akrsp gemstone sector study final draft of 18 june 2014

Final Report

Development and promotion of gemstone sector policy/regulatory framework for community based fair, clean and ethical practices

Under ‘Gilgit-Baltistan, The Jewel of Pakistan” Project

By:

Izhar Hunzai &Ashabullah Baig

Consultants

June 2014

A Policy/Regulatory framework for a sustainable community-based gemstone sector in Gilgit Baltistan

Table of Contents

List of Acronyms-------------------------------------------------------------------------------------------------- 5

Acknowledgements-----------------------------------------------------------------------------------------------6

Executive Summary---------------------------------------------------------------------------------------------- 7

1 Introduction---------------------------------------------------------------------------------- 8

1.1 Background----------------------------------------------------------------------------------------------- 8

1.2 Objectives of the Study--------------------------------------------------------------------------------10

1.3 Scope of the study--------------------------------------------------------------------------------------10

1.4 Methodology-------------------------------------------------------------------------------------------- 10

1.4.1 Research Questions---------------------------------------------------------------------------------11

1.5 Challenges----------------------------------------------------------------------------------------------- 12

2 Situation analysis-------------------------------------------------------------------------13

2.1 Overview of gemstone sector------------------------------------------------------------------------15

2.2 Resource Potential-------------------------------------------------------------------------------------18

2.3 Market Geographic/Behavioral Segmentation---------------------------------------------------21

2.3.1 Geographic Segmentation-------------------------------------------------------------------------21

2.3.3 Behavioral Segmentation--------------------------------------------------------------------------22

2.4 Product Segmentation---------------------------------------------------------------------------------23

2.4.1 The external Perspective - Marketing Mix-----------------------------------------------------23

2.4.2 The internal perspective – Resource Base-----------------------------------------------------25

3 Stakeholders analysis--------------------------------------------------------------------26

3.1 The Miners-----------------------------------------------------------------------------------------------26

3.2 The Traders--------------------------------------------------------------------------------------------- 28

3.3 The Investors------------------------------------------------------------------------------------------- 30

3.4 The Trade Associations-------------------------------------------------------------------------------31

3.4.1 Pakistan Gemstone and Minerals Association (PGMA)-------------------------------------31

3.4.2 The regional trade associations-----------------------------------------------------------------32

3.5 The Promoters and Support Organizations-------------------------------------------------------33

3.5.1 The AKRSP-----------------------------------------------------------------------------------------34

3.5.2 The PGJDC-----------------------------------------------------------------------------------------35

3.5.3 Other Support Organizations--------------------------------------------------------------------36

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3.6 The Communities-------------------------------------------------------------------------------------- 37

3.7 The Regulator-------------------------------------------------------------------------------------------38

4 Review of existing policy/regulatory framework--------------------------------39

4.1 Legislative/Policy Framework----------------------------------------------------------------------39

4.2 The Institutional/Regulatory Framework--------------------------------------------------------40

5 Market analysis----------------------------------------------------------------------------44

5.1 Supply side market dynamics-------------------------------------------------------------44

5.1.1 Requisite/missing services on Supply side----------------------------------------------------44

5.1.2 Socio-Economics and Geographic distribution------------------------------------------------48

5.1.3 Mining techniques and technologies used-----------------------------------------------------49

5.1.4 Risks and hazards on the supply side-----------------------------------------------------------50

5.2 Demand side market dynamics----------------------------------------------------------51

5.2.1 Requisite services on Demand side--------------------------------------------------------------51

5.2.2 The existing market size, intermediaries, buyers--------------------------------------------54

5.2.2.1 Revenue Growth analysis------------------------------------------------------------------------56

5.2.2.2 Value Loss analysis-------------------------------------------------------------------------------57

5.2.3 Transaction/Business Models in practice------------------------------------------------------59

6 Financial Analysis------------------------------------------------------------------------- 61

6.1 Formal or/informal financing mechanisms in practice----------------------------------------61

6.2 Cash flows in a typical business---------------------------------------------------------------------63

6.3 Rates of returns in different business models----------------------------------------------------65

6.4 Income distribution patterns (miners/traders/financiers)-----------------------------------66

7 Support systems/Service providers-------------------------------------------------68

7.1 Professional/Support organizations---------------------------------------------------------------68

7.2 Government services----------------------------------------------------------------------------------70

7.3 Services gap/missing services-------------------------------------------------------------------------70

7.4 Future expansion of gemstone services chain-------------------------------------------------------72

8 Review of best practices in Artisanal/Small-scale Mining (ASM)------------73

8.1 Framework for review of best practices-----------------------------------------------------------73

8.2 Best practices in ASM---------------------------------------------------------------------------------74

8.2.1 Legislation and Policy----------------------------------------------------------------------------75

8.2.2 Prospecting and Mining--------------------------------------------------------------------------77

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8.2.3 Grading and assessment--------------------------------------------------------------------------78

8.2.4 Branding and Marketing--------------------------------------------------------------------------79

8.3 Overview of Sri Lankan Model-----------------------------------------------------------------------79

8.3.1 Salient features of Sri Lankan gems and jewelry sector--------------------------------------80

8.3.2 Policy and institutional support to Gems & Jewelry sector in Sri Lanka-----------------81

9 The prospective policy/regulatory framework-----------------------------------83

9.1 Guiding Principles--------------------------------------------------------------------------------------84

9.2 Policy Goals----------------------------------------------------------------------------------------------87

9.3 Policy Objectives--------------------------------------------------------------------------------------- 88

9.4 Policy Actions and Milestones-----------------------------------------------------------------------89

9.5 Resources------------------------------------------------------------------------------------------------92

10 References-------------------------------------------------------------------------------- 93

11 Annexures-------------------------------------------------------------------------------- 96

Annexure A Methodology and research tools---------------------------------------------96

A.1 Data collection and analysis--------------------------------------------------------------------------96

A.2 Data Collection instruments-------------------------------------------------------------------------96

A.3 Sampling Strategy--------------------------------------------------------------------------------------96

A.4 Interviews----------------------------------------------------------------------------------------------- 96

A.5 Identification of key stakeholders------------------------------------------------------------------96

A.6 Literature Review------------------------------------------------------------------------------------ 100

Annexure B Cost analysis of Artisanal and Small-Scale Mining (ASM) in GB-----101

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List of AcronymsAKDN Aga Khan Development Network

AKF Aga Khan Foundation

AKRSP Aga Khan Rural Support Programme

ASM Artisanal/Small-scale Mining

BCDF Baltistan Culture and Development Foundation

BGMA Baltistan Gems and Mining Association

BGMT Baltistan Gems and Minerals Trading

GBC Gilgit Baltistan and Chitral

GBLA Gilgit Baltistan Legislative Assembly

GDCP Geo Data Centre of Pakistan

GJTMC Gems and Jewelry Training and Manufacturing Centre

GoP Government of Pakistan

GSP Geological Survey of Pakistan

HGMA Hunza Gems and Minerals Association

KADO Karakorum Area Development Organization

KIBOR Karachi Interbank Operations Rate

KPK Khyber Pakhtoon Khuwa

MIFA Mining Investment Facilitation Authority

MR 2003 Mining Rules 2003

NGMA Nagar Gems and Minerals Association

NMP National Mineral Policy

TOR Terms of Reference

PFCC Pakistan Federal Chamber of Commerce

PGJDC Pakistan Gems and Jewellery Development Company

PGMA Pakistan Gems and Minerals Association

PIDC Pakistan Industrial Development Corporation

RF Rupani Foundation

SECP Security and Exchange Commission of Pakistan

SGMA Shigar Gems and Minerals Association

SME Small and Medium Enterprise

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AcknowledgementsThe policy/regulatory framework recommended in this report was created and developed collaboratively. We are indebted to everyone with whom we interacted, corresponded or received feedback since start of our work in March 2014.

We are truly grateful to Mr. Abdul Rahman at AKRSP for sharing his invaluable experiences and for giving suggestions from his lifelong professional career in gemstone sector across Pakistan; Mr. Safiullah Baig at AKRSP for providing tremendous support and feedback during the field work of the project; Syed Asif Hussain, Director PGJDC Gilgit for his tremendous help and for sharing his experiences and insights on gemstone sector in Gilgit Baltistan.

We are highly grateful to all the members and officials of GB government who have given us their input and feedback. Our special thanks go to Mr. Amjad Hussain Azar, Advoate and Member, Gilgit-Baltistan Council (GBC), for his invaluable and holistic response; Syed Akhtar Hussain, Secretary Health for taking personal interest in the project and for providing his tremendous support; Mr. Husnain Raza, Secretary Minerals, Industries and Labour; and Mr. Anwar Ali, Director Minerals Department for giving us their feedback and for sharing useful information.

Key officials of all the support organizations shared their vision and guidance with us. Our particular thanks go to Mr. Jalal Uddin, CEO, Rupani Foundation (RF) for sharing his invaluable experunce; Mr. Mubeen, CEO and Ejaz Ali Manager Projects at KADO for giving us their points of view and input; Mr. Wazir Ejaz Hussain, CEO, BCDF and Mr. Jafer Ali Shigri, the founder of BGMT, for adding value by sharing their experiences in gemstone processing.

We are appreciative of the feedback and information received from all gemstone trade associations in the region. We extend our sincere thanks to Mr. Muhammad Zarin, Chairman PGMA for taking personal interest and giving us his feedback on matters of gemstone trade; Mr. Hyder, Secretary PGMA for sharing useful information; Syed Hyder Shah, President SGMA; Mr. Muhammad Naqi, President BGMA; Mr. Ghulam Abbas, Acting Vice President, HGMA; and officials of NGMA for sharing their concerns.

Several people have helped us during our field trips in Hunza, Nagar and Baltistan. We express our appreciations to Mr. Ayub and Mr. Manzoor for their support and for accompanying us during interactions with mining communities in Hunza and Nagar. We truly admire the support of Mr. Salman Ali at AKRSP for facilitating and helping us in Skardu. We want to express our special thanks to Mr. Wahidullah Baig and Mr. Nabi for their logistic support and for making field visits to remote villages of Shigar valley possible.

Last but not the least; we are indebted to all the miners, traders and communities across the regions of GB with whom we interacted and who enriched our knowledge and understanding of real life dynamics of gemstone mining and trading at grassroots level.

Izhar Hunza (Lead Consultant), Asabullah Baig (Consultant)

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Executive SummaryThis study was commissioned by AKRSP under its EC funded project, “Gilgit-Baltistan, the Jewel of Pakistan” out of the firm realization that natural mineral reserves of Gilgit Baltistan should be effectually employed into economic use. In particular, the region has tremendous resource potential of precious and semi-precious gemstones. The policies and strategies to sustainably exploit these resources deserve due consideration as the gemstone sector in the region is currently beset with inefficiencies and performance deficits. This study presents a survey of these issues and draws recommendations and conclusions supported by an extensive qualitative primary and secondary research exercise. This includes invaluable input from all key stakeholders of gemstones sector including communities, miners, traders, investors, promoters and the GB government. This research exercise then proposes a community-centered prospective policy/regulatory framework, which is inspired by the ideal of necessity - of creating an equitable, sustainable and effective community based gemstone sector in Gilgit Baltistan.

The reasons for the observed inefficiencies and underperformance of gemstone sector in GB are many. The key problem is that the region has a poorly organized supply side of gemstone sector that is loosely connected with an under-developed demand side of the market. The gemstone sector in GB is primarily comprised of a large base of community based artisanal and small-scale mining (ASM) operations. The tools and techniques employed for mining gemstones are traditional and very basic. Inefficient mining practices at community level result in value loss. Lack of a proper system for grading and quality assessment of gemstones further adds to the problems. The gemstone processing industry in the region is progressing steadily and can only cater to a fraction of the total production output. The trade of raw gemstones is largely informal and transactions are conducted in an unqualified manner. The marketing and promotion of raw gemstones is dominated by the informal sector, with little support from the government and support organizations. Market and institutional infrastructure is lacking the capacity to tap the tremendous economic potential of the gemstones trade. A fragmented value chain, lack of an effective regulatory regime and absence of facilities for direct exports to international markets are the key problems that need to be redressed. In order to support this important sector of the economy, coordinated efforts are needed by the government, support organizations and communities in creating services that are missing. The private sector in such an enabling environment will flourish and lend a hand in leveraging the expansion of gemstone mining, processing and marketing industries.

The formalization of gemstone sector in GB ought to be reinforced by the recognition at legislative and policy levels that ASM is a priority sector, with broader benefits and the potential to contribute towards poverty reduction, employment creation, and improved resource utilization, than large-scale mining (LSM). Therefore real need for an enabling policy/regulatory framework for ASM is in the institutional, financial and technical support mechanism that should endorse that ASM is going to be a force for sustainable community development. The need is to facilitate access to finance, information especially geological and gemstone pricing, access to areas for exploration and exploitation, access to markets; and fostering processing and marketing services, research and development, capacity building; and encouraging use of modern technology and techniques.

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1 Introduction

1.1 BackgroundThe abundance of natural reserves of gemstones in Gilgit Baltistan and Chitral (GBC) is a key advantage that can be used to catalyze the economic progress in the region. The debate now centers on the policies and strategies to exploit these resources and maximize their value for spurring economic activities and supporting wellbeing of people of GBC, particularly the youth. Gemstones found in the region present an opportunity to be developed as a key sector through enabling policy, technical support and private sector participation.

The global Gems and Jewelry (G&J) market has seen a tremendous growth in the last ten years. In 2013, the global market size was $50 billion from a total of $18 billion in 2003. Despite the fact that Pakistan is endowed with abundant resources of several precious and semi-precious gemstones and, is believed to have the sixth largest reserves in the world, its global market share has remained only 2.4% in 2013. This shows the tremendous potential of G&J sector in country and the scope for future growth, value added trade; export diversification, job-creation and private sector development in both rural and urban areas of Pakistan.

The geological composition of various mountain ranges of GBC provides an ideal mix of natural factors for small-scale mining of gems and precious stones. Although an accurate estimate of the total size of natural deposits is unavailable, the region is contributing as much as 70% of the total raw materials to the Pakistani gemstones market. The availability of raw material, relatively low cost and increasingly literate labor force, and sizeable and growing regional and international markets, are key advantages giving Pakistan a potential edge in global trade in this sector. However, this industry has remained under-developed owing to a number of shortcomings, starting from primitive methods of mining and lack of enabling policy, imaginative product design, branding and marketing, and a blend of other shortcomings in between, related to poor choice of technology, skills and market orientation.

By default, the gemstone sector in GB is largely export oriented but without much value-added. More than 80% of raw and uncut gemstones are exported to international market. Other countries use these gemstones as cheap raw material for manufacturing high value products later to sell at premium prices. The difference of value between uncut and polished stones is widely held to be significantly higher - a properly mined, cut and polished piece of a gemstone sells at a price that is at least ten folds the price of an uncut and raw gemstone in the market. The value loss due to raw exports is enormous. Due to widespread hindrances and bottlenecks, the sector is imbued with inefficiency and performance deficit.

The reasons for massive inefficiencies and underperformance of gemstone sector in GB are many. The key problem is that, the region has a problems-ridden supply side of gemstone sector which is loosely connected with yet-to-be-strengthened demand side of the market. The

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gemstone sector in GB is primarily nurtured by a large base of community based artisanal and small scale miners (ASM). The tools and techniques employed for mining gemstones are traditional and very basic. Inefficient mining practices at community level result in additional value loss. Lack of a proper system for grading and quality assessment of gemstones further adds to the problems. The natural attributes of a raw gemstone ought to be magnified through further processing and finishing. The processing industry in the region is at a nascent stage and can only cater to a fraction of the total production output. The trade of gemstones is largely informal and transactions are conducted in an unqualified manner. Therefore, the marketing and promotion of gemstones is placed lowest on the priority list. Market and institutional infrastructure is lacking the capacity to tap in the tremendous economic potential of the gemstones trade. A fragmented value chain and lack of facilities for direct exports to international markets poses another set of problems that need to be redressed.

Despite these impediments, the gemstone sector in the region has shown signs of resilience and notable growth during the past few years. It presently employs thousands of people as miners and traders; and it has potential to create additional opportunities for youth as designers and cutters of gemstones in a growing processing industry. If the sector is managed and organized in a proper way, it can provide employment to thousands more, making G&J sector as the largest employer in the region. The gemstone sector in GB has a vital role to play in the social and economic development of the region. In order to fully reap the benefits from the regions’ invaluable assets of gems and precious stones, careful and effective reparation of the whole gemstone value chain is needed, matching the supply with demand for processed items in national and international markets.

The first step towards strengthening the gemstone sector in the region is recognition of community based ASM and processing as a separate and small-scale industry at policy and regulatory level and create space to accommodate the specific needs of such an industry. This will help manage and formalize the sector while bringing about clarity in roles played by different stakeholders. Effective yet relevant policies and planning by different stakeholders will help achieve development objectives of gemstone sector smoothly. In order to create an enabling environment, colossal efforts are needed to be made by the government and support organizations to provide services that are missing.

A thorough review of the existing problems and their underlying causes has been conducted in this study. Wherever applicable, solutions to the problems have been proposed keeping in view the specific needs of communities, various stakeholders and market dynamics. This research exercise then distills and articulates a community based prospective and policy framework, which is inspired by the ideals of creating an equitable, sustainable and effective community based gemstone sector in Gilgit Baltistan.

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1.2 Objectives of the StudyThis study aims to develop a replicable policy framework for Gems and Jewelry (G&J) sector and the promotion of fair, clean and ethical mining practices in GB. Commensurate with project TOR, this study will achieve the following specific objectives:

1. Assess and document the community practices in gems mining, processing and marketing in GBC.

2. Study the government policy documents, procedure and practices in GBC, and other provinces of Pakistan and federal documents.

3. To review and document best practices in community based artisanal mining, processing and marketing from around the world.

4. Develop a replicable policy framework and policy manual for community based fair, clean and ethical practices in Gems and jewelry sector in GBC.

1.3 Scope of the studyThe scope of this study is set to focus on the geographical areas of GB which are well known for the mining and extraction of the gemstones, including the mining sites of Hunza and Nagar, and Shengush, Rondu and Shigar valleys in Baltistan. The existing policy frameworks are analyzed in the context of GB’s provincial governance infrastructure with that of federal government. All the key actors and stakeholders of gemstone sector across GB including miners, traders, trade associations, promoters and the regulator were surveyed in order to produce the reliable and robust evidence for this research study.

1.4 Methodology

In order to achieve the key objectives of this study, the consultants followed an exploratory and qualitative research methodology guided by an implementation framework comprising of the following sequential steps:

Context/ baseline – reviewed the current situation, policy environment, sector trends, community mining and trade practices, national context and global best practices, through literature review, consultative meetings with stakeholders and field observations

Analysis of options – based on the potential, constraints and opportunities, developed desired options and trajectories for public policy, technology and skills up gradation, covering artisanal mining and product and trade development, and strategies for branding and marketing

Evaluate – based on the objectives of the assignment (community-based fair and clean G&J sector development), evaluated risks/ rewards for desired options and select and prioritize strategic interventions

Path / Proposal – synthesized results, produced a comprehensive report, summarized key findings and provided specific recommendations

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The relevant data and information was collected through adaptive and robust data collection instruments, per se the specific objectives of this study. In order to set the ground for rigorous analysis and creation of new knowledge, primary research instruments were applied among all the key stakeholders of the gemstone sector in GB. In addition, secondary sources of information were thoroughly surveyed including an extensive and detailed review of policy documents, practices and experiences in gemstone sector in GB and wherever relevant, such examples from around the world. The parameters affecting gemstone sector in GB are interdependent, and issue by issue analytical approach has been followed since it facilitated accessing and analyzing information in a comprehensive manner. The analyses, observations and recommendations proposed in the study are organized on the basis of theoretical frameworks drawn from several disciplines including the economics, finance, marketing and public policy. The outcome of this extensive research exercise is intended to provide feedback for charting out an effective policy framework as well as to highlight good practices amongst communities and to indicate gaps and issues and pertaining remedial measures in gemstone mining, processing and marketing in GB.

1.4.1 Research QuestionsIn order to fully appreciate the extent of each specific objective of this study, the following questions have been explored during this inclusive yet comprehensive research exercise;

Table 1.1 Objectives of the study and pertaining research Questions/Instruments

Objectives Research Questions Research Instruments

1. Assess and document the community practices in gems mining, processing and marketing in GBC.

a. Who are the key stakeholders in gemstone sector in GB?

Stakeholders analysis, survey research including all stakeholders, interviews, survey questionnaires

b. What are the current mining practices in GB?

Qualitative research survey of active miners and groups of miners

c. What processing facilities and expertise are available in GB?

Qualitative research survey of promoters and service providers in GB

d. What strategies are used by the traders to gain access to the national and international markets?

Qualitative research survey of traders and groups of traders

e. What are the issues at the supply and demand side of gemstone market?

Review of issues at supply side and demand side

f. What services are available or missing in gemstone sector?

Review of available and missing services on supply and demand side

7. Study the government policy documents, procedure and practices in GBC, and other provinces of Pakistan and

a. What policies are followed by the GB government to regulate the gemstone sector?

Qualitative interviews of seniors officials of government mining department

b. To what extent are the provincial government mineral policies appropriate in the social, economic and commercial circumstances of GB.

Review of the government policy documents, review of legislative and regulatory frameworks

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federal documents.

c. What are the policy gaps and missing services on part of government in gemstone sector?

Review of the government policies, the institutional infrastructure and regulatory mechanisms

10. To review and document best practices in community based artisanal mining, processing and marketing from around the world.

a. What are current policies and practices employed in neighboring countries in gemstone sector?

Review of policy documents, review literature pertaining to community practices of different countries

b. What are the best practices that best match with the specific environment of gemstone sector in Gilgit Baltistan?

Best practices selection criteria set for choosing the relevant best practices

12. Develop a replicable policy framework and policy manual for community based fair, clean and ethical practices in Gems and jewelry sector in GBC.

a. What are the guiding principles of the policy framework?

Specification of guiding principles based on the current situation and future needs of gemstone sector

b. What strategic objective(s) does the proposed policy framework intends to achieve?

Specification of strategic policy objectives supporting the overall guiding principles of the prospective policy framework

c. What are the actions and practical measures that are needed to be to materialize the policy objectives?

Specification of actions and practical measures commensurate with objectives

d. What resources are available/needed for this purpose and what are the milestones?

Identification of types of resources available or needed to get to the specific milestones

For detailed information on study methodology, research instruments used and strategies for sampling and data analysis, kindly refer to Annexure A of this report.

1.5 ChallengesThe primary challenge faced by researchers during this study has been the lack of reliable sources of data. As there is no gemstone sector specific information system in place, data and information from informal sources have to be relied upon and wherever possible, verify it from several different sources. Although, information on observational and descriptive parameters were generously shared by the respondents; but statistics on financial/trade and quantitative data were hard to find. Therefore, available data has been used cautiously in different analyses and every effort has been made to ensure reliability of information provided in this report.

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2 Situation analysis

The region of Gilgit-Baltistan is situated between the soaring peaks of Hindukush and Karakorum on the north and those of western Himalayas in the south. The region is surrounded by Dir, Swat, Kohistan and Kaghan districts of KPK province in the west, the Wakhan Corridor of Afghanistan in its northwest, Xinjiang Province of China to its east and northeast, AJK to the southwest, and a 480 km-long link alongside Kashmir and Ladakh in the southeast. Spanning over an area of 74,600 sq. km, the region is administratively divided into two divisions of Gilgit and Baltistan. The Gilgit division constitutes five districts of Gilgit, Ghizer, Diamer, Astore, and Hunza-Nagar; and the Baltistan division consists of four districts including Skardu, Ghanche, Shigar and Kharmang. This highly mountainous region is characterized by glacial movements, icy breezes, snow and mud flows, lake formations, great rivers and beautiful valleys. In the backdrop of this castle of mountains, the local populations have lived for centuries in isolated valleys, cut off from the rest of the world, earning their livelihood out of the harsh mountainous terrain and only making an intermittent breakthrough across high passes during the summer season until the construction of the Karakorum Highway (KKH) that opened communication and transit channels across the region to the outside world. Several cultural traditions, languages and civilizations have thrived and survived for centuries in pristine form in the region that gives Gilgit Baltistan its unique and distinct character. (Dani, 2001)

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Due to its geostrategic placement and importance of trade routes passing through it linking the subcontinent to China and Central Asia, GB has historically remained a center of interest of several imperial and regional powers. The British, Chinese, Russians and the developments in Kashmir in many ways have impinged on the local dynamics and politics during the late nineteenth and early twentieth centuries. Before these influences, the region was ruled as several independent and warring principalities and monarchies. After the creation of Pakistan in 1947, the local people fought a war of independence and won their freedom from the colonial rule of Marajah in Kashmir. Soon after, the local representatives declared their accession with the state of Pakistan. The region was given a conditional status until the resolution of Kashmir dispute excluding historically and culturally integrated Chitral that became a district of the than N.W.F.P. and now KPK. In 1970, the region was made a separate federally administrated unit under the name of Northern Areas amalgamating the former Gilgit Agency, Baltistan and the princely states of Hunza and Nagar (Zain, 2010).

A major breakthrough was made in 2009, when Gilgit-Baltistan Empowerment and Self-Governance Order was promulgated by the Federation of Pakistan. The region was renamed as Gilgit-Baltistan and as a result of this ordinance, the Gilgit Baltistan Legislative Assembly (GBLA) and Gilgit Baltistan Council (GBC) were created in addition to establishing an institutional infrastructure for a separate judiciary, accountant general office, election commissioner office and a regional public service commission; thereafter, GB was given the

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status of a de facto province less a constitutionally federated unit of Pakistan. The GBLA is a body of thirty three locally elected representatives who then chief minister and speaker of the assembly. The thirteen member GB Council on the other hand is chaired by Prime Minister of Pakistan; its other members include the Governor of GB, the GB Chief Minister, six members nominated by the Prime Minister from time to time from amongst Federal Ministers and members of Pakistani Parliament; six members elected by GBLA in accordance with the system of proportional representation by means of a single transferable vote; and the Federal Minister for Kashmir Affairs and Gilgit-Baltistan as Minister in-charge of the Council. The legislative powers are distributed between GBLA and GB Council. The GB Council legislates on subjects mentioned in Council legislative list, whereas the local Assembly is empowered to legislate independently on subjects mentioned in Assembly legislative list; with no overlap between the two concurrent lists, (GB Self-governance order, 2009). The Governor of GB is appointed by the President of Pakistan.

This model of semi-autonomy has given the people of GB the powers to legislate through their local assembly to address socio-economic needs in the areas of education, health and social development, among others. Policy making however remains a federal subject, but the provincial government has powers to pass acts and make rules while staying within the federal policy frameworks to formulate GB specific regulatory regimes. This space available at the regulatory level provides opportunity to perk up the incomes, employment and performance of GB economy ultimately leading the region towards greater prosperity.

