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Building Botswana

As the outlook for mining diminishes, Botswana’s economy is seeking other revenue streams from the diamond industry.

Sep 1, 2010 6:05 AM   By Avi Krawitz
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RAPAPORT... Parked outside the News Café in Gaborone, BMWs, SUVs and Peugeots line the street. Inside, the trendsetters of “Gabs,” as Botswana’s capital city is affectionately known, drink, dance and laugh while checking their latest smartphones, all in time with the music. Most of them are professionals, ranging from bankers to teachers, lawyers and nurses. Few, if any, work directly in diamonds. But while they may not be conscious of it, they have all benefited from the country’s most precious resource.

Local economist Keith Jefferis, managing director of econsult Botswana and former deputy governor of the Bank of Botswana (BoB), explains that there has been a deliberate policy to invest the government’s diamond revenues in public assets. As a result, everyone has benefited from the industry-funded education services, health care and infrastructure projects. “A large chunk of those funds came from diamonds,” Jefferis notes.

With a population of just over two million people sparsely spread across its large landlocked mass, the country relies heavily on the diamond industry. Government figures show that about 80 percent of export earnings and 40 percent of government revenues stream from diamonds, accounting for approximately one-third of Botswana’s gross domestic product (GDP). While this has elevated the country from abject poverty into a middle-income economy, it has also made it vulnerable.

Jefferis explains that the collapse of diamond sales when the worldwide recession hit at the end of 2008 had a dramatic impact on Botswana government revenues and, therefore, on the county’s economy. GDP fell 6 percent in 2009 as mining activity dropped 27 percent, according to the BoB. Excluding mining, GDP grew 6 percent in 2009, which Jefferis attributes to the government stimulus program.

The recent economic recovery, however, has produced the reverse effect, adds Jefferis. Diamond production has picked up in the first half of 2010 — Debswana, the De Beers-government mining joint venture, nearly tripled output from the same period of 2009 — while nonmining activity has slowed, and overall economic growth has returned to positive territory.

Jefferis forecasts that the economy will rise by about 7 percent for the full year 2010, due to increases in the diamond sector, before settling back to growth of 4 percent to 5 percent per annum from 2011 going forward. “It’s important to note that while we have seen a recovery, we are not back to where we were precrisis and the government is still running a deficit,” he stresses, adding that the government depleted its fiscal reserves and took out a $1.5 billion loan from the African Development Bank (AfDB) to carry it through the crisis.

But while the recession highlighted the government’s overdependence on diamonds, the country has long been aware of its need to diversify its economy. With the larger diamond deposits of the Jwaneng and Orapa mines becoming depleted, and Debswana unlikely to ramp up production to precrisis levels any time soon, the contribution of diamond mining to export earnings and revenues is expected to decline in the medium- to long-term future.

A Viable Trading Center

With this in mind, government has set its ambitions on creating a diamond trading center in Botswana to encourage more downstream activity within the industry.

“As a country, we are worried about the legacy that diamonds will leave once the mines run dry,” explains Jacob Thamage, who assumed the position of Diamond Hub coordinator in February 2010. “We know that diamonds have done their bit — a lot — but we still believe that much more can be achieved for the country, especially in the downstream industry.”

Botswana has already seen significant progress and investment in developing other sectors along the diamond pipeline, with 16 polishing factories operating in the country that are supplied rough by the Diamond Trading Company Botswana (DTCB).

Thamage explains that the hub initiative is focused on four key developments: a viable cutting and polishing industry, rough — and eventually polished — trading, jewelry manufacturing and ancillary support services for the industry. 

With the polishing industry in operation, the country is clearly focused on the next stage in establishing a trading platform in Gaborone. Mervin Lifshitz, chairman of the Botswana Diamond Manufacturers Association (BDMA), notes that while it is inevitable that trading will take place, the format of such trading is still largely unknown.

Marketing Changes

The initial groundwork, however, appears to have been laid in the marketing contracts that the government recently signed with Boteti Mining for its AK6 mine, and with Firestone Diamonds for its BK11 mine, to sell their goods on tender when their respective operations come onstream in the coming year. In addition, and more significantly, the government is re-evaluating its marketing arrangement with De Beers, whose current contract to sell Debswana goods expires at the end of 2010.

From the hub project viewpoint, Thamage stresses that the key is to have the transaction take place in Botswana. “We are not saying that only the companies in Botswana should purchase the rough but the transaction should be conducted here,” he explains. “We want to build a bit of traffic and if we are able to get something set aside from Debswana that can be sold to the secondary market, that will create a little more activity, which is what we are looking for.”

