and many are evaluating opportunities to invest. In his September 2007 first session parliament speech, President Ernest Koroma spoke about revising mining policies to generate more returns from diamond exports for the development of the country. With the need for rough diamonds likely to continue to rise in value, rough diamonds could continue to yield billions of dollars in decades to come. However, the diamond mining industry has been one of the most corrupt sectors with billions of dollars in lost revenues been recorded from smuggled diamonds, making the rough diamonds sector Sierra Leone’s costliest corrupt sector.
There is a theory behind improving the environment for investors in the diamond industry. The theory is that a well-coordinated system of investments in the diamond industry can buffer the country against inflation shocks to the Sierra Leone economy. Strategic diamond exports allow the Sierra Leone government to generate more foreign exchange by millions of dollars of foreign investments in the industry.
The more of foreign investments in the country can help the government as a diamond-exporting country to grow its economy. Strategic policing of the industry promotes the image of the country that in turn attracts more investments. And it may reduce (to a great extent) the massive revenues that flow to corrupt scam hawks, helping to make them less formidable troublemakers. Thus, in theory, a properly regulated diamond industry is an important tool of both economic and foreign policy. In practice, it boosts foreign exchange earnings for the government that can support massive development projects when these earnings are handled properly. And on that front, the government really has to be firm in putting in place a system that effectively regulates the industry.
The country has had administrations with opaque and weak mining policies when public officials designates lined up their pockets with profits generated from under-reported production of rough diamonds. The Ministry of Mineral Resources makes decisions about mining policies. It also coordinates diamond exports. Sierra Leone diamonds are still appreciated as one of the best diamonds in the world, even when major diamond regulators in Antwerp controlled the reliability and pricing of rough diamond supplies because they hold most of the world’s excess production capacity.
Today's market, by contrast, has little excess capacity, and supplies are priced in diamond markets dominated by massive volumes of private trading. Yet stocks of quality rough diamonds are rarely handled with an accurate view of these markets, even though effective management would mean offering reliable supplies. Bigger supplies of rough diamonds could help improve Sierra Leone’s natural resource security, but until the Sierra Leone government better manages its strategic rough diamonds production, billions of dollars would continue to go away without growing the economy. Such an effort would be warranted only if the Koroma administration radically reformed its approach to the country’s mineral deposits and coordinated it to meet international standards in order to create a better atmosphere for foreign investors to inject more capital resources to strengthen the Sierra Leone economy.
Most important, the Koroma administration should shift control over its mineral deposits from the president (and his political appointees in the Ministry of Mines) to an independent minerals deposits board. Presidential and ministerial discretion, once thought to lend flexibility to the system and make the rough diamonds production a powerful foreign policy tool, now has the opposite effect. Presidential and ministerial control has politicized decisions about the deposits, especially as most Sierra Leone presidents have proved unable to move nimbly and credibly with the diamond trade.
Furthermore, because diamonds are a splendid global commodity, the Koroma administration must also promote better domestic coordination of national alluvial deposits. The current system for domestic coordination has generally worked profitably for politicians who have politicized decisions on mining policies, and has proved to help scam hawks as well who have been given greater latitude to corrupt the industry and are evidently helping themselves first. The current metric for assessing whether the GGDO is doing its part to protect against insecure rough diamonds exports and scamming of foreign investors is how much taxes are reported from Kimberley Processing calculations. A better system would focus instead on how well they manage the proper documentation of diamond purchases and how well foreign investors are informed about challenges of doing business in Sierra Leone with advice and protections on how they could successfully function in the country as private sector developers.
One lesson foreign investors have learned over the years of scammers misusing investors funds, is just how vulnerable they are to scam hawks: many foreign investors losing millions of dollars in the industry without making any returns. To help limit the scam hawks’ motivations to mislead investors, Parliament should pass legislation that protects investors from predators in the country and with penalty of prison term for the scam hawks who deliberately and intently decide to scam investors of their money. Such a move empowers foreign investors and generates greater motivation for investors to get involved in the industry in Sierra Leone. A model of governance issues in the mining sector would reflect the structure of a viable mining framework, in which foreign investors are fully protected from predators as that would motivate more investors to inject more capital into the country.
