Mixed Signals from Botswana
August 10, 06Within two years there will be some 15 diamond factories in Botswana, employing some 3,000-5,000 workers – if not more. The government’s policy of “beneficiation of the diamond resource” aims at going downstream: processing as much as possible of the raw materials domestically, moving from sorting to manufacturing and jewelry production. De Beers and the government have identified and are encouraging many of the world’s best Sightholders to come down to Botswana.
We know precisely what the Sightholders expect: guaranteed access to rough diamonds at reasonable prices. However, do we really know what the government and the “people of Botswana” expect to get out of this beneficiation policy? Are their objectives attainable? Have all parties involved actually ever explored that question?
They have now – or at least have made a start. This week, a four-day policy conference was held at the Tati River Lodge in Francistown, Botswana, under the ambitious and telling title: “From Wealth Distribution to Wealth Creation: Implementing Botswana’s New Economic Drive.” This wasn’t just “another” conference. Held every two years, the National Business Conference brings together key government officials (president, ministers, etc.) and the private sector to discuss pertinent issues affecting the development of Botswana, a forum for constructive dialogue between the government and the private sector. “This is to Botswana what the Davos Economic Forum is to the world,” a participant explained. .
Needless to say that diamond beneficiation policies dominated the discussions. In a way, the government was quite “defensive” when the question was raised why it had taken 20 years or so before the government adapted a meaningful beneficiation policy. According to Jacob Thamage, Director of Mineral Affairs at the Ministry of Minerals, Energy and Water resources, “the challenge of developing a new cutting center in Botswana has always been how to supply rough to a local cutting center without compromising the largest source of public revenue.” In plain English it meant that the government got more money through exporting rough than by diverting diamonds to the domestic manufacturers.
To optimize its revenue, the government was a strong supporter of the supply driven (i.e. cartel) strategies, which have now become “increasingly challenged by competition authorities,” said Thamage. The government spokesman presented Harvard’s Michael Porter’s competitiveness model, stressing that channeling goods through De Beers made it a “strong supplier” selling to “weak buyers” (weak in the sense that they didn’t have much bargaining power). In his model of the present situation, the rough buyers remain “weak” – something we all know – but it is useful to hear it from a producer country.
Thamage was very critical about “the experience of interventions by other producer countries- subsidies, direct fiscal intervention (some form of tax on rough diamonds).” He failed to admit that this is exactly what the Botswana government is going to do now: provide preferential treatment to domestic manufacturers. In its new agreement with De Beers, the latter is obliged to guarantee supplies to domestic players – and if they fail to do so, there is even a “penalty” clause in the marketing accord. The domestic cutters will not get access to cheaper rough – they will, however, be guaranteed a supply based on business plans that don’t contain downstream marketing obligations or other Supplier of Choice criteria.
The Botswana government may not realize that, de facto, this will make it rather impossible to continue SoC. The arrangement approved by the European Commission Competition Authorities guarantee equal competition among Sightholders. On a level playing field, every Sight applicant should be scored on the same criteria. The 15 (or 16, there was a major Belgian sightholder who is not yet on the license recipient list assessing his options in Gaborone last week) potential manufacturers will get preferential treatment over other Sightholders – voiding the SoC process from real meaning. True, there is a political contingency clause in the contract with the Sightholders allowing for political demands by producing countries, but the combined scope of such demands in
Diamond Rush in Botswana
While stressing the commitment to free economic markets and reiterating the propensity of diamonds to go where it is more economic to polish the goods, no clear explanations were forthcoming by government as to “why” there is now a “diamond manufacturing rush” in Botswana.
What particularly concerned me was the obvious desire by the conference participants for the adoption of beneficiation policies leading to domestic “wealth creation.” To quote President Festus Mogae: “[the conference themes] signify that our private sector wants to focus its energies in the generation of wealth rather than re-distribution of existing wealth, mainly through Government.” That represents quite a noble and correct statement, but the president ought to have stated that it was the government that, traditionally, gave the preference to the redistribution of the wealth, as it was the government that virtually held (or still holds) a near monopoly on that wealth. But that’s a different story.
From a diamond manufacturing perspective, we were always given to understand that the government is mainly interested in job creation and in transferring valuable skills to Batswana (Botswana citizens); thereby tackling the colossal (and growing) unemployment problem in this nation. The diamond industry will undoubtedly greatly contribute to achieving that objective.
But from the conference one can now conclude that the expectations are far higher. Beneficiation is expected to create a new class of business entrepreneurs who will create wealth for the nation. We don’t expect that to happen – and if it does, mainly on the peripheries. All the diamond factories, almost without exception, will be owned by foreigners. Most factories may actually lose money in their first two-three years of operations in the expectation to become profitable by 2010.
