Angola: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
05 Apr 2005
eISBN:
9781451800531
Language:
English
Keywords:
ISCR; CR; Angola; inflation; debt; company job; company operation; ENDIAMA official; Participation in the diamond market; Angola's decision; Mining sector
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This Selected Issues paper on Angola reports that oil production in Angola accounts for about half of GDP and about 75 percent of government revenue. The projections for the government’s fiscal position in the medium term will be crucially dependent on both the value of oil production and the proportion that will accrue to the government. However, in addition to the usual uncertainties associated with projections of the total value of oil output, the government’s share has been subject to volatility.

Abstract

This Selected Issues paper on Angola reports that oil production in Angola accounts for about half of GDP and about 75 percent of government revenue. The projections for the government’s fiscal position in the medium term will be crucially dependent on both the value of oil production and the proportion that will accrue to the government. However, in addition to the usual uncertainties associated with projections of the total value of oil output, the government’s share has been subject to volatility.

II. Issues in the Diamond Sector7

A. Introduction

37. Angola is the fourth largest producer of rough diamonds in the world. In 2003 production was recorded to have reached 6 million carats, valued at US$788 million, representing about 95 percent of the country’s non-oil exports and about 10 percent of non-oil GDP8. Angola has considerable potential to increase output further and benefits from the high proportion of its production which is of gem quality9.

38. Angolan diamond reserves fall into one of two categories: primary, or kimberlite deposits, and secondary or alluvial deposits10. Angola’s known stock is largely alluvial. Diamond deposits are mainly concentrated in the north-east (Lunda Provinces) with some also in the central and southern parts of the country. Over half of Angola’s current production of diamonds comes from the Catoca mine in Lunda Sul.

39. The Angolan diamond sector is currently being reformed through major legislative and institutional changes. Between June and July 2003 the Angolan government issued several decrees that modified existing laws on diamond-related activities, reversing many of the changes applied in 1999. ENDIAMA11, the parastatal diamond company, which is both a commercial operator and performs regulatory functions, is also undergoing substantial internal reorganization in respect to both roles. The following sections attempt to explain the current status of the diamond market in Angola and offer some perspectives on production, revenue, and policy issues that will become relevant in the near future.

Figure II.1.
Figure II.1.

Angola: Average Diamond Production Volume, 1990-2004

Citation: IMF Staff Country Reports 2005, 125; 10.5089/9781451800531.002.A002

Sources: Angolan authorities; and staff estimtes and projections.

B. Structure of the Sector

40. Diamond production in Angola is mainly divided between a formal sector, with companies operating under licenses issued by ENDIAMA, and an informal sector, comprised of artisan diggers (garimpeiros)12, many without a license. There is also a semi-legitimate sector, where mining and buying ventures are permitted by provision of valid documents, not issued by ENDIAMA. Historical data for diamond production are poor and unreliable, reflecting the dispersed nature of the informal sector, governance issues surrounding the formal sector, and changes in ownership and control during the 27-year civil war. As a result there are discrepancies between official figures and estimates by outside agencies.

Figure II.2.
Figure II.2.

Angola: Diamond Exports, 1990-2004

(As percentage of non-oil exports)

Citation: IMF Staff Country Reports 2005, 125; 10.5089/9781451800531.002.A002

Sources: Angolan authorities; staff estimates and projections.

41. Prior to 1999, around nine firms dominated the formal sector. Tax regulations were loosely enforced and little information was available on diamond production or exports. In the informal sector, and in companies under rebel control, diamond revenues fueled the long-standing civil conflict between rebel group UNITA and the Angolan state. UN reports throughout the 1990s estimated that UNITA was responsible for 25 to 30 percent of all nonreported Angolan diamond exports, with revenues at times amounting to US$250,000 per day.

Production

42. ENDIAMA introduced a sector reorganization strategy in 2004. Institutional changes outlined in the strategy include a government pledge to recapitalize the company and absorb all internal debt, which as of 2001 amounted to nearly US$300 million13. ENDIAMA has also formed a new subsidiary to develop mining ventures in its own right rather than being a passive shareholder in foreign-operated projects14. Operational objectives include the ending of informal mining by incorporating artisan diggers into the formal sector, and the substantial reduction of ENDIAMA’s non-mining company holdings. Other legal measures adopted recently include Decree No. 36/03 of June 27th, 2003, establishing a differential treatment for licensing, whereby all alluvial diamond licenses will be authorized by the Ministry of Geology and Mining, while all kimberlite projects will be authorized by the Council of Ministers. Some of these changes have started to be implemented, though it is not clear whether the strategy outlined by ENDIAMA will be completed15.