The 2002 Kimberley Process international certification system for the trade in rough diamonds focused on how the gems are traded—their movement to the international market—and set out conditions for grappling with the problem of “conflict diamonds”—diamonds traded by “rebel” armies that were fueling wars in Sierra Leone, Angola and the Democratic Republic of the Congo. And “in the Interlaken Declaration of November 5, 2002, representatives of the United States and 47 other countries announced the launch of the Kimberley Process Certification Scheme for rough diamonds ("KPCS"). Countries participating in the KPCS (“Participants”) are expected to prohibit the importation of rough diamonds from, and the exportation of rough diamonds to, non-Participants and to require that shipments of rough diamonds from or to a Participant be controlled through the KPCS” (US Department of the Treasury Office of Foreign Assets Control). Over the next several years since 2002, Sierra Leone steadily made improvements, through the GGDO, in revaluations of diamonds which build government-owned taxes through the competitive Kimbeley Certification system. The GGDO has also relied on Ministry of Mines officers to police the buying of rough and ensure that the rough purchased is properly documented.
The most serious interruption of diamonds to the system came in the heat of the war that started in 1991, after Foday Sankoh’s rebels wreaked havoc on diamond exploits from the diamondiferous areas creating shortages on government earnings from rough diamond exports instead used to finance the war machine of the RUF and Charles Taylor’s National Patriotic Front of Liberia (NPFL). Former President Tejan Kabbah’s administration lost huge revenues from diamond exports because of rebel activities in these diamond rich areas. The rebels entirely controlled the production of rough diamonds then, and for many years rough diamonds exports were illegally used (“smuggled via complicit dealers (Lebanese, naturally) to Liberia, then onto world markets” (Global.Research.ca) to finance Foday Sankoh’s rebellion.
To correct this, international intervention became inevitable with UN passing resolutions that gave the exiled government of President Kabbah more muscle to prosecute the war and eventually suppressing the rebel leader Foday Sankoh to submission and death in prison. And the government today should recognize that activities of scam hawks are domestic interruptions to the diamond industry which are as bad for an enabling investment climate as those caused by Foday Sankoh’s illegal claims over the mines in mid 1990s through 2001.
Despite the efforts of strong international commitment to end the war, the prevalence of scams has continued to undermine the Kimberley Process Systems’ purpose. Leading politicians’ involvement in diamond production and not wanting to pay taxes on their harvests and exports and foreign investors’ vulnerabilities in the industry continues to deal the diamond sector a blow. The damage to the credibility of the diamond investment environment is still being done, unless the government improves its practices and work to implement robust checks and balances in the trade that empowers foreign investors and improve diamonds declarations at the GGDO for more taxes to be collected by government for the common good.
Apparently, the diamond sector has been mismanaged in these times of relative calm. “In a speech in August, 2003, President Tejan Kabbah delineated the “common and well-known problems associated with the diamond industry in Sierra Leone” as follows:
· illegal mining;
· environmental damage;
· poor working conditions, including child labor; and
· misuse of official positions and power.
These corrupt practices, he noted, destroy the economy of this country and may endanger the…security and image of Sierra Leone”. In President Koroma’s first address to Parliament in October 2007, he recognizes the problem that the mining sector is plagued with a poor regulatory framework and rampant smuggling. Koroma’s pledges to enforce existing mining legislation and to develop a robust environmental policy should include dealing with scam hawks to discourage their motivations to distress investors. In doing so, Koroma is creating the enabling conditions of what the situation requires that would attract more investments into the industry which is also consistent with the Core Mineral Policy (CMP) of the Government of Sierra Leone designed to create an internationally competitive and investor-friendly business environment in the mining sector (Ministry of Mineral Resources).
President Koroma’s administration should redouble efforts to strengthen regulation of the diamond industry to arrest the squandering of diamond exports by various elements including scam hawks and high level politicians who support their illegal production of rough diamonds using covert marketing channels in collaboration with corrupt “Lebanese traders” (Global.Research.ca) in the country. Also setting up of diamond cutting and polishing stations in Sierra Leone, with enough regard for trends in world market prices for cut and polished diamonds, which the President himself made mention of in his first address to Parliament in 2007, would ensure an increase in exports as well as encourage secondary processing of minerals in the country in turn increase the tax revenue base and create more jobs.
Meanwhile, revenues from rough diamonds has still not benefited the country the way they should have like how oil revenues are benefitting most Middle Eastern countries. The diamond industry is facing low inventories and volatile prices because foreign investments have dried up because of the vulnerabilities that have been so overwhelming for investors. Fake and falsified certificates of existence and ownership decorated with the Sierra Leone Coat of Arms are often traded in the Internet where telemarketing scam hawks try to lure unsuspecting investors into very costly scams.