Today, the existing operating factories only bring the “labor costs” to the country; these Botswana factories don’t buy the goods in their own right, and the profits of selling the output is not invested in Botswana. The new manufacturers, who may purchase the rough from DTC Botswana, are unlikely to show significant, or any, profits in the domestic entities. This is because the goods will be transferred to the owners’ overseas operations in a non-arm’s-length fashion.
There will, however, be plenty of wealth-creating opportunities for Batswana entrepreneurs around the diamond sector, ranging from hotels, real estate, construction, tourism, insurance, accounting, retail, courier, scouring servicing, and a host of other exciting and promising areas for investments and wealth creation. But not in manufacturing as such.
Manufacturing Wealth in Hands of Foreigners
As it stands now, the (still highly theoretical) “wealth” that will be created by the factories will belong to the foreign investors who are now flocking to Botswana. Though this is self-evident, and maybe one shouldn’t give it a second thought, I cannot help but remember that there were years in South Africa in which (with one or two exceptions) all factories were foreign-owned. That has backfired – and now domestic participation in factory ownership is both the law of the land and part of De Beers’ allocation policy in South Africa.
Clearly, the situations are not comparable. Botswana never suffered the Apartheid trauma, and it is free from all the emotional and psychological baggage that characterizes its southern neighbor. If South African entrepreneurs own and operate diamond companies, why would the industry in Botswana remain (almost) solely in foreign hands? One might argue: Chaim, why raise that problem now? That’s years down the road. So much can happen – why “worry” about it now? But there are a number of reasons to worry now. We have seen, in the De Beers SoC policy, certain implied or even specific promises. Companies were encouraged to go downstream, to invest in branding, to develop niche markets, to promote, and invest – and by and large, many of these companies didn’t even get the goods needed to support these programs. Many of these investments were wasted; the promise wasn’t or couldn’t be kept.
Undoubtedly, the intentions were the best in the world – and we’ll see SoC evolve into something quite different by next contract. The aspirations of the African producer governments are, as was already pointed out, a contributing factor to the eventual dismantling of SoC as we know it today – especially, the far-going Botswana beneficiation policy, which presently transcends the 10 factories De Beers and the government initially agreed should be established.
It is only valid, therefore, to cautiously ask whether the new Botswana beneficiation policy runs the risks of unintended consequences. These lines are written while I am still in Botswana, and all concerned parties stress that Botswana is a country that is committed to encouraging foreign investments, that it has clear laws on the repatriation of capital and profits, and has a fair and advanced legal regime that will protect each and everyone.
Having said that, the conference addressed the issue on how beneficiation will lead to domestic wealth creation – both for the country as such as well as for the entrepreneurial sector. The DTC, the government, and the Sightholders coming here ought to reflect on these entrepreneurial aspirations, even if only to provide further assurances that there is no reason for concern. One of the manufacturing license holders, who already commenced hiring local staff and had rented factory space, has “cold feet” and has indefinitely postponed the opening of a factory. The excuse given to government was “current market conditions,” but this hardly sounds convincing. As this particular company had made enormous efforts to secure a manufacturing license to begin with, this early departure is puzzling. It is something on which the government ought to reflect.
Employment Remains Key Driver
The president proudly noted that Botswana’s “economy, in real terms, GDP grew by 8.3% in 2004/05 compared to 3.4% the previous year. The main contributor to this growth was the mining sector which grew by 18.2%. Formal employment grew by 2.8% in 2005 compared to 3.1% the previous year. It is, once again, clear that economic diversification is key to Botswana’s future success as well as sustainable employment generation and poverty reduction.”
In a daring and quite unusual move, a leading speaker respectfully challenged the importance of these figures. Unemployment (and the resultant poverty) is such a huge problem in Botswana that everything else pales to it. Chamber of Commerce president M.I. Ebrahim, at a key note speech at the conference, summed it up:
“To us in the private sector the simplest indicator of economic malaise is the growing numbers of jobless people. Because of the tight economic circumstances the private sector is undergoing restructuring, downsizing, rationalization and other nice sounding terms that in brutally honest terms means dismissing staff. For the first time in many years, there are vacant industrial, commercial and residential properties with no takers. (…) Not many businesses will readily admit it, but they are finding it increasingly difficult to meet their monthly commitments including salaries. (…) These warning bells are sufficient proof that there seems to be, let me be politically correct and call it an economic malfunction.”
Disagreeing with the validity of indicators that point to a modest economic growth, Ebrahim stressed, “Current mineral and commodity prices at near-record levels coupled with the devaluation of the Pula, have added to increased growth in Government revenues. This does not necessarily mean that the economy is growing it only shows that certain commodities are receiving better returns for the same volume of production. These good returns factor their way into the statistics that can sometimes distort and misrepresent the picture. Economic growth that does not create new jobs for citizens could be termed as incomplete growth; such growth should not give us comfort because it is a jobless growth.” This reflects what every visitor senses: things aren’t going so well.
