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We want more - A Divergence of Interests Between The Government of Botswana and De Beers

10th November 2023

     

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This article has been supplied as a media statement and is not written by Creamer Media. It may be available only for a limited time on this website.

By: Sheila Khama

Botswana leads in mining, sorting, and valuing of diamonds but has fared less successfully in cutting and polishing. In this extract from a third of four articles on www.sheilakhama.com/blogpage, I comment on the Government of Botswana’s approach to diamond value addition and the potential clash of interests with its partner De Beers. Botswana’s desire risks undoing De Beers strategy for selling rough diamonds from its own mines and those of its partners. Though modified over the years, the strategy has been the cornerstone of the company’s business model for more than 60 years and it remains central to its fortunes.

Mastering The Country’s Destiny: Because De Beers’ pursues a single channel marketing strategy, the Government’s desire to leverage production from its JV with De Beers and supply its own company and others conflicts with De Beers’ approach to rough diamonds marketing which has been in place since the start of the partnership. The divergence of interests raises the question of whether the company is justified in its desire for arrangements to remain unchanged. In other words, can a country’s right to self-determination as relates to sustainable development of its mineral resources be defined by a strategy for a private company? If not, what policies are necessary for Botswana to succeed in charting the country’s path while protecting the value in De Beers a company in which it is also a shareholder? To answer these question, it is worth reflecting on the history of the marketing arrangements and the country’s beneficiation initiative to date.

Through the Eye of the Investor: The ability to sell mineral production, recoup and repatriate profits are essential investment considerations for mining companies. The factors are also top of mind for equity holders and investors inventing in mining projects. Therefore, to secure project finance, companies must assure banks that these rights are secured because otherwise it is inconceivable financiers would lend. Therefore, from the beginning, the sales agreement was a vital piece in a range of agreements entered into with Botswana. In this respect there is nothing out of the ordinary about such an agreement being in place. Referring to the 1969 agreements, in 2009, Former President, Mogae, said, ‘In return the government accepted the single channel marketing that is to sell only through the De Beers Central Selling Organization now known as the Diamond Trading Company.’

The Elephant In The Room: The phrase ‘Single channel” is the language De Beers used at the time to articulate the company’s marketing philosophy. It imports several strategic implications which most simplistically, mean granting De Beers exclusive rights to sell Debswana’s production based on its methods for sorting, valuing, pricing, and sales contracts with clients. Therefore, acceptance of a single channel marketing system was Botswana’s endorsement of this comprehensive business model. This understanding goes to the core of De Beers’ long term commitment to invest in mine development and subsequent decisions to plough back its share of free cash flow from Debswana into future mine infrastructure. The right to recoup the investment aside, it is hard to argue that Botswana’s right to amend policy should rank second to the company strategy. Viewed from this angle, Former President Mogae’s words mask the reality that national development goals, economic needs and public expectations change with time and when they do, they impact public policy and agreements with investors. Hence, De Beers’ challenge is to embrace the changing reality of Botswana’s policies that manifested even before Mogae’s own tenure.

The matter is made more complex by the fact that, while De Beer’s goal is confined to profit, the Government straddles political interests and economic development needs. The Government must also ensure that pursuit of value addition and the country’s changing development aspirations are balanced with maintaining Botswana’s reputation as a favoured mining destination based on policy stability. Elsewhere, such policies, have been derailed by political rhetoric. A test of Botswana’s diamond value addition debate is how well policymakers avoid this temptation and adjusts the arrangements with its partner based on a clear and consistent policy direction rather than a desire to score political points. As such the question of whether or not De Beers’ strategies must prevail is a moot one. A more relevant one is how the Government will shape the emerging policy landscape while maintaining Botswana sparkling image.

Business Of Politics: The current environment suggests a leaning towards political rhetoric that could damage the country. According to a NYTimes report of June 29, 2023, Botswana’s Minister responsible for mining said; “Nobody’s ever ready for a divorce. But if you are told to get out of the house, you get out of the house. De Beers is not the only company in the world.”  Is Botswana Getting a Raw Deal From De Beers Diamonds? - The New York Times (nytimes.com). Tough talk by any stretch of imagination especially coming from a former De Beers and Debswana trainee. But also a misfire given the negotiations referenced were about production sharing and not the joint venture. In the circumstances, one can only assume political rhetoric at best and limited understanding of arrangements between Botswana and De Beers at worst. In some respects, it may be the overlay of complex arrangements that makes it difficult for public officials to explain policy to citizens leading to a simplistic if populist narrative instead. Either way, one cannot help but wonder how the tough talk landed in the ears of investors Botswana hopes to attract into cutting and polishing and for that we will have to wait.