43. The aims of the proposed phasing-out of garimpeiros (informal sector activity) appear to be to ensure optimal exploitation of diamond resources, improve the welfare of workers in the sector, raise Angola’s credibility in international markets, and increase state revenue. In 2003-04, operations were set in train under national security regulations to expel perhaps 100,000 foreign miners16. Prior to this, between 250,000 and 400,000 foreign and domestic garimpeiros were estimated to be working in Angola, producing at times perhaps one third of Angola’s diamond output. In this period, legislation allowed artisan miners with official licenses to operate in designated areas determined by the Angolan government as not viable for industrial-scale companies. Often these were on the fringe of company operations. The assumption under ENDIAMA’s new sector strategy is that informal sector production will in future be absorbed by licensed companies that will use more efficient extraction methods, ensure safety standards, pay taxes, and provide social services to their local community.

44. Despite the declared objective of phasing out the informal sector, it is unclear whether current regulations actually preclude continued artisan operations. As many mining areas in Angola are expected to remain uneconomic for companies to establish operations, there may be strong arguments for allowing the informal sector to survive. Indeed, ENDIAMA’s marketing subsidiary SODIAM announced that rough purchases from the remaining informal sector amounted to US$10 million in the first half of 2004 and confirmed the opening of 8 regional buying centers to collect output from the artisan diggers that remain operating. In the same vein, reports suggest that ENDIAMA will continue to allow Angolan nationals who have lived in diamond areas for more than 5 years to continue operating, even though it may no longer issue artisan mining licenses17.

45. The number of firms operating in the diamond sector has increased since 2002, probably reflecting some absorption of artisan mining. As of July 2004 there were 264 national firms and 34 international firms operating in a total of 90 concessions (Table II.1 and Table II.2). However, only 8 of these concessions involve kimberlite deposits. All concessions include ENDIAMA as a passive participant. ENDIAMA also retains its original mandate to regulate and supervise all mining operations.

Table II.1.

Angola: Diamond Projects and Firms by Province

article image
Source: ENDIAMA.

As provided by ENDIAMA.

Table II.2

Angola: Foreign Firm Participation in the Diamond Market, 2004.

article image
Source: ENDIAMA.

46. The Angolan authorities project that output in 2005 will increase substantially, reflecting in part the recent approval of several new projects by the Council of Ministers, and the rising production in the vast Catoca mine18. ENDIAMA has however reported that the recorded output of the informal sector has been decreasing19. ENDIAMA officials expect improved infrastructure conditions to allow firms to resume activities in paralyzed projects and/or begin prospecting previously isolated or unsafe areas.

47. ENDIAMA is set to return to prospecting and exploration activities under its new subsidiary, ENDIAMA P&P20. In addition, there are reports that De Beers might return to exploration activities, suspended in 2001, after settlement of a major legal dispute between the state and the mining conglomerate. Other elements of ENDIAMA’s sector reorganization strategy include plans to conduct a geological survey of Angolan territory to establish potential mining areas (60 percent of Angola has not yet been surveyed), the opening by SODIAM of selling offices abroad, and a market analysis concerning Angola’s potential for cutting and polishing operations21.

Marketing

48. Following several oscillations in policy regarding arrangements for marketing diamonds extracted in Angola, the Angolan government decided on December 1999 to establish a single-channel marketing system for exports. This was in part designed to limit tax evasion and to respond to international pressure to eradicate conflict diamonds22. A law enacted in January 2000 transferred ENDIAMA’s right to market diamonds, or to issue licenses for that purpose, to its 99 percent-owned subsidiary SODIAM, operating through a newly created joint-venture company ASCORP (Angolan Selling Corporation), which was accorded a market monopoly to buy and sell diamonds23. This attempt at consolidation was accompanied by other measures to transform the sector. One example was Angola’s decision to become the first subscriber to the Kimberley Process in 200024. Additionally, Angola is being encouraged by donors to implement the Publish What You Pay campaign and to join the Extractive Industries Transparency Initiative (EITI).