2.1 Overview of gemstone sectorWebster’s Unabridged Dictionary defines a gem as “any jewel, whether stone, pearl, or the like, having value and beauty that are intrinsic and not derived from its setting; a precious or, sometimes, a semi-precious stone cut and polished for ornament.” In modern usage, gems or gemstones are substances that are exquisite, durable and rare. The degree of beauty of a gemstone is determined by its color, transparency, brilliancy, luster and its ability to disperse light. The durability of a gem hinges on its hardness, toughness and stability. The gemstones are classified based either on their value (precious or semi-precious), origin (natural or synthetic) or treatment (enhanced or unenhanced). In trade and market, gems are categorized into three groups: 1) natural – found in nature; 2) synthetic/artificial – synthetically made from plastic and glass; and 3) imitation – which look like natural stones but have way different physical and chemical properties. (Smigel, 2014)

This is all about the natural gems found in Gilgit-Baltistan – an area that has under-developed yet abundant natural resources. It has an educated and dedicated youth that can play its role in development and prosperity of the region; and in particular, ensuring the effective management of the mineral and gemstone sector can provide tremendous leverage to the regional economy (GBER, 2010). In order to cash on these enormous economic opportunities, a policy environment is needed that meets the needs and aspirations of local populations.

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The history of precious and semi-precious gemstones mining in GB goes to nearly five decades back when the communities and local artisanal miners started small scale mining sites in Haramosh and Hunza valleys for the first time. Since then, the indigenous people with the help of their accumulated knowledge, skills and basic tools have brought the gemstone sector to the present era. Gemstones are largely found in villages across different valleys of GB; but the most renowned mining sites are located in: Hunza/Ishkoman (precious stones); Nagar valley (precious/semi-precious); Rondu and Haramosh (precious/semi-precious); and Shigar valley in Baltistan (precious/semi-precious). Today, raw gemstones from GB have reached all the major gemstone trading markets around the world. The enormous output potential of these mining sites remains untapped and presently, there is a need to link this potential with enabling regulatory regimes, value-added processing and marketing chains, people friendly planning and development strategies; and systems of equitable distribution of benefits among communities.

Pakistan is considered to hold the fifth largest gemstone reserves in the world because of the output potential of gemstone mine bearing areas of GB, apart from AJK and KPK. The total worth of gemstone deposits of GB however have not so far been assessed gemologically; hence scientific and reliable estimates are unavailable. The gemstone sector in the region largely is informal and unorganized. The mining methods employed are rudimentary and traditional yielding low output efficiency. The gemstone processing and finishing industry has yet to set its feet firmly on the ground and therefore, exports from the region constitute more than 80% raw gemstones. The region is considered to be a source of cheap raw materials for gems processing centers around the world. The business transactions conducted are largely unregulated and implicit as well as there exists no well-connected gemstone value chain through which to properly channelize the local market to national and international markets. Inequitable distribution of benefits and obligations, inefficiencies, lack of transparency and technological know-how coupled with the lack of well-grounded regulatory regime in the region are the key issues to name a few that have held back the progress towards an equitable, sustainable and productive gemstone sector in GB.

Table 2.1 Introductory Snapshot of gemstone sector in Gilgit Baltistan

First gemstone mining site started in the region

Haramosh and Hunza valley; traditional/artisanal miners started small scale mines of semi/precious gemstones nearly 50 years ago

Major mining sitesDifferent villages located in Hunza/Ishkoman (precious stones); Nagar valley (semi/precious); Rondu and Haramosh (semi/precious); and Shigar valley in Baltistan (semi/precious)

Type of mining techniques employed

Traditional/artisanal/small scale hard rock mining conducted at elevations 4000 to 5000 feet above sea level,

Climate/weather Severe cold in winter and moderate/warm in summers; mining in some areas is seasonal due to snow and ice at high altitudes

Total varieties of gemstones found

Evidence of occurrence of nearly 50 fifty different varieties of gemstones

Well known gemstones Ruby, Spinel, Aquamarine, Tourmaline, Topaz and Quartz etc.

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Resource potentialConsidered to be very high on the basis of observational estimates, no gemological assessment is conducted yet; the region supplies 80% of materials to gemstone markets in Pakistan

Major industries Agriculture and tourism; the gemstone sector has potential to be developed as a major industry

Total population of the region Approximately 2 Million

GDP per capita of the region Approximately $400

Total number of artisanal miners in the region Approximately 10,00

Total number of traders in the region Approximately 1,500

Nature of gemstone trade Exports oriented: more than 80% of production is exported in raw form;

Major trade destinationsPrecious raw gemstones: Europe, USA, Japan etc.Semi-precious raw gemstones: India, Sri Lank, Thailand etc.No processing, marketing or promotion, mass export of raw material

Total value of trade of gemstones in the region Rs.400 to Rs.500 Million per year

Is there a trade/Market hub in GB No: Currently, 90% of gemstones are traded in Peshawar gemstone market

Regulatory FrameworkGuided by National Mineral Policy set by Federal Government and implemented/executed by Minerals/ Commerce Secretariat and Minerals Department, Govt. of GB (Currently in the process of

Support OrganizationsFour major support organizations are working on providing missing services in gemstones mining, processing and marketing. These organizations include the AKRSP, PGJDC, RF and KADO

Source: GB Govt. Minerals Directorate, GB Govt. Planning and Development Department; PGJDC; AKRSP

Despite all the impediments, the total business value of raw gemstones of GB is presently estimated to be Rs. 1.15 billion per annum. The GDP per capita of the region is estimated to be $400; substantially lower compared to the national figure of $1,368 in 2012-13. While the major components of GBs’ economy are services, agriculture and tourism; in order to bring the per capita income at par with national levels, there is greater need to diversify the regional economy through exploiting fresh avenues of income and prosperity. This makes the case of overhauling the gemstone sector in the region even stronger. (Economic survey of Pakistan, 2012/13)

The non-metallic minerals sector in Pakistan recorded positive growth of 5.86% during the year 2012-13 against the growth of 4.6 percent the previous year. Gemstones sector in GB has potential to grow due to the latest innovative interventions of government and support organizations; creating positive spillovers to the economy of the region. The sector has potential to offer employment and income generation opportunities to the youth of the area; and if the growth is managed properly, it can emerge as highly profitable and sustainable source of income and economic activity while providing tremendous leverage to the growth of trade and industry in the region (Economic highlights, 2013).

The gemstone sector in the region is currently providing direct employment to around 17,000 people; of which, approximately 10,000 are artisanal miners; 1500 are traders; and another 5500

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people are affiliated with government minerals department, support organizations and gemstone processing industry as craftsmen, designers and cutters; this includes those who are currently undergoing/have received training in lapidary skills. A gemstone sector development matrix is proposed relating the resource potential with industries and supporting occupations;

Table 2.2 A proposed development matrix for gemstone sector in GB

Resource Potential By Products Allied Occupations

Resource Potential of Gemstone Reserves

Exploration and prospecting of gemstones

Gemstone prospecting, mining & safety equipment

Creation of Gemstone mining industry

Gemstone quality assessment, grading & evaluation and gemological equipment

Human resource potential – Communities; Miners; Artisans; Cutters & Polishers; Designers; Traders

Creation of Gemstone processing industry

Gemstone cutting, polishing, finishing and value addition

Promotion of local Gemstone Marketplace

Development of gemstone based products e-g lenses; Use of gemstones in jewelry and clothing

Support Organizations; Promoters; Trainers; Investors; Buyers

Creation of Gemstone Marketing and Export Channels, Value Chain

Gemstone outlets, marketing enterprises, exhibition, exports and outreach

Research and Development in Gemstone sector

Mining research centers, vocational training centers and degree courses in gemology

Government Policies, Infrastructure, Regulatory Regime, Political Commitment

For each miner’s job at the grassroots, the gemstones industry can create up to 90 additional jobs at different levels along its value chain. (Gary et al, 2007) Based on number of artisanal miners (10,000) and assuming that half of these jobs will be created in GB, the future employment generation potential of the sector can safely be estimated to be between quarter and half a million. GB is sitting on a treasure trove of precious and semi-precious raw gems that calls for the concerted efforts from all the stakeholders in the region. A vibrant gemstone sector can provide impetus to creation of numerous occupations and small industries greatly contributing to enlarging the size of the regional economy.

2.2 Resource PotentialThe gemstones have grabbed ahold of human imagination and aesthetics ever since the dawn of civilization. In olden days, only a few privileged people could have possessed these; but nowadays, gemstones happen to be within the reach of an average person. The gemstones are minerals formed out of different physical and chemical reactions that take place at high pressures and temperatures in the earth’s crust. The earth’s crust is aggregate of minerals that is composed of three basic types of rocks – the Igneous Rocks which are formed by volcanic action and solidification of molten magma; the Sedimentary Rocks which are formed from the decaying of existing rocks into smaller particles due to exposure to sun, rains, wind and glacial movements. Water streams carry these particles down to lower elevations creating deposits in lakes and river beds; and Metamorphic Rocks which are formed at extremely high pressure and temperatures in

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deeper recesses of the earth. Out of these rock types, igneous rocks are the hardest than metamorphic and sedimentary rocks. The hardness (ability to withstand abrasion) of gemstones is measured on Moh’s Scale that scales the hardness from 1 (lowest) to 10 (highest). The harder the rock, the harder the gemstone it rears. For example, diamond that is found in different varieties of igneous rocks has a hardness of 10. The Ruby and Topaz have hardness of 9 and 8 respectively and are found in different varieties of metamorphic rocks. The Quartz that has hardness of 7 is found in different varieties of sedimentary rocks. All the gemstones that have hardness greater than 7 are classified as precious stones; and those with hardness of 7 or less, are considered to be semi-precious. In addition to hardness, gemstones are valued for their physical and optical properties including shape, size, luster and translucence. (Moh’s scale, 2014)

The mountain ranges of GB have provided a geologically fitting natural environment for rearing of valuable gemstones in the region. While there is no evidence of occurrence of diamonds in igneous mountain rocks of GB, the hardness of gemstones found in the area starts from 9 (Ruby) or below. The earth’s crust in GB is primarily composed of lithotectonic layers of igneous, metamorphic and sedimentary rocks stretched out through Karakorum, Hindu Kush and Himalayan ranges; which rear precious and semi-precious gemstones other than diamond. Some well-known and frequently occurring gemstones found in GB are Ruby, Emerald, Beryl (Aquamarine, Emerald), Spinel, Topaz, Tourmaline, Quartz, Pargasite, Apatite, Fluorite, Zircon, Moonstone and Garnet. A full-scale gemological assessment to appraise the reserve potential of gemstone bearing areas in the region is yet to be conducted.

The Ruby and its associated gemstones such as sapphire, spinel and pargasite are found along 100 kilometer dolomitized marble belt stretching from Hunza to Ishkoman valleys. The rubies come in transparent to translucent to brownish pink to pinkish red in color. Sapphire in violet or indigo color is also found in ruby mines of the area. Spinels with a variety of colors ranging from brown, red, plum red, violet to blue are found in ruby mines of Hassanabad. These occur as euhedral crystals and are far more attractive than the spinels associated with the ruby deposits elsewhere in the world. Pargasite locally known as Hunza Emerald is found in this area; its crystals are translucent to opaque with deep pistachio green color. The estimated potential of these deposits is 1.8 million carats. The ruby mining is conducted in the area intermittently and exported out of GB mostly in raw form.

Table 2.3 Detail of major types of gemstones found in Gilgit Baltistan a

Sr No.

Mining Location Gemstone Name

Hardness(Semi/Precious)

Total Reserve Potential

Annual Output Potential c

1 Aliabad, Ganish, Hassanabad, Mirmalik/Huna Ruby 9.0

(Precious)1.5

Million CaratsNot

Assessed

2 Aliabad, Hassan abad, Ganish Sapphire 9.0 (Precious) 0.3

Million Carats

NA

3 Ali Abad, Hassan abad, Ganish Spinel 8.0 (Precious) NA

4 Shengush, Haramosh Emerald 8.0 (Precious) Not Assessed NA

5 Sumayar, Ganish, Herchu, Haramosh, Aquamarine 8.0 NA 0.2

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Bulachi, Shigar, Shengus, Dasso, Heramosh, Iskere, Tistung (Shigar) (Precious) Million Carats

6 Nagar and Shigar valley Zircon 7.5 (Precious) NA NA

7 Nit, Dassu, Hassanabad (Shigar) , Sumayar (Nagar) Morganite 7.5

(Precious) NA NA

8 Astak Nallah, Bulachi, Shengush, Shigar, Sumayar Tourmaline 7.0 – 7.5

(semi- precious) NA 0.1 Million Carats

9 Sumayar, Haramosh, Shengush, Bulachi, Astak, Shigar, Herchu Topaz 7.0

(semi- precious) NA NA

10 Khyber (Hunza), Sumayar (Nagar), Shigar, Quartz 7.0(semi- precious) NA NA

11 Hunza, Nagar, Shigar, Gilgit Garnet 6.5 – 7.0(semi- precious) NA NA

12 Shengush, Bulachi Moonstone 6.0 – 6.5(semi- precious) NA NA

13 Haramosh, Shigar valley Pargasite 5.0 – 6.0(semi- precious) NA NA

14 Sumayar, Haramosh, Shengush, Herchu, Bulachi, Shigar, Bunar Flourite 4.0

(semi- precious) NA NA

a: This list is based on the information received from formal and informal sources; including the Minerals Directorate and survey of miners and traders in different areasb: International Gem Society (IGS)http://www.gemsociety.org/reference-library/

c: The figures herein are drawn from various informal sources of information

The Aquamarine and its associated class of gemstones are found abundantly in the form of light blue, transparent and clear euhedral crystals in the gem bearing areas of Gilgit, Shigar and Nagar valley. Morganite, the pinkish red variety of beryl, is also associated with aquamarine in the gem bearing pegmatite of Shigar. Although the total reserve potential is unknown but it is estimated that annual output of 200,000 (0.2 million) carats can be achieved if the mining sector is strengthened in proper manner. The Tourmaline is found in several colors including pink, blue, green, red and black. Astak Nallah is known for mining of bi and tri-color tourmaline. These crystals are dark green or black at the root with light green, blue or pink at the ends. Green, red and black tourmaline is found in Shengus and Bulachi. The output potential of tourmaline is estimated at 100,000 (0.1 million) carats per year. Topaz is largely found in mines of Sumair Nagar, Bulachi and Shengush and in Nit and Dasso of Shigar valley. Its crystals are colorless to yellowish brown to deep cherry color. Moonstone is mostly found in Shengush and Bulachi areas, color ranges from soft gray to silvery white. These reserves are of good quality, fairly large and can ensure steady production.

The table 2.3 shows a list of major gemstones mined in the region. It should however be noted that this is not an exhaustive list of all the gemstones that can be found in the region. Geological research has proved elsewhere that of all the varieties of minerals, at least 100 different types of precious and semi-precious gemstones are found in the Earth’s crust. It is suggested that the mineral reserves of GB contain at least fifty different varieties of gemstones. As the history of

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http://www.gemsociety.org/reference-library/


gemstone mining in the area spans only over last five decades, quite a lot of prospective mining sites are virgin. Further gemological exploration will potentially lead to occurrence of several other gemstone types in the region.

30%

70%

Output of precious/semi-precious gemstones in GB

PreciousSemi-precious

The mining in semi-precious stones is more prevalent compared to the precious stones. The major mining sites are the Sumayar Nagar and Shigar valley where the Aquamarine, Topaz and Tourmaline are produced in large quantities. An active, vibrant and industrious workforce is motivated by the high production potential of gemstones that has made the region one of the major producer of raw materials. It is about time to work towards an organized and streamlined gemstone industry in GB – an ideal that can be achieved if all the stakeholders start on the same page and make concerted efforts to bring about positive change.

2.3 Market Geographic/Behavioral SegmentationIn today’s globally interconnected world, the mass markets that used to dominate a couple of decades ago have now become extinct. Market shares are won with instruments of market segmentation and product differentiation. The understanding of how the market works and how it can be segmented should be a matter of central importance to the policy makers and planners alike. Pakistan is rich in mineral resources; its northern mountains bear a variety of gemstones that have fifth largest gemstone deposits in the world, yet the contribution of the mineral sector to the national GDP is hardly 1%. Being primarily an agrarian country, mineral sector has received a peripheral and lesser priority so far and the situation in GB is no different. While the global gemstone trade is annually growing at 6% (Mathew, 2014), the gemstones trade in the region is goaded with traditional business models in which marketing has remained the most elusive and neglected part of trade and commerce; partly because of more than 80% of raw exports out of the region; and the lack of a strong gemstone processing industry in Pakistan.

2.3.1 Geographic SegmentationThe existing marketing practices in gemstone sector are based on the old marketing paradigm of flooding the market with raw materials, resulting in tremendous value loss to the GB economy. Rough gemstones from the region are exported as raw material to gem and jewelry manufacturing centers in other countries amid a highly value based international market which is

21


dominated by trade of processed gems. The gemstone producing countries around the world have promoted the gem processing and value adding services that place them in a position to take advantage of the global market potential. In order to take maximum advantage of economic opportunities offered by the enormous mineral resource potential of GB, all the bottlenecks along the whole gemstone value chain need to be identified and eliminated. The following illustration presents the main destination markets for gemstones from GB;

Market Segments

Raw export of high quality raw gemstones to European markets,

10%

Retained for processing and fin-ishing in local market, 10%

Raw exports from Peshawar to international buyers as spec-

imen, 10%

Processed in Peshawar and sold to jewelers in Karachi, 10%

Raw Export from Peshawar to India, Thailand, China and Sri

Lanka etc. as raw material; 60%

Gemstone market segmentation

The gemstones from the region reach to all the major national and international markets, indirectly. Almost 10% of gemstones, the highest quality of the lot are directly exported to

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Precious and Semi-precious gemstones

mined from GB (more than 60% of

gemstone supplies in Pakistani markets)

10% retained in local market for processing

10% highest quality gemstones, raw

exports

Italy, France, Germany, UK, China, USA etc.

80% medium/low quality gemstones, raw

exports to Peshawar

10% are processed in Peshawar and sold to

jewelers in Karachi

10% exported as specimen to buyers in

Europe, China and Middle East

60% raw exports to India, Sri Lanka, & Thailand etc.

Sold to buyers in local and national markets


European markets. Out of the remaining 90% medium to low quality stones, 10% are retained by local cutting and polishing industry and later supplied to jewelers in local and national markets. The remain 80% of the lot is exported to Peshawar market, popularly known as Namak Mandi, where 10% are processed to be supplied to jewelers in Karachi and other cities. Rest of the 70% are exported to international markets from Peshawar - 10% to US, European and other countries as specimen and whole chuck of 60% to India, Thailand, Sri Lanka and China to be used as raw material for their gems and jewelry industry. It is worth mentioning that these countries after processing and finishing, sell the gems at lucrative prices in international markets. It happens very often in local market that the gemstones originated from GB after getting finished in the hands of craftsmen from Thailand or India, get imported back to Pakistan and bought by local buyers at exorbitant prices.

2.3.3 Behavioral SegmentationYears of routine exports of raw gemstones from GB have hardened a unique behavior in the minds of buyers from different national and international markets – they recognize GB as the supplier of raw and cheap gemstones. The provenance of gemstones originating from GB is not given due recognition at major trade hubs; this is particularly the case with the merchandise exported from Peshawar. This is primarily because of the lack of a proper assessment and coding system before exports. Also, the local trading fraternity seems to be more used to do the ‘trading’ than worrying about the marketing and promotion. The gemstone sector in GB is mostly informal and so are the sentiments it receives from the buyers in other markets. New messages and value propositions will help change these deeply entrenched behaviors and perceptions.

2.4 Product SegmentationThis product segmentation exercise explores the gemstone sector of GB from internal and external perspectives. The external perspective represents the 4 Ps’ of marketing mix including the variables Product, Price, Place; and Promotion. The internal perspective on the other hand takes a resource based or capabilities view focusing on available tangible and intangible resources. Technological skills are considered to be a core competence; which in combination with an effective support environment contributes towards enhancing the productivity and competitiveness. The supplier side segmentation approach is followed that is a more appropriate way of knowing the gemstone market amid the unavailability of concrete data on demand side. This helps picture a panoramic view of structural characteristics of gemstone market while highlighting the issues and bottlenecks prevalent in its value chain.

2.4.1 The external Perspective - Marketing Mix The external perspective of marketing mix looks at the products and markets from perspective of the buyers. A mix of factors prescribed by human judgment and rationality prevails in market place. For example, a typical buyer wants to buy a product of high quality attributes at reasonable price from a convenient marketplace. The buyer may be willingly to pay a premium price if the product is unique and well known. This phenomenon is reflected in marketing mix

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that builds the view of the market dynamics on four key parameters; the product attributes, the price of product, the place where it is sold and the promotion or market recognition of product.

If we try to fit the existing gemstone market of GB into this marketing framework, we unsurprisingly end up with more negatives than positives. Take for example the product attributes of precious and semi-precious gemstones, as described in the table 2.3 below. The raw gemstones of GB though valued for their natural qualities and intrinsic attributes, lack intelligent human efforts to be recognized as premium products in the market. As a result, these valuable stones of nature are undervalued fetching much lower prices than they could possibly do. The bad word in gemstone market is ‘Raw’- anything raw is bound to lose its true value. Although a number of semi-precious stones are used in industrial manufacturing such as the quartz being used in making lenses, majority of stones from GB can be converted into quality gems. Colored gemstones such as Emerald, Sapphire and Aquamarine are sometimes valued more than the diamonds. A good deal of soul searching is needed as to where the gemstone marketing of GB is currently heading towards.

Of all trades and businesses, gemstone market is the most promotion and advertising intensive. Gemstones directly appeal to human imagination and aesthetics and therefore clever marketing is the key to successful capturing of market share and earning high premiums. But presently, what we rather see is that hapless advocate of appeal to human imagination and prudent marketing is on the back seat; whereas the witless chap whom we all know as supplier of cheap raw material is on the front. The businessmen of the area need to revisit their business models, and give its due recognition to what we call the marketing, promotion and advertising to be personally better-off and to earn good name and better reputation for the region in the longer run.

Table 2.3 A Marketing Mix for gemstones based on current market conditions [Target Market: Local, National and International Marketplace]

Product PricePrecious gems [Ruby,

Sapphire, Emerald, Spinel, Aquamarine etc.]

Semi-precious gems [Tourmaline, Topaz, Quartz, Garnet etc.]

Precious gems [Ruby, Sapphire, Emerald,

Spinel, Aquamarine etc.]

Semi-precious gems [Tourmaline, Topaz, Quartz, Garnet etc.]

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Intrinsic physical & optical properties - Color, Carat, Clarity, Cut and Hardness

Relatively of high quality

Can be used in jewelry, watch making and fashion industry when processed; and as specimen when in raw form

The ruby, sapphire, emerald and other precious stones are extracted in pieces; aquamarine may be extracted in pieces or in bulk

No branding or product differentiation in local market -mostly exported uncut

Intrinsic physical & optical properties - Color, Carat, Clarity, Cut

High quality Can be used in jewelry

making when processed and as pieces of decoration when in raw form; high quality lenses can be made from quartz

Produced in bulk; No branding or packaging is done in local market

No processing, branding, no product differentiation in local market -exported in raw form

Beauty, rarity and quality are strong selling points

No price standardization in local market - informal trade

Buyers are price sensitive - high demand due to low prices

Cannot fetch standard market prices due to lack of a well-connected market value chain

Price negotiation is kept implicit – lack of transparency; information asymmetries are abundant

Unrecorded trade transactions

Beauty, rarity and quality based on personal preferences

No price standardization in local market - informal trade

Buyers are price sensitive - high demand due to low prices

Sold in bulk at below market rates, no support from established value chains

Price negotiations are informal; information asymmetries are abundant

Secretive; lack of trade record

Place PromotionPrecious gems Semi-precious gems Precious gems Semi-precious gems

Local gemstone markets in Gilgit and Skardu, showrooms and other outlets

Exported to national markets in Peshawar and Karachi

Low trade volume in local market

No formalized marketing/ distribution channels

Fewer local traders have access to international markets

No recognition of provenance

Local shops in gemstone markets of Gilgit and Skardu

The material changes several hands before reaching to high value end customers in international markets

No formalized marketing/ distribution channels

Fewer local traders have access to international markets

No recognition of provenance

No large scale promotion or advertising activities other than sporadically participating in national and international fairs & exhibitions by leading traders

No scientific support base to promote the potential of gemstones of GB

Lack of promotional data, information and gemological research

No large scale promotion or advertising activities other than sporadically participating in national and international fairs & exhibitions by leading traders

No scientific support base to promote the gemstones of the area

Lack of data and gemological research

2.4.2 The internal perspective – Resource BaseIn GB, we have a tangible primary resource base in the form of natural gemstone reserves. For decades, local people have grappled with the nature to dig out their livelihoods from pieces of raw gemstones with their traditional knowledge and rudimentary tools. Today, GB is known for several types of precious and semi-precious raw gemstones in national and international markets.

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The circumstances, social dynamics and market dynamics have changed, but the traditional practices of gemstone trade and techniques still prevail due to lack of capacity and empowerment to transform. The good sign is that lack of financial resources and modern technology has not deterred the motivation of communities to improve.

This should be taken as an opportunity to create an environment fit for revitalization of gemstone sector in the region. The communities, the support organizations, the tradesmen and the government have to work together to develop a broader resource base of all the requisite tangibles and intangibles. Modern tools and techniques, necessary financial resources, modern financial and marketing services; and conducive regulatory and institutional infrastructure; all will contribute towards the achievement of collective goal of streamlining the gemstone sector from the mine to the market.

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Resource Base

Tangible Intangible

Available

# Production potential

# Human Resource

# Traditional tools and equipment

Missing

# Financial Resources

# Modern technological Equipment & tools

# Conducive institutional infrastructure

Available

# Realization to improve

# A needy yet dedicated workforce

# Traditional knowledge& business models

Missing

# Modern technological skills

# Modern Financial and Marketing services

# Capacity and Empowerment


3 Stakeholders analysisThis part of the report highlights the key findings of the primary survey research conducted for the purpose of gaining firsthand insight into the prevailing dynamics around the gemstone sector in GB. All the stakeholders including the miners, traders, associations, support organizations, concerned government department and the communities at larger gave their input and feedback in the process. The findings of this exercise are presented in the following sub sections.

3.1 The MinersAt the grassroots of this sector are the miners, who are responsible for the actual mining and extraction of gemstones from the earths’ crust. The primary functions of these miners are guided by long established unwritten rules and customs across all gemstone-bearing areas of GB. The most fundamental of these is the right of access to the mining area. The ownership of the mining site traditionally comes under the collective ownership of the community or tribes. The miners are allowed to mine on the site if they are born to the community or to the tribe that has right to ownership. Any deviation from this norm may result in serious clashes and strong reaction from concerned communities. Having access to the mining site, the miners are free to extract the gemstones without any obligation. Once they start a mine with hard work, they sort of own it until they completely stop mining in it. Another miner or a group of miners can take over the mine only after the confirmation that the previous party has abandoned it absolutely. These local norms effectively and voluntarily apply everywhere in GB and as such no policing is required to watch over.

