Botswana claims its share

Caught in the vortex of this power play between the government and De Beers, are the diamantaires, the Sightholders of De Beers. In 2007, when De Beers invited its Sightholders to set up cutting and polishing factories in Botswana, it seemed like the pot of gold at the end of the rainbow. Five years and a bout of recession later, the pot of gold is as elusive and certain Sightholder companies have closed down or are planning to wind up.

All is not as hunky dory as it seems in Botswana and this is a story of the power play, politics and pressure tactics. A report on Botswana and its diamond industry by Aasha Gulrajani Swarup

Botswana has a dream, an ambitious vision. As the largest producer of diamonds, it also wants to be the only country in the world, home to all levels of the diamond pipeline – from exploration, mining, sorting, cutting and polishing to value addition through jewellery manufacturing.

Four Key Players :

There are four key players in Botswana, who can make this dream come true.

1. The Botswana government to frame policy, develop infrastructure and support the players.

2. De Beers, in a marriage of convenience with the Botswana government, has fallen in with the beneficiation plans of the government, after dragging its feet in initial resistance. Both the parties have a 50:50 partnership now in Debswana, which currently carries out diamond exploration, production and sorting activities in its four mines in Botswana.

Succintly explains Pranava Bhargava, Group General Manager, Shrenuj & Company Limited, “Botswana is the highest contributor to the De Beers kitty of diamonds with the highest share of larger roughs. The Botswana government realised its strength and pressed for better negotiations. De Beers could not afford to lose this market.”

3. The third player is the De Beers Sightholder, who has been brought in by De Beers to set up the cutting and polishing base and jewellery factories in Gaborone in line with the government demand.

4. And then Botswana – collectively the local people who will be actually trained to cut, polish and make jewellery. This may, well, be the weakest link now.

Diamonds A Priority: The Botswana government, realising the potential of development through its own mineral resources, has made the diamond industry a priority sector and pushed for beneficiation, or cutting and polishing of diamonds locally, thereby providing employment to its sparse population.

In 2007, President Festus Mogae, an economist from Oxford, UK, stated that Botswana wanted to be "no less" a centre for manufacturing than the big three - comparable to Antwerp, Ramat Gan and Mumbai. He knew the real wealth in diamonds lay not in the mining or the sale of rough, but in the beneficiation or cutting and polishing of diamonds.

De Beers Resist & Relent:
Although, De Beers initially resisted this, it fell in with the demands of Botswana. It probably realised that as the mineral wealth actually belonged to Botswana, other miners could also produce diamonds for Botswana alternately. But most importantly, it wanted to protect its bottom lines. Each year 30 million carats, or 6,000 kilograms of diamonds are exported from Botswana, representing a quarter of the world’s total annual diamond production.

“Botswana diamonds also provided two thirds of De Beers profit and until recently De Beers had actively blocked any attempts of beneficiation,” states the 2009 Southern African Development Committee (SADC) research report on Corporate Social Responsibility in the Diamond Mining Industry in Botswana, by the Benchmarks Foundation, South Africa.

In October 1997, then Botswana minister of Mineral, Energy and Water Affairs, David Magang had publicly attacked De Beers for failing to beneficiate diamonds in Botswana.

Government Twists Arm:
“In 2004, Botswana and De Beers experienced a spousal spat, with the Botswana government threatening not to renew De Beers mining licenses unless it beneficiated some diamonds locally,” states the SADC report. By 2005, De Beers and Anglo-American offered Botswana limited concessions and agreed to shift London-based Diamond Trading Company (DTC) operations to Botswana, creating some cutting and polishing capacity there. Today, however, De Beers is singing a different tune.

De Beers Falls In Line:
Informs Lynette Gould, Head of Media Relations, De Beers Group, “We support the government’s aims to create a sustainable downstream diamond industry in Botswana. In 2006, we formalised our approach and announced the establishment of DTC Botswana, the largest and most sophisticated sorting and valuing facility in the world. Also, DTC Botswana offers a proportion of rough diamonds for sale to local Sightholders with dedicated manufacturing operations in the country.”

De Beers Placates Government:
Around this time, to stay on the right side of the Botswana government, De Beers encouraged its Sightholders to set up cutting and polishing factories in Gaborone. It also announced its intention to make Botswana the hub of its diamond trade.