49. For the period 2000-2003, the state—through ASCORP—was the sole official channel for the sale of diamonds to the international market. However, despite support from intensified internal controls, reports indicate that smuggling was still extensive.25 Nevertheless, ASCORP publications report a tripling of government diamond revenues between 1998 and 2001. After a decade of negative balances, ENDIAMA reported profits in 2002 and 2003 (See Table II.3).

Table II.3

Angola: ENDIAMA’s Financial Results, 2001-2003

article image
Source: ENDIAMA

50. ASCORP’s monopoly of rough diamond buying in Angola was rescinded in July 2003. Resolution No. 21/03 of July 8th 2003 allowed SODIAM to establish joint ventures with other firms to market diamonds. Small-scale producers and garimpeiros (often through middlemen) now have access both to ASCORP and to other companies operating in partnership with SODIAM, forming a semi-open market regulated by the state. However, the largest producers can only sell their rough diamonds through SODIAM itself.

The World Diamond Market.

Diamonds are mined commercially in over 20 countries. The value of world production of rough diamonds was estimated to be US$6.8 billion in 1999, amounting to approximately120 million carats. About 80 percent of all diamonds mined are used for industrial purposes. De Beers mines approximately 55 percent of world production, mainly in partnership with the South Africa, Botswana and Namibia governments.

Diamonds may be sold rough or polished. There is evidence of intra-Africa trading of rough diamonds, but the majority of production is flown to Antwerp and other trading centers such as Tel Aviv, New York, and Bombay. Implementation of country of origin and country of provenance is getting stronger as a result of the Kimberley Process.

Industrial diamond sales occur at an estimated ten times, or “sights” per year. Polished diamonds are traded and sold on to jewelry manufacturers, or are set in jewelry by the polishing company. The total timeframe from point of extraction to the final sale to the consumer is estimated to be about two years. The main cutting and polishing centers are currently India, Belgium, Israel, Thailand, and the USA, with China rapidly raising its operations.

C. Revenue from the Diamond Sector

51. Reported government revenue from the diamond sector in Angola remains extremely low when compared to the industry’s reported production26. The total value of output as reported by the Ministry of Geology and Mines was US$638 and US$788 million for 2002 and 2003, respectively. Related fiscal income as reported by ENDIAMA amounted to US$45 million in 2002 and US$112 million in 2003 (See Table II.4)27. This low ratio of government revenue to production is also a feature of some other diamond-producing countries in sub-Saharan African, where the dispersed nature of production from alluvial diamond sources inhibits high rates of tax collection. However, in Botswana and South Africa, where there are consolidated industries organized around a few large-scale producers, ratios of tax collected to total assessed production are higher. Angola shares characteristics with both large- and small-scale producing countries.

Table II.4

Angola: Diamond Sector Fiscal Contribution Value, 2001-2003

(In millions of US dollars)

article image
Source: ENDIAMA.

52. The diamond tax system in Angola consists of a combination of tax levies, royalties, and export duties as well as corporate taxes. Taxes of between US$1 and US$3 per hectare are payable for surface (prospecting) rights. Subsequent mining rights are rewarded on payment of a bonus, reflecting the scale of the potential project. Royalties are then applied to the gross value of production at a rate currently set at 5 percent. Export duties are levied at a currently reported rate of 3.5 percent. In addition, mining companies are subject to a corporate tax rate of 35 percent, a withholding tax of 15 percent, and a capital income tax of 10 percent, although they are provided with substantial tax holidays and special dispensations, such as exemption of mining equipment and supplies from import duties and accelerated depreciation of fixed assets and exploration equipment. SODIAM as of 2003 also collected a 1.5 percent commercial fee. The Ministry of Geology and Mines is responsible for industrial taxes and royalties while export duties are collected by customs.

D. Policy issues

53. Recent changes in the legal framework could potentially result in a major change in the structure of the diamond sector. The Angolan government has indicated its intention to absorb garimpeiros of Angolan origin into licensed companies with responsible fiscal and social policies. However, the success of this effort will depend in large part on the responses of local communities. Similar efforts in other countries have been limited by the absence of alternative income sources for those not able to find company jobs.