When it comes to the existing mining practices, tools and techniques employed by the miners, these can be categorized as traditional and rudimentary. The miners acquire the necessary skills from experience and perfect them throughout their active mining life yet fall short of precision and accuracy. The miners have their own ways of conducting the affairs of their vocation. They seldom do the solo mining; rather they operate in groups of five to seven for the purpose of division of labor and responsibility as well as for creating a readily available support system. The key criterion to join a miners’ group is to be faithful and honest towards the other members. They create an endowment from equal contribution of group members or their representatives and prepare for a potentially rewarding spell of mining. A member can be expelled from the group if majority of group members are not happy with his conduct or contribution. Their technology and resources for the mining includes tools such as levers, hammers, diggers, shovels and bits; food, clothing, water, explosives, fuel and the drill/compressor machine. The passion of the miners takes them up to the mining site along with their bits and bobs. Exactly how they determine the potential of a mining site is a mystery. They guess it either from the structure of the layered rocks, the wetness and hardness of the mother rock, presence of mica or pegmatite - coarsely crystalline granite or other high-silica rock occurring in veins or dikes. With a rough estimate in their mind, they start digging in the mining site. Mining sites of GB are composed of hard rock, so they drill the holes to blast and explode with explosives. After the blasting of rock,

27


they excavate the boulders from the mine in a bid to create a tunnel of four to six feet high and three to four feet wide, sufficient for human passage – they are tightfisted in this regard as creating a bigger tunnel can be alarmingly expensive from the perspective of their practice of artisanal mining.

Narrative of quest for gemstones and ‘onion soup ‘

The widely held perception of getting rich overnight from the short spells of quest for gemstones is not supported by the realities on the ground. The miners under the prevalent circumstances can be described as the jockeys of the gemstone sector in GB, who toil in a bid to be better off in a hard way, yet the fruits of their efforts are reaped elsewhere that notoriously remains beyond their reach.

Luck, uncertainty and hope play a fundamental role in the life of small scale miners in GB. In a rare case, with a stroke of good luck, a miner hits at a gem of the gems which changes his fortunes forever – too good to be true. On the other extreme, the hard work of the miners pays the hard way. The miners do an arduous and physically challenging job in the hope that one day they will be able to dig out the gem of their life - but to no avail. However they keep on the quest for gemstones and never lose their hope and optimism.

Hard rock tunnel mining is a strenuous profession and the miners need to be fed properly; but it was observed that at least half of the miners surveyed consumed little amount of food under the fear of bringing upon themselves a heavy financial burden if a vicious stroke of bad luck hits them hard and their mining spell earns them very little as a result. In some areas, miners suffer from serious malnutrition – during days of mining, they consume a soup made from boiled onions, salt and pieces of dried bread; they assuage their nerves with frequent cups of black tea.

On their way deeper into the tunnel, they carefully extract any pieces of gemstones they come across and collect them in a sack. During the extraction process, almost half of the gemstones are broken or wasted due to the lack of precision equipment and use of force with their basic tools. The deeper they dig into the tunnel the harder it becomes to breath due to depleting levels of oxygen. Lack of any safety measures, insufficient fresh air and fading light forces them to slow down. Fumes and dust created by drill or compressor machine adds to the problem. The deeper the mine, the longer it takes for the dust and debris formed by explosion of rocks to settle down – they wait for long after explosion to re-start their quest of gemstones and suffer from serious health issues if remain exposed for a long time in these conditions. Sometimes, they meet with serious injuries that can be fatal or disabling. Under these circumstances, the miners cannot go more than 400 to 500 feet deeper into the tunnel. This is the maximum range of depth that can be reached in gemstone mining tunnels across all the mining sites in GB. At this stage, the miners usually decide to abandon the tunnel in favor of a new site. (Miners’ survey, 2014)

From the early morning till the evening, they continue their struggle with hard rock until the end of their mining spell that lasts for weeks and even longer if the supply of food and other essentials continues. When they descend from the mines, they are greeted by the local traders who buy the raw gemstones at the onset. The price is negotiated on mutually agreed terms, but usually the trader has better market information; the deal necessarily goes in his favor. The sale proceeds are then equally divided into shares, one each for miner group members, one for the supplier of the food and one for the owner of drill machine. The last two can be any individuals not necessarily involved in arduous job of mining and digging. If the miners are lucky they earn

28


a livelihood out of the process and take respite; if not, they prepare for another spell of mining. Irrespective of geographical location of mining sites, these trends are shared by all the miners across GB.

It is relevant to discuss some local and area specific troubles of the miners that came to limelight during this research exercise. For example in Hunza, the mining site of Datumbarasho is highly inaccessible that takes at least a day of journey by foot to reach the site. It is known for extraction of ruby and spinel that can be mined during four months in the summers. The local miners indicated that shortage of drinkable water is the biggest problem when the ice melts and disappears during the summers – a good deal of their mining time is rather spent in fetching water from distant areas away from the mine. In order to make the mines more accessible, the miners suggested construction of a pony track up to the site – that will facilitate transportation of water on animal backs to mines. Similarly, the mining community of Sumair Nagar active in mines at Chomar Bakor said that due to lack of health facilities, the injured miners are to be transported down to the village from the mines. A seasonal dispensary setup with medical and paramedical staff at mining site will be of great help. They further said that a jeepable road to the mines will facilitate transportation to and from the mines. A power transformer at the site for lighting the mines is desirable – all of these facilities will reduce the cost of mining and help improve the mining conditions. In Shigar valley of Baltistan, the miners asked for the tools and technologies that will be helpful to reduce the breakage and wastage of gemstones during the extraction process. The availability of explosives was the biggest problem quoted by the miners in all regions. There is a single supplier of explosives in the region who supplies to all the bigger and smaller consumers. The gemstone sector receives less priority over bigger consumers. As a result, the small scale mining is disrupted due to the shortage of explosives in the market. This issue is particularly serious in remote mining sites of Shigar valley, where mining is the only source of income.

The dream of an equitable and transparent gemstones sector will not be materialized unless the fundamental issues at miners’ level are resolved. All the other stakeholders need to take heed of the plight of artisanal miners of GB, who don’t even have an association that could voice their concerns at regional or provincial level, (Miners’ survey, 2014)

3.2 The TradersThe traders are crucial link between various market actors, right from the mines to the end consumers in the market. The volume of gemstones trade as of now is estimated to be around Rs. 1 billion per year in GB. However, this figure can be best described as only an approximated total of the actual figures which are kept hidden and implicit. The gemstone sector is a secretive business where the information on business transactions is not transparent. The success of traders is proportional to their ability to utilize the market information for their advantage. Asymmetries of information are thus abundant in gemstone trading. The traders who are more educated and informed about the market dynamics have an edge over the other side. This is true for the traders at all levels. This feature comes into play at the first place when the traders close a deal with

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miners, where the traders are in a stronger position to bargain. A transparent process of conducting the transactions can give an opportunity of a better deal to both the miners and traders. (Traders’ survey, 2014)

Due to the lack of a system of standardization, gradation and evaluation of gemstones in GB, as well as due to shortage of skills and facilities in gemstone processing, nearly 80% of exports consist of rough stones that earn only a fraction of potential value. While the local traders have access to the miners and native markets of GB established in Gilgit and Skardu, the bigger traders have access to the larger markets in Pakistan, most notably the Namak Mandi, Peshawar and gemstone market Karachi. These traders earn a margin of at least 10% and 100% at maximum, depending on their bargaining skills and characteristics of the gemstones in local market. Some traders act as agents who help two parties in closing a deal and charge a commission of around 10% of the transaction value. In rare cases, they earn premiums if they are able to sell the gemstones to foreign buyers, who are very infrequent to the area due to deteriorated situation of law and order in the country. Sometimes, they incur loses for not being able to earn a return on their investment. This happens when it becomes hard to find an interested buyer for their stock in local market. In a bid to avert this from happening and in hope of greater profit margins, the traders are forced to turn towards the national gemstone markets in Pakistan. Namak Mandi is the largest gemstone market in Pakistan that caters for the gemstone products from neighboring countries including Afghanistan. The traders are able to sell their products in Peshawar though, but at a price that hardly matches the value of gemstones of GB.

Narrative of experiences in Namak Mandi Peshawar by a typical trader from GB

During this research survey, several traders across the entire region shared their gruesome experiences they have encountered during their business trips to Namak Mandi. When a typical trader from GB approaches this bigger market, the businessmen in Peshawar take advantage of his situation and initially give a cold shoulder knowing that the trader has come all the way from GB as seller of gemstones. Upon insistence, they fascinate the trader with a handsome offer but ask him to wait for a few days. When re-approached after the gap of few days, they turn the trader away with an unfitting excuse.

The trader receives similar responses from several other potential buyers in Namak Mandi. Meanwhile with every passing day, he starts feeling the pressure mounting because of lodging and other expenses in Peshawar, which further diminish his bargaining power. After a series of these recurring and disappointing events for weeks, the trader from GB is forced to sell his gemstones at throw away prices in ‘Namak Mandi’ to start his journey back to home.

Out of this business trip, the traders of GB barely recover their investment in gemstones and travel expenses with meager and ‘saltish’ profit margins. There can be exceptions, but this case applies to sizeable proportion of traders of GB who deal in Peshawar. Once in possession of gemstones from GB, the shrewd businessmen of Namak Mandi further sell these at premium prices in the name of KPK and Afghanistan.

At village and communal level, the traders create a support system in which they sponsor the miners by providing them with food, explosives and machinery and other essentials of mining. This is particularly the case in Nagar, Shigar and Rondu valley where the miners seek for financial help from the traders. In certain cases, the traders financially support the families of miners who out of uncertainty are not lucky enough during their mining spells. Such miners have

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to return this favor either in the form of raw gemstones or in cash matching the amount of financial support from trader at a later stage when their circumstances improve.

Some traders also run proper showrooms in various market places of GB, but usually remain active in bigger markets in Peshawar, Karachi and Orumchi China. It was revealed that due to low trade volumes, they incur losses on their local showrooms which are compensated from the profits earned from other business locations. One trader who owns and runs his only showroom in Karimabad, Hunza stated that he has been running the business in losses for the past several years after 9/11 – an incident that badly hit the tourism industry in GB. Due to reduced flow of foreign visitors into the area who take keen interest in local gems and crafts, the local businesses such as gemstones and antique showrooms currently have hard time meeting their running costs.

There are a very few big players of gemstone trading belonging to GB who have access to the lucrative markets outside Pakistan and conduct their businesses according to needs of international markets including China, Europe and USA. They trade in gemstones from GB as well as other countries. (Traders’ survey, 2014)

3.3 The InvestorsUnlike the industrial mining and metallic minerals, the gemstone sector is not capital intensive and thus has modest capital requirements, though it needs a greater connectivity between the producer, processor and buyer along its value chain. This makes the gemstone sector attractive for smaller investments predominantly made by the local and domestic investors.

Table 3. 1 Comparison of investment requirements for metallic, industrial and gemstone mineralsMetallic Minerals

(Iron Ore / Bauxite etc.)Industrial Minerals

(e-g; Coal)Gemstone Minerals

(Ruby, Topaz, Quartz etc.)

explorationHigh exploration risk, High

risk/ High rewardHigh probability of losses

Lower exploration risk/ generally fixed reward

Probability of losses tied to end use markets

(power, cement etc.)

Modest capital requirementsDomestic investors

exploitationCapital intensive

$100 million to $5 billion investments

(Global investors)

Lower capital requirements$1 million to $250 million

investmentsDomestic investors encouraged

Need for greater connectivity between the producer,

processor and buyer

There are tremendous investment opportunities in the sector in GB. The region can be benefited a lot by technology intensive investors that can modernize and uplift its overall output and efficiency. The research survey at miners’ level revealed that nearly half of the value of raw gemstone is lost to breakage during the extraction process that can be reduced and/or prevent through application of modern small scale mining equipment. Prospecting of the gemstone mining site is another area that can benefit from use of modern technology by saving time and efforts put on mines with lesser prospects.

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Currently, the traders belonging to respective regions of GB are acting as the prime investors in GB who have strong links with local communities and populations. The investment model exercised by these investors is very elementary in which they provide short term financial support to miners groups lasting for one season. During or at the end of mining spell, the miners in turn preferably sell their raw produce to these investors cum traders. This model rather works at the lines of a forward sale which can be regarded as an elementary from of futures market in which gemstones are traded ahead of their extraction from the mines.

In the recent past, the GB minerals department issued leases and permits to non-local investors granting specific permission to mine the gemstones at particular sites. However, the investors from outside the region faced tremendous resistance from the local communities to the extent of halting of mining activities. The communities suspected that they will lose their customary and collective ownership of the mining sites if the investors from outside are given free hand in the area. Effective mechanisms for creating an environment of trust and mutual cooperation can be helpful to establish rapport between the local populations and investors at communal level.

In addition, there exists no investment policy through which to channelize the outside investment into GB. In order to streamline the process and attract high value investors from outside the GB, the government needs to develop its own investment policy to speed up the wheel of economic development in the region. A tailor made investment sub-policy identifying the respective rights and responsibilities of investors and communities towards each other will benefit all the stakeholders in gemstone sector in the region.

3.4 The Trade AssociationsThe trade associations are representative bodies of traders active in the business of gemstone sector in GB. Presently, the traders are either affiliated with Pakistan Gems and Minerals Association (PGMA) or with the regional trade associations that represent the regional traders in respective areas of Hunza, Nagar, Shigar and Baltistan. Following is the summary of interviews and discussions held with the officiating members of these representative bodies;

3.4.1 Pakistan Gemstone and Minerals Association (PGMA)The PGMA is a national association based in the GB region. Established in 2009 after evolving from it precursor NAGMA (Northern Areas Gems and Mining Association), the PGMA is the sole representative body of all the traders belonging to GB. It is registered with federal ministry of industries, the SECP (Security and Exchange Commission of Pakistan) and the PFCC (Pakistan Federal Chamber of Commerce). Based on trading worth, PGMA has three categories of membership – corporate, associate and provisional members. Those traders who have been allotted a Sales Tax Registration Number (STRN) and National Tax Number (NTN) are eligible to be the corporate members. Those who only have NTN are considered to be associate members. Those small traders who have neither of the numbers are registered as provisional members. The current membership strength of PGMA is nearly 1100; of which 300 are corporate and associate members and 800 are provisional members. The PGMA has actively pursued and

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facilitated the opening of Trade Development Authority of Pakistan (TDAP) office in Gilgit. PGMA has however showed its concern regarding the disobliging role of government in facilitation of trade in the region. It was of the opinion that government should simplify the rules and facilitate the traders before levying royalties and taxes on the local traders. The government is taking the measures in GB that have no precedence in other provinces. The registration of traders with government is a similar issue, which is not practiced in other provinces. (Trade associations’ survey, 2014)

In order to facilitate trade of gemstones to China, the government was asked several times to set up a TDAP desk in Sost. Similarly, in order to facilitate trade visits to Shanghai China, the government was requested to take measures to open a China visa desk in Sost but to no avail. As a result, the traders have to travel to Islamabad and stay there for at least fifteen to get a Chinese visa. The PGMA members detested the government’s recent harsh decision to confiscate the trade items of gemstone exporters out of the region. These orders were given under Mining Rules 2003/2014 by the local authorities. In response, the PGMA protested with government and submitted its recommendations for revision of Mining Rules and to make the regulatory regime commensurate with the indigenous circumstances of GB. On the other side, the government authorities say that the traders should follow a system of checks and balances enacted by the government and should not give precedence to their personal business interests over the greater interest of the region. The traders say that they are ready to submit to the authorities if the government supports and facilitates them rather than creating unnecessary hurdles.

The PGMA is keen to collaborate with AKRSP, PGJDC and RF to mutually work and support the initiatives in gemstone processing and marketing. It has linkages with major stakeholders of gemstone sector in GB. Recently, the SGMA and BGMA have decided to be part of PGMA whereby their members will be counted as the members of PGMA.

3.4.2 The regional trade associationsThere are four regional trade associations in GB. HGMA (Hunza Gems and Mining Association) is a representative body of traders in Hunza valley. Similarly, the NGMA (Nagar Gems and Mining Association) represents all the traders belonging to Nagar Valley. The BGMA (Baltistan Gems and Mining Association) and SGMS (Shigar Gems and Mining Association) represent the voice of the traders from Baltistan and Shigar Valley, respectively. These regional trade associations operate independently from each other, which are however not registered or legal entities per se, rather they act as a conglomeration to protect the rights and business interests of the local and regional traders.

HGMA has almost 50 members and is based in Hunza; and NGMA has nearly 70 members and is based in Nagar valley. The members of these associations raised their concern about the governments’ decision to impose taxes on the gemstone sector and said that the traders pay all the applicable taxes at the time of export of gemstones out of Pakistan; and that demand of

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government to paying taxes in the local and national market is myopic and unjustified. They were also of the opinion that only local people should be issued the gemstone mining leases.

The Shigar Gemstone and Mineral Association (SGMA) is a representative body of local and regional traders belonging to Shigar valley, which is the largest mining area of GB in terms of its mining areas and production. SGMA was established in 2008 and has 200 members. The SGMA members shared their concerns that rights of the local people should be respected and mining leases should be given to local people. The government has stopped issuing mining leases since 2008, which is not justified. In addition, charging of multiple taxes (local taxes and taxes at the time of export) is unjustifiable. It further shared that Baltistan has highest number of miners in the region who are untrained and no support system exists for their wellbeing and social care. SGMA also demanded to establish an office of TDAP in GB. While the raw gemstones are extracted and exported in huge quantities from local mines, the gemstone cutting and polishing should be encouraged to the extent that it should be given the status of small/cottage industry in the region. The SGMA members also expressed that non-availability of explosives in local market is a major hurdle in the way of smooth mining operations. A center like PGJDC in Gilgit should also be established in Baltistan. They further said that government’s charging of Rs. 10,000 fee per year from the traders is not justified; such restricting policies of government will leave the youth jobless and unemployed. (Trade associations’ survey, 2014)

The Baltistan Gems and Minerals Association (BGMA) is the representative body of traders from Rondu and Shengus area. The members of BGMA also raised their voice and said that due to strictness of government authorities, the traders are facing the transport problems. The traders are searched at checking barriers and asked to pay royalties without a proper system or paper work. They also said that customers from outside GB cannot come to GB due to security reasons and uncertain law and order situation in the region; therefore, there should be direct export facilities from GB to international markets. Local business environment is not conducive and friendly due to governments’ restrictions. They also shared that miners face tremendous problems while operating in difficult mountain areas. In Shengus, two miners were killed during the mining but authorities were not concerned about the incident.

3.5 The Promoters and Support OrganizationsA number of support organizations are active in realizing the potential of gemstone sector in GB. These organizations are providing the services that support the overall objective of creating an efficient, equitable and vibrant gemstone sector in GB. The gemstone sector of GB is imbued with several challenges. Lack of clarity at regulatory level in terms of land ownership and lease problems due to a complex legal status of GB; lack of a system of assessment, gradation and certification of gemstones; problems of access to appropriate technology for mining and processing; export of raw material out of GB at throw away prices; lack of transparency and formal systems along the value chain; lack of measures for health and environmental safety, lack of standards for price determination; shortage of mining inputs; shortage of power and electricity to develop a gemstone cottage industry; and lack of access to geological information, to name a

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few. A complex mix of these several factors have given impetus to the conception of support organizations in response that are going all out to fill the services gaps which exist in gemstone sector in GB. Each of these organizations specializes in any of the particular problem areas commensurate with their mandates and strengths. These organizations recognize the potential of gemstone sector as catalyst for social and economic change; and are inspired by a common vision – to enhance the efficiency of gemstone sector in GB by developing the local human resource, train and create opportunities for local youth, streamline the gemstone value chain and ensure greater market access; and benefit all the stakeholders right from the grassroots to the top; and eventually fuel an equitable and sustainable economic growth in the region. While the role and importance of GB government and public sector is unquestionable and establishing of PGJDC in the region by federal government is highly estimable, the civil society organizations have been playing a key role in improving the status of gemstone sector in GB. The discussions presented in the following sections are based on the feedback from the key officials of these organizations.

3.5.1 The AKRSPThe history of interventions made by support organizations in gemstone sector in GB was started when the AKRSP realized the resource potential of the sector in creating fresh avenues of income and employment generation in the region. The AKRSP is a pioneer in taking targeted measures to uplift the socio-economic condition of the people aiming at developing the pecuniary potential of a range of sectors in Pakistan and in particular, in the region of GB.

The gemstone sector in GB is yet another area that the AKRSP is set to focus on creating an enabling environment through promoting economic activities along the gemstone value chain. However, the gemstone sector direly needs up-gradation and modernization in its existing practices all along its value chain. The mining activities in GB are carried out through artisanal and small scale mining with traditional tools that need a massive upgrade; the market place for gemstones in GB is going through its formation phase that needs expansion; the current regulatory regime has yet to recognize the gemstone sector in GB as a specialized sector organized on the lines of a cottage industry; the communities involved in the sector are to be organized to set off an equitable and efficient system of benefits and obligations.

The AKRSP is cognizant of these challenges and in response; it has been following a three prong strategy in developing gemstone sector in GB. Firstly, it started several groundbreaking initiatives in strengthening the gemstone value chain which included the provision of direct services to the communities through imparting knowledge and training in the key areas of gemstone mining, processing and marketing. As a sustainable measure, it has produced master trainers in gemstone mining, cutting and polishing who in turn impart skills and knowledge at grassroots level across the region. It continues its targeted interventions in this regard. It aims to expand the activities that will result in value addition and market expansion of the local gemstones. Secondly, AKRSP is involved in social organization of communities and creation of community based institutions in the region; KADO and Rupani Foundation (RF) are examples of

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the efforts made by AKRSP on these lines. It has instituted the local and village level community development organizations which act as representative platforms for community based interventions across the region. This social capital created by AKRSP has paid huge dividends in the form of tremendous success in the developmental work carried out so far in the region. This social capital can be employed in creating a sustainable community based gemstone sector in GB. (Support organizations’ survey, 2014)

Thirdly, the AKRSP has been assuming an advocacy role in promoting best practices in GB and taking measures to replicate the most appropriate and successful models of gemstone sector from other countries. It is engaging with all the stakeholders of gemstone sector in the region to developing an integrated and supportive environment. It intends to provide feedback to GB government on the formulation of a viable regulatory framework for gemstone sector in the region; which will ultimately lead towards creating an environment conducive for improving the efficiency and output of the sector while augmenting the overall performance of GB economy.

AKRSP and RF are partners in implementing “Gilgit-Baltistan, The Jewel of Pakistan” project supported by the European Commission (EC), which aims to identify gaps in the value chain and provide product development and marketing support to various key stakeholders, from miners to small traders.

3.5.2 The PGJDCAs subsidiary of Pakistan Industrial Development Corporation (PIDC) working under the Ministry of Industries and Production GoP, the Pakistan Gems and Jewelry Development Company (PGJDC) was established in 2006 with a mandate to enhance the gems and jewelry value chain from mine to market. Export facilitation and promotion, technology up-gradation, skills development and marketing initiatives are key areas through which the Company endeavors to achieve its broader aims of distinguishing Pakistani gems and jewelry market as a high value and competitive world class hub for precious stone cutting and jewelry manufacturing.

In order to achieve these overarching objectives, the Company has established state-of-the-art Gems & Jewellery Training and Manufacturing Centres (GJTMCs) and Gemstone Testing Laboratories at Karachi, Lahore, Quetta, Peshawar, Gilgit, Sargodha and Muzaffarabad. The company has set-up two Gem Exchanges at Peshawar and Quetta and also established two Assaying and Hallmarking Centres at Lahore and Karachi. Under the directives of PGJDC, Gems and jewelry Training and Manufacturing Center GJTMC - Gilgit was established in March 2008 with the objective to enhance skills and to upgrade the technological base of the gems & jewelry sector of GB. It provides the gems and jewelry entrepreneurs and manufacturers a high technology platform through state-of-the-art machinery and equipment to improve the quality and value of the products, leading towards growth in business and exports. The center currently offers courses in safe mining techniques and use of mining equipment; gemstone prospecting; gemstone identification, dressing, faceting and carving; manual jewelry design in addition to

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offering a diploma in gemstone lapidary. GJTMC – Gilgit offers a complete range of services at discounted rates to the local market including gemstone testing and gemological reports; gemstone faceting, carving and tumbling; beads and cabochon making; beads drilling; and specimen cleaning and dressing. More than 2000 participants have benefited from its training courses and particularly, the females have shown their keen interest in jewelry making and design. The impact assessment of these trainings reveals that 63% passed out students belonged to the Gems and Jewellery Sector, 26% participants were students of various schools and colleges and 11% were from other professions. 57% of the participants were found to be directly benefiting from the courses in financial terms whereas 33% of the passed out students were found to be indirectly benefiting from the courses in terms of building their financial capacity.

GJTMC Gilgit with its well-equipped and technologically advanced center of excellence in gemstone sector in GB is resolute to further strengthen its technological base with advanced gemological equipment and analytical tools to determine the distinctive characteristics of natural, synthetic and treated gem materials and to promote research in the field of gemology on its way towards establishing one of the world’s finest gemological facilities in the region. It aims to collaborate with other institutions at academic, technical and industrial levels to jointly and independently develop research and degree programs in design and creation geared towards the development of gemstone sector in GB. (Support organizations’ survey, 2014)

3.5.3 Other Support OrganizationsThe Rupani Foundation (RF) specializes in gemstones processing and marketing in GB. It aims to create a sizable critical mass of human resource to cater for the future needs towards developing a vibrant gems sector and accelerate the processes and activate gems sector players through establishing a state of the art central processing system for developing value chain from mine to market. It recognizes that the lack of skilled workforce in gems processing and marketing is the key challenge in GB. In order to meet this challenge, RF is providing skill development training in gemstone cutting and polishing to the women and youth. For marketing, RF is organizing and participating in local and national exhibitions to promote locally developed gemstone products and to develop linkages with national and international gems players. For the last three years, RF has been making targeted interventions in gemstone sector leading towards the enhancement of socio-economic status of targeted populations ultimately supplementing the income and employment generation. To date, RF, in partnership with civil society organizations, has established six gemstone cutting and polishing training centers in GB and Chitral and has trained over 500 individuals of which 60% are women. Many of these graduates have emerged as master trainers, supervisors and production workers and have now assumed a multitude of responsibilities in the several productions units. Linkages have been developed with local, national and international gems market players. Products developed by these individuals are now exported to the international market on a small scale. RF intends to foster a vibrant gem sector in GB, capitalizing on indigenous gem resources, through developing a cottage industry. In order to achieve these long term social objectives, RF is following a sustainable approach and has created

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an endowment fund by pooling a portion of its revenues for the future sustenance of training activities and development of human resource along gemstone value chain in GB.