Many Sightholders lured by positive possibilities, invested millions of dollars in setting up capital intensive factories, purchase of state-of-the-art equipment and training a work force. But five years later, there are only 21 factories in Gaborone, limited employment, and the vision of Antwerp or Mumbai like operations, remains a distant dream.

Sightholders Distressed:
Discloses a disgruntled DTC Sightholders (on condition of anonymity), “DTC invited its clients to invest in Botswana, ensuring us a guaranteed supply of roughs for starting a polishing factory, which seemed like an attractive decision, as we suffered a shortage of roughs. We were told that there were 550 million dollars worth of goods to be given to 15 sightholders, who would set up factories in Botswana. We expected thus De Beers would provide each an average of 50 million dollars worth of roughs,” he adds, but it did not materialise.

Fishing in troubled waters:
“Setting up a factory was difficult but feasible as the local people were eager to learn. But Botswana is not organised, it has no equipment. We made capital investments in improved machinery. Four years later, supply of roughs is still an issue. There are no larger goods, labour charges are high, there is no efficiency and thus productivity is impacted. We have five expats, working mostly as supervisors and managers and we are finishing the goods ourselves. It’s not a profitable investment. It is a tight system, re-exports are difficult and we are unhappy. The DTC is tight fisted with supply, hiding behind rules and regulations. The kind of goods we get depends on historical, because we had taken smaller goods in the past, we cannot be given larger ones now. We are caught in the web of the system.”

Today, this company is reconsidering its decision and may probably withdraw from Botswana as other low-cost centres like India and China are more efficient.

Other Sightholders are also similarly placed but De Beers is not yielding. States Gould, “All DTC Slightholders are offered the rough diamonds at the same price. However, the application of sightholders with operations in Botswana, for supply and on-going performance throughout a contract period is assessed against criteria, which include a series of ‘beneficiation criteria’.

Happy Exception:
On the other hand, Shrenuj & Company Limited, an Indian company in Botswana started to make profits from the first year itself.
Informs Pranava Bhargava, Group General Manager, Shrenuj & Company Limited, “It made commercial sense to go to Botswana. In 2009, we acquired DDA, a distressed, Israeli company, which had cutting and polishing facilities in Botswana, but had bottomed out due to the ongoing recession. We took over the assets and upgraded facilities. We retained the trained work force. We had secured rough supply from DTC. We were profitable right from year one. Our secret was replicating our Indian operations in Botswana. We brought our best people from India to train the locals. We changed them to what we use in India. Profitability is a function of managing resources. Expats cost more on travel, housing, families and so on so we had to use the retrained local people as the workforce.”

Profitability Illusion:
Eurostar Botswana too set up a cutting and polishing factory in Gaborone at an investment of over US $8 million. “It was a wise move as DTC, London was to relocate to Botswana, and we needed to be closer to the rough diamonds source,” says Norbert Padt, marketing manager, Eurostar Diamonds.

However, profitability is still elusive. “It is going to be a long term vision, say, eight more years, to see a serious breakthrough to profits,” Padt says. There are 21 factories in Gaborone of which three are Indian and the majority of the rest are Israeli companies. Blue Star, an Indian company was offered a license in Botswana, while the other Indian company, Suashish recently decided to close down its diamond jewellery manufacturing plant, citing unattainable raw material costs.

“Today, only three to four factories are not suffering huge losses,” informs Bhargava, adding that Shrenuj is planning to set up a retail jewellery outlet in Botswana. It seems that Sightholders in Botswana, adequately supported by De Beers managed comfortably while others struggled.

Pressure On De Beers:
Sullen Sightholders mounted pressure on De Beers, which sought to maintain a balance in its tight equations with the government of Botswana. The Slightholders and Anglo American, who hold 40 per cent of equity in De Beers and not in favour of beneficiation, recently bought out the Oppenheimer family’s stake in De Beers and currently hold 85 per cent of De Beers.

“I would imagine De Beers was in trouble. Over the last couple of years, Botswana government found that being the sole provider of goods, it was stronger and it has got a better deal. It had the confidence to negotiate,” says the DTC Sightholders.