Thamage admits that the mechanics of how trading would work still have to be determined. Some of the issues on the table include how to license traders to purchase rough easily and efficiently, as well as how to design the infrastructure to accommodate current and future trading activity. Another challenge might be the technicalities involved in encouraging trading among the 16 cutting and polishing factories, which Thamage notes is currently prohibited as rough buying can only be done through the DTCB.

“There are a number of hurdles that need to be removed to make doing business easier and we have to look at that,” Thamage says. “It’s a step-by-step process that has to develop over time. Once rough trading is set up, we will look at the opportunities there are for trading polished.”

De Beers Holds the Key

Thamage stresses, however, that the next six months, with the government and De Beers neogitating a new marketing agreement, are key. It is expected that the framework will include a portion of Debswana supply being set aside for the secondary market.

Neo Moroka, a former trade and industry minister, who in February was appointed resident director and chief executive officer (CEO) of De Beers Botswana, recognizes the important role that De Beers plays in the government’s hub ambitions. “We know that one of the government’s objectives is to attract foreign investment and the biggest investor in the country is De Beers, so we are well-placed to contribute toward the objectives of the diamond hub,” he explains. “We share the ambition to make sure that all activities in the diamond pipeline are sustainably represented in Botswana and to establish a diamond center here.”

De Beers already has made a big commitment to Botswana’s growth outside the mining sector, particularly in its $83 million DTCB sorting facility in Gaborone that opened in March 2008. Moroka adds that the company still plans to move its aggregation operations from London to Gaborone even though the move was delayed in 2009. The plan is to sort De Beers goods from all its mining centers at the Gaborone site into different grading categories. Moroka notes that a number of requirements — including infrastructure, assured security and regulatory services — need to be in place before aggregation can take place at the center.

Equally important to the beneficiation program has been the development of the Diamond Technology Park (DTP), which officially opened in January 2009. Brian Gutkin, chief executive officer (CEO) of the South African Diamond Corporation (Safdico), the sightholder that owns and manages the park, explains that the idea driving the development is to centralize the industry and make it more efficient.

Gutkin reports that the first phase of the project is complete and fully occupied. In addition to two large cutting and polishing factories — Safdico and Steinmetz — tenants include industry service providers such as the Gemological Institute of America (GIA), Brinks, Malca Amit, brokers Hennig and Rothschild Diamonds, banks ABN Amro, First National Bank (FNB) and Stanbic, and mining companies Namakwa Diamonds, Firestone and Boteti, among others. The government’s Diamond Office and Diamond Hub also are located in the park.

Safdico has plans to build a second-phase development based on demand. While Gutkin notes that there have been a number of inquiries about space in the expansion, not enough commitments have been made to justify the extension yet. 

Finding its Niche

Despite these developments, the verdict is still out on the scale to which Gaborone can compete with other cutting and trading centers in Mumbai, Ramat Gan and Antwerp. Most recognize that Botswana needs to create a niche to find its place in the market.

Lifshitz admits that Botswana is not a low-cost center but adds that the country should not aim to compete on price. “We aim to be better and more efficient and that’s our focus,” he says. Gutkin agrees, adding that he has built his factory on a different model than other local manufacturers, limiting its employment capacity to 100 people and focusing on stones larger than 2 carats to minimize the per-carat labor cost.

Failure Not an Option

Underlying Gutkin’s approach is the scarcity of skilled workers locally. He says that his company is trying to create more of a blue-collar-type workforce rather than a low-paid production line. Other companies, he points out, have designed factories to accommodate 200 to 300 people. “It’s just a different model,” he insists.

The availability of skilled labor is a challenge these factories are dealing with and there remains a high proportion of expatriots from Israel, India, Belgium and South Africa filling the more advanced positions. For this reason, the government has placed an emphasis on skills transfer and training, offering tax incentives linked to training and development programs.

While other operational and technical challenges exist in the country, including unreliable internet access and limited direct flights into Gaborone for international travelers, most operating there praise the country for being highly investor-friendly. Part of the secret, they stress, is that everyone is on the same page with the same goals.

“It’s not a question of tax incentives or anything like that.

It’s more about the government’s attitude toward the industry,” Lifshitz explains. “They want us to succeed and we want to see Botswana succeed.”      

That success may have a strong impact on the guys and girls of Gabs, but whether they’re aware of it or not, failure is not an option. Diversification is a gamble Botswana has to take.

* Picture: Aerial view of Diamond Technology Park. Courtesy of SAFDICO. 

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Tags: Avi Krawitz, Avi Krawitz, Botswana, Safdico
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