There are also international scam hawks mostly in the Middle East, the United States, Europe and India who often claim to represent high volume buyers of rough diamonds and requesting artisanal miners and/or dealers of rough diamonds in the country to send formal manifests and FCOs (full-corporate-offers) and to courier the rough diamonds themselves by Brinks Security Company or UPS International to the buyers for evaluation. These investors’ representatives would claim to have a LOI (letter-of-interest: a kind of like a pre-contract where the buyers agree to purchase the rough at certain basic terms, with the rest of the terms to be agreed in the final contract) and BCL (bank-comfort-letter). Such representatives would also ask suppliers for formal manifest for the diamonds and FCO (full-corporate-offer) on the seller’s letterhead with name, signature and stamp. The point is, internal affiliated corporate procedures where internal laws are applied may be suitable for LOI or BCL type of deal, but not for international trade applications. Many experts maintain that deals that use the terms LOI or BCL have major problems. The person claiming to have the capacity to buy rough diamonds would try to get the rough diamonds with such documents then seek to sell such diamonds before paying the supplier. Therefore, paying the supplier would be very difficult and often times those few who enter such deals find it difficult to recover payment for the roughs supplied. The Internet has caused this explosion of ambiguous traders to exist like no other time. Suppliers of rough diamonds (artisanal miners and dealers) and investors alike must therefore act with prudence at all times.
In this regard, the government must act to raise the level of confidence of foreign investors by putting in place measures that make it difficult for scam hawks at home and abroad to operate. Creating a Registry of Business Facilitators, for example, for a listing of all business facilitators or consultants in the country, is service investors could use to quickly obtain facilitators’ reliability reports and background checks of indigenous business facilitators and/or consultants who must be listed with the Registry. Like a Better Business Bureau, the Registry of Business Facilitators collates all complaints against business facilitators and consultants in the country, and a foreign investor could call the Registry of Business Facilitators to learn if a business facilitator or consultant has any outstanding client complaints. The registry could also help business facilitators in the country identify and understand their social responsibilities, capabilities and impact; develop strategies and tactics to reduce social risks and improve social responsiveness.
Again, the government should consider re-evaluating the alluvial deposits in the country using reliable methods and tested equipment to offer 2D (surface) definitions of the diamondiferous areas and their geologies (photogeology) adding 3rd dimensions (seismic) to lead the sampling programming. These methods provide cross-sections of alluvial terraces with less than 5% depth error and they test the economic reliability of the deposits. It's very logical, if the government is going to do this, to want to have a good idea where the bedrocks are before starting the sampling program. The seismic offers excellent depth-distance profiles and their costs are low compared to costs of follow-the-pattern blind drilling which costs too much. Multilateral donors can support this effort of re-evaluating the alluvial deposits in the country. A project of this nature would enhance private sector speculation about the potential alluvial deposits in the various diamond areas in the country. This is a good call because private investments are boosted. Confidence and more investments follow, as well as even more capital intensive projects are supported by investors’ money and through that rough diamonds extraction operations would be made more viable using modern extraction systems such as the Bateman’s Containerized Modular Diamond Recovery which is duplicatable. The containerized X-ray diamond recovery plant is 11, 5 m high and weighs 28 tons, but it can be dismantled into transportable modules only 2, 4 m high with a maximum weight of 10 tons. The plant can be assembled in two days, connected up to the water and power supplies and set into production without delay. More of these plants in the country would boost production and would allow more diamond exports that grow the Sierra Leone economy.
With proper management of the natural resources security of the country, rough diamonds’ usefulness as a major GDP booster would definitely be ensured. Unlike in the 1960s and 1970s, rough diamonds security today is a function of more production of rough from the mines using modern methods—circumstances that make it practical for more revenues from increased diamond exports. The diamond industry of Sierra Leone in this day and age needs to be shifted to a more just-in-time delivery system, meeting the supply market need for rough diamonds. This would change the game for ensuring Sierra Leone diamonds security in the world market.
Value Added Diamond Exports
South Africa, Botswana, Congo and Angola—countries that produce 90% of the world’s rough diamonds—are going ahead with plans to impose a 5-7% export duty on rough diamonds. India imports almost 80% of the rough diamonds produced in Africa and these imports are polished in factories in Gujarat and Maharashtra. Now, these African countries want polishers to set up factories within their boundaries in an effort to boost the local economy and generate local employment. The duty will make rough diamonds costlier by at least 5%. The Diamond Export Levy Bill has been introduced in South Africa’s Parliament in October 2006. The other African countries listed have done the same. Many of the cutting and polishing units in Gujarat and Maharashtra are therefore moving to Africa, with an estimated 25% of the workers in these units losing their jobs. Some Gujarati-owned, but Antwerp-based firms, including the world’s largest diamond manufacturing company Rosyblue, and Eurostar have already set up operations in Africa. Rosyblue owns the high-end diamond brands Rosiblu and Orra and ended 2006 with $1.7 billion in revenue. Some other firms are in advanced stages of discussions with these countries. Sierra Leone has an opportunity to benefit from this shift in international policy South of Africa. The government should woo owners of these diamond polishing units to set up some of their units in Sierra Leone. With such diamond polishing outfits in Sierra Leone, is added value to the country’s diamond exports. The government should not neglect the potentials of value added cut and polished diamond exports to the GDP of the country. Contingency plans based on these assumptions have to be drawn up. An ‘independent alluvial diamond deposits board’ would prove to be a useful forum for coordination; the system seems valuable at least after these many years of failed government intervention of managing the natural resource security of the country. The country has not made any progress because of its long tradition of politicized management, based on cumbersome political decision-making. The Koroma administration should now consider rewriting its rules so as to shift control of power wielded by politicians over alluvial deposits of the country to the responsibility of a single authority, which could make resource management of the country’s alluvial deposits more transparent and more predictable.