Strong Development Case: There is an irony in political undertones because actually there is a legitimate economic and moral case to be made for adding value to Botswana diamonds that can and should resonate with every well-meaning investor. According to the UN Population Fund, about 33.5% of Botswana’s population is aged 10 -24 years and unemployment for the same age bracket stood at at 37.85% in 2022. This is the strongest case for expanding cutting and polishing because if successful, it increases employment and therefore needs no justification. Further, the authorities know all too well the challenge the country has faced in seeking to attract foreign direct investment in the sector and so far Botswana’s success was based on a value proposition and not threats.

A government study on the country’s competitiveness in the late 1990s concluded that the country was uncompetitive relative to Asia. The conclusion was based on lack of skills, comparatively high unit cost of labour and low levels of productivity. But Botswana is in the same boat as many others struggling to compete with Asia. However, political pressure continued and De Beers relented. So, in 2006, an agreement was reached for De Beers to set aside a portion of the company’s diamonds purchased from Debswana and other companies in its portfolio to be sold to cutting a polishing factories in Botswana. De Beers begun supply to the first 10 factories in the same year and there now 39 De Beers sightholders and 10 other factories in Botswana. The annual value of the 2008 supply by De Beers was US$550m, rising to US$950m by end of 2022 and increased to US$1b following the June 2023 deal with Botswana. The goal is to generate employment and by October 2023 an estimated 4300 jobs have been created though a few skilled workers came from India and other parts of the world. The investors are transferring skills and benefitted the country through billions of US$ in investment. This boosts the economy and warrants a pad on the back of Botswana’s leaders.

But how did Botswana overcome the challenge of uncompetitiveness? Firstly, Botswana leveraged its relationship with De Beers wherein the company agreed to invite its clients to set up operations in Botswana. Secondly the two capitalized on global rough supply gap to entice companies by offering them additional supply to that available through De Beers contracts. That is to say, rather than the government addressing the business climate, focus was on negotiation tactics but the problem of the business environment was not addressed and remains largely unchanged.

Missing Link: Negotiation tactics were undeniably successful. However, from a long-term policy perspective, a few loopholes emerge. The arrangement for De Beers to supply the factories did nothing to address the root cause of poor competitiveness. It means that rather than a policy, value addition is largely driven by relations with an investor. This does not meet the standard for a long-term policy design. A better alternative would have been a policy based on clearly understood trade-offs with risks and rewards. It would enable Botswana to improve the business environment and compete with other centers.

Of particular concern is lack of programs to address skills deficiency and pave the way for more jobs. The conditions makes cutting large stones using technology in order to compensate for high costs and low productivity a logical alternative. Ironically, this goes against Botswana’s goal of employment creation because, it is small stones that are cut in large quantities that explain the nearly 1million people employment in India. Given that the primary goal for value addition is employment creation, building this capacity should therefore be the thrust of Botswana’s response. Yet to this day, the country does not have a single training facility. In May 2023, speaking on the same issue, the opposition leader Ndaba Golatlhe rightly said, ‘we are not willing to invest in technical, industry specific skills.’ The politician was right. After all, the country invests hugely in other areas of education while for 50 years diamond cutting and polishing skills fell between the cracks. Botswana can and must do better.

Familiar Trends: Botswana resembles other natural resources rich emerging markets countries in Africa that do not invest enough to create an environment in which they can competitively add value and therefore maximize benefits. The countries operate under the falsely premise that abundance of raw materials alone is sufficient to attract investment mid and downstream. Yet because of this presumption, one after another the countries are unable to catch up much less outpace Asia. There is an important lesson too for extractives companies entering into long term relations with governments in developing nations. The first is that politics loom large. The second is that as development aspirations of host nations change so too must corporate partner business models. Rather than resist, a better response might be to be ahead of the curve by anticipating these needs and working hand in hand with governments. The question is how will Botswana and De Beers deploy this and otherlessons from the past 50 years.

Sheila Khama is a Policy Advisor, Podcast Host, NED of FTSE, NASDAQ and ASX companies and an Associate Fellow of Chatham House. She is former CEO of De Beers Botswana, a former NED in Debswana and DTC Botswana.

Visit www.sheilakhama.com/blogs for the full article.

Edited by Creamer Media Reporter

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