Karakorum Areas Development Organization (KADO) is active in gemstone sector for the last few years that aims to support its value chain by offering services to enhance skills of local artisans in gems processing and marketing to highest standards. It imparts skill development trainings in gems carving and faceting; beads making and jewelry making; eventually to support and develop cottage industry of jewelry sector in GB. So far, KADO has trained almost 350 youth of which 75% are female, in gems faceting and jewelry making. It has supported and developed small enterprises through scaling and replication in local market and has played its crucial role in organizing the fragmented miners of Hunza. In future, KADO will continue its interventions ensuring quality and value addition along the gemstone value chain in the region. KADO is exporting small quantities of cut gemstones to a Japanese company, specialized in ethical jewelry. This segment has significant growth potential and provides an ideal niche for sustainably mined gems in GB.

Baltistan Culture and Development Fund (BCDF) is an organization that aims to espouse and develop cultural aspects of Baltistan region. The region is largest gemstone producing area in GB and BCDF thus recognizes the potential and value of gems related finished products. It specifically focuses on gemstone cutting and polishing; and intends to develop the local skills to the highest standards to cater the needs of the international market. BCDF has trained youth in gemstone cutting and polishing who are working in jewelry shops in local market. In order to further improve the quality and value addition of finished gems based products, BCDF intends to purchase high quality imported equipment, to better compete in national and international markets.

Baltistan Gems and Minerals Trading (BGMT) is a private business organization started in 2009 by a local entrepreneur which is probably the first initiative of its kind in GB that purchases the raw gemstones from local market to process them for value addition and sell them to the local jewelers, and to some extent, to the national markets. It hires the locally trained skilled youth to cut and polish the bulk of raw produce of gemstones from local mines. It takes the orders from local and national jewelers and strives to meet their demand through linkages to local suppliers. The entrepreneur shared that processed gems market is highly competitive. High quality of cutting and polishing adds value to the intrinsic characteristics of gemstone. The cutting and polishing skills and technology base available in local market, in many instances, reduce than enhance the value of processed gemstones. This is one of the primary reasons that 80% of gemstones are exported as raw material out of the GB. He has had hard time honoring the business expectations and commitments of his customers due to these constraints.

3.6 The CommunitiesThe communities are playing a fundamental part in gemstone sector in GB. Traditionally, the local communities have owned the pastures, grazing grounds, water sources and other natural

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resources in the region. Two distinct rules apply to lay claim to the communal or collective ownership of these resources - either ownership of the resource is based on proximity of communities to the sites or it is based on tribal identities. These long established rules and strong tribal identities come into play when it comes to the question of rights to take benefit from the natural resources preserved in the mountains. For example, a person from Hunza cannot mine in areas of Nagar without the grant of formal approval and agreement of the local community, if granted at all, and vice versa. By extension, the local gemstone traders have first right to the purchase of raw stones extracted from local mines, whereby the miners are obliged to sell their freshly mined gemstones to the local traders. In case a deal is broken locally, other traders around the region are allowed to participate in the deal. (Community survey, 2014)

The community also plays a crucial role in the process of arbitration when an intra-communal dispute arises regarding the collective ownership or in the dealing of routine affairs. The elders and influencers of the community act as the arbitrators and issue informal decrees to settle the disputes according to the traditional rules and norms of the area. In the greater interest of the local community, the parties of dispute on the either side abide by decisions made in accordance with local customs. However, the situation becomes complicated when two rival communities belonging to different geographical areas or two different tribes lay claim to the ownership of the same natural asset. This inter-communal conflict of interest sometimes leads the concerned communities to judicial system where the cases are tried in the court of justice. (Community survey, 2014)

The discussion on the communities is incomplete without mentioning the contribution of development sector in developing social capital in GB. In their interventions for the last three decades, the supporting organizations have organized the communities around area specific development processes, strengthening belief in collective and collaborative action for social and economic change. This tested model of social organization can be used as a platform to consolidate the potential of gemstone sector at the grassroots level, so as to get underway an equitable and sustainable system of rewards and benefits, for the larger good of communities of GB.

In order to streamline and formalize the mining sector as a whole in GB, the communities are to be heard and placed at the center stage. They are to be fully involved in the process of growth and development of the sector. Any arrangements made by government or any other stakeholder excluding the communities will be artificial and unsustainable which will create a social and communal void, later to be filled by mistrust and estrangement.

3.7 The RegulatorThe GB government minerals department is the sole regulator of gemstone sector in the region. It is responsible for implementing the regional mining policy in GB. It is also responsible for giving recommendations for further legislation for the enhancement of the sector. It regulates the operators and investors and issues licenses to the people who might shoulder the responsibility of

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expanding the gemstone sector in the region. The regulator has a fundamental role to play in stimulating the efficiency, marketability and employability of the gemstone sector in the region. In addition to regulatory responsibilities, the minerals department is operating gems mining and cutting training centers one each in Gilgit and Baltistan.

A detailed overview of the Governments’ role in gemstone sector and relevant policy and regulatory regime is presented in the context of the particular nature of relationship of GB with federal government in the next chapter of this report.

4 Review of existing policy/regulatory frameworkThe Mineral, Industries, Labour and Commerce Department of GB government is the sole regulatory authority for minerals concessions in GB. It has a mandate to develop mineral resources in the region as a vital economic activity, while maintaining the highest standards of equity, safety and social welfare. An elaborate discussion on legislative, policy and government institutional framework is presented in the following sub-sections.

4.1 Legislative/Policy FrameworkConventionally, policies formulated for the larger minerals sector apply to the gemstone sub-sector in Pakistan. In order to set a context for discussion on regulatory framework of gemstone sector in GB, it is therefore pertinent at this stage to review the National Mineral Policy (NMP) of the federal government. The NMP is formulated by the Federal Ministry of Petroleum and Natural Resources that issues guidelines on matters of policy to the provinces - an exercise of power entrusted to the federation by articles 72 and 73 of the constitution (the Constitution of Pakistan, 1973).

During the early 1990s, greater emphasis was given to privatization of state run enterprises. The mining sector that was largely operated and managed by the government until 1994 was opened for the investors in private sector. As a result, the Pakistan Gems Development Corporation (PGDC) that also operated in gemstones mines in GB for nearly fifteen years was abolished. The government assumed more of a regulatory role when the private sector gradually stepped in to developing the mining sector. The first NMP was thus formulated and implemented in 1995 with the primary objective to enhance the attractiveness of the mineral sector to private investors. In light of NMP 1995, the federal government issued the Mining Rules 2003 (MR 2003) to the provincial governments to regulate mineral resources falling in their respective jurisdictions. Keeping in view the changing constitutional requirements and global advances in mining sector, NMP 1995 was revised in 2013, through which greater regulatory autonomy was given to the provinces. The new policy among other things aims to achieve the optimization of exploration, development and exploitation of minerals; value addition of minerals and growth of upstream and downstream sectors; generation of mass-scale employment and socio-economic uplift through enhanced skills, sustainable mineral development, technology transfer and regional infrastructure development; and ensuring safe mining operations and safety and security of

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investors. The federal government in consultation with provincial governments intends to achieve these key objectives. The new policy thus clearly identifies division of responsibilities with respect to mineral sector between the federal and provincial governments (NMP, 2013).

The NMP 2013 draws its origins from the article 172 of the constitution that empowers the provincial governments to make rules for the grant of mineral concessions and titles in respect of any mineral resources falling within their geographical boundaries. This applies to all minerals except for nuclear material, oil and gas which remain the federal subjects. The article also requires that any property which has no rightful owner shall, if located in a province, vests in the government of that province and in every other case, in the federal government. Thus the provincial governments are responsible for regulation, detailed exploration, mineral development and safety concerns in these operations, whereas geological/geophysical survey and mapping, national and international coordination and formulation of national policies and fiscal plans remain federal responsibilities. The Geological Survey of Pakistan (GSP) is responsible for geological, geophysical and geochemical mapping, geo-data generation and research. The federal government plans to establish a Geo-data Centre of Pakistan (GDCP) that shall be updated with latest geological survey data generated by GSP; which will serve as a data bank for the provinces. In addition, the federal government designs fiscal regimes to set thresholds for taxes and royalties applicable on mining sector; and communicates them with provinces as amended from time to time.

The new policy envisions that Mineral Investment Facilitation Authorities (MIFAs) are to be established at both Federal and Provincial levels as mandatory bodies provided for in the Federal/Provincial Mining Concession Rules in their respective jurisdiction. These authorities will be further aided by Mineral Investment Board (MIB) established by federal government, to facilitate investment and flow of capital in mineral sector. The MIFA (P) at provincial level is to be headed by Chief Minister of the Province with a Vice-Chairperson and members as decided by the respective Provincial Governments which is also responsible to define the functions of MIFA (P) under its jurisdiction.

There is however a fundamental difference between other four federating units of Pakistan and GB in that, the region of GB has been given a de-facto provincial status without de jure recognition of its integration with the federation of Pakistan. In 2009, the region was given this provisional status through the Gilgit Baltistan Empowerment and Self-Governance Order. With this, GBLA and GBC were created. The legislative powers are distributed between GBLA and GB Council. The GB Council legislates on subjects mentioned in Council legislative list, whereas the local Assembly is empowered to legislate independently on subjects mentioned in Assembly legislative list. Minerals, forestry and tourism are included in Council legislative list; therefore in the light of NMP 2013, GB Council is the authority that has powers to ratify a regulatory framework and Mining Rules (MR) for the mineral and gemstone sectors of GB.

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4.2 The Institutional/Regulatory FrameworkIn line with NMR 2013, a secretariat is functional in GB that looks after the broader functions of industries, labour and commerce in addition to having the charge of mineral directorate that has been responsible to implement MR 2003 until recently. Commensurate with NMR 2013, a newer version of mining rules (MR 2014) is currently in the process of development and approval. A draft version of MR 2014 was sent to GB Council for ratification but is still under the consideration. Various stakeholders including the miners and traders expressed their strong reservations with the provisions of the draft legislation that proposes charging fees and royalties on mining and trading of gemstones in GB. The draft MR 2014 proposes to grant gemstone mining lease to locals after the payment of Rs.50,000/- per 5 acres of the mining site for one year. The local mining community has mooted staunch concern over the suggested yearly lease amount for several reasons. Firstly, due to uncertainty in prospects of mining site, there is no guarantee that the lessee will be able to extract a gemstone in 5 acre area; secondly, the lease doesn’t account for the fact that several mining sites in GB are seasonal; thirdly, in MR 2003 the area of mining site was to be measured in Kilometers (Km) which was appropriate. In MR 2014 this has to be done in acres. While a convenient measuring unit for agricultural and flat land areas, but it can be technically confounding to measure mountainous areas in acres. The gemstone mines are usually situated in sloppy areas at high elevations – a vertical face of cliff can be 5 acres with a negligible horizontal span. Fourthly, in absence of geographical mapping and detailed geological data, managing the mining sites leased out this way will create more problems than facilitating the people. Finally, the communities are reluctant to relinquish their centuries old system of collective ownership of gemstone mining areas. They expressed their reservations about the Mining Exploration and Mining Deposit Retention Licenses being issued to non-locals. As the issuing authority of MR 2014 is the GB government, the communities are insistent on the revision of these regulations. (MR, 2014)

Table 4.1 Mining Concession/Regulatory Rules 2014

Category Concession Size

Tenure Period Renewable

Fees/RentRestricted to locals?On

ApplicationRenewal

FeeRent/ Sq.

KM

Reconnaissance License

100 – 500sq. KM 1 year No 50,000 N/A N/A No

Exploration License

25 sq. KM 3 Years 2 times/3 years each

100,000 First renewal50,000;Second

Renewal50,000

Year 1-3 (250);Year 4 (750); Year 5 (1000); Year 6 (1250); Year 7 (2000); Year 8

No

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(2500); Year 9 (3000)

Mineral Deposit Retention License

Up to25 sq. KM 2 years 1 times/

2 years 100,000 100,000 3,000 No

Gemstone Mining Lease/License 5 acres 1 year Every year 50,000 50,000 N/A Yes

Source: Mining Concession rules 2014, Government of Gilgit Baltistan

One the other hand, the traders are equally adamant that the governments’ demand to pay a royalty of 3% and above on export of raw precious and semi-precious gemstone out of the region is unjustified for several reasons. Firstly, the true value of raw gemstone cannot be determined as the government has no system in place for gradation and evaluation. Therefore, there are no standards or indices based on which to assess the quality of raw gemstones and the amount of royalty. Secondly, the export of gemstones is conducted by personal initiative of local traders and entrepreneurs, without any incentives, facilitation or any kind of support from the government; and pay export fees and custom duties at the time of export. The local traders bear the risk of loss in business transactions or profit thereof without protection or risk sharing mechanism proposed by government. Thirdly, in spite of the fact that GB produces 80% of gemstones in Pakistan, a national gemstone market has not evolved locally so far, although the GB government has supported the initiative of establishing three dedicated gemstone markets in Gilgit and Skardu; which are still not a good match to gemstone market Peshawar, well known as Namak Mandi – there is a long way to go.

Members of GBLA and relevant government officials during this research pointed out that the precious assets of GB are exploited and sold away at marginal prices. The communities, miners and traders should co-operate with the governments’ initiative in promoting a system of checks and balances in gemstone sector for the benefit of all the stakeholders in the region. The secretariat and mining directorate officials said that taxes and rents set by GB government are much less compared to the taxes charged in other provinces.

Table 4.2 Comparison of mining taxes applicable in GB and other provinces

Sr. No Type of tax Gilgit Baltistan Other Provinces

1 Royalties on Production 1 to 10% 1 to 10%

2 Surface Rents/Title Fees Annual, nominal Annual, nominal

3 Corporate Profits Tax Not applicable 35% (public), 45% (private)

4 Dividend Withholding Tax Not applicable 7.5%adjustable

5 Property and Asset Taxes Not applicable 2%CapitalValueTax

6 Value Added Tax Not applicable 15%GST

7 Customs Duties Not applicable 10%

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8 State Equity Participation Not mandatory Yes

9 Excise Duties/Labour Welfare Not applicable YesSource: GB Government Minerals Department

The government apparatus to regulate the mineral sector in GB however is going through its initial stages of development that needs to build its strengths in technical aspects. The local populations are expecting much more from the government including a center for calibration, gradation and evaluation of gemstones in GB. The general perception that gemstones make the people filthy rich overnight is farfetched and distant from reality. The government is also expected to take heed of ground realities and circumstances of the artisanal miners and traders, the majority of whom depend on mining proceeds for their subsistence. Various stakeholders look towards the government as regulator that would deploy a people friendly regulatory regime in the region setting incentives for modernization and distributing equitably the rewards, responsibilities and obligations. Foremost, the gemstone sector in the region needs to be recognized as a specialized sector of its own.

A mix of several factors has created a trust deficit between the government authorities and various stakeholders of gemstones in GB. This however should be taken as an opportunity to work towards a more transparent and sustainable gemstone sector in GB, for which the government has to play the parental role. Appreciating the fact that NMP 2013 is a giant leap forward towards streamlining and formalizing the overall mineral sector in the country, there is greater need to appreciate the distinct nature of gemstone sector in GB. Whereas other provinces of Pakistan are largely known for industrial or large scale mining, it is the region of GB that has the largest potential in gemstone production through artisanal and pocket mining. A lot more needs to be done at policy and regulatory level to exploit this potential without leaving the communities and local populations out of the equation. Finally, it is genuinely believed that if institutional infrastructure as spelled out in NMP 2013 is established in its true spirit in GB while enhancing the requisite capacities of local communities and various actors in market place, the gemstone sector of GB can positively and assuredly contribute to the provincial and national exchequer (GBER, 2010).

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5 Market analysisThis part of the report will present the supply side and demand side dynamics of gemstone in GB. In addition, different financing and investment models will be discussed; building on the research findings and analyses presented in the previous sections of the report.

5.1 Supply side market dynamicsThe supply side has several issues. Standardization, transparency, technological skills and stronger relationships between various stakeholders are the measures to name a few which can ameliorate the supply side constraints of gemstone sector in the region.

5.1.1 Requisite/missing services on Supply sideOne of the biggest service gaps on the supply side of gemstone market in GB is that there are no formal arrangements for assessing the quality of the raw materials extracted from the mining sites. In Sri Lanka, the very next step after the dexterous extraction of gemstones from the mines is that the raw gems go through a thorough process of sorting, grading and evaluation. Every piece of gemstone is coded and recorded according to gemologically established standards. Gems are classified according to the size, shape, cut and transparency; and then forwarded to the processing industry where further value addition adds to the natural attributes. After this thorough process, the value of each piece is calculated based on international market standards. The processed gems are then targeted at the lucrative international gemstone markets to fetch premium prices.

Gemstone market is value based; and the value is added when raw gems are cut, polished and finished by expert human hands. Although substantial progress has been made, but the depth and breadth of skills set in gemstone processing industry of Pakistan and for that matter, of GB, still need to be improved to compete with the international quality standards. Until then the export of raw gemstones is the inevitable option. Being the largest producer of gemstones in the country, gemstone sector of GB is incurring enormous value loss from raw exports. Export of raw gems out of the region acts as a double edge sword; the present growth in export earnings is a result not of value addition or quality improvement, it is because of supply of more raw materials causing an excessive depletion of natural mineral reserves; and the raw gems only fetch unstandardized prices far below their potential value. In a bid to further enhance the earnings, excessive mining is conducted, causing even further depletion of natural reserves. Excessive supply of raw gemstones in the market causes further loss of value. This cycle continues until the time when the over-supply of raw gems causes the supplier’s glut - a phenomenon in which due to over-supply, the commodities are sold at lowest prices in the market. As far the observational evidence goes, this has already happened to the existing supply chain of raw gems from GB. The phenomenon is reflected in below illustration.

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Source: Own compilation

This situation marginally benefits the gemstone sector temporarily but will cause huge economic losses in the longer run. Giving away of natural assets at throw away prices and the resulting loss of value is all but unsustainable. The story would be different if the supply was of processed gemstone products. In order to address these structural issues on supply side, multiple layers of streams of services are needed to be created; not only to fill the existing services gap, but to build on the available strengthens and capabilities. There is no denying the fact that valuable minerals are a key asset of the region that wins the bread for thousands of people associated with gemstone sector. Increasing numbers of people are looking to the sector with expectation to meet their economic needs. This places a huge responsibility on the shoulders of GB government and support organizations to introduce and support value adding services at mining and processing level. Even if the production is kept constant, the value adding services alone may upsurge the returns five to ten folds.

A gemstone in its crude form is little more than a piece of ordinary rock. What is more important is that one should know where to dig for it; and that it should come out of the earth in its best possible natural form - the extraction/mining process should not affect its natural attributes; if any, then not more than five percent (reported cracking/breakage rate is 30% to 50% from existing mining practices). After the extraction, the gemstone should be pampered, cleaned and looked after; given recognition by recording its features and attributes; assessed its grade, quality and potential; crafted and polished by expert hands; and showcased beautifully in a marketplace. The potential buyers will swarm in to see and lay claim to the gemstone – they will readily empty their pockets to own it. These phrases are however too fanciful compared to the hard

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Need for enhanced earnings Growing needs And so……...

Excessive Mining Even excessive mining And so……...

Depletion of reservesDepletion of reserves at

faster rate for lesser valueAnd so……...

Supply of raw gemstones

Excessive supply of raw gemstones

Suppliers’ glut

Value loss Excessive value loss Bottom value


reality the valuable gemstones endure in GB. This reality prescribes the need to have more skillful hands, more know-how of technology and a more ‘gemstone friendly’ environment; this indeed is a slow moving process. The below is the illustration of requisite services which should be in place on the supply side of the gemstone sector.

Table 5.1 Requisite services on supply side

Type of activity Requisite Services Actors Outcomes

Gemstone Prospecting

Geological mapping, systematic alluvial test pitting, geophysical and geochemical prospecting, and remote sensing.*

Understanding of geological characteristics of gemstone deposits in order to be able to select the most efficient methods.

Use of traditional wisdom and experience

Relevant government agencies (GSP, GDCP)

Miners Support

organizations Geological/

gemological experts

Saving of time, energy and financial costs resulting from mining in areas with no/low prospect

Environmental safety

Gemstone Mining

Training of miners in best practices in mining and fundamentals of gemology

Use of appropriate tools and equipment for extraction of gemstones

Use of health and safety equipment by miners

Use of efficient technology for drilling and tunneling, use of precision instruments

Following of all personal and environmental safety standards

Relevant government agencies (GB minerals Dept.)

Gemologists Support

organizations Mining experts Gemstone

mining technologists

Health and safety experts

Efficiency in mining process and reduction in value lost

Safe and better working environment for miners

Safe mining practices resulting in cost effective operations

Gemstone Assessment, standardization and Evaluation

Gemstone sorting and grading Gemstone identification, recording

and coding Gemological equipment to assess

chemical and physical composition and quality

Optical equipment to assess the optical properties

Valuation techniques/standards according to which to classify/value the gemstones

Advanced gemological instruments for origin determination/provenance

Advanced gemological equipment to delineate fake, synthetic and treated stones from natural gemstones.

Relevant government agencies (GB minerals Dept.)

Gradation and evaluation agency to be run by government

PGJDC - Gilgit Baltistan

Gemstone assessment and evaluation experts

Greater transparency due to availability of technical information

Clarity in value/price setting

Recognition of provenance/origin of gemstones

Greater interest and trust of potential buyers

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Gemstone Processing/ Lapidary

Gemstone cleaning and dressing Cutting, polishing and, tumbling Faceting and carving Gemstone jewelry and beads

making Integration with clothing, jewelry

and fashion industry Strong connectivity with market

value chain

Support organizations

PGJDC - Gilgit Baltistan

Gemstone processing experts

Gemstone processing professionals

Market actors in clothing, jewelry and fashion industry

Recognition of quality Desirability and

interest of buyers from lucrative markets

Selling of gemstones at premium prices

Diversification of gemstone sector with other allied sectors

Access to greater international markets and increase in market share of finished products

*Simonet et al, 2003

Several government and support organizations are taking positive steps in order to tackle these issues at different levels. As previously mentioned in this report, the support organizations are doing a commendable job in introducing and improving gemstone processing and lapidary services. A few of these organizations also engage with communities and help miners improve their skills and knowledge in gemstone mining. Two important areas – the gemstone prospecting and gemstone assessment & evaluation - are however still lagging behind for several reasons; firstly, high capital cost of the advanced equipment needed for gemstone prospecting and assessment/evaluation deters the private organizations from obtaining these technologies; secondly, being the regulator, the services of gemstone standardization and assessment can best be rendered by GB government. A state-of-the-art gemstone grading and evaluation center in public sector in GB is the need of the hour and wherever possible, public mobile assessment and gemstone grading units in order to provide these important services at the remote mining sites of the region is a necessity. The government can also facilitate to have access to geological/gemological mapping information maintained by Geological Survey of Pakistan (GSP) and Geo-data Centre of Pakistan (GDCP). Most importantly, the supply side activities associated with gemstones now need to be recognized as a constituent full-scale cottage industry. This is necessary for leveraging the potential of gemstone sector in the region. Presently, the gemstones mining sector is confused with industrial mining sector, as the latter is dominant part of mining sector in Pakistan. In GB however, the gemstone sector has unmatchable potential that deserves to be treated as a separate entity having its own market dynamics. At processing level, the gemstones command the personal care, passion and finesse of human hands, in addition to application of precision technology. The structure of gemstone market is way different than the market for other mineral based commodities. In addition, the gemstone sector has tremendous potential to create employment opportunities at different levels of its value chain, for it needs a variety of human skills at each level. Therefore it deserves its due recognition.

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5.1.2 Socio-Economics and Geographic distributionThe miners constitute the largest group of people who are associated with gemstone sector in the region. Although at personal level age, weight, degree of physical fitness, degree of acclimatization and metabolism are the decisive factors to nominate as a miner; at group level, people of different social backgrounds participate in the mining. A common streak of socio-economic attributes runs through the miners’ community; youth with few other employment alternatives, poorly educated individuals and school dropouts, individuals whose career has matured in other manual occupations, farmers, shepherds and part-time earners; and diehard enthusiasts of adventure and gemstone mining; to name a few. These subgroups can be further classified into two categories: the full time miners and part time miners. The full-time miners engage in the gemstone mining round the session or round the year. Whereas, part-time miners follow the profession, based on available opportunities. Almost 70% of all the mining population consists of full time miners. For example, most of miners in Hunza do the mining intermittently, whereas in Sumayar Nagar, all the individuals of working age engage as miners during four month mining session. The miners in Shengus and Haramosh engage full-time in mining round the year. The miners in Shigar valley make it full-time and round the year. The biggest impediment in pursuit of gemstones is the severely cold weather during the winters. Some mining sites are at extremely high altitudes where the temperature dips down to -40 Celsius. This is the case in Sumayar, where the mining sites remain operable only for fourth months during the summers. The mining sites of Aliabad remain operable round the year, whereas those in Hassanabad remain closed in winters. The mining sites in Shigar, Rondu and Shengus are operable round the year. During the winter mining spells, the miners have to make extra arrangement for clothing and food in order to counter the severe cold weather, although the temperatures inside the mining tunnels remain moderate during winters.

The tradesmen come from different social backgrounds and are more mobile than the miners. Socio-economically, the traders can also be classified into several categories; 1) traders who have established themselves as the dealers and suppliers of gemstones and own a shop/showroom or two in the local, national or international gemstone markets; 2) traders who trade in regional markets and have established a shop/showroom in regional gemstone market; 3) traders who work as intermediaries for the bigger dealers; 4) Full-time traders and part time miners, who act as a link between the local miners and traders with regional dealer; 5) Full-time miners and part-time traders, who directly interact with miners and deal with traders in local markets. It is difficult to draw a clear line between these categories, but traders are better-off compared to other social groups. In a typical village of GB, where the gemstone mining is the only source of livelihood; is inhabited by miners and traders (local/regional); the village has a few modern style houses; and rest of the houses are made of traditional materials; the modern houses usually belong to the smart traders whereas the old style dwellings go to the miners.

Another social group of individuals (males and females) associated with gemstone sector is in the making. These are the skilled individuals who have received vocational and certified training

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in lapidary and gemstone processing skills from various training programs. With demanding skills in their hand and prospects of gemstone processing industry rapidly growing in near future, these individuals are likely to do well. This group is likely to emerge as experts in value addition of gemstones. The gemstone processing industry is the one in which females are also participating enthusiastically, whereas mining and trading activities are exclusively male dominated. The strong cultural belief that only men are made to do the arduous job of mining; therefore all the miners are males. The trading is male dominated but there are some females who run a few gemstone shops in local markets.

