Diamond manufacturers in turmoil
Brian Benza | Friday November 28, 2014 17:06
After five years of exemption, most of the 21 diamond cutting and polishing company will from this month be obliged to pay 0.2 percent of their turnover to government through the Human Resource Development Council (HRDC) as training levy.
While observers assert that the 0.2 percent is a small amount for a sector that does not pay a lot of taxes, industry insiders told BusinessWeek that their already troubled industry is a high turnover, high costs but low profit margin business and cannot therefore cushion the effects of any more taxes.
Due to depressed polished prices set against high rough prices, cutting and polishing companies globally are currently facing difficulties with the local industry’s situation exacerbated by the comparatively higher labour costs.
The combination of high rough prices and market-induced strain on the cutting and polishing business in Botswana has recently triggered severe cutbacks in an industry that employs around 3,700 people. About 300 workers have already lost their jobs in recent weeks. Moti Ganz Botswana last week retrenched 100 workers while another company is said to be finalising the process of laying off 200 of its 300 workforce.
The Botswana Diamond Manufacturers Association (BDMA) said polished prices are in a very difficult phase right now notwithstanding that Christmas is around the corner. “Manufacturing centres such as India and others in that region are very competitive and centres such as Botswana find it more and more difficult to remain competitive.
“However, as a body representing the diamond manufacturers we wish to find a solution to the training levy concerns that will ensure skills development in the industry while the unique conditions of the local diamond industry are also considered,” BDMA Executive Director Pauline Paledi told BusinessWeek.
The turnover-related tax was created in 2008 to finance the provision of relevant training of the workforce, as an effort towards increasing their efficiency.
Companies can claim back the levy to fund training of their staff.
The industry has already presented their exposition statement to government over the vocational training tax with protracted negotiations expected over the next few weeks.
Coordinator of Relocation and Opportunities at the Diamond Hub, Mmetla Masire said he believes the levy should not seriously impact negatively on any company’s bottom line, as the actual percentage that is charged is very small.
“One needs to put things into perspective. VAT is 12% of turnover and the Training Levy is 0.2 percent of turnover. Also for those companies that pay the training levy, they can claim almost double what they would have paid for any training they undertake. Also as an industry, they can apply to HRDC to assist in other training matters,” he said.
However, the diamond companies say the 21 factories operating in Botswana have already trained their staff fully financed with their own corporate funds and the likelihood that they will ever “need” the fund is minimal.
According to an industry insider, the 0.2 percent levy might seem small but given that the diamond cutting and polishing is a high turnover business, the amount that companies will end up paying is ‘significantly high for any kind of training needs’.
“Most of the companies in the local industry have a turnover of between $30million to $50 million. If a company pays 0.2 percent of $50 million it translates to a levy of $100,000(P920, 000). It is impossible for an individual company to spend close to a million pula on training in a year. The government will end up just keeping that money,” she said.
Another industry insider explained that the introduction of the levy will impact heavily on the compressed margins, as the levy is basically a turnover tax, which is levied even when no profits are made.
“ The local cutting and polishing business is uncompetitive on the global market as it is due to high labour costs. Some of the companies operating in Botswana are making losses but continue to operate here because they need to secure supply for themselves and their parent companies abroad.”
“To introduce this levy at a time when the industry is already struggling could be the last straw for the local industry.
“De Beers under the Oppeinheimers at least tried to alleviate the situation by supplying us with the larger stones, which are more profitable to cut. But things have since changed under the new dispensation which seems not to care,” he said.
High labour costs in Botswana’s fledging diamond cutting and polishing industry have always been perceived as a possible threat to the beneficiation efforts. Due to relatively higher labour costs in comparison with other cutting centres around the world, local firms can only viably cut larger stones with higher profitability margins, but are in limited supply in Botswana.
It is estimated that diamond cutting costs $12 to $25 per carat in India, $20 to $30 in China while in Botswana it costs between $60 and $65 per carat.
Journalist and industry analyst Chaim Even-Zohar says that the redundancies “should be viewed as a red flag to the Botswana government.
“At the end of the day, companies vote with their feet. “The mispricing of the boxes gives De Beers and Botswana an immediate short-term cash gain – but it could hurt long term beneficiation prospects.” However, other observers have suggested that funds from the levy could be used to set up a diamond cutting and polishing school.
“Cutting is highly competitive but 0.2 percent seems small for companies that are known to pay virtually no taxes in Botswana. We have no diamond cutting school and the companies have basically had to pay for the cost of training all their 3,700 staff. It would be really useful that the government should earmark the funds for the development of a diamond cutting school in Botswana which would in turn lower the costs of training,” said Professor Roman Grynberg of BIDPA.