RAPAPORT... With a population of just over two million people spread across a landmass comparable in area to that of Texas, Botswana historically was rural, tribal and agriculture-based. That is, until the discovery of diamonds in 1967 turned the country into a poster child for the benefits of a well-functioning African democracy and an economic success story.
Observers credit the effective relationship between government and the country’s private sector along with the investor-friendly attitude adopted by state officials for the progress in Botswana. Given the country’s heavy dependence on the diamond industry, nothing has been as important to its development as the government’s partnership with De Beers, a partnership that marks its 40-year anniversary in 2010.
While the government owns a 15 percent stake in De Beers and the two entities have equal shares in the Debswana mining company and the Diamond Trading Company Botswana (DTCB), it is estimated that, after accounting for royalties, taxes, duties and dividends, 80 cents of every dollar of revenue generated by De Beers goes to the government.
Undoubtedly, 2010 will see new milestones for that relationship as the economy claws its way out of the global recession and Botswana aggressively embarks on a program to diversify away from diamonds. Much of the second half of the year will be spent negotiating a new marketing contract for Debswana goods, as the current contract expires at the end of 2010. It is hoped this contract will pave the way to finally introduce diamond trading in Gaborone.
Overseeing many of these developments, Minister of Minerals, Energy and Water Resources (MMEWR) P.H.K. Kedikilwe is acutely aware of the fine balance required to trade off what is best for the country, for De Beers and for the diamond industry, and he is increasingly sensitive to the changes that lie ahead.
Rapaport Diamond Report: What is the secret to Botswana’s diamond success?
Minister P.H.K. Kedikilwe: You will appreciate that 80 percent of our export earnings, about 95 percent of our mineral revenue, 40 percent of our government revenue and about one-third of our gross domestic product (GDP) comes from diamonds. So we are extremely dependent on the industry.
In 1967, a year after independence, the government legislated that our diamonds would be used for development, and that has helped transform Botswana from one of the poorest countries in the world into a middle-income economy. Our revenues from minerals, and diamonds in particular, have been used for infrastructure, public services and all the other development you see here today — building schools, roads and health facilities and financing education and skills development.
RDR: That dependence on diamonds also makes the economy vulnerable. To what extent was the country affected by the world economic downturn?
PHKK: Although we were affected by the recession, the impact was cushioned by our approach to the downturn. Each mining company was treated as an entity unto itself and their individual capabilities and limitations were assessed in determining what they needed. Our help ranged from a postponement of royalties to an infusion of cash, not directly by government, but via financial institutions.
In order to conserve cash, some mines were temporarily closed and others were placed on care and maintenance schedules. We suspended projects that we would otherwise have undertaken, including some development projects. We halted all increases in civil-service salaries and ministerial budgets were cut in half.
In monetary terms, mineral revenues fell from Botswana Pula (BWP) currency of 12.4 billion ($1.8 billion) in 2008 to BWP 6.6 billion ($970 million) in 2009. Total revenues fell from BWP 27.4 billion ($4 billion) to BWP 24.6 billion ($3.6 billion).
But we made sure that those projects that would assist in social and infrastructure improvements continued, such as in water and electricity, and our education programs. We also continued to invest in our six “hub” programs, which consist of diamonds, innovation, health, agriculture, transport and education, all essential to helping the economy develop and diversify. There was a clear strategy not to be caught napping so that when the recovery came about, we would be in a position to take advantage of it.
RDR: Are you seeing the fruits of that strategy now that the global economy is showing signs of slight recovery?
PHKK: Yes. With the exception of one or two, the companies we assisted during the recession are all on their feet, and they otherwise would have fallen. The same applies to the cutting and polishing companies. Of course, there were retrenchments but, in terms of employment, the numbers are going up again.
RDR: What are your forecasts for 2010?
PHKK: There is evidence of some recovery but we are not anywhere near 2008. We are extremely cautious about the recovery and I think the banks, both international and local, are also, having burned their fingers before. At this point, it would be guesswork to predict what the rate of growth will be, but we are expecting growth in 2010. In the diamond industry, there are indications of growth in terms of volumes, but values vary. Larger stones are more bullish now. For us, that makes a big difference because the bigger rough is our favorite over the smaller ones. I guess that stands to reason in terms of its value.
RDR: What is the government hoping to achieve in its negotiations to renew the marketing contract with De Beers?