5.1.3 Mining techniques and technologies usedThe mining techniques currently employed are traditional and basic; and classified as artisanal, small scale or pocket mining. Geologically, the mining sites in the area consist of either dolomitized or hard rocks. The ruby mines strip along Hunza and Ishkoman valley consist of dolomitized rocks which are easier to break. In order to reach to the gemstones deep under the surface, it is inevitable for the miners to dig holes, explode the rocks and create tunnels. Usually 3 to 4 feet wide and 4 to 6 feet high tunnels are created making use of very basic tools and equipment. Traditional wisdom and experience is applied to identify a potential mine. The miners then make fox holes in the hard rock and create irregular tunnels by piercing the mountain following gemstone bearing veins or layers. They give up their quest when they reach 400 to 500 feet deep into the mining tunnel for health and safety reasons. The miners usually prefer to operate in groups of 5 to 7 people. Adding more people reduces the average and marginal productivity of the group due to limited space in the tunnels – economies of scale at work. Following is the illustration of current activities carried out by miners in the life of a typical gemstone mine in GB.

Current mining practices and typical activities in the life of a gemstone mine

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Prospecting

Exploration/ Mining

Mining/ExtractionOperations

Closure

Traditional methods of prospecting – experience

and texture of rock

Create tunnels by hard rock drilling and blasting using drill

machine & explosives

Chip away the gemstones found in the mother rock using

traditional/basic tools

Abandon the mine after its tunnel depth reaches 400 to 500 feet for

safety reasons


The ultimate technological appliance currently used by the miners is the drill machine used to make holes in hard rocks; it comes in two types – the punjar drill machine and the compressor drill machine. Before the drill machines, the rock holes were made manually with lever and hammer that took hours of arduous labor and patience to make one foot deep hole in hard rock. The advent of drill machine has proved to be the blessing in a disguise for miners. Although easy to carry and transport, the gasoline operated punjar machine is notorious for creating unhealthy fumes, dust and harmful gases in small and closed tunnels due to lack of ventilation in the mines. The compressor machine on the other hand is operated by air created by a fuel operated air compressor unit placed outside the tunnel. The drill machine is connected with air compressor unit through a long hose. Pressurized air hard pushes through the hose setting the drill machine lever in rotary motion and generating powerful torque to drilling the holes in rocks. This resolves the old problem of bad fumes and gas, but it too inevitably creates the dust during the process of rock drilling. However, the compressor drill machine is considered by the miners to be a significant improvement over punjar machine. Small pocket miners who operate in mines on high altitudes are still using the punjar drill machine.

Ammonia dynamite cartridge high explosives and fuses are the other bits in the arsenal of miners which they stuff in drilled holes to blast the rocks. One blast costs Rs.200 based on the current prices of the blasting material. Please see Annexure B for cost analysis of small-scale mining. The miners knock up at least 12 to 20 blasts a day. The food and drill machine fuel costs together with cost of dynamite adds up to nearly Rs.5,000 per day – gemstone mining is not as cheap as seems to be. A cycle of blasts and subsequent hunt for gemstones continues till the exhaustion of supplies and human will. No precision instruments are used for careful prospecting and targeting of drilling; though the seasoned miners use their hard earned wisdom and experience. The miners’ toolbox unavoidably includes the hammers, shovels, diggers and levers, essentially to remove the debris and excessive material out of the tunnel. Different sizes of hammers are the only tools that are maneuvered to carefully chip out the gemstones from the mother rock. During the process of blasting and extraction this way, almost half of gemstones are either cracked or broken down into smaller pieces.

The miners’ transition from manual drilling to punjar drilling machine and then lately to compressor machine demonstrates the fact that people in the region are technologically progressive and ready to adapt newer technologies. They need to be empowered with skills and knowledge to be more effective and productive. The advent of newer technologies in gemstone prospecting and mining will be of tremendous help in improving the efficiency of artisanal and small scale mining (ASM) sector.

5.1.4 Risks and hazards on the supply sideThe problems at gemstone mining level constitute a sizable proportion of risks and hazards observed on the supply side. Hard rock gemstone mining is a risky enterprise, more risky when the miners are not trained to follow health and safety measures. The basic safety equipment used by the miners include, a mouth or nose cover, rubber or leather gloves, and hard boots to cope

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with walking on rocks – barely enough for protection from imminent hazards during the mining. Deep tunnel miners are exposed to several health risks. They are prone to suffering from various health issues. Cases of exhaustion and problems of breathing due to low oxygen in tunnels are most common – they don’t have the luxury of oxygen masks. Risk of incurring injuries and serious wounds is also very common due to falling of stones and debris from the cracked walls of tunnels after blasting. Long exposure to dust and fumes cause respiratory problems which result in expensive treatment costs – too much for a typical village miner. Inappropriate and insufficient intake of food due to social and financial pressures is another problem prevalent in the miners. Long hours of work and labor, insufficient body rest, less sleep and exhaustion are some of other problems endured by gemstone mining fraternity.

The artisanal mining is conducted on smaller scales and as such no hazardous materials are used other than the use of explosives for rock blasting in limited quantities. No serious environmental hazards have so far been recorded during the small scale gemstones mining in GB and thus considered to be environmentally clean. However, blasting at some mining sites has resulted in damaging of water channels running down in proximity of the mines. In such cases, the miners are obligated by the community to shipshape the damages to the water channels resulting from falling of debris from the mines.

5.2 Demand side market dynamicsThe demand side of the market is primarily based on the notion that the economic activities can be fueled up by increasing the demand for commodities and services. Dealing with demand side of the market is trickier, though it needs a strong support from the supply side. The overhauling of gemstone value chain is incomplete without fixing the glitches on the demand side; which is linked proportionally to the fixing of issues on the supply side.

5.2.1 Requisite services on Demand sideThe discussion in this section investigates the demand side from two perspectives; - the macro level and micro level. At the macro level, the most important asset to be showcased is the enormous potential of gemstone sector of GB itself that can be peddled as a mega-product bestowed by the nature. The idea of creating demand for gemstone products in the market, in the first place, is strongly correlated with investments and capital inflows for the development of gemstone sector in the region. Therefore, the expansion of the sector needs a helping hand from national and international high value investors who have flair for quality and modernization by introducing state-of-the-art techniques and technologies in exploration, mining and processing of gemstones; while serving their business interests. This will help realize the true potential of the sector, while greatly contributing towards the expansion of regional economy. The provincial and federal government agencies have a pivotal role to play in creating a conducive and investment friendly environment in collaboration with local communities. The government needs to offer investment oriented services to the potential investors, making the process flexible, transparent and community oriented. A governmental institutional infrastructure and policy framework at federal level already exists (that has been discussed chapter 4 this report); the need

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is to strengthen the capability and regulatory role of GB government to attract high value capital investors into the region. A summary of investment oriented services is presented hereunder.

Table 5.2 Requisite investment oriented services on Demand sideType of activities Services Actors/Facilitators Outcomes

Attracting high value local investors

Ease of access to geological/ gemological information

Transparent system of licensing and registration

Flexible and attractive fiscal/tax policy regime

Friendly and mutually beneficial relationship with communities

Geological Survey of Pakistan (GSP)

Geo-data Centre of Pakistan (GDCP)

GB government Minerals Department

Federal Ministry of Petroleum and Natural Resources

Concerned Communities

Benefit to regional economy from capital inflows

Job creation

Modernization of the gemstone sector

Tax revenues generation

Attracting high value foreign investors

Ease of incorporation in Pakistan

Ease of access to geological/ gemological information

Transparent system of licensing and registration

Flexible and attractive fiscal/tax policy regime

Friendly and mutually beneficial relationship with communities

Geological Survey of Pakistan (GSP)

Geo-data Centre of Pakistan (GDCP)

GB government Minerals Department

Federal Ministry of Petroleum and Natural Resources

Mining Investment Facilitation Authority (MIFA)

Mining Investment Board (MIB)

Concerned Communities

Benefit to regional economy from capital inflows

Job creation

Modernization of the gemstone sector from newer technologies and techniques

Tax revenues generation

At the micro level, due to growing interest of private businesses and various other stakeholders, gemstone trading and marketing has lately taken momentum in GB. However, if we closely look at the market fundamentals, it is revealed that currently, Pakistan and for that matter GB, by default, is positioned as supplier of raw gems to the advanced markets in the world. Due to the lack of high quality lapidary skills in the local market, the gemstones are exported as raw material to the countries that have well established value adding industry. The locally processed gems (presently very low in volume - 5% to 10% of total gemstone exports), have low demand; and if traded at all, the buyers reprocess them for further value addition. The biggest loss amid this phenomenon is suffered by gemstone market of GB. The very first step towards competing with the advanced markets is to ward-off the perception of ‘supplier of cheap gems’. This calls for a long-term commitment to fostering the gemstone processing industry and developing skillful human resource in cutting, polishing and finishing, in order to achieve perfection to the

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international standards. The gemstones are a natural product and those mined from the Karakorum and Himalayan ranges have distinct intrinsic attributes. These attributes need to be magnified through further processing. The international gemstone market is ruled by processed gemstones. Some countries are strict to the extent of declaring the export of unprocessed gems to be illegal. The neighboring country Sri Lanka is such an example where marketing and export of raw gems is strictly prohibited.

The importance of filling the service gap in gemstone processing is felt by several promoters and support organizations in GB. Starting from almost the scratch, they have made a remarkable progress, but there is a long way to go. The development of human capacities is a long term process that needs patience and endurance. In the next few years, the gemstone processing industry is likely to contribute positively in creating a vibrant and effective gemstone value chain.

Presently, the marketing of raw gemstones from GB is proving to be a quagmire. The raw gemstones are all but homogenous. This homogeneity of raw gems makes it difficult to establish a strong value proposition for effective marketing. This further gets complicated when it comes to conduct the market segmentation and product differentiation of raw gemstones. The question is, whether the mass marketing of raw gemstones is really that important? If answered yes, then the problem is that this re-enforces and hardens the entrenched perception of ‘cheap supplier’ amidst the currents of market forces. But if answered no, then what alternate options are available at hand? A transitional arrangement is to showcase the however little quantity of locally processed gemstones of GB in potential markets along with raw gems. Over the longer run, while the processing industry gains further momentum, the quantity of processed gems will gradually increase with corresponding decrease in bulk of raw gemstones. Five to ten years from now, all the gems will get routed through the processing industry. This will result in gradual increase in value addition with a matching increase in price premiums. Keeping a long term perspective, demand side market oriented services are suggested in the below table.

Table 5.3 Requisite trade/market oriented services on Demand sideType of activities Services Actors/Promoters Outcomes

Promotion for potential buyers in local and national markets

Advertising in local and national media

Advertising on social media

Local and national exhibitions

Product selling campaigns

Stalls in cultural and social events

Roadside exhibitions Seminars and

educational events

Local/national traders and entrepreneurs

Support organizations Promoters Relevant government

departments and agencies

Event managers Advertisers and

publishers Media houses

Promotion of gemstone products in local/national markets

Potential increase in sales in local/national markets

Potential increase in revenues/profits

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Promotion for potential buyers in international markets

Advertising in international media

Advertising on social media

International exhibitions Promotion campaigns in

international markets Stalls in international

events Seminars and

educational events

National /international traders and entrepreneurs

Support organizations Promoters Relevant government

departments and agencies

International sponsors and event managers

Advertisers and publishers

Media houses

Promotion of gemstone products in international markets

Potential increase in sales in international markets

Potential of fetching premium prices

Potential increase in revenues/profits

Product differentiation/Market segmentation

Marketing mix modeling Identification and

targeting of lucrative markets

Regular monitoring of international gemstone markets

Monitoring of competitors

Technological improvements to remain competitive

Continuous improvements in value adding services

Customer oriented marketing

Local/national/ international gemstone business concerns

Marketing management consultants and experts

Promoters Relevant government

agencies Educational institutions

Promotion of gemstone products in national/ international markets

Potential increase in sales

Increase in national/international gemstone market share

Increase in customer base

Potential growth in business

Potential to enter lucrative markets

Gemstone Brands

Creation of Gemstone Brands in GB

Collaboration with global gemstone brands

Strong integration with national/international market players

Linkages with fashion industry

Local/national/ international gemstone business concerns

Marketing management consultants and experts

Promoters Brand managers Relevant government

agencies Educational institutions

Brand loyalty Recognition of GB as

source of high value gemstones

Premium returns on sales and business

High value customer base

5.2.2 The existing market size, intermediaries, buyers Trading of gemstones has lately evolved into one of major business sectors in GB. The market however is export oriented whereby unprocessed precious and semi-precious gemstones are exported to national and international markets. The following illustration shows the trade flow of gemstones from GB.

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The gemstones trade flow

Source: Miner, traders and processors qualitative research survey conducted for this study

Trade of gemstones is conducted in an informal and elusive way. Dealings are mostly conducted verbally and as such no records of business transactions are maintained. This practice is inherent in the strong belief that disclosing trade secrets might jeopardize the value of gemstones. Largely unregulated and having no need to maintain financial accounts, little concrete evidence is available as to the volume of trade and revenues. However, a rough estimate provided by GB government minerals department and trade associations reveals that approximately a total of Rs.1150 million were generated during the current financial year from the trade of gemstones. The ballpark figures for trade flow inform that miners of the region are primary source of semi-precious and precious raw gemstones who sell the material to local traders and intermediaries immediately after the gemstones are freshly extracted from the mines. Nearly 10% of the gemstones are sorted or informally graded as top quality whereas the remaining 90% are considered to be of medium and low quality. This assessment of quality is rather based on

56

Miners are Primary

Suppliers (100%)

Purchase of highest quality gemstones by

local trader/agent (10%)

Bulk purchase of medium to low quality gemstones

by local traders (90%)

Purchase by local exporter (10%)

Raw export to international

markets (10%)

Export to traders/processors in Peshawar (80%)

Raw export to international

markets (70%)

Processing in Peshawar (10%)

Buyers/jewelry makers in gemstone market

Karachi (10%)

Exported as raw material for jewelry

making (60%)

Exported as raw specimen to international buyers (10%)

Buyers in Europe, USA, China, Middle

East, Hong Kong (10%)

Buyers in India, Thailand, Sri Lanka

and China etc. (60%)

Purchase by local processing centers

(10%)

Buyers/ Processors in Europe, USA,

Japan, China (10%)

Buyers at local/national show rooms and jewelry

makers (10%)


apparent attributes (clarity, cut, sheen, shape, size) of gemstones than a detailed gemological testing. The local exporters buy these highest quality gemstones from local market (10% of total); and subsequently export to European markets. The returns are considered to be high from such exports due to demand for high quality raw gems in European countries. Another 10% go to the local processing centers in GB for cutting, polishing and value addition, subsequently to be sold to the local jewelers and showrooms. A small bulk of locally processed gemstones are sold to jewelers across Pakistan and rarely, to the international buyers.

The rest of 80% raw gemstones from GB are traded in Peshawar gems market. Of which, 10% of the total are processed and supplied to jewelers in Karachi; 70% of raw gemstones are exported to international market by dealers in Peshawar – 10% as specimen to the buyers in Europe, Middle East, China, Singapore and Hong Kong etc., and the remaining 60% to different buyers in India, Thailand, China and Sri Lanka as raw material for processed gems and jewelry making.

Buying and selling of gemstones much depends on expectations of seller and personal preferences and experience of buyer. As no scientific standards of assessment and evaluation for gemstones are currently in place, there is no index or measure based on which to set the minimum prices of these valuable minerals. Therefore, raw gemstones are usually undervalued in the market. The revenues could be much higher if GB had a strong gemstone processing industry and trade hub of its own. Table 5.4 below presents estimates for revenues from gemstone trade in GB.

Table 5.4 Trade flow and revenues

Sr. No Description of markets and buyers Trade Flow Rate Total revenues earned

1150 Million/annum

1Raw export of high quality raw gemstones directly to European market by local exporters

10% Rs. 115 Million

2

Retained for processing and finishing in local market subsequently to be sold to the local jewelers and showrooms, national and international markets

10% Rs. 115 Million

3 Raw gemstones exported to Peshawar gemstone Market 80% Rs. 920 Million

Source: Govt. officials and traders, trade associations qualitative research survey conducted during this study

5.2.2.1 Revenue Growth analysisWe have estimated figures on total trade revenue for 2007/08, which are taken as the baseline. An average five year revenue growth (2007/8 – 2012/13) can be calculated from the available figures. During the year 2007/08, total revenues earned from the sale of gemstones in GB were Rs. 500 million. In 2012/13, these revenues increased to Rs.1150 million, achieving a revenue growth of 130% over the period of five years, which translates to an average yearly growth rate

57


of 26% for each of years from 2007/08 to 2012/13. These revenue figures portray an impressive picture of gemstone trade growth in the region but not really. Calculating growth rate in rupee terms can be spurious due to a fluctuating inflation rate and usually depreciating exchange rate of rupee against dollar, which is the major currency of trade. In 2007/08, the average dollar/rupee exchange rate was 62.55. The 2007/08 trade revenues (Rs.500 Million) when converted into dollar terms, the trade revenues were held to be $7.99 Million. Similarly, the 2012/13 the average dollar/rupee exchange rate has been 1: 97.38. The 2012/13 trade revenues (Rs.1150 Million) when converted into dollar terms, the trade revenues amount to $11.81 Million. The five year revenue growth in dollar terms thus calculates to 47.73%, giving us yearly growth rate of 9.55%. This per annum growth rate of nearly 10% in dollar terms gives us a more accurate and realistic statistic for gemstone trade in GB, as it accounts for the inflation and currency fluctuations in the market. The following table presents these statistics in tabulated form.

Table 5.5 Comparison of revenue growth in rupee and dollars

Sr. No Description of trade revenues Pak Rupees (PKR) US Dollars ($)

1 Total trade revenues in 2007/08 Rs.500 Million $7.99 Million

2 Total trade revenues in 2012/13 Rs.1150 Million $11.81 Million

3 Total growth in revenues over five years Rs.650 Million (130%) $3.82 Million (47.73%)

4 Average annual revenue growth rate 26% 9.55%

Source: a- Govt. officials and traders, trade associations qualitative research survey conducted during this study b- Historical dollar exchange rates, State Bank of Pakistan: www.sbp.org.pk/ecodata/HER-USDollar.xls

A nearly 10% yearly growth is by any means is good news for the economy of the region. However, it should be noted that this growth is rather resulting from the proportional increase in production of raw gemstones, rather than improvement in quality and efficiency in value chain.

5.2.2.2 Value Loss analysisThe trade revenues as presented in previous sections are pushed down due to lack of capacity to avoid value losses in gemstone value chain. Major value loss occurs due to fracturing and breakage of gemstones during the existing mining practices. This ranges from 30% to 50% of total value of gemstones extracted. At least 25% value loss can be avoided if the fracture and breakage is reduced by introducing efficient mining methods.

Another major area that causes the value loss to GB economy is that despite being supplier of 80% gem material of national markets, GB has no market/institutional infrastructure to conduct trade of gemstones on the scale of Peshawar gemstone market. It is assumed that at least 50% value loss is incurred when major trade activities are carried out outside the region.

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http://www.sbp.org.pk/ecodata/HER-USDollar.xls


Another area that results in tremendous loss of value is the raw export of gemstones due to a nascent processing/lapidary industry in the region. It is assumed that at least 50% direct additional value loss could be avoided if the exports were made after processing (cutting and polishing at least) of gemstones. Developing lapidary industry has an added advantage of creating employment opportunities for the youth. An analysis of value loss based on these scenarios is presented in the Table 5.6 below.

Table 5.6 The estimated value loss in rupee and dollars

Sr. No Description of value loss

Values loss

Pak Rupees (Rs.) US Dollars ($)

1Assuming 25% loss in value due to fracture and breakage resulting from existing mining practices.

25% 0f Rs.1150 Million =Rs.288 Million

25% of $11.81Million =$2.94 Million

2 Assuming 50% loss in value due to lack of market/institutional infrastructure in GB

50% of Rs.1150 Million =Rs.575Million

50% of $11.81 Million =$5.91 Million

3 Assuming 50% loss in value that could be saved from export of processed gems

50% of Rs.1150 Million =Rs.575Million

50% of $11.81 Million =$5.91 Million

4 Total value loss (1 + 2 +3) Rs.288 + Rs.575 + Rs.575 =Rs.1438 Million

$2.94 + $5.91 + $5.91 =$14.76 Million

5 Total Revenue Potential if no value loss Rs.1150 + Rs.1438 =Rs.2588 Million

$11.81 + $14.76 =$26.57 Million

The current annual value loss of Rs.1438 ($14.76) million is the opportunity cost of not having a strong market value chain in the region. Positive steps towards rectifying these shortcomings will help achieve true revenue potential of gemstone sector while leading the regional economy towards greater prosperity.

5.2.3 Transaction/Business Models in practiceThis section presents the analysis of different business models currently followed by gemstone businesses in GB. Accounting for current business practices in GB, four different business models are reviewed based on six key parameters including: a) the suppliers, b) the nature of the business, c) the market access and scope, d) the nature of buyers, e) the profit margins; and f) market competition. Following is the summary of the analysis.

59


Table 5.7 Different types of Transaction/Business Models in Practice

ParametersType of Business Model

Business Model A / (A local gemstone

showroom)

Business Model B/ (A small size gemstone

business)

Business Model C/ (A medium size gemstone

business)

Business Model D/ (A larger size gemstone

business)

Suppliers

Finished precious and semi-precious gemstones supplied by processors in local market and down country

Supplied by local Miners

Supplied by miners and Smaller traders

Supplied by trusted miner, Smaller traders and through agents

Nature of gemstone Business

Trade of processed gemstones, specimen, souvenirs

Trade of raw precious and semi-precious raw gemstones

Trade of medium to low quality precious, semi-precious raw/processed gemstones

Trade of high quality precious, semi-precious raw/processed gemstones and specimen

Market Access and Scope

Showroom selling of showcased products in local market

Selling in local market; selling to bigger traders

Selling in local market, Selling in Peshawar Market, Export to international markets

Selling in Peshawar Market, Selling in Karachi Market, Export to international markets

Nature of Buyers/Customers

Local and foreign tourists, other interest local buyers

Clients in local market, local exporters and bigger traders

Clients and foreigners in local market, dealers in Peshawar, Jewelers in Karachi, Buyers in China, Sri Lank, Thailand etc

Dealers in Peshawar, Dealers in Karachi, high value customers in China, Europe and USA etc.

Profit Margins10% to 25%(Low margins due to low business activity)

20% to 50%(Margins are variable based on supply and demand in the market)

20% to 50%(Margins are variable based on supply and demand in the market)

100% to 400%(Margin are assuring and stable)

Business Competition in the market

Normal to Moderate in local market

Severe competition from local traders

Moderate in local market, severe in Peshawar market

Normal in local market, moderate in national and international markets

Source: Miners and traders qualitative research survey conducted during this study

Over time, the gemstone businesses have evolved from a simple shop in the local markets to the ones’ that have access to national and international markets. The gemstone businesses have become increasingly sophisticated in manner with the rising demand for gemstones in national and international markets. Their business scope has expanded due to ease of access to bigger markets. Consequently, the traditional gemstone shop in the town has now turned into a beautiful showroom; the traders who used to carry gemstones in pockets to sell to a dealer down the country, now have themselves become dealers and suppliers of gemstones in national and international markets. This trend informs of the growth of gemstone sector it has scaled during

60


past two decades. However, on the flip side, these businesses are confronted with their own stock of challenges. The industry dynamics, the regulatory regimes, the situation of law and order in the country; and many other factors influence the performance of gemstone businesses in the region. For example, the business model - A is typical of a gemstone business that is successor to the old gemstone shop. Its business model is based on its ability to attract local and foreign tourists towards buying the specimen and processed gems at their showroom. But due to lower flow of tourists in the region, it has lost its primary customer base. As a result, such market entities have hard time continuing as stand-alone businesses. Such businesses in GB have two options: either liquidate or diversify. As small businesses, it is difficult to choose either, although some businesses have opted for either market diversification in gemstone sector or diversification to other types of businesses.

The business model – B is representative of a gemstone business that primarily acts as an agent or intermediary between miners and bigger traders/exporters in local market. In many cases this happens to be a one man business having strong linkages with communities, miners and bigger players. To be successful and to confront other competitors, the businessmen remain active and keep an eye on developments in local market. Such businesses are an essential link in the gemstone supply chain. The future aspirants of gemstone business start with business models A or B.

The business model – C characterizes a business that has expanded trade activities both on its supply and demand side, it not only trades in local market, but has access to national and international markets. Its export destinations include India, Thailand, China and Sri Lanka etc. It exports medium to low grade raw precious and semi-precious gemstones into these markets and earns relatively stable and sizable profit margins.

And finally the business model – D is typical of a premium and successful gemstone business in GB. It picks the best quality raw gemstones for direct export to high value customers in Europe, USA, Japan, Hong Kong and Singapore etc. It has strong linkages with dealers in Peshawar and Karachi. It also trades in gemstones imported from other countries and earns highest profit margins due to presence in lucrative markets. Such types of businesses are very few in GB though.

It is pertinent to note that it takes years of experience and motivation for gemstone businessman to move up from one business model to the next. Therefore, the smaller A and B model type businesses are more prevalent than more advanced C and D type businesses.

6 Financial AnalysisThis part of the report presents analyses of the financial aspects of businesses operating in gemstone market. A discussion on current formal and informal financing mechanisms is

61


followed by analysis of cash flows in a typical business, rates of returns in different business models; and income distribution patterns of miners, traders and financiers

6.1 Formal or/informal financing mechanisms in practiceThe financing of business activities predominantly remains informal in gemstone sector in GB as the businesses prefer off the record avenues of financing over having to go through the formalities entailed in availing credit from banks and financing institutions. There may be exceptions but the informal ways of business financing are relatively more popular.

The primary activity of a gemstone business is to replenish and maintain the inventory levels matching or exceeding the supply and demand of gemstones in the market. Even the rough gemstones are dearer commodities and having enough cash to keep the business afloat in the market is utmost important for a typical businessman. A closer investigation of currently practiced financing mechanisms in gemstone market, right from the miners to the bigger traders, reveals that at least four financing mechanisms are practiced between; 1) trader to miner, 2) trader to trader, 3) barter exchange between and among miners/miners, miners/traders and traders/traders; and 4) banks to traders - as depicted in the following illustration.

These financing mechanisms involve the exchange of cash for gemstones on mutually agreed terms. A system of barter exchange is also prevalent, in which one sort of gemstone is exchanged for another – it works more like exchanging apples for oranges. In certain cases, bigger businesses resort to go to banks for short/long term financing to support their activities. An analysis of these financing modes is conducted based on the following eight parameters as detailed in Table 6.1 below.