54. The alluvial nature of the majority of Angolan diamond deposits proves a challenge for government revenue collection. While formal sector extraction from large kimberlite deposits allows considerable potential for raising government revenue, both at production and selling stage, the alluvial deposits are disperse and currently mined extensively by the informal sector as well as by licensed companies, which inhibits imposition of an effective taxation system either at the level of production or income or of sale. There may, therefore, be a need to maintain a mixture of tax regimes to ensure an effective trade-off in all sectors between incentives for exploration and prospecting, and the maximization of government revenue.28

55. Although arrangements within the current tax regime provide various means for the public sector to capture the sizeable rents available from diamond extraction, it is difficult to assess whether these are being applied effectively. In principle, the spectrum of instruments available is extensive, including sales of exploration and mining rights, taxes on prospecting rights, payments of royalties, levies on export, monopsony arrangements and commissions for purchasing rough diamonds, and the taxation of income. However, the limited transparency of the sector inhibits an assessment of the current optimality of taxation arrangements. It is also difficult to assess how onerous or fairly applied is the rest of the current tax regime, although Angola seems to be subject to relatively light tax rates in international terms, particularly taking into account tax holidays and exemptions. Information about the margins earned by SODIAM and ASCORP and payments for mineral rights are not published.

56. While the partial opening of marketing arrangements is a positive step towards a more competitive environment for diamond mining, the perception of Angola as a high-risk location continues to deter investors. This reflects several factors. One problem has been the instability and ambiguity in the legal framework surrounding mining activities and a pervasive lack of transparency, including in the ownership of firms (including in diamond marketing) and revenues. The continued dominance of ENDIAMA, and its intrinsic conflicts of interest, has also perpetuated concerns about restricted access and privileged treatment. Another deterrent has been the involvement of Angolan parastatals in arbitration conflicts with foreign firms due to contract breaking. In addition, the prices being paid by SODIAM to large producers are currently considered to be well below international market value and can be changed arbitrarily. Other risks include the legacy of the sector’s war-time history of corruption and the security forces’ close involvement in its operations.

57. There is considerable potential to make the diamond sector more attractive to foreign and local investors, while preserving national interests. At the heart would be transparent and stable legislation, which provided a clear separation between regulators and operating companies in the sector, ensured consistency in taxation and marketing arrangements, and clarified that special privileges would not be accorded to individual citizens or companies. To avoid conflicts of interest, and to permit ENDIAMA to exploit its commercial potential, its licensing, regulatory, marketing, and advisory functions might be transferred to other agencies or the current regulating ministries. Its role as a passive shareholder might also be separated from its active operational roles. All taxation would be executed by an appropriate, independent, fiscal authority while legislation might also ensure that contractors of ENDIAMA would not be accorded special tax privileges. Parastatals and their subsidiaries or associated companies would in general be subject to clear commercial rules, including transparency and auditing requirements. Establishment of an independent regulatory function might also enable data collection to be improved.

58. One particular concern that might be addressed by legislation or regulation is the openness of the current bidding system for concession rights. To maximize potential state revenue, and encourage all potential operators, bids for all new licenses need to be conducted in a fully competitive and transparent manner. This is particularly important in Angola, given evidence of privileged political or military access in the past and perceptions that the emphasis on ‘Angolanization’ of the sector is encouraging foreign companies to continue engaging such domestic partners, and to grant them substantial equity rights, independent of their level of expertise or provision of capital.

59. The authorities indicated in 2000-01, during the operation of Fund staff-monitored programs, that a diagnostic study of the sector would be undertaken29. It was understood that this would enable a systematic approach to be adopted for the whole sector, embracing production, marketing, regulatory, depletion and taxation issues and both formal and informal operations. One prospective world development casting a shadow on the sector is the potential impact of synthetic diamond production.

E. Conclusions

60. While the diamond sector already provides a large proportion of Angola’s reported non-oil exports and revenue and of its non-agricultural employment, it has considerable untapped potential. Over half the country remains to be surveyed. A large part of current diamond production is probably still being smuggled abroad. There is currently little ‘downstream’ activity.

61. Numerous governance issues remain to be addressed. A systematic appraisal of the sector might focus particularly on the separation of roles currently being played by ENDIAMA. Its sizeable potential conflicts of interest impede improvements being made to the transparency and openness of the sector and hence to its attractiveness to potential investors. The sector would gain in particular from clear and fair rules of entry under guarantees of a stable regulatory environment. In the granting of licenses and the application of tax provisions, clear commitments to fairness of treatment and transparency would reassure investors and ensure that government revenue could be maximized. More information should be published about revenue payments made by the sector and the earnings of parastatals and associated companies. There are also outstanding social issues, including prospects for garimpeiros of Angolan origin.