Hostility Towards Foreign Investors?
It is clear that no economic growth can be achieved without foreign investors, i.e. the equity brought by foreign diamantaires. The government is being helpful to foreign investors – extremely helpful, I would even say.
What is interesting – and puzzling to an outsider – is that President Mogae found it necessary to warn the business community to be “more friendly” to foreign investors. (Keep in mind, he was addressing a domestic audience.) The president stressed that “Foreign Direct Investment (FDI) is key to an export led development strategy which is critical for countries with a small domestic market such as our own. FDI opens up business opportunities, access to technology and markets and is the main vehicle through which our economy can benefit from globalization.
“The Brand Botswana initiative that is currently underway is aimed at marketing Botswana as a unique destination for investors, tourists and visitors.” President Mogae then said: “I am seriously perturbed by the ongoing perception that some members of our society are unwelcoming and even overtly hostile to foreign investors and, worse still, that we are xenophobic.”
The president continued with, “Government and myself personally expend a lot of energy and resources in attracting foreign investors to Botswana for which there should be adequate return. It is unfair to portray the impression that foreign investors are displacing local investors. The two can work together harmoniously for mutual gain and ‘win-win’ outcomes. We should all be aware that in today’s globally competitive environment, foreign investors have many options to take their investment to. It is said that ‘Money goes where it is wanted and stays where it is well treated’,” concluded President Festus Mogae.
Does Government Expect that Manufacturers will Make Money?
The president referred to one specific foreign investor who had created much wealth for the nation and that was De Beers. He didn’t refer to secondary industry.
I was wondering whether any government representative would provide a solid reason to a domestic audience as to why a secondary diamond industry – the 15 or so factories coming to Botswana – might succeed. Quite disappointingly, such assurances or explanations were not forthcoming. To the contrary, the spokesman for the Ministry of Minerals, Energy and Water Resources repeated the often-made De Beers argument that “Diamonds have an extremely high value to weight ratio: therefore unlike other commodities can be economically transported, unprocessed, to any location where efficient low–cost processing is available.” This is hardly a “Welcome to
Then he “encouraged” foreign investors by stressing “that for most types of diamonds, low-cost manufacturing centers of Asia, India and China offer investors a comparative advantage. Given opportunity investors engage in some arbitrage to optimize returns by seeking low cost areas.”
Stressing the new De Beers strategy to focus on cost effectiveness, he concluded that “Botswana offered a cheaper alternative to London, hence many DTC functions to relocate to Gaborone.” Not a word on why it is now advantageous for foreign diamantaires to come to Botswana.
Though the president reiterated that his “government is committed to increasing the private sector role in the economy,” there was no explanation as how these free-market, liberal policies will bring about a polishing sector.
Allow me to say what was not said at the conference: Exercising its God-given right to dispose of the nation’s minerals in the best way it feels appropriate. The government has basically abandoned that “free market” approach and is “forcing” De Beers to allocate goods domestically. Going back to the Porter model of “strong supplier” versus “weak clients,” the government knows that access to rough will keep the diamond rush going. But the government knows full well that Botswana doesn’t hold a competitive advantage in most categories of manufacturing, if not all.
It doesn’t matter. This country deserves beneficiation and diversification of its economy; I think the government is doing the right thing for Botswana. It would be nicer – or more useful – for the government to clearly say so.
The government also knows that after a foreign investor has invested in a factory, state-of-the-art equipment, and trained a workforce – these factories are at the mercy of the supply and pricing decisions of the DTC Botswana.
It would be nice, really nice, if the government would publicly issue some assurances to these manufacturers. Sheila Khama, CEO of De Beers Botswana, has said in a local magazine, “the idea is to maintain a sustainable cutting industry in Botswana, and to provide rough diamonds to the country’s industries downstream. The focus isn’t on numbers, but rather on ensuring sustainability.”
Khama then says, in context of labor costs, “Theoretically, there are many options to employ. For example, an investor might opt to use more technology, to reduce the cost of high labor. On the other hand, an investor would have to look at the trade-off to be made – does he want to create jobs or revenue?” (I can tell Khama that there is no question – every investor wants to optimize revenue.) The CEO concludes, “That the authorities in Botswana will need to examine and determine an appropriate model for the country.”
We couldn’t agree more, and the earlier the better. There are too many mixed signals. Sightholders who are considering investing in Botswana ought to have a much clearer understanding of the government’s thinking and views.
Have a nice weekend.