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Miners TradersCash

Raw gemstonesTraders Traders

Cash

Cash

Traders/ Miners

Miners/ Traders

Raw gemstones

Raw gemstonesTraders Banks

Cash Loans

Principal +Interest

1 2

3 4


Table 6.1 Analysis of Financing Mechanisms in practice

ParametersFinancing Mechanisms

Trader to Miner Trader to Trader Barter Exchange Bank to Trader

Financer Trader Trader Trader/Miner Bank

Beneficiary Miner Traders Trader/Miner Trader

Nature of financing/ Exchange

Cash in return for raw gemstones

Cash, to be paid later at a stipulated

Exchange of one kind of gemstone with another between:Miner and Miner;Miner and Trader;Trader and Trader

Loan as cash, to be returned in equal or variable installments

Size of financing 10,000 – 50,000 50,000 – 200,00 Variable 50,000 – 500,000

Purpose of financing

To meet the expenses of mining; to meet the household expenditures

To meet the short term financing needs of the business

To fulfill the demand of a buyer; to fill the demand of particular type of gemstones in market

To address the need for short/long term financing of business

Cost of financing

Physical labor in mining and commitment with financer

Minimal cost and much lower than loan interest of banks; works on the mutual sentiment of give and take

Not applicable, the value of gemstones to be exchanged is mutually agreed upon by two sides

A moving or fixed interest rate applicable on principal amount - normally more than 20% of remaining principal amount per annum

Terms and condition

In return for cash, the miner is obliged to sell/deliver the freshly mined raw gemstones to the financing trader.

The receiving end has to respect and return the amount ; this goes in favor of his own business interests

The exchange is conspicuous; exchanging parties use their wisdom, trust and experience

The trader has to present a tangible asset as collateral; the trader is bound to return principal and interest within a fixed period.

Maturity Period of the financing terms

Normally one to two mining seasons; may exceed in rare circumstances

Few weeks to few months, a year maximum

On the spot exchange of gemstones

As stipulated in the terms and condition of the financing institution - normally 5 years


While the traders have several options to finance their business activities, the miners have access only to the local traders who provide conditional finances for spending on mining expenses. If the miners are not lucky enough to dig a sizable quantity of gemstones, they need additional money for meeting the household expenditures, which really creates financial strain on them. The propensity of going for bank loans is very low and afforded only by a few well-established gemstones businesses in the market. Due to its simplicity and convenience, the traditional and old barter system is still popular among gemstone miners and traders in the region; that once used to be the only system of exchange in trade well before the advent of coin or paper based currency in GB. (Dani, 2001).

And finally, an informal nature of the gemstone sector makes it difficult for those in financial need to avail the credit from formal channels. Variations and uncertainty inherent in

63


production/extraction of gemstones from the mines is another factor that makes it difficult for miners and smaller traders to seek funds from formal financing institutions. Gradual formalization of the gemstone sector will help resolve this problem.

6.2 Cash flows in a typical businessThe cash flows are an important indicator of financial health of any business venture that signifies its financial liquidity and its ability to create a stream of sufficient cash inflows in order to meet its imminent liabilities and cash outflows. Investors are attracted by the businesses with higher rates of returns; and the expected cash flows signal the financial attractiveness and potential returns on investment - the higher the expected cash flows, the higher are the rates of returns on the investment

Nature of businesses dealing in gemstone market is characterized by low investments on capital expenditure and higher financing requirements for maintaining inventories and other operating costs. The gemstone businesses are primarily involved in merchandising (buying and selling) requiring frequent replenishment of stocks depending on the demand for gemstones in the market. The returns on investment depend on the merchant’s ability to reach potential buyers through penetration in different markets. This is reflected by the expected cash flows of a typical gemstone business based in GB, as shown in Table 6.2.

The five-year expected cash flows exhibited below symbolize a typical medium size gemstone business started with an initial investment of Rs. 600,000. The company is thought to buy and sell raw precious and semi-precious gemstones - it has a smooth supply line of stock from the local miners and smaller traders; it trades in the local market and in the Peshawar and Karachi gemstone markets; it intermittently exports to the international market in addition to dealing with a few foreign buyers in local market. This demonstrates that operating cash inflows and outflows make a sizable part of the business transactions. This is typical of the environment in which the traders from GB conduct their business of gemstones.

The gemstones of GB have high demand in the market; therefore stocks are normally sold within a period of twelve months or less; such that the businesses have to replenish their stocks frequently in addition to maintaining their inventory levels during the year. The capital investment in equipment and others is low, with a minor investment in financial support of miners - a common practice of traders based in all major markets of GB. The business has low leverage as 90% of financing is done by owner/trader. The business with its healthy inflow and outflow of operating cash fares well financially with an Internal Rate of Return (IRR) of 24%. This is quite substantial in the sense that it readily beats the inflation rate of 8.0%, the one year KIBOR (Karachi Inter Bank Operation Rate) of 10%; and the 22% of interest rate that the investment banks normally charge on long term loans (KIBOR, 2014; Inflation Monitor, 2014).

Table 6.2 Cash flows in a typical businessYear 1 Year 2 Year 3 Year 4 Year 5

CASH FLOWS FROM OPERATING SCTIVITIES

64


Cash InflowsReceipts from sale of precious stones in local market 120,000 130,000 140,000 150,000 160,000Receipts from sale of semi-precious stones in local market 130,000 140,000 150,000 160,000 170,000Receipts from sales to dealers in Peshawar market 430,000 440,000 450,000 460,000 470,000Receipts from exports to international markets 250,000 270,000 290,000 310,000 330,000Receipts from sale of gemstones to jewelers in Karachi 150,000 155,000 160,000 165,000 170,000Receipts of commission/brokerage fee 50,000 55,000 60,000 65,000 70,000Receipt from sales to a Chinese customer 25,000 50,000 75,000 100,000 125,000Interest Received 5,000 10,000 15,000 20,000 25,000

Total Cash inflows from operating activities 1,160,000 1,250,000 1,340,000 1,430,000 1,520,000Cash OutflowsPayment to suppliers for direct Inventory Replenishment 250,000 255,000 260,000 265,000 270,000Payment to suppliers to maintain change in Inventory Levels 280,000 285,000 290,000 295,000 300,000Salaries / Benefits 150,000 155,000 160,000 165,000 170,000Rent 25,000 30,000 35,000 40,000 45,000Utilities 10,000 10,000 10,000 10,000 10,000Repairs / Maintenance 1,000 1,500 2,000 2,500 3,000Advertising 5,000 5,500 6,000 6,500 7,000Travel / Entertainment 150,000 160,000 170,000 180,000 190,000Annual Lease/Registration Fee 10,000 10,000 10,000 10,000 10,000Taxes/royalties 50,000 55,000 60,000 65,000 70,000Mailing Costs 5,000 5,500 6,000 6,500 7,000Office Supplies 1,500 1,500 1,500 1,500 1,500Interest payments 3,000 3,000 3,000 3,000 3,000Telephone /Mobile/ Internet 15,000 15,000 15,000 15,000 15,000

Total Cash outflows from operating activities 955,500 992,000 1,028,500 1,065,000 1,101,500a. NET CASH FLOWS FROM OPERATING ACTIVTIES 204,500 258,000 311,500 365,000 418,500

CASH FLOWS FROM INVESTING ACTIVITESCash InflowsProceeds from sale of equipment 0 0 0 0 0

Total Cash inflow from investing activities 0 0 0 0 0Cash OutflowsPurchase of equipment 45,000 0 0 0 0Purchase of property 0 0 0 0 0Registration/Lease/License 100,000 0 0 0 0Loan/Support to Miners 100,000 100,000 100,000 100,000 100,000

Total Cash outflow from investing activities 245,000 100,000 100,000 100,000 100,000

b. NET CASH FLOWS FROM INVESTING ACTIVTIES (245,000) (100,000) (100,000) (100,000) (100,000)

CASH FLOW FROM FINANCING ACTIVITESCash InflowsProceeds from borrowings and loans 50,000 0 0 0 0Owner's capital financing contribution 550,000 50,000 60,000 70,000 80,000

Total Cash inflow from financing activities 600,000 50,000 60,000 70,000 80,000Cash OutflowsRepayment of principal loan 10,000 10,000 10,000 10,000 10,000Drawings of owner from the business 250,000 280,000 310,000 340,000 370,000

Total Cash inflow from financing activities 260,000 290,000 320,000 350,000 380,000

c. NET CASH FLOWS FROM FINANCING ACTIVTIES 340,000 (240,000) (260,000) (280,000) (300,000)

CASH FLOWS AT BEGINNING OF THE YEAR 0 299,500 217,500 169,000 154,000

TOTAL CASH FLOWS AT END OF THE PERIOD 299,500 217,500 169,000 154,000 172,500


6.3 Rates of returns in different business modelsRates of return or Internal Rates of Return (IRR) are used to assess the desirability of an investment opportunity. The higher the IRR, the higher is the probability of a successful business

65


venture. It is a vital indicator of the efficiency, quality, or yield of an investment. An investment is considered to be viable if its IRR is greater than an established minimum adequate rate of return or cost of capital. The minimum set rates chosen for the purpose of this analysis are the KIBOR rate of 10%, the inflation rate of 7.98% and one year term bank deposit rate of 8.5% each (KIBOR, 2014; Inflation Monitor, 2014; Bank deposit rates, 2014)

Taking cue from the business models discussed in chapter 5 of this report, IRRs are calculated for each business model scenario. These IRRs are based on the initial capital investment and five year net expected cash flows. The summary of this analysis in presented in the below table.

Table 6.3 Rates of returns in Different types of Transaction/Business Models

ParametersType of Business Model

Business Model A / (A local gemstone

showroom)

Business Model B/ (A small size

gemstone business)

Business Model C/ (A medium size gemstone

business)

Business Model D/ (A larger size

gemstone business)

Internal Capital (1,000,000) (300,000) (600,000) (1,500,000)

Cash Flows – Year 1 255,000 125,491 299,500 873,671

Cash Flows – Year 2 242,700 91,133 217,500 634,469

Cash Flows – Year 3 240,600 70,811 169,000 492,990

Cash Flows – Year 4 245,600 64,526 154,000 449,233

Cash Flows – Year 5 248,400 72,278 172,500 503,200

Internal Rate of Return(IRR) 7.42% 14.59% 23.60% 32.57%

Comparison with current Inflation rate (7.98%)

-0.56% 6.61% 15.62% 24.59%

Comparison with one year bank term deposit rate (8.5%)

-1.08% 6.09% 15.10% 24.07%

Comparison with KIBOR rate (10%) -2.58% 4.59% 13.60% 22.57%

Is the Business Model Desirable?

No: Better it changes its business model

Yes: But it needs further leverage

Yes: It has got good potential

Yes: It is has got huge potential

In order for the business to be financially viable, its IRR should be equal to or greater than the reference rates. In the analysis presented above, the business model A has an IRR of 7.42%, much lower than all the reference rates. That makes it undesirable for an investor. Although the business has an initial capital of a million, it is not able to produce sufficient cash flows in proportion to the initial investment. This is typical of gemstones standalone showrooms in Hunza and Gilgit that depend on visiting buyers to sell their gems and related items. When the flow of visitors is reduced in the market for several reasons, they receive fewer buyers. As a result, cash

66


inflows are reduced to the extent that conducting business based on this model no more remains financially viable.

Businesses that are run according to model B do well in the market. The model B has an IRR of 14.59% which exceeds the benchmark rates and though it has a low initial investment but is able to produce relatively better cash inflows. This is typical of a start-up gemstone business that if provided sufficient leverage, can catch up with the model C and D type businesses.

We have already discussed a model C type business in Cash flow example in section 6.2. This is typical of a medium size business with all the ingredients of being financially viable: - stable relations with suppliers, good connections in the local market and outreach to national and international markets. Reasonably good cash inflows earn it an IRR of 23.60%, substantially higher than the benchmark rates, making it attractive and desirable for investors.

The businesses following D type model as shown in the above analysis is a typical example of comparatively large size businesses in gemstone market in GB. Such a venture involves a higher initial investment that is able to produce sizeable cash inflows from its business operations spread across several national and international markets. The IRR of 32.57% makes the D type business model the most favorable investment option out of the four. The key factors contributing to its success are: access to lucrative international markets and its ability to harness processed and high quality gemstones from the local market.

The initial capital alone is not the only vouchsafe factor for the success of gemstone businesses. A business with high initial capital may incur loses (type A example), a business with low initial capital may perform well (type B example). The socio-economic environment, access to high value markets, the quality of merchandise; and personal motivation of trader, are the factors to name a few that contribute towards the success of businesses in the today’s highly unpredictable market environment.

6.4 Income distribution patterns (miners/traders/financiers)People associated with gemstone sector can be categorized into at least four income groups. First group is that of the miners who earn their livelihood from the mining and extraction of gemstones from the mines. The second group is those of the small/local traders, who started their career as miners but have evolved into local buying and selling of gemstones and act as a necessary link between the miners and bigger traders from other regions. These traders when further evolve in their career become deal makers and agents between miners and other traders. The third income group constitutes the traders who trade in precious and semi-precious raw gemstones of medium and low quality in local, national and international market. The fourth group consists of those traders who trade in high quality precious and semi-precious raw or processed gemstones in local, national and lucrative international markets. The financially successful traders in addition to merchandising of gemstones act as financiers to miners and

67


small traders. This trend is more or less applicable across all the mining communities across the region.

Within each group, there are variations in disposable incomes at individual level. For example, a typical miner may earn between Rs.10,000 to Rs.40,000 a month, depending on where and what he mines. Similarly, the small traders make a little more than miners. The bigger traders on the other side potentially earn much better depending on their trading skills and motivation. The summary of this analysis – though a bit conservative due to lack of formal data - is presented in the Table 6.4 below.

Table 6.4 Earnings of different income groups in gemstone sector

ParametersType of income group

Miners Small/local traders Traders Premium

Traders

Monthly disposable incomes (Rs.) 10,000 – 40,000 30,000 - 80,000 50,000 – 120,000 70,000 – 200,000

Yearly disposable incomes (Rs.) 120,000 – 500,000 350,000 – 1,000,000

600,000 – 1,500,000

850,000 – 2,400,000

Miners Small traders

Traders Premium traders

0

40,000

80,000

120,000

160,000

200,000

Monthly disposable incomes

Minimum

Maximum

Exponential (Maximum)

Miners Small traders

Traders Premium traders

0.00

500,000.00

1,000,000.00

1,500,000.00

2,000,000.00

2,500,000.00

Yearly disposable incomes

Minimum

Maximum

Exponential (Maximum)

Source: Miners and traders qualitative research survey conducted for this study

Although, individuals dealing with gemstones are considered to be very cautious to disclose the secrets of their trade, the above figures are based on the research survey and informal information gathered from miners and traders across GB. In spite of presenting the average figures for incomes which may be misleading due to extreme values, the disposable incomes for each group are presented as ranging between a minimum and maximum number. Miners lie at the lowest part of the income spectrum compared to the traders. As mentioned elsewhere in this report that a new breed of gemstone professionals are in the making in GB, who relate to gemstone processing industry. The earnings of individuals in this group are expected to lie at the midpoint on income spectrum, between those of the miners and traders.

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7 Support systems/Service providersThe government, the civil society support organizations and to some extent, the private sector and communities put together constitute the support system for gemstone sector in the region. In light of the analysis conducted in the previous sections, it is appraised that the level and depth services need to be fortified at different levels of gemstone value chain to fully exploit the potential of the sector. For the sack of clarity, the services have been divided into two categories – the training services and the commercial services. Each category is evaluated for the providers based on five classes of services including; gemstone prospecting; mining; grading and evaluation; processing; and marketing & promotion. The following sections provide summary of the services provided by different providers and the existing services gaps that need to be filled in longer run.

7.1 Professional/Support organizationsFour support organizations are primarily providing services in gemstone mining, processing and trading. The organizations include the AKRSP, PGJDC, RF and KADO. The summary of services provided by each of these organizations is summarized in the below table;

Table 7.1 Training services provided by different organizationsClass of Service AKRSP PGJDC Rupani Foundation. KADO

Gemstone prospecting

Conducts community based trainings in improving the traditional gemstone prospecting techniques

Offers courses in gemstone prospecting

Gemstone Mining

Conducts community based trainings in good practices in artisanal and small scale mining

Courses in Safe Mining Techniques and Training on Mining Equipment

Provides in Training safe mining practices

Gemstone grading and evaluation

Offers basic training in gemstone grading

Training programs in Gemstones Identification and grading

Gemstone Processing

Offers short term trainings in gemstone cutting and polishing

Offers courses in specimen dressing; gemstones faceting; carving; manual Jewelry designing; offers diploma in lapidary

Running six gemstone cutting and polishing centers in GB; offering courses in cutting, polishing and jewelry making

Offers courses in gemstone cutting and polishing

Gemstone Marketing and Promotion

Helps the local traders in participating in exhibitions and promotion activities

Connects the local businessmen to the national markets

Promotes the local gemstone products in national and international exhibitions

Promotes local products in national and international markets

Source: Survey of stakeholders conducted during this study

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Table 7.2 Commercial Services provided by different service providersClass of Service PGJDC Rupani FD. KADO AKRSP

Gemstone prospecting

The AKRSP doesn’t provide any commercial services though it provides overall support to the gemstone sector. It rather plays its vital role in organizing and mobilizing the communities and other stakeholders

Gemstone Mining

Gemstone grading and evaluation

Provides commercial services in gemstone testing and gemological reports at discounted rates

Gemstone Processing

Provides full range of commercial services in gemstone processing services at discount rates

Provides commercial services in gemstone cutting and polishing at reasonable rates

Provides gemstone processing services at commercial level in local gemstone market

Gemstone marketing and promotion

Source: Survey of stakeholders conducted during this studyNote: The grey boxes show missing services

The matrix analysis presented in Table 7.1 reveals that a number of organizations are providing training services in gemstone mining and processing. The AKRSP conducts these trainings among the communities. The professionals of AKRSP reach out to the village populations to conduct the training and awareness programs. The PGJDC on the other hand has established a state-of-the-art training center in Gilgit where the participants attend their chosen training courses. It offers full range of courses in gemstone prospecting, mining and processing and a diploma in lapidary. The RF and KADO are also run training programs in gemstone processing. RF specializes in gemstone processing and runs at least six training centers across GB. All the four organizations support marketing and promotion programs, though intermittently.

The table 7.2 shows the detail of commercial services provided by different service providers. The major commercial service providers are PGJDC, RF and KADO. PGJDC provides full range of commercial services in gemstone identification and processing at discount rates. The RF provides commercial services in gemstone processing including the cutting, polishing and designing. The KADO is also providing services on a smaller scale. The uptake of these services is however very low. The private sector and the people in general are not taking full benefit from

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the range services available at these service providers; quoting the average quality of local processing skills as their major concern.

7.2 Government servicesThe government plays a fundamental role in development of gemstone sector in the region. While fulfilling its regulatory role, the mineral secretariat and mineral directorate of GB government grants prospecting licenses and mining leases; and charges royalties and fees wherever applicable. Following is the summary of services provided by government for the betterment of gemstone sector in the region;

Table 7.3 Government services in gemstone sector

Type of services Specific service activities

Gemstone mining Provides training to the miners in gemstone mining through its two training center one each established in Gilgit and Skardu

Gemstone processing Provides trainings in gemstone cutting and polishing through its training centers in Gilgit and Skardu

Gemstone marketing

Government minerals department has played its due role in creating dedicated gemstone market places in Gilgit and Skardu

An office of Export promotion bureau is established in Gilgit to facilitate the gemstone exports, though is presently non-functional

Facilitates the local businessmen to ensure their participation in national exhibitions

Source: GB government minerals department

More than playing the role of service provider, the government has to lead the gemstone sector towards an efficient and equitable system of governance and market regulation. More than anything else, a regulatory framework for gemstones should be flexible with capacity to evolve with changing circumstances. The fiscal measures taken should be relevant to socio-economic circumstances of the people. In addition, there are certain services which only the government can provide. For example, the geological survey data can be made avail to the public so that this will help in prospecting of the gemstone mining sites. Similarly, the government can also set up information and database systems to capture and manage gemstone related information.

7.3 Services gap/missing servicesThe gemstone sector in GB is presently traversing the initial stages of its formalization. This essentially entails a transition from traditional methods to the more scientifically advanced and modernized practices. In order to support this transition, streams of newer services have been introduced by government and support organizations. While there is need to beef up the existing services in order to have a competitive edge in the global gemstone market, there is even greater need to fill the service gap that still exists in the gemstone service chain. Following is the detail of missing services at different level of gemstone value chain; the introduction of which can further strengthen the ongoing efforts of service provision

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Table 7.4 Missing/requisite service in gemstone service chain

Type of service Nature/Quality of Service ProviderA modern and well equipped gemstone center and mobile assessment services in Gilgit Baltistan

A modern and well equipped gemstone center is important not only for screening and grading of raw gemstones but to assess the quality and to evaluate price. As mining is conducted in far off areas of the region, mobile assessment services to remote areas will

Government has to play a major role.Support organizations, private sector

Financial Services

The financing services for miners and small traders are an important area that needs further measures. Presently, an informal system of financing is followed between the miners and traders. The informal nature of ASM deters the miners and small traders from availing financing from formal sources. This needs to be addressed.

Support organizations, private sector, government, communities

Information and monitoring Systems

No regulation, planning or strategy can be made successfully and no timely decision can be made without relevant and reliable information. Therefore, it is imperative to set up information and monitoring systems at prospecting, mining, assessment, processing and marketing levels of gemstone sector

Support organizations, private sector, government

Quality Control Systems/ Standards

There is need to develop quality control standards from the mining onwards to the grading, processing and marketing. The service organizations in collaboration with government, communities and private sector can achieve this objective

Support organizations, private sector, government

Health, Safety and environmental standards

Miners are prone to several health and safety hazards and there are no standards in place to address this. Procedures for good mining practices should make the compliance of the health, safety and environmental standards mandatory.

Support organizations, private sector, government, communities

Research and Development;Higher education in gemstone related discipline

The gemstone sector needs to be enriched with first hand research and development initiatives in gemology and allied fields.Higher education in the field will create people with right knowledge and skills for the right job

Educational institutions in public and private sectors, Specialized gemological research institutes

Marketing and promotion services

The marketing and promotion of gemstones is one of the key areas that have so far received little attention. In order to strengthen the gemstone value chain, it is imperative to initiate extensive and intensive marketing services in the region. With gemstone processing industry progressing, marketing of processed gems becomes even more important.Gemstones auction market An auctions market for gemstones in Gilgit and/or SkarduProduct differentiation/Market segmentation Identify different buyer segments in global gemstone market. Differentiate markets based on product attributes, pricing,

nature of target market and strong promotion in targeted markets.

Gemstone Brands Creation of Gemstone Brands in GB Collaboration with global gemstone brands Strong integration with national/international market players

Support organizations, private sector, government, brand managers, marketing firms

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7.4 Future expansion of gemstone services chainThe tremendous potential of gemstone production in GB calls for vast expansion of services along its value chain. Particularly, the capacity of processing industry needs to be enlarged to a great extent. While, the available processing facilities in the region can process up to 15% of the total current gemstone production; the 85% of the material is exported as raw material. The total processing machines currently installed in the region by all the service providers is nearly 400 - most of these presently remain idle due to shortage of power. In order to make sure that at least 70% of gemstones get processed in local industry, the numbers of modern processing machines/stations need to be powered up to at least an additional 2000.

The private sector has a tremendous role to play in germinating a gemstone processing industry in the region. The local entrepreneurs are to be encouraged to establish small units of gemstone processing. It should be given a status of a small cottage industry in which people from different walks of life will own a gemstone cutting and polishing machine and perfect their lapidary skills as a healthy pastime. Lapidary should be made part of local culture and competitions be held frequently; and excellence in lapidary skills should be exalted at provincial/national level. In the longer run, selling of raw gemstones should be looked down upon with derision.

Illustration of gemstone services chain and cross cutting themes

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Prospecting

Mining

Grading/Assessment

Processing

Marketing

Geological mapping; Systematic alluvial test pitting; Geophysical and geochemical prospecting; Remote sensing

Efficient technology and techniques for drilling and tunneling; Precision instruments for gems extraction

Gemological equipment to assess chemical and physical composition and quality; optical equipment to assess the optical properties

Advanced instruments/ technology for processing of gemstones; Avail the highest quality technologies and best techniques

A gemstones auctions market in

Gilgit/Skardu

Product differentiation/Market segmentation;

Creation of gemstone brands

Health & Safety, Information and Monitoring Systems; Research and Development; Quality Control


8 Review of best practices in Artisanal/Small-scale Mining (ASM)This section of the report is divided into two parts. The first part presents brief overview of best practices in gemstone Artisanal/Small-scale Mining (ASM) from around the world. The second part investigates the gems and jewelry sector of Sri Lanka as a potential replicable model for GB.

Several countries across the world have organized the gemstone sector as a separate industry. However, in Pakistan, that has a huge resource base of gemstones in mountain ranges of GB, the ASM sector is beset with a number of hindrances. Although the National Mining Policy 2013 (NMP 2013) highlights the importance of encouraging ASM and participation of private sector in its development, it doesn’t tell as to how to achieve these objectives. At the policy and regulatory level, ASM is fundamentally considered a peripheral part of the larger industrial scale mining and the NMPs so far issued by the federal governments basically recognizes it as such. This is evident from the fact that NMP document does not even provide a standard or working definition of ASM. These wider misperceptions have trickled down to the Mining Rules (MRs) formulated in light of NMPs by GB government that regulate the mining sector in the region (NMP, 2013; MR 2003; MR, 2014).

Rapidly expanding global gemstone trade and industry and the growing realization of the need to employ the natural resources in economic use necessitates prioritizing the ASM as a separate industry by giving it ample policy space. This will pave the way subsequently for addressing the prevalent issues on the supply and demand sides of gemstone sector in Pakistan and GB.

8.1 Framework for review of best practicesIn order to conduct a comprehensive review of best practices, key parameters are identified that have bearing on ASM. These parameters are categorized into three broader and correlated thematic areas of: a) policy/legislation, b) supply side; and, c) demand side. Prevalent issues in each thematic area are already discussed thoroughly in the context of gemstone sector of GB in previous sections of this report.

It should however be noted that what can be considered a good practice in a given context, environment or geographical area may not be as good in different contexts or circumstances. An effort has been made to collate the success factors that help create circumstances of sustainable ASM development; but since these context specific factors though provide examples and lessons to be learnt from experiences elsewhere, may not be exactly replicable in the context of GB. These examples rather should be taken as illustration: to know as to what other countries are doing or have done to strengthen the ASM and its allied industries; and after learning from these examples, how the local circumstances can be made more conducive for achieving success in a broader sense.

For each category of parameters, examples of what can be considered as model practices from around the world are presented. Keeping in view the gemstone sector of GB, examples and case

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studies on individual parameters are drawn from different countries. A case-to-case analytical approach is followed to make the exercise relevant and informative yet comprehensive. The framework for selection and review of ASM individual parameters under relevant thematic areas is provide in the Table 8.1 below.

Table 8.1 Framework for review of best practices in ASM

No. Thematicareas Specific Parameters

1 Legislation/ Policy

Legislation and Policy Country or GB Specific definition of ASM and legislation Designation of areas for ASM Mineral Rights Decentralization of ASM rights Recognition of ASM and its specific constraints at policy level Regulatory role of government and its functions Policy directions and strategies

2 Supply Side

Prospecting & Mining Use of applicable techniques and technologies Technical training and awareness Promotion of safe mining practices Promotion of ASM specific technologies Reducing fraction and breakage in mining Local gemstone pricing systems Health and environmental safety Access to credit and finance ASM mining units ASM organizations ASM research and developmentGrading and Assessment Gemstone grading and assessment technologies Evaluation and Information and Monitoring systems

3 Demand Side

Processing and finishing Gemstone Processing and value adding industry Training in processing and value adding skillsMarketing and Promotion Incentives to encourage trading of finished products Gemstone market pricing systems Market access Promotion and advertising activities Gemstone value chain support

8.2 Best practices in ASMSpecific parameters in three thematic areas of legislation and policy, supply side; and demand side will be explored while highlighting relevant best practices and experiences in ASM.