PHKK: We are a diamond-producing country and it is in our interest to ensure that the right atmosphere exists here for the industry. We are very sensitive, however, to the needs of the private sector and we don’t want to destroy the goose that lays the golden eggs.
We also want diamonds to be traded in Botswana because we want to develop an international center here and we need to take the necessary steps to promote that. Therefore, our relationship with De Beers and any other company that has interests in diamonds must be nurtured, but not at the expense of our goals, or of our people.
There are many spin-offs to trading here, which is why, among other things, we have expanded our airport and built a diamond security facility there to ensure that fraud is kept to a minimum, if not zero.
In March 2010, we chose to contribute to De Beers through a loan, along with the company’s other shareholders. We did so because not only did we want to protect our shareholding, but also to protect the industry. An alienated De Beers would not only not be good for Botswana as a country, but also not good for the global diamond industry.
RDR: Is Botswana looking to increase its share in De Beers if the opportunity arose?
PHKK: We would consider — and try to optimize — all our options regarding anything that affects diamonds and diamond production and that promotes Botswana’s interest.
RDR: It seems the negotiations will focus on introducing diamond trading outside the DTC framework. Is that a goal the government wants to achieve — to set aside a portion of Debswana diamonds for rough tenders in Gaborone?
PHKK: We want as many diamonds as possible to be traded here in Botswana, which is why, ultimately, the intention is to have the trading that currently takes place in London take place in Gaborone. For us, that is core to beneficiation.
We appreciate that there are other implications we will need to examine closely, such as tax issues, so that the environment is right for developing trade.
RDR: In practical terms, what do you envisage the diamond trading hub to look like?
PHKK: We want to ensure that a proper and suitable trading platform is developed and that is why we have appointed a consultancy to advise us on how we can achieve that.
The idea is that companies opening diamond mines here would agree to trade their diamonds in this country, in line with our diversification strategy. We would like to see all diamonds produced in Botswana, sold in Botswana. We want to be involved in all the various stages of the diamond pipeline, including jewelry manufacturing, retail, trading and cutting and polishing. Already, we have issued 16 licenses for cutting and polishing, so we are moving in the right direction.
Our goal is to diversify the economy away from diamonds. Of course, as long as we have diamonds, we will benefit from them. But we want to reduce our dependence on them because in the long term, it is not good for the county’s economy.
RDR: The diamond hub essentially diversifies the industry along the pipeline. What initiatives outside of diamonds will help to reduce that dependence?
PHKK: Our diversification program doesn’t just focus on diamonds; it also tackles tourism, along with other minerals. We have promising deposits of coal, uranium and copper, some not so small, and we are hoping something good will come out of those.
For diversification purposes, we have invested heavily in power, as well as other forms of energy, such as biogas, biofuels and a solar water-transfer scheme.
We are also working to attract investment in exploration of other minerals and we recently held a workshop on that subject. And we continue to invest in the six hub projects.
RDR: What is Botswana’s competitive advantage in developing the diamond hub?
PHKK: The resource is here and to an extent, we can control, through exploration, the quantities mined in this country. We are using the best technologies available to access that resource. In addition, our tax policy is highly competitive.
RDR: Are you requiring new companies coming on board through the AK6 and BK11 mines to make a certain amount available for polishing here?
PHKK: We want them to trade the goods here but also, to the extent possible, to supply goods to the local polishers.
RDR: Do you foresee government owning a stake in some of the cutting companies?
PHKK: The establishment of a Botswana diamond investment company — with all these options and permutations — is imminent.
RDR: What are the greatest challenges facing the Botswana diamond industry and the economy moving forward?
PHKK: We have the quantities and qualities of diamonds and have historically been the world’s largest producer by value. But, because we now have to mine deeper, our comparative advantage in terms of lower production cost will be affected. We are reviewing our mining operations in anticipation that we will have to mine deeper.
We also have to ensure that we have a slimmer organization so that the overhead costs do not erode the revenue that would otherwise come to the government. So we are privatizing some operations and outsourcing others.
In addition, we must ensure that the allure and sparkle of diamonds are sustained in the world market. The natural diamond still has sparkle for consumers and we need to continue to promote and market that appeal.
* Pictured: Minister of Minerals, Energy and Water Resources P.H.K. Kedikilwe
Article from the Rapaport Magazine - September 2010. To subscribe click here.