The pressure of high urban unemployment, unofficially bordering around 40 per cent, also compelled the government to remain firm on beneficiation. Indicative of the mistrust, creeping into its equation with De Beers, it also wanted to test the prices at which De Beers sold the diamonds.

De Beers Relent for Open Sale:
Negotiations between De Beers and the government were prolonged until De Beers conceded and the new agreement was finally signed in September last year. Under the new deal, De Beers committed on two issues—to transfer DTC’s sights and sales operations from London to Botswana and also to provide the Botswana government the option of buying 10 per cent of its aggregated diamond roughs for independent sales, which would increase to 15 per cent over the 10 year pact period.

Gould says, “De Beers has begun the process of relocating our Sights and sales operations - including professionals, skills, equipment and technology - from London to Gaborone, expected to be completed by the end of 2013.”

Price Discovery Mechanism:
“The independent sale by the government is a price discovery mechanism also meant to provide a consistent rough supply for goods produced locally. It is expected to be about US $350 million worth of goods, to encourage local industry,” explained Bhargava.

Okavango Trading For Price Discovery:
To sell diamonds outside DTC in the open market, the Botswana government set up the Okavango Trading Company, a state-owned private trading company, which is expected to start operations in about four months and is expected to favour local companies, who are without a base in Botswana.”

Blow to De Beers:

Historically, it is a blow to De Beers. Ernest Oppenheimer, the man who would rather dump all the diamonds into the sea, than allow others to dump diamonds into the market, and thereby spoil the ‘market, would be shocked at his grandson giving 10 to 15 per cent of diamonds to a newly set up enterprise with no experience of sales. This indicates the pressure on De Beers, which was not missed by its Slightholders, who are quietly awaiting signals of the new direction under Anglo American. There appear to be some changes on the anvil.

The Norms Change:
At the June Sight in London, the prices of roughs being too high, for the first time in its history, Sightholders were ‘allowed’ to defer delivery whereby half the value of the goods could be left on the table.

Additionally, De Beers could also be seeking to admit new Sightholders. “According to a recently introduced updated distribution process, diamantaires, who demonstrate demand for consistent scale supply of particular categories of rough diamonds through the Diamdel auctions and who meet pre-determined thresholds, will be invited to submit a Contract Proposal Questionnaire (CPQ) to the DTC for assessment. This will be to allocate any additional supply, the DTC may have available in the next intention to offer (ITO) period,” states Gould.

Following its contractual victory from De Beers, even the Botswana government would have to gear up for changes, The Okavango marketing channel would allow it to sell the rough and bring in beneficiation and foreign exchange into the country, besides skills and employment to its people, the Batswana, who could still be the weakest link in the ambitious vision for Botswana.

Training Batswana:

Currently, 80 per cent of the Batswan earn their livelihood through agriculture, a sector that contributes only about three per cent to the GDP, and supplies only 50 per cent of the food needs, mainly due to prolonged periods of drought and inadequate rainfall. Mining provides employment to less than five per cent of the labour force. Other serious problems that threaten the economy are high urban unemployment, and the incidence of AIDS with 25 to 30 per cent of adults being HIV- positive, the second highest in the world.

As a person, the average local also rather favours his beef and beer, music and dance and an open life under the sun. Training an alien manpower the intricacies of the fine diamond trade has been limited for many of the factories already present in Gaborone.

Bhargava points out, “The availability of a trained workforce is limited. In Surat, if I need 7,000 workers, I can get them, In Botswana, I shall be able to get about seven to eight workers only who are adequately trained. Or even those who are conversant with accounting norms, shipping procedures, insurance and other support services. The industry is still small.”

Productivity continues to be an issue in most of the factories and diamond cutting and polishing is still at its infant stage in Botswana. But Himanshu Mody of Diarough Diamonds states, "The local population is adapting to specialised training and we are positive about the future of Botswana diamonds.”

Infrastructure Challenge:
Besides Batswana, infrastructure is another challenge. “With the Sights moving to Botswana, you’ll see 75 Sightholders companies flying in and out of Gaborone ten times a year with their requirements for accommodation, transport, restaurants, office and conference facilities. There will be significant opportunities for local businesses,” says Gould.