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8.2.1 Legislation and PolicyThis thematic area will focus on best practices in legislative and policy aspects of ASM. Most of the case studies in this section are drawn from several minerals rich African countries that have an established small scale mining industry of value minerals including diamonds, gold and other gemstones. The countries like Tanzania, South Africa, Sri Lank and Zimbabwe are supporting the ASM as one of the important sectors of their economy

Country Specific Definition: The first step towards the recognition of ASM as an important economic activity is to build consensus on country specific working definition as to what is it meant by artisanal, micro or small scale mining. For all practical purposes, a universally accepted definition is irrelevant due to country specific parameters that affect ASM such as economic variability, cultural and communal diversity in practices, type of geography and many other considerations. Several researchers including Quashie, 1991; Priester et al., 1993; Taupitz et al., 1993 agree upon the fact that ASM should be given a country specific definition. Such a clear definition is important for bringing about clarity in legislation, regulation and management of ASM; and for effectively directing ASM services by government and support organizations.

Classifying small miners as ‘artisans’ stems from the fact that, over time, mining and mineral processing are performed using basic skills and unsophisticated technology developed within the profession; for example, gemstone miners in GB create foxhole tunnels as deep as 500 feet using basic tools and low technology. This is signified in the World Bank’s definition of artisanal mining as:

“A type of manual, low technology mining conducted on a small scale, predominantly in rural areas of the developing world”. (World Bank, 1995)

The International Labour Organization (ILO) contends that the definition of ASM should be drawn from the mix of such factors as: the level of employment or number of workers for a particular mine; annual production output; capital investment; level of mechanization; size of claim; and depth of the mining operation. (ILO 1999)

Definitions of ASM adapted by different countries share such common characteristics as: in most countries ASM activities are limited to locals; need for skilled labour and sophisticated technology is low; mining operations are labour intensive; size of capital investment and production capacity is low; and have room for technological advancement.

Recognition of ASM as a catalyst for economic development and poverty alleviation has led many African countries to legislate for regulation of the sector. Having a potential ASM in the country and not having legislation leads to illegal and ambiguous trade activities. For instance, Sudan has a total mining population of 100,000 that engages in ASM in different parts of the country but has no formal legislation to regulate these activities. As a result the small -cale miners are alleged to be involved in illegal activities (Mutagwaba, 2000).

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Table 8.2 Comparison of Mining and ASM related legislation of different countries

Country Category Concession Size

Tenure Period Renewable Restricted

to locals?

Pakistan/Gilgit Baltistan(Mining Rules 2003/14)

Reconnaissance license

100 – 500sq. KM 1 year No No

Exploration License 25 sq. KM 3 Years 2 times/3 years each No

Mineral Deposit Retention License

Up to25 sq. KM 2 years 1 times/

2 years No

Gemstone Mining Lease/License 5 acres 1 year Every year Yes

Ghana

Reconnaissance license

Up to 5000 acres 1 year Depends on

performance Yes

Prospecting License Up to 5000 acres 2 years Depends on

performance Yes

Mining License Up to 5000 acres 15 years Up to

15 years Yes

Tanzania

Primary Prospecting License

Up to10 acres 1 year Every year No

Primary Mining License

Up to 10 acres 5 years Yes Yes

Zambia Gemstone Mining License

Up to 1000 acres 10 years Yes Yes

Zimbabwe Mining license 200m x 500m Yes Yes

Source: MR 2014, Secretariat/Directorate of Minerals, Industries and commerce, Govt. of Gilgit BaltistanCompendium on best practices in small scale mining in Africa, Published by Economic Commission of Africa

Mineral rights: The legislation for mining in Tanzania includes two sub-groups each for ASM and LSM (Large Scale Mining with specific provisions for each sub-group. The mining act of Tanzania recognizes ASM as a separate sector. It discusses the mineral rights, mining regulation, health, safety and others parameters separately for ASM. This can be regarded as a good example of legislation that is unambiguous, transparent and ASM specific. (Mining Act of Tanzania, 1998)

Similarly, the Ethiopian mining legislation has separate and specific provisions each for ASM and LSM. In addition to specifying clear definitions of ASM, the legislation specifies mineral rights (type, size of concession, duration and renewal), procedures, rights and obligations specific to ASM. (Ethiopian Mining Proclamation, 2010)

8.2.2 Prospecting and MiningDrilling and blasting: Drilling and blasting are two important activities in small scale rock mining. In order to avoid fracturing of the gemstones, the effect of the detonation shock waves must be reduced. This can be achieved by using explosives having much less diameter compared

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to the diameter of hole in drilled rock. Other effective techniques include placing explosives and stemming materials with air gaps between the rocks, firing one or very few charges at a time or the application of explosives with very low velocity of detonation (e.g., ammonium nitrate emulsion slurries). Tanzanite miners in Merelani, Tanzania, apply the technique of firing one or very few charges at a time in order to loosen the gemstone bearing ore without damage.

Technical Training and Awareness: Training of miners in basic skills and knowledge is important to enhance the productivity and efficiency of ASM. Realizing this necessity, DFID, in association with the Zimbabwe Geological Survey Department (GSD) and the Small-scale Miners Association of Zimbabwe (SSMAZ), introduced courses in ASM covering such topics as; basic principles of geology; identification of rock types and minerals; map reading and interpretation; simple surveying, using tape and compass methods; the nature of orientation of veins and shear zones; mine evaluation and planning; simple exploration techniques; and basic financial planning. Courses on the similar lines are conducted in ASM in South Africa

Reducing fraction and breakage during mining: A process is proposed by mining coordinating unit of South African Development Commission (SADC) in mining of aquamarine, beryl, tourmaline, topaz and similar minerals based on experience of gemstone mining in Zimbabwe. In this process, selectively mined gemstone bearing ore/rock is taken to a plant where it is broken into smaller pieces of 80 -120mm while keeping eye on gem crystals. The pieces are washed to dissolve the clay and break weak rock material, and then passed through 4 and 9 mm screens. The fine tails from 4mm screens are passed through a box for recovery of coarse fraction and picking of smaller stones. The materials from 9mm screen are transferred to a conveyer belt where the raw gems are sorted out including any other minerals. This simple method reduced damage to the raw gemstones significantly (SADC, 1994).

ASM organizations/community organization: ASM organizations and cooperatives can be an effective way of organizing the communities at the grassroots, giving voice and representation to miners when dealing with issues of mutual interest including security, training, mobilizing infrastructural support and other socio-economic issues. The provision of assistance to the gemstone sector can be easily mobilized through the miners’ representative organizations rather than through individual groups of people.

A good example of effective social organization of miners and communities is that of miners’ association in Zimbabwe. The Small-Scale Miners’ Association of Zimbabwe has a membership of 5000 miners, which is less than 2% of the total estimated number of small-scale miners in Zimbabwe (350,000). Despite the low membership, the association has been very active in mobilizing and conducting activities aimed at benefiting its members and ASM mining sector in the country as a whole. Its main contributions include its participation in the development of the Shamva Mining Centre. The association is the official owner of the center and looks after its management of operations. It has organized training programs for the miners in promotion of good practices in ASM (Shvotwa, 1993).

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Access to Credit and finance: In order to provide short term financing and facilitate access to credit for ASM miners, the government of Tanzania has developed the strategies through its mining policy.

It supports the formation of formal enterprise groups and formalize traditional funding systems including the forward sales and mutual group saving schemes. It encourages banks to finance miners and establish mobile and commercial banks in mining areas. The policy further encourages the financial institutions to support the sector through affordable credit schemes and start-up capital requirements and promotes the use of third party guarantees to enable financing institution to assist ASM miners and Small traders. (Mineral Policy of Tanzania, 1997)

8.2.3 Grading and assessmentThe grading and assessment of gemstones is though based on standardized grading of color, clarity and cutting but these have never been established on a uniform basis within the trade or within different gemological laboratories. Therefore, there are too many variables and subjective grading schemes in colored gemstones industry. In addition, every gemstone comes with its unique intrinsic attributes and therefore the grading standards for diamonds cannot be applicable for sapphire or ruby. For example, the diamonds are graded for their colorlessness whereas the colored gems are graded for their tone, saturation and purity of color. An additional problem with color is that its interpretation is a subjective matter. Also, there are so many tones and hues of one type of color that it will be futile to standardize a certain type. (Grading explained, 2014)

Similarly the clarity, colored gems are more saturated with inclusions than with diamonds. There are many different types of inclusions in colored gemstones. This can be established for each type of gemstone after close inspection with the aid of a loupe or microscope.

Grading of cutting has similar complexity issues. The key issue is that natural stones occur in a variety of cut styles and it is next to impossible to give a complete detail of cutting style on each and every single gemstone.

The size or carat is the most apparent feature of any colored stone. Normally, the bigger the size, the higher will be its value provided the piece of gem has good features in departments of color and clarity. 1-2 carats (1 carat = 200mg) colored stones are found resourcefully but bigger size colored stone are rarer and dearer. The preferences for stone size widely differ between precious and semi-precious. It is again a difficult science to set a common standard for size.

The bottom line best practice in grading and assessment is how the gemstone appears to the beholder. Having said this, it is now imperative to do extensive gemological research in order to prepare a catalogue of the features of the precious and semi-precious gemstones found in GB. This repository of information will help in grading and assessment of the unique features that the gemstones in the area are endowed with. This will also help establish standards for grading and assessment of local found colored gems, which are inevitably different in characteristics from the gems found in other parts of the planet.

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In addition, the provenance or origin has strong bearing on grading and value of gemstones. Buyers put high stakes on getting stones of well-known origins. The marketing of gemstones should focus on the proposition that why the gemstone from GB are unique.

8.2.4 Branding and MarketingThe 1997 mining policy of Tanzania elucidates strategies aimed at growth of both local and export markets by simplifying licensing procedures for dealers and traders and rationalizing and streamlining fiscal terms. The policy suggests imposing penalties on mineral smugglers. It further highlights that government will facilitate establishment of competitive mineral markets close to mining areas that are operated by major stakeholders. In order to strengthen local marketplace, it recommends establishing a system of local market committees that will ensure smooth and efficient operation of mineral markets and keeping statistics. It gives access to up-to-date minerals/gems market information due priority and proposes to facilitate the process. The policy also encourages export promotion activities including promoting formal financing schemes and direct sales to foreign buyers and utilizing the country foreign missions to identify markets, link them to dealers and initiate promotional programs (Mineral Policy of Tanzania, 1997).

Another example of good practices in marketing is that of Ghana that enacted the ’Precious Minerals Marketing Corporation Law, 1989’ and established an organization with the name of the Precious Minerals Marketing Corporation (PMMC). Republic of Ghana is known for mining of diamonds and gold. PMMC oversees, regulates and participates in the marketing of precious minerals. It deals mainly with the marketing of gold and diamonds. The corporation issues buying licenses to both foreign and local companies to buy diamonds directly from the miners. It supervises the purchases and arranges all the necessary documentation for export, when the licensed buying company is ready to do so. The only requirement for a company to be licensed is that all purchases must be pre-financed through the Bank of Ghana and the buyer has to pay an annual License Fee of $ US 10,000. (PMMC, 2014)

8.3 Overview of Sri Lankan ModelThe gems and jewelry sector is one of the vibrant components of Sri Lanka’s economy. The country is considered to be among the best sources of gems and precious stones. This coupled with a thriving industry for value addition and gemstone processing has made the country one of the top gem bearing and processing centers of the world. As a result, gemstone sector has high potential of earning foreign exchange and providing employment opportunities. The gems and jewelry industry is Sri Lanka has a long history which primarily consists of three segments: 1) gems; 2) diamonds; and 3) jewelry. In gems segment, Sri Lanka is recognized as producer of a variety of finest quality gems in the world, and best known for Ceylon Sapphire. (Sunil C, 2013)

Gems mines in Sri Lanka are entirely confined to sedimentary deposits, unlike GB where the gemstone mines are mostly found in igneous or metamorphic rocks. Geo-scientific research informs that nearly 90% of Sri Lanka’s land mass is potentially gemstone bearing. The

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techniques of gemstone mining in Island nation is labour-intensive and very efficient, compared with such practices in other developing countries. Around 3,000 mining and manufacturing units around the country employ at least 100,000 miners and 100,000 manufacturers; and nearly 100,000 people are involved in trading and business activities. The gemstone industry is enriched with a variety of human skills and occupational categories including: miners, cutter, polishers, dealers; jewelry designers, manufacturers and craftsmen; marketers and sales persons.

8.3.1 Salient features of Sri Lankan gems and jewelry sectorThe gemstone industry in Sri Lank is organized in three tiers. The first tier consists of miners of different levels of skills. It can absorb skilled, semi-skilled and unskilled labour from rural and semi-urban areas. The gem mining is conducted in sedimentary/alluvial deposits employing mostly the traditional methods. Major approaches in mining are open cast shallow or deep pits and in some case the tunneling or dredging of river bed is also done using unskilled labour that works on daily wages. Light mechanized mining methods are also in use. The unique feature of resource potential of Sri Lanka’s gem mines is that an assortment of gems such as Spinel, Corundum (Ruby, blue and star Sapphire), Cat Eyes, Zircon and many other varieties are found in a single gemstone pit.

At the second tier, the gemstones freshly mined from the deposits are passed on to processing industry after grading. Depending on quality, the gemstones are processed either by applying traditional or through modern methods. The gemstones go through further finishing in jewelry manufacturing sector that consists of traditional artisanal production units and modern technology based units. The jewelry makers in Sri Lanka have perfected their hereditary skills in lapidary over centuries to attain highest standards in creativity and craftsmanship. These craftsmen are among the most highly paid in the sector. Sri Lanka has modernized its gems and jewelry design and manufacturing sector with latest technology and equipment. The industry is highly organized and the factories are equipped with modern bruiting machines and polished wheels mainly from Belgium, Israel, Thailand, India and China. Finesse of craftsmanship and focus on design excellence has made Sri Lanka an emerging center of high quality jewelry in platinum, gold and silver.

The third tier constitutes trade oriented activities involving gemstone dealing/wholesaling, imports, exports and retailing. The total value of Sri Lankan gems and jewelry exports in 2013 was around $550 Million. The gem and jewelry market in Sri Lanka comprises of three primary market segments: domestic (31%), tourist (5%) and exports (64%). The exports comprise of specimen corundum, processed diamonds, polished gemstones and designer jewelry.

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Table 8.3 Gems and Jewelry Export statistics of Sri Lanka (USD Million)

Year Gems Jewelry Diamond Re-exports

Diamond Jewelry

Export of Specimen

2008 92.7 17.2 408.0 8.7 1.5

2009 62.5 13.2 310.6 3.6 0.9

2010 65.7 13.1 316.2 2.7 1.2

2011 90.1 15.6 408.0 3.4 1.3

2012 111.0 19.0 410.8 2.5 1.7

Source: National Gems and Jewelry Authority, Sri Lankahttp://www.srilankagemautho.com/st-exportstatistics.php

The above statistics reveal that though processed gems makes a major chunk of exports, but much of the revenue comes from the re-export of processed and finished diamonds, after rough imports. This tells of a thriving lapidary industry in the country. It can also be observed that the exports figures have declined for the years 2009 and 2010. This is because of the fact that during that period, markets were recovering from the shock of global economic slowdown.

The growth and expansion of gems and jewelry sector in Sri Lanka has become possible due to a balanced mix of five key success factors including: 1) resource potential of gem deposits; 2) A vibrant and skilled labour force; 3) excellent craftsmanship in gems and jewelry design 4) a strong market infrastructure/value chain; and 5) policy and institutional support.

8.3.2 Policy and institutional support to Gems & Jewelry sector in Sri LankaThe development and prospecting of mineral resources is the responsibility of the Geological Survey and Mines Bureau and is governed by the Mines and Minerals Act No. 33 of 1992 and the Mining Regulations No. 1 of 1993 of Sri Lankan constitution. An elaborate legislative framework exists to provide support to develop and improve the gems and jewelry sector in the country (Chino Kuo S, 2012).

In 1993, National Gems and Jewelry Authority (NGJA) was created with a mandate to regulate the sector in the country. NGJA is the sole licensing and regulatory authority for mining, lapidary and trade of gems and jewelry. The government takes keen interest in the sector and plays key role in its management and development at all levels.

The regulations for gemstones mining in Sri Lanka necessitate that only the owner of the land where the mine is located can be issued a mining license. In order to get a license successfully an individual has to prove his legal ownership of the land. This ownership is recognized in three forms: absolute ownership, co-ownership and lease ownership. Amount of the license deposit, mineral tax; and other terms and conditions are determined on the basis of the type of ownership the applicant holds. The dealers, wholesalers, traders and lapidary experts have to get a dealer/lapidary license. NGJA issues license to dealers on the basis of the value of maximum stock they maintain annually whereby the license fee increases with volume of stock. The

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http://www.srilankagemautho.com/st-exportstatistics.php


lapidaries are issued licenses based on number of machines they operate; the license fee increases with increase in number of lapidary machines.

For exporters, it is mandatory to have a dealer’s license. The exporters take their export goods to Export Department of the NGJA along with all the necessary documentation. All the goods are examined by NGJA gemologist who establishes value of each export item to ensure that the goods are not under/over invoiced. It is pertinent to note that all the exports related to gems and jewelry in Sri Lanka are exempted from customs duties and value added taxes of any sort. Similarly, the imports of gems and jewelry are made through NGJA. The imports of gemstones are tax and custom free. These gems-and-jewelry-sector-friendly regulations have helped Sri Lanka emerge as one of the major suppliers of high quality gems in international market.

The governments’ growth oriented policies unambiguously support artisanal and small scale miners which is reflected from the fact that the legal process to obtain a mining license actually favors ASM over LSM by a levy imposed on mechanization in mechanization free zones. This informs of an institutional infrastructure that is unambiguous, clear, transparent and supportive of all the stakeholders in gems and jewelry sector of the country.

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9 The prospective policy/regulatory framework Policies and regulations in gemstone sector should ideally be based on consultation with broad base of stakeholders and should provide direction and vision to resolve key sector issues. The gemstone sector in GB primarily draws it strength from a wide base of artisanal miners from local communities. The sector is so far informal and is facing a number of hindrances despite its enormous output potential. An International Roundtable on artisanal and small-scale mining held at the World Bank in 1995 concluded that formalization of Artisanal and Small Scale Mining is the only way forward to resolve the unique nature of challenges faced by the communities.

Evidence proposes that neglecting or attempting to wind down ASM activities has met no success. There is wide recognition that the formalization sets a stage for developing the sector and an enabling policy framework is an essential precursor to transformational change in the ASM sector. It will upgrade the sector's fundamental parameters including those related to technical, economic and social performance. Pakistan can be counted in majority of those countries that implicitly include ASM under general mining; making management of ASM difficult and challenging, the consequences of which are greatly felt by communities associated with a relatively expanded ASM based gemstone sector in Gilgit Baltistan. Any positive move towards greater formalization of gemstone sector in the region ought to be reinforced by the recognition that ASM alongside LSM has the potential to contribute to poverty reduction, employment creation, and improved resource utilization that may not be suitable to capital intensive LSM, integrated regional development or to generate high volumes of tax revenues.

Therefore, real need for an enabling policy framework for ASM is in the institutional, financial and technical support mechanism that should endorse that ASM is going to be a force for sustainable community development. The need is to facilitate access to finance, information especially geological and gemstone pricing, access to areas for exploration and exploitation, access to markets; and fostering processing and marketing services, research and development, capacity building; and encouraging use of modern technology and techniques.

The realization for creating a relevant and effective policy/regulatory framework for a community based gemstone sector in Gilgit Baltistan stems from the fact that such move is timely as

a) The region’s resources need to be put equitably and efficiently into economic useb) The gemstone sector has potential to improve the economy and GDP per capita of the

region, which is presently abysmally low at nearly $400c) A highly dynamic and educated young population needs employment opportunities and

sources of income generation; and gemstone sector has potential to addressing this needd) A rapidly growing global gemstone industry sources its raw material from raw gems of

GB; policy support to gemstone sector will add to increase value and global market share

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e) New governance paradigm necessitates that in addition to being the regulator, government is supposed to play the role of facilitator and promoter.

9.1 Guiding PrinciplesA prospective policy/regulatory framework for gemstone sector in Gilgit Baltistan has to be guided by the overarching principles of equity, inclusive growth, transparency, innovation and sustainability, as discussed in the following sections.

9.1.1 Equity

Equity is a worthy goal because of its strong association with fairness and social justice. Policies based on the principles of equity can help reduce poverty necessitating that incomes and obligations are distributed evenly in the society. Equity enhancing policies in the longer run boost economic growth and prosperity, social cohesion; and reduce political conflict. To be effective, most policies require broader social and political support; equity is the underpinning upon which such a favorable environment can be fostered.

Equitable distribution of rewards and obligations in local communities is the basis upon which sustainable systems of human enterprises can flourish. An equitable participation of communities in development process without discrimination will empower them to be better prepared for development of gemstone sector in GB. The government, private sector and civil society must work together to build stronger capacity at the local level in long range planning for management and mining of the resources. (Hunzai, Baig, 2013)

Despite a sizable expansion of ASM in gemstone sector in GB, income and social gaps have widened during the last few years. This growing trend necessitates showing greater concern for equity in future policy formulation for the sector. The ASM based gemstone sector in GB has a broad participation of people and communities at local level, out of shear need of fulfilling their economic needs. The dimension of equity in policy formulation supported by government and its institutional infrastructure will work in favor of longer term objectives; of achieving sustainability, social justice and fair distribution of economic benefits.

9.1.2 Inclusive growth

While there is a need to reduce the marginalization of poor segments of the society, there is an equally important need for inclusive growth; whereby, the growth process benefits all the segments of society including, poor, near poor; and middle and higher income groups. The inclusive growth should ideally reduce the disadvantages of the most disadvantaged while benefiting everyone (Klasen, 2010). In addition to sharing the benefits of growth, the communities must participate actively in the process of growth ensuring the expansion of opportunities for participation in productive economic activities and having a say on the orientation of that growth process. The inclusive growth provides impetus to promote

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development that is understood as comprehensive improvements in multiple dimensions comprising both living conditions and empowerment.

The gemstone sector in GB involves people from all social-economic backgrounds along its value chain. Emphasis on dimension of Inclusive growth in future policy formulation will make sure that the growth process works for the benefit of all its participants and that the process is owned by the people; and that it improves their incomes and living conditions and enhances their ability to be part of decision making processes at different levels.

9.1.3 Transparency

The transparency improves what we know about the markets and institutions that drive them. Improved access to information helps everyone in the market better understand the implications of their investments and dealings within the market. In enhancing the capacity of the market to better communicate, transparency can foster market efficiency, social welfare and cost effectiveness; which in turn provide support to the ideals of sustainable development.

Transparency in policy/regulatory framework fosters a culture of trust and understanding between the government and all the other stakeholders. Transparency should be the key dimension governing the laws and regulations pertaining to award of contracts and licenses, business transactions, market operations. This will lead towards an effective, transparent and sustainable system of responsibility and accountability in the longer run.

The informal gemstone sector in GB can benefit from the principle of transparency in that it will help resolve the issues of information asymmetries that are currently prevalent in trade and market operations. Transparency can be ensured if the people have access to information. Right from the prospecting of gemstones to the mining, processing and marketing; free flow of reliable information will make the growth process transparent and sustainable, benefiting all the stakeholders of the sector.

9.1.4 Innovation

In the globally interconnected gems and jewelry industry, innovations take place at a rapid pace at different levels from modest improvements on existing technologies and products to dramatic changes in processes. In all cases, the capacity to innovate will be a function of the commitment of local communities of GB, the government and other stakeholders in relation with the changing circumstances in the global market.

This commitment has to be demonstrated by choosing best practices and appropriate technologies whenever it becomes necessary. For example, the role of state has changed from owner-operator of mining enterprises to that of promoter and regulator of private and community based mining activities in a market economy. In order to keep pace with the new developments in the global industry, the government has to promote all measures that ensure efficiency and effectiveness. This includes modernization of policies, laws, and regulations necessary to create

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a competitive, equitable and stable legal framework to attract commercial private investment ensuring freedom of business organizations, benign labour laws; and facilitation of marketing and financial transactions.

Technology alone is rarely a key to unlocking economic value, but it can make tremendous difference when combined with new skills and ideas. The communities, support organizations and private sector can play their innovative role in order to make this difference happen. Innovation needs continuous renewal of knowledge and mastery of skills that opens pathways towards greater competitiveness; resulting in greater economic prosperity and creation of wealth in the longer run.

9.1.5 Sustainability

The sustainability ensures to meet the needs of present without compromising the ability of future generations to meet their own needs. In the arena of sustainable development, it is imperative to answer three questions: what to be sustained and for how long; and what to be developed? A simple answer to these questions in the context of gemstone sector in GB is that nature, natural resources and communities should sustain now and in the future while developing its people, economy and society in the meanwhile. This implies limits to be imposed by present state of technology, social organization and available infrastructure.

The question of how best to organize the available resources so as to maximize benefit from the resources in hand while achieving the development objectives; is linked with ideal of a sustainable community based gemstone sector in GB. There is a need to ensure that the resources are skillfully managed both by communities and government so that their depletion is steady and secures the very last benefit from these exhaustible resources. The requirements for sustainable development are essentially the pro-growth policies that emphasize the need for widespread social benefits on one hand; and proper management of natural resources on the other, if these policies are to be sustainable.

9.1.6 Institutional/government support

The previous dimensions of this policy/regulatory framework can be achieved if the government provides institutional support in realization of these principles. Current legislation and policy does not unlock the true developmental potential of ASM. In order to realize this potential, ensuring a high degree of structural stability in government institutions; especially the institutional mandates, authorities and operational procedures will be positive steps towards a long term and sustainable development of gemstone sector in Gilgit Baltistan. The government has to play its parental role in formulating pro-development policies while ensuring sustainable management of the natural resources of the region.

This in conjunction with high degree of excellence and competence of professional staff; attractive fiscal regimes, transparent processes of regulation and the overall stability of

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government institutions will win the trust of investors and all the other stakeholders. In addition, given the unique features of ASM and due to high employment potential of gemstone processing industry, the government has to distinguish the sector as a small industry, giving it due recognition in future legislation and policy formulation. The government has to play its fundamental role in creation of institutions charged with understanding and maintaining of the regions’ mineral resource potential for more informed planning, management and promotion of the sector. The government also has to beef up and create an institutional infrastructure to facilitate and support the gemstone value chain from the mines to the markets.