Nobody knows how an independent alluvia deposits board would really work in mitigating the corruption in the diamond industry, but the signs are auspicious. With excess capacity of roughs benefiting just a few private interests, the government should now adopt policies favoring the collective good. National systems for coordination have always been hampered by the fact that ultimate decision-making authority resides with the national government, and previous administrations have kept executive control over the country’s diamond deposits making it easier for politicians to meddle in the deposits’ management exactly at the moments when participants in the diamond market need to be confident that the government would protect their interests.
Creating a New Independent Alluvial Diamond Deposits Board
To improve the current dismal trends in the diamond industry, the Sierra Leone government should manage existing alluvial deposits more effectively. Its first step should be to create a new ‘Independent Alluvial Diamond Deposits Board’ that would take over nearly all the responsibilities currently assigned to the Ministry of Mines. The Board would be the Ministry of Mineral Resources’ main point of contact in Sierra Leone and would decide regulations that work for the collective good, with a view to building the Sierra Leone government's ability to restore the integrity of the industry. It would act to add value to roughs exported from Sierra Leone. Such independent management would boost the Ministry’s usefulness and allow for better gains from the precious minerals’ markets. The board would have a broad mandate to ensure that investors interests are protected in the country and cutting and polishing stations are established and maintaining an orderly regulation of the industry. Using this broad authority, the board tailors its measures to the particular problems that needed solving.
The board would manage the re-evaluation of Sierra Leone’s alluvial deposits and gather and publish more information on the potentials of the country’s deposits. Data on the alluvial deposits in the country is surprisingly poor given the importance of rough diamonds to the Sierra Leone economy. Poor management of the country’s diamond deposits also discourages private investors from making capital investments to develop the Sierra Leone diamond industry.
There are no perfect models for an effective diamond regulation system, however, the point of creating an ‘alluvial diamond deposits board’ would be to vest critical economic decision-making power in an authority that is professional and relatively independent of political meddling and yet also subject to political oversight. Such a board would also have the independence to make difficult decisions to protect the industry from predators at home and abroad. The board could be an arm of the GGDO (which has the most expertise in diamond valuations and markets) best financed through direct authorization from Parliament.
It Could Be an Effective Board
The better management of alluvial diamond deposits in Sierra Leone could support sustainable development initiatives in the country. Better environmental standards are also needed to better reflect the realities of the diamond production today. Such a board would regularly assess private investors’ compliance based on corporate management of their operations. Investors’ corporate interests are overseen by independent professional authorities who are fully integrated into the board’s coordination system and whose actions would be seen as most reliable because investors could count on their being more supportive than when managed by opaque and unpredictable processes of the Ministry of Mineral Resources, an institution vulnerable to political interference. The credibility, transparency, and independence of the board’s management are ensured.
Much of Sierra Leone’s mining policy to date has focused on measures that look good but do not have much impact on real development, such as generating sufficient revenues to build infrastructure in the country. Many elements of a sensible mining policy, such as increasing diamond production and boosting investment in cutting and polishing stations in Sierra Leone, are well known. But better management system for the industry has largely been ignored.
This is unfortunate because in addition to contributing to Sierra Leone’s mining industry, the better management of the country's alluvial diamonds deposit would create a tremendous opportunity to engage the scam hawks at home and abroad. The country has successfully dealt with major interruptions in the diamond trade caused by the decade-long war; strengthening its management procedures to sustain stability in the industry and project an enabling investment environment is what needs to be done at this time. A better-run and better-coordinated national system of alluvial diamond deposits could attract more capital investments in the industry. Better management of diamond deposits in the country, however, will not by itself make all the problems in the industry disappear overnight. Solving the problems in the industry will require a comprehensive strategy that protects the industry from predatory exploitation and making it more responsive to the development needs of the country.
Vince Palamara & Sarah McClendon PART 2 OF 4 JFK
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