The government will have to introduce direct flights into Gaborone, build better roads and hotels for housing the visitors, develop IT and technology, real estate, construction, tourism, insurance, retail, courier and other support services. The government is also developing the infrastructure for diamond trading offices with sorting and viewing rooms, management offices, a laboratory, diamond equipment and internal security systems besides a diamond trading platform.

Opportunities Galore:

“Development of Botswana as a major diamond trading centre would also be a catalyst to other businesses, and help to make Botswana a world-leading diamond hub, paving the way for increased investment and skills while also providing further opportunities for economic diversification,” adds Gould.

The government is supportive and has already provided a central single window diamond hub for clearances to encourage factories and bring in value addition.

“If we need any permission from City Council or any other local government or civic authority, the Diamond Hub facilitates the communication,” says a Sightholder.

A Peaceful Secure Country:
On the up side, Botswana is a peaceful country. The law and order situation is good, the economy and the currency—Pula—is stable and there is good security. Indian banks including Bank of India, Bank of Baroda and State Bank of India, are present in Gaborone to facilitate financing. Indian food, even Jain and South Indian eatable, besides Gujarati tiffin, are available. There are two large temples and an Iskon temple is coming up. Property prices are reasonable. Being a British protectorate, English is a spoken language. So there are no communication barriers. But the government needs to bring in urgency and swing into fast forward as its diamond resources are not going to last forever.

Limited Life of Diamond Resources:

According to economic consultant Keith Jefferis, “Botswana has just 10 good years” left in which to maximise revenues from its diamond mining sector and diversify its economy into other sectors.” He predicts that the country’s diamond producing sector will be “exhausted” by 2030.

De Beers Optimistic:
But De Beers continues to believe in the future of diamonds in Botswana. “We believe it is sustainable. We also believe in the residual potential of the country which is why De Beers has a number of early stage exploration activities across Botswana to provide future growth opportunities,” says Gould. De Beers also believes that with strategic management of diamond resources, diamonds are a sustainable business where demand shall always exceed the supply. “With no new major sources of supply anticipated on the horizon, we expect demand to continue to exceed supply. The desire for diamonds is as strong as ever - people still get married and celebrate important events with diamonds. There is extraordinary growth in consumer demand for diamond jewellery in China and India, also demand in the Gulf is projected to surpass the US market share by 2015. The demand for diamonds as an investment is also increasing in Russian, Middle Eastern and Asian markets,” states Gould.

Oppenheimers Exit:
While strategic management of diamond resources is the key, the Oppenheimers are out of De Beers, leaving the Sightholders a little shaky about the future direction of diamonds in Botswana, and the world.

BOTSWANA Mascot of DIAMOND DESTINY!
Diamonds are the best thing that happened to De Beers and Botswana. For De Beers, it made its first discovery of diamonds in Botswana, which proved a major find indeed. For Botswana, diamonds brought in quick riches which transformed the country from being one of the poorest nations in the world to the fastest growing economy, with a GDP of nearly 10 per cent in 1999. Nearly 80 per cent of the country’s export earnings come from diamonds.

Within 20 years of Botswana’s independence from Britain in 1966, Debswana, an equal partnership between De Beers and the Botswana government, established four diamond mines – Orapa (1971), Letlhakane (1975), Jwaneng (1982) and Damtshaa (2002). Debswana is the world's leading diamond producer by value. It is also the largest non-government employer and the largest earner of foreign exchange in Botswana. These foreign exchange reserves brought in by diamonds were prudently ploughed into improving the country's economic infrastructure, education, health and per capita income. Thus, Debswana's mining operations have been significantly responsible in the transformation of Botswana from an agricultural economy in the 1960s to a country with the highest economic growth rate in the world.

Recession Advocates Other Alternatives:
However, the recession in world markets also impacted Botswana. Mining activity was suspended. Economic growth slowed down in 2009, and turned negative, sending out strong signals that the government needs to develop cattle raising, dairy and the leather industry in addition to diamonds.

Today diamond mining accounts for more than 30 per cent or one third of the country's current GDP and contributes about 50 per cent to the government's revenues. The Jwaneng diamond mine, is the single richest diamond mine in the world and Botswana is the world's largest producer of gem quality diamonds.