9.2 Policy GoalsThe following long term strategic objectives are recommended for the prospective policy/regulatory framework for gemstone sector in GB;

Table 9.1 Policy Goals

Goal - 1

Promote a sustainable community-based gemstone sector in GB

This overarching goal seeks to establish a sustainable community-based gemstone sector in Gilgit Baltistan. The widely informal and unorganized gemstone sector in the region calls for social organization at grassroots level for sustainable development of the sector. This has to be complemented with improvement in knowledge and skill of miners in ASM practices. Going a step further, the financial troubles at grassroots level have to be resolved. The recognition of ASM as a small industry will help manage the sector comprehensively, while encouraging its capacity for employment generation. Health and safety standards and social safety nets for the miners at the grassroots will improve the social environment and their working conditions.

Goal – 2

Increase the efficiency and quality of gemstone sector in GB

Technology is the hallmark of improvement and quality. The largely redundant technology being currently used in gemstone sector in GB needs to be updated with modern technology and techniques. This calls for introducing innovative tools and technologies in prospecting, mining, grading and assessment; and processing of gemstones. This will be a huge leap forward in overcoming the inefficiencies at these levels. Innovation and flair for quality has to be deeply imbedded in the work ethic of gemstone sector in region. Commensurate with its resource potential, the region should emerge as a leading practitioner of modernized techniques in all aspects of gemstone sector.

Goal – 3 Promote GB as a major market for gemstones, both nationally and international

GB is recognized as a supplier of raw materialized gemstones in national and international markets. The cost of this perception is very huge in terms of value loss. The processing industry in the region needs to be strengthened and expanded in order to be able to cater processing of raw gemstones. The public, private and support organizations will have to make collective efforts to re-position the region as a major supplier of processed gemstones. Further, the market infrastructure of the region needs to be strengthened in order to achieve the status of major trade hub for gemstones in Pakistan. Internationally, the region has to be showcased as a supplier of premium quality gems. Local gemstone brands, annual exhibitions and extensive promotion efforts will further highlight the image of GB as a major market for

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gemstones, both nationally and internationally.

9.3 Policy ObjectivesThe following policy objectives are recommended for the realization of each overarching goals for strengthening of gemstone sector in the region;

Table 9.2 Policy Goals and Objectives recommended for a prospective policy/regulatory framework for gemstone sector in Gilgit Baltistan

Goal - 1 Promote a sustainable community-based gemstone sector in GB

Policy Objectives:

1.1 Social organization of communities, miners and local traders at grassroots level for the sustainable development of gemstone sector

1.2 Impart skills and knowledge in good mining practices in ASM at community level

1.3 Impart training in health and environmental safety in ASM in relevant communities

1.4 Promote the availability of financial services for ASM miners and small traders

1.5 Formalize the ASM sector and organize it on the lines of a small cottage industry

Goal - 2 Increase the efficiency and quality of gemstone sector in GB

Policy Objectives:

2.1 Promote prudent techniques and modern technologies to improve gemstone prospecting

2.2 Reduce fracture and breakage in mining by Introducing modern technologies and innovative practices

2.3 Establish scientific and modern techniques for gemstone grading and evaluation

2.4 Introduce local pricing mechanisms

2.5 Promote value adding and gemstone processing services

2.6 Develop capacity of local gemstone processing industry

Goal - 3 Promote GB as a major market for gemstones, both nationally and internationally

Policy Objectives:

3.1 Consolidate the local gemstone marketplace

3.2 Promote export of locally processed gemstones

3.3 Promote marketing services and creation of local gemstone brands

3.4 Promote the image of Gilgit Baltistan as a major market player in gemstone sector in Pakistan

3.5 Integrate the local gemstone market with national and international gems and jewelry industry

3.6 Attract high value investors to invest in gemstone sector in GB

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9.4 Policy Actions and MilestonesThe following policy actions are recommended to achieve Goal - 1 and its objectives

Table 9.3 Recommended Policy Actions and Milestones for achieving Goal - 1 and its objectives

Goal - 1 Promote a sustainable community-based gemstone sector in GB

Policy Objectives Policy Actions Milestones

1.1

Social organization of communities, miners and local traders at grassroots level for the sustainable development of gemstone sector

1.1.1 Create ASM units at village and communal level (At least one in each mining area) Village level ASM units

1.1.2 Socially organize the village level ASM units into region level ASM organizations

District level ASM organizations

1.1.3 Create a ASM Cooperative in GB, consisting of members from ASM units and organizations

ASM cooperative at GB level

1.2

Impart skills and knowledge in good mining practices in ASM at community level

1.2.1Technical training and awareness programs for ASM miners in prospecting and mining and basics of gemology

Improved knowledge and skills

1.2.2Train miners in safe mining practices, technologies and methods to reduce fracture and breakage of gemstones basics of grading

Efficiency in mining practices

1.2.3Nominate master trainers at community level who will conduct refresher courses on continual basis;

Sustainable training services

1.3

Impart training in health and environmental safety in ASM in relevant communities

1.3.1

Educate the miners about the basics of first aid and palliative medicine; encourage them in use of personal safety equipment including helmet, gloves, glasses etc.

Better health and safety practices

1.3.2

Educate the miners about potential environmental hazards that may cause from ASM activities and strategies to improve the working conditions in mining tunnels

Improvements in working conditions

1.3.3Establish personal and environmental safety standards; Train master instructors at community level to ensure compliance

Compliance of environmental and safety standards

1.4

Promote the availability of financial services for ASM miners and small traders

1.4.1Micro credit schemes for miners and small traders; by creating endowments at the level of ASM units, organizations and cooperatives

Alternate avenues of financial services

1.4.2Link the ASM organization and cooperatives with local banks and financial institutions for short loans

Formal avenues of financial services

1.4.3Formalize the traditional system of mutually cooperative petty financing between miners and traders

Traditional avenues of financial support

1.5

Formalize the ASM sector and organize it on the lines of a small cottage industry

1.5.1 Recognize ASM as an effective tool for employment generation

Formalization of ASM sector

1.5.2 Provide health and social safety net for ASM miners

Formal support system for ASM miner

1.5.3 Regularize the ASM operations Improved governance

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The following policy actions are recommended to achieve Goal - 2 and its objectives


Goal - 2 Increase the efficiency and quality of gemstone sector in GB


2.1

Promote prudent techniques and modern technologies to improve gemstone prospecting

2.1.1

Use of geo-data and geological mapping to identify prospective gemstone bearing locations; a thorough gemological survey of GB, in order to establish size of resource potential

Access to geological survey data; true estimate of resource potential

2.1.2Use alluvial testing, remote sensing and other modern techniques to improve gemstone prospecting

Scientific prospecting

2.1.3 Train the traditional prospecting experts in modern techniques and technologies Prospecting experts

2.2

Reduce fracture and breakage in mining by Introducing modern technologies and innovative practices

2.2.1 Upgrade the traditional mining tools; improve drilling technology and methods

Modern technology in mining

2.2.2 Introduce special tools and devices for chipping out gemstones from mother rock

Reduction in fracture and breakage by 30%

2.2.3 Experiment with innovative ways of extracting the gemstones from mother rock

New ways of extracting gemstones

2.3

Establish scientific and modern techniques for gemstone grading and evaluation

2.3.1Establish a gemstone grading and assessment lab in GB; and mobile assessment labs for remote areas.

Gemstones assessment labs

2.3.2 Develop a catalogue of gemstones found in GB; Introduce gemstone certification systems

Database of gemstones

2.3.3 Establish provenance and gemological standards for locally found gemstones Gemological standards

2.4 Introduce local pricing mechanisms

2.4.1 Establish standards for pricing of raw gemstones Pricing standards

2.4.2 Provide guidelines for setting prices of gemstones at communal level Pricing guidelines

2.4.3 Freely provide gemstone price information to ensure transparency

Access to information on pricing

2.5Promote value adding and gemstone processing services

2.5.1 Encourage the local youth, particularly the females to take lapidary as a profession

Increased number of people in lapidary

2.5.2 Introduce state-of-the-art technology for processing of gemstones;

Modern processing technology

2.5.3 Set high quality and design standards for local gemstone processing industry

Quality and design standards

2.6Develop capacity of local gemstone processing industry

2.6.1 Encourage the private sector to invest in establishing gemstone processing centers

Private investment in processing industry

2.6.2Strengthen the link between ASM and local gemstone processing industry; improve the quality of lapidary training

Expansion in processing industry

2.6.3 Popularize the provision of commercial services in gemstone processing in GB

Commercial services in processing go up

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The following policy actions are recommended to achieve Goal - 3 and its objectives


Goal - 3 Promote GB as a major market for gemstones, both nationally and internationally


3.1Consolidate the local gemstone marketplace

3.1.1Established gemstone auction/ exchange houses in Gilgit and Skardu, where traders will buy and sell raw and processed gems

Fair trade in auction / exchange houses

3.1.2Encourage record of business transactions and exchange of price information in local markets to formalize the gemstone trade

Transparency in business transactions

3.1.3 Establish gemstone pricing mechanisms for open market trading of gemstones Fair trade

3.2Promote export of locally processed gemstones

3.2.1 Strengthen linkages between processing industry and export activities

Close ties between processing and export

3.2.2Incentivize export of local processed gemstone; provide infrastructure for global export of gemstones directly from GB

Increase in processed gems

3.2.3Strengthen the image of GB as the supplier of processed gemstones through marketing and promotion

Image building in the market

3.3

Promote marketing services and creation of local gemstone brands

3.3.1Encourage local traders to employ innovative marketing techniques in promotion of their gems related products

Better marketing strategies

3.3.2 Encourage provision of gemstone specific marketing services in private sector

Availability of marketing services

3.3.3Set incentives for creation of gemstone local brands; facilitate linkages between local and international businesses

Recognition of local brands

3.4

Promote the image of Gilgit Baltistan as a major market player in gemstone sector in Pakistan

3.4.1Hold annual gemstone exhibitions in GB and invite major players of gemstones trade in national and international markets

Recognition of GB as a major gemstone market

3.4.2Encourage participation of local traders in national and international exhibitions and sell image of GB as supplier of quality gems

Promotion of local gemstones globally

3.4.3 Develop local market as the major hub of gemstone trade in Pakistan

Increased trade flow through GB market

3.5

Integrate the local gemstone market with national and international gems and jewelry industry

3.5.1Encourage manufacturing of jewelry in local market; ensure supply of processed gems to local and national jewelry markets

Increased use of locally processed in jewelry making

3.5.2 Target international lucrative markets with branded gem related items from GB Higher revenues

3.5.3 Invite international brands to open processing industry and outlets in GB

Increase in quality based competition

3.6

Attract high value investors to invest in gemstone sector in GB

3.6.1 Attract investors in gemstone mining sector Improvements in gemstone mining

3.6.2 Attract investors and entrepreneurs to invest in processing industry

Increase in capacity of processing industry

3.6.3 Bring investors in manufacturing of industrial grade products from semi-precious stones

Expansion of processing industry

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9.5 ResourcesIn order to achieve the goals and objectives recommended for a policy/regulatory framework for gemstone sector in GB, all the stakeholders will have to make their bit of contribution in terms of human and monetary resources. The government has to play a fundamental role as a regulator, facilitator and promoter of gemstone sector in the region. The GB government for example will have to make special budgetary provisions to conduct a scientific and geological survey to estimate the true resource potential of gemstones in the region. It is expected that the government will help introduce modern technologies in prospecting of gemstone bearing areas on international established standards. The government will have to allocate resources to establish a modern gemstone grading and assessment center in the region. The government will also have to take heed with regards to formalization and regularization of ASM and social safety net for the miners at the grassroots.

The support organizations will assume the complementary role in social organization, training and skills development. The ASM cooperatives thus created in the longer run will be able to create a stream of services including the transfer of skills and knowledge, modernization of techniques and small scale technologies; and alternate avenues for short term financing. The private sector will have to step in the big way to strengthen the gemstone processing industry making sure wider availability of commercial services in gemstone processing.

The government has to facilitate strengthening of market infrastructure in the region. Establishing auction or exchange centers in Gilgit and Skardu will facilitate the market operation in gemstone sector. In order to ensure transparency, the all the stakeholders will have to work towards establishing pricing mechanisms in local and regional markets. The information on business transactions should be recorded and made available to the market participants. The private sector should contribute towards the expansion of services in marketing and promotion of local gemstone products. Annual exhibitions and promotion campaigns in GB will help improve the market image of gemstone local brands. Tremendous efforts should be focused on creating linkages with international gems and jewelry industry.

In a nutshell, all the stakeholders will have to shoulder the responsibility of making GB one of the major market players in gemstone industry nationally and globally. This is achievable in five to ten years if sincere, concerted and collective efforts are made in each area and overcome the stumbling blocks as an attempted has been made in this report to highlight these.

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Nations Seminar on “Guidelines for the Development of Small- and Medium-scale Mining”), 11-19 February 1993, Harare, Zimbabwe.

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11 Annexures

Annexure A Methodology and research toolsThis annexure presents the design methodology followed in achieving the objectives of the study. A number of stakeholders were surveyed to get their feedback and response and collect data relevant to the scope of the study. The research design, strategy and tools applied in field surveys are discussed in detail in the following sub-sections.

A.1 Data collection and analysisStaying within the scope of the project, all the relevant and available sources of evidence were thoroughly examined. This will included the detailed survey of qualitative and quantitative data acquired from the various sources including miners, traders, the private sector organizations and the government mining department. Every step was undertaken to ensure consistency, internal validity and external validity of the data generated for the purpose. All the applicable statistical tools were applied to analyze and present the information in the best possible meaningful and comprehensive way.

A.2 Data Collection instruments In order to achieve the first and second specific objectives of this study, primary data was collected from all the key stakeholders in the region. This includes the miners, traders, promoters and regulator who are active players in gemstone sector in GB. A flexible yet robust approach was followed. An open ended and multi-dimensional survey questionnaire was designed to be targeted one at each stakeholder. In this qualitative survey research respondents were approached personally by the researcher. The responses were then collated for further analyses of survey data.

A.3 Sampling StrategySampling of the available population of the miners and traders was done in order to ensure unbiased participation of respondents and for consistency and robustness of survey data. Stratified and random sampling techniques were used to identify the respondents. Due to time constraints and geographical spread of GB, the sample size for miners’ survey was 75. Whereas, the sample size for traders was set at 48. The researcher believes that gemstone mining is a specialized field and the selected sample sizes have generated credible data on which to infer the supply side sectorial dynamics in GB.

A.4 Interviews The two key stakeholders - promoters and regulator and heads of five trade associations were personally interviewed. The researcher personally met with key officials of AKRSP, RF, PGJDC, KADO, BCDF and BGMT for semi-structured interviews and recorded their responses. The key officials of GB governments’ mining department in secretariat and directorate were approached in person to get their perspective and feedback. The officials in government and private sector were also requested to share the research and literature in their possession to enrich this ongoing research exercise.

A.5 Identification of key stakeholdersAlong the value chain of gems and jewelry sector in GB, several stakeholder groups are involved in mining, processing and marketing activities at different stages. This study specifically focused on the stakeholder groups which are either directly involved in mining, processing and marketing of the

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gemstones or are greatly influence or influenced by these activities in gems and jewelry sector in GB. These include all the market players based in communities as well as those in public and private sectors. This exercise set the ground to decipher and assess gems and jewelry market dynamics in a broader context; which in turn provides context for policy framework and good practices in the sector. Following is the detail of key stakeholders identified along with the selected sampling strategy for each;

A.5.1 The Miners :- The miners are the key stakeholders at the lower end who feed the gemstone sector with the raw material on which to build the rest of the value chain. Miners active in the different mining sites of Hunza, Nagar, Shengush and Shigar valley were selected for survey response through random and stratified sampling accounting for the age, experience and their personal circumstances. All the gemstone mining practices across the GB are based on hit and try rule that use traditional and basic equipment.

In Hunza, mining is done on three different sites, of which one is located in mountain ranges in Aliabad well known as Bajuring from where ruby and spinal are extracted. The second mining site in Hunza is located in Hassanabad Nala called Datumbaresho known for extraction of ruby; and red, black and brown spinal. The third site in Hunza is located at Khyber in Gojal valley well known for the mining of quartz. Mining on these sites is done round the year (except Hassanabad Nallah) yet fewer people are engaged in mining in Hunza and thus a total of 10 miners were sampled as respondents.

Nagar valley has one major gem bearing site located in the mountain ranges over Sumair. This mining site named Chumar Bakor is well known for mining of a variety of semi-precious gemstones including aquamarine, fluorite, tourmaline, topaz and quartz. Due to cold and harsh weather the mining activities last only for four months during the summers. The Sumair Nagar has a household strength of 500 and almost 700 men of working age engage in mining during the season. This makes Chumar Bakor one of the heavily mined sites in GB. This mine is active for the last twenty five years. A total of 15 miners were included in the survey. In addition to recording the response of individual miners, the researcher conducted a communal interview from the people engaged in mining.

The Shangush valley is located at the fringes of Gilgit and Baltistan. This area bears the oldest mining sites of GB scattered across the valley and Baluchi is one of the major mine in the area. Mining is conducted round the year, which is the major source of livelihood for the people of the area. Semi-precious stones such as aquamarine, tourmaline, topaz and fluorite are mined using the traditional mining methods. At least 5 miners were contacted to record their response from the area.

Almost eighty percent of gemstones of GB are supplied from the mines located in several villages of Shigar valley in Baltistan. Keeping eye on the timelines of this project, three villages from Shigar valley were selected for miners’ survey including the Hyderabad, Dassu and the village of Nit. In all three villages, mining is the primary and only source of income. Mining in these localities is conducted round the year and almost all the men of working age engage in the activity. During the survey, it was revealed that youth of the area start mining from the early age. Due to lack of opportunities of alternate employment, the average age of miners in Shigar valley is 23, lowest of all the miners in GB. Accounting for all the social and personal circumstances of miners of the valley, a total of 10 miners from Hyderabad village, 20 from Dassu and 15 from Nit village were selected as respondents of the research survey. The miners form the largest body of human resource active in gemstone sector in GB, but so far there exists no miners association to protect their rights.

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A.5.2 The Traders :- The traders are involved in buying and selling of gemstones in the market chain. The gemstones are passed on to the market place through the transactions conducted by the traders who are dispersed across the region. Based on trading skills, transaction volumes and their capacity for outreach, the traders of gemstones in GB can be readily classified into three distinct categories.

The first category of these can be called the local traders or agents who buy the gemstones at the source from the miners. These traders have personal stakes and strong linkages with the miner folks. The miners act as sellers at this stage and strictly local traders as buyers. The transactions take place in an implicit and informal way. While these transactions are conducted based on mutual understanding and agreement; in many instances, the selling miners have less of the bargaining power and are bound to sell the spoils of their labor at the price and terms set by the local trading agents who sell gemstones to the bigger traders in local and national markets and thus earn their profit margins. This category also involves those who have set up their showrooms in local markets and sell the gemstones to the direct customers - mostly the visitors from outside the GB.

The second category of the traders constitutes those who trade in local and national markets. They purchase the gemstones from the local traders in the market and create a sizable stock to sell it on higher margins in bigger national markets. Eighty percent of these traders target the Namak Mandi in Peshawar which hosts the biggest gemstone trading center in Pakistan; a few have access to the gemstone market in Karachi. The third category involves those fewer traders who are the biggest players in gemstone sector in GB. They have access to local, national and international markets. A few of them have managed to establish their outlets in Orumchi, China and other lucrative international markets.

Traders belonging to six districts of GB falling in three categories were surveyed for the purpose of this study. The sample size for local and national traders across the region was 20 and 25 respectively, whereas only three global traders were contacted to get response. In many instances, the miners assume the role of local and national traders. This is particularly true for the miners’ active in Sumair, Nagar valley where the mining is seasonal – they engage as miners for the four months and involve in trading of gemstones during the rest of the year. Overall, at least 50% of the traders across the regions have started their career in gemstone sector initially as miners.

A.5.3 The Trade Associations :- There are four regional and one national trade associations operational in gemstone sector in GB. The traders belonging to each gems bearing area are associated with a respective regional trade association. By virtue of this, HGMA (Hunza Gems and Mining Association) is a representative body of traders in Hunza valley. Similarly, the NGMA (Nagar Gems and Mining Association) represents all the traders belonging to Nagar Valley. The BGMA (Baltistan Gems and Mining Association) and SGMS (Shigar Gems and Mining Association) represent the voice of the traders from Baltistan and Shigar Valley respectively. These regional trade associations operate independently which are however not registered or legal entities per se, rather they act as a conglomeration to protect the rights and business interests of the local and regional traders.

Established in 2009 after evolving from it precursor NAGMA (Northern Areas Gems and Mining Association), the PGMA (Pakistan Gems and Mining Association) is the sole representative body of all the traders belonging to GB. It is registered with federal ministry of industries, the SECP (Security and Exchange Commission of Pakistan) and the PFCC (Pakistan Federal Chamber of Commerce). Its current trader membership stands in excess of 500. As the membership of traders in regional associations

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currently is not automatically transferable to the PGMA, some traders maintain a dual membership of regional association and PGMA. All the trade associations claim that they are representative of the grassroots miners; the evidence however shows that more than 80% of the miners have no affiliation with any traders or miners association. Key officiating members of all the trade associations were contacted and personally interviewed to record their feedback and point of view during the survey exercise. These will be highlighted in the proceeding chapters of this report.

A.5.4 The Promoters :- The promoters lend support to the other stakeholders in mining, processing and marketing of the gemstones. They play a pivotal role in enhancing the efficacy of the gemstone sector by promoting good practices at various stages of value chain. These organizations provide services to the miners and traders in the region. There are six promoters of gemstone sector in GB which can be classified three each into two categories – those who operate at GB level and those who operate on regional level.

At GB level, the AKRSP is the leading and pioneering promoter that has fostered an enabling environment in gemstone sector. On one hand it has been preparing the much needed human resource in modern and efficient ways of mining and gems processing; on the other, it has been paving way for other promoters to initiate to make effective and useful interventions in the gemstone sector in GB. The Rupani Foundation (RF) is another NGO promoter that initially collaborated with AKRSP to set its priorities to specialize in processing of gemstones. Currently RF is independently running several gems processing training centers across various regions of GB. RF has so far been successful in preparing a critical mass of processing experts and master trainers who will contribute positively in processing of gemstones in the region. Another key promoter at GB level is Pakistan Gems and Jewelry Development Company (PGJDC) that is directly linked with the Federal ministry of Industries. It houses the only state-of-the-art gems laboratory in GB that is equipped with latest equipment for gradation, evaluation and processing of gemstones. It runs a training center that trains the human resource in gemstone processing and jewelry making. PGJDC has tremendous potential to emerge as a major center of excellence in gemstone lapidary in the region.

At the regional level in Hunza, Karakorum Areas Development Organization (KADO) is running a gemstone concern along with its chain of other services. It is a valley based NGO inspired by the AKRSP model of social organization. It has been providing services in gemstone processing to the regional mining industry and has the potential to diversify the sector with its innovative approach. In Baltistan, two regional promoters are rendering the services for the promotion of gemstone sector. The Baltistan Culture and Development Foundation (BCDF) is a regional NGO that has mandate to catalyze the development process through the promotion of cultural elements of Baltistan. It runs a gemstone cutting and polishing center that serves the local gems market. The BCDF has potential to diversify its portfolio by creating a mix of gemstone products along with locally weaved fabrics. The Baltistan Gems and Minerals Trading (BGMT) is a private organization started by a local entrepreneur which is probably the first initiative of its kind in GB that purchases the raw gemstones from market to process them for value addition and sell them to the local jewelers. Key personnel in all the stakeholders were contacted in person for the interview to recording their feedback, which will be elaborated in the proceeding chapters.

A.5.5 The Regulator :- The GB government minerals department is the sole regulator of gemstone sector in the region. It is responsible for implementing the regional mining policy in GB. It is also responsible for giving recommendations for further legislation for the enhancement of the sector. It

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regulates the operators and investors and issues licenses to the people who might shoulder the responsibility of expanding the gemstone sector in the region. The regulator has a fundamental role to play in stimulating the efficiency, marketability and employability of the gemstone sector in the region. In addition to regulatory responsibilities, the minerals department is operating gems mining and cutting training centers one each in Gilgit and Baltistan.

Key officials in secretariat and directorate of GB government mining department were contacted for a personal interview and feedback. The conclusion of their discussions with the researcher will be presented in the following chapters of this report.

Table A.1 Summary of qualitative research survey of key stakeholders

Stakeholder Mining Area Region Sample Size

Miners

Hunza (Aliabad - Bajuring, Datumbaresho, Khyber) Hunza valley 10Nagar (Sumair - Chumar Bakor) Nagar valley 15Shengush (Bulachi) Shengush valley 05Hyderabad village Shigar valley 10Dassu Village Shigar valley 20Nit village Shigar valley 15

Total miners surveyed 75Stakeholder Category Sample Size

TradersLocal traders/Agents 20Traders/Agents having access to local and national markets 25Traders having access to local, national and international markets 3

Total traders surveyed 48Trade Associations

Regional trade associations HGMA, NGMA, BGMA, SGMA 4National/GB level associations PGMA 1

Total trade associations surveyed 5

PromotersGB level promoters AKRSP, PGJDC, RF 3Regional promoters KADO, BCDF, BGMT 3

Total promoters surveyed 6Regulator Key officials of GB Government Minerals Department, Member GBLA

A.6 Literature ReviewIn order to meet the second and third specific objectives of this study, a detailed review of literature on gems and jewelry sector in GB and Pakistan was undertaken. This included the review of existing policy documents, the constitutional and regulatory frameworks, evaluation reports and briefings as well as academic and grey literature on mining, cutting and marketing practices in gems and jewelry sector in GB and in Pakistan. Wherever relevant, national and international experiences in similar circumstances were reviewed for lessons to be learnt and to identify best practices in gemstone sector. This exercise particularly focuses on the policy models represented by several African countries and many neighboring countries including Thailand and Sri Lanka. The examples of good practices in gemstone sector from other countries were also reviewed to enrich the findings of this study.

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Annexure B Cost analysis of Artisanal and Small-Scale Mining (ASM) in GB

Table B.1 Cost analysis of ASM (Based on typical consumption patterns and current prices in PRK)

a.

Capital Costs

Drill Machine 150,000

Other tools and traditional equipment 20,000

b.

Unit costs

Drill machine fuel price per litres 110

Cost per blast (Inc. explosives and fuses) 200

Cost of food per day per miner 100

Portage and other costs per miner 100

c.

Quantities required

Fuel required per day (litres) 5 litres

Total blasts per day 15

Average number of miners in a single group 7

d.

Total costs per day

Cost of drilling machine fuel 550

Cost of blasting and explosives 3,000

Total per day cost of food for a miners’ group 700

Other per day expenses of one miners’ group 700

e.Total cost per mining day of a miners’ group 4950

Total cost per mining day of an individual miner 710

Source: Qualitative research survey of miners conducted for this study

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akrsp gemstone sector study final draft of 18 june 2014

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