References

  • ENDIAMA, May 2004, Balanço de Implemenção da Estrategia do Governo Aprovada para o Relançamento do Sub-Sector Diamantífero e Perspectivas.

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  • Global Witness and Partnership Africa Canada Publication, ISBN -1894888-63-4, Rich Man, Poor Man Development Diamonds and Poverty Diamonds: The Potential for Change in the Artisan Alluvial Diamond Fields of Africa.

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    • Export Citation

  • Oomes, Nienke et al., August 2003, “Diamond Smuggling and Taxation in Sub-Saharan Africa”, IMF Working Paper WP/03/167 (International Monetary Fund).

    • Search Google Scholar
    • Export Citation

  • Partnership Africa-Canada, July 2004, “Diamond Industry Annual Review, Republic of Angola 2004”, The Diamonds and Human Security Project (Ottawa, Canada).

    • Search Google Scholar
    • Export Citation
7

Prepared by Maria Mendez.

8

This estimate does not include any allowance for smuggled output, which has recently been estimated at US$350 million per year (Minister for Geology and Mines, December 2004)

9

Gem quality stones account for only 5 to 10 percent of world supply.

10

Kimberlite deposits refer to diamonds that originate in a volcanic crust in the earth’s surface. Alluvial diamonds are those stones washed out of weathered kimberlite deposits into river systems. At present, apart from the large Catoca mine, nearly all production in Angola is from alluvial deposits.

11

Empresa Nacional de Diamantes de Angola, ENDIAMA.

12

Garimpeiros generally work in small teams, often diving into river beds, and are frequently dependent on middlemen for equipment, supplies, credit and the purchase of any diamonds collected.

13

ENDIAMA retained a large workforce through the civil war, despite having few operational functions.

14

ENDIAMA, Pesquisa & Produção (P&P).

15

The record of previous efforts to reorganize and reshape the sector has been poor in terms of implementation and longevity.

16

Operação Brilhante (Operation Brilliant). The majority of expelled workers are presumed to have been of Congolese nationality, many of whom worked in or near mines controlled during the civil war by UNITA.

18

Catoca’s shareholders in 2002 included ENDIAMA (33 percent), Alrosa (33 percent), Daumonty Financing, and Oderbrecht.

19

Remarks by Chairman Avanaldo de Souza. ENDIAMA recorded sales of 1 million carats by the informal sector in 2000.

20

Prospective financing includes joint-venture partners BHP Billiton and Escom’s subsidiaries: Angola Mining Finance, Ltd and Angola Mining Services Ltd. Banco BFA is also expected to provide financing.

21

SODIAM selling offices were opened in Tel Aviv in July 2004 and in Antwerp in November 2004. Offices are expected to open in Dubai and New York in 2005. It is reported that work has been started on the cutting and polishing plant planned by the Leviev group.

22

UN resolutions in 1999 determined Angolan diamonds as “conflict diamonds” and sanctions on Angolan diamond production were established.

23

ASCORP was designed as a joint effort between SODIAM and two foreign companies, WELOX owned by the Lev Leviev Group and Tais, owned by Belgium’s Sylvan Goldberg.

24

The Kimberley Process, a coalition of industry and nongovernmental organizations and government, established an international certification scheme for rough diamonds backed by the UN General Assembly to help outlaw trade in “conflict diamonds”.

25

Economist Intelligence Unit and Global Witness. This seems in part to have reflected the low prices paid by ASCORP relative to comparable international prices.

26

The Ministry of Finance does not produce estimates of the proportion of tax payments attributable to the diamond sector, although the Ministry of Geology and Mines and ENDIAMA (2004) issue a table on diamond sector fiscal contribution. (see Table II.4)

27

This reported revenue does not seem to include payments by companies for receipt of mining rights or profits earned by SODIAM and ASCORP as a result of high marketing margins.

29

It is reported that the first phase of such a study has since been completed.

Same Series

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Cover IMF Staff Country Reports
Angola: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Volume/Issue:
Volume 2005: Issue 125
Publisher:
International Monetary Fund
ISBN:
9781451800531
ISSN:
1934-7685
Pages:
84
DOI:
https://doi.org/10.5089/9781451800531.002

Angola: Average Diamond Production Volume, 1990-2004

Angola: Diamond Exports, 1990-2004

(As percentage of non-oil exports)