Sunday, September 27, 2020

Debswana- Trouble in paradise

Nicholas Oppenheimer is probably the most curious name among the 74 who were quizzed by Slaughter and May investigators. The one and a half page long text under his name marks him out as a prime target. Hardly surprising! If anything went wrong at Debswana, Nicky would be among the first to know.

The 65-year-old, who is nicknamed ‘the Cuban’ for his raggy grey-black beard, is Chairman of De Beers Group. De Beers has 50% equity in Debswana. There is, however, something very odd with the decision by Botswana government ÔÇô the other half of Debswana ÔÇô to keep the investigators’ report away from him.

The way the investigation was conducted betrayed “lack of trust between the shareholders of Debswana. De Beers is positioned as the potential partner to Louis Nchindo’s alleged misconduct and the Government of the Republic of Botswana as the victim”, observed a De Beers internal report.

The relationship between the Botswana government and De Beers is full of such curious moments these days. There is a power struggle for the heart and soul of Debswana.

The government of Botswana seems to be trying to claw back control by hoarding information and managing its flow from the government enclave to the Debswana boardroom.

“A number of executives used the term dysfunctional to describe the Debswana board. Some executives have suggested, although they have not been able to provide any evidence to this, that they have been instructed by the Ministry of Minerals Energy and Water resources not to provide any information directly” to non government representatives in the board, states the Slaughter and May report.

De Beers executives with their mastery of the business black arts, however, seem better suited to the demands of this messy relationship. Slipperiness. Duplicity. Unaccountability. Shady deals in smoke filled rooms… most De Beers executives feel at home in Debswana which had become a cesspool of shady deals and dodgy practices.

If there was any one incident that brought the Debswana rot into sharp focus, it was the controversial de-listing of De Beers in 2001. This was a complicated deal – not least due to the number of cross-holdings that made up the dense relationship between Anglo and its sibling De Beers. The takeover was proposed by a consortium called DBI, which is made up of the Oppenheimer’s family firm Central Holdings Ltd (CHL) with a 45% stake, Anglo (45%), and Debswana (10%). CHL would hold a management contract for De Beers with Oppenheimer at its head. Anglo, therefore, was effectively helping the Oppenheimers secure control of their diamond inheritance, while the family barely put its hand in its pocket. No wonder, then, that several institutions were hopping mad. Critics feared that the highly secretive diamond trade would become even more opaque as the Oppenheimers take De Beers off the stock market and away from the prying eyes of financial analysts. Many pointed out that Nicky Oppenheimer, head of the family, chairman of De Beers and deputy chairman of Anglo is a man who hates publicity. Amid the controversy, Botswana never missed a step behind De Beers.

The Slaughter & May report states that, “it has been suggested to us that the Botswana Government authority for this transaction was given at a meeting between former President Festus Mogae, Louis Nchindo and Nicky Oppenheimer in late 2000. We understand that as neither Mogae’s Permanent Secretary nor representatives from the Ministry of Minerals, Energy and Water Resources were present at the meeting no notes were made.”

The Slaughter & May report suggests that Nchindo used the meeting to bypass the normal channels for discussions of the delisting transaction.

Botswana government representatives in the board, Morago Ngidi and Serwalo Tumelo were duped into signing a round robin resolution giving government consent to the deal. The duo was misled to believe that they were merely rubberstamping a decision that had already been made by President Festus Mogae.

“The apparent acceptance by certain officials that this transaction was both highly confidential and approved at the highest levels had the effect of by-passing and undermining the essential roles of key government ministers and their officials in considering the merits of this transaction”, stated the report.

Other Debswana board members from De beers who signed the resolution, Louis Nchindo and Nicky Oppenheimer had conflict of interest and could not be trusted to act in the best interest of Debswana.

Although Oppenheimer must have been aware of the potential for conflict, there was never any disclosure to the Debswana board in respect of the De Beers share options held by Nchindo. The options, valued at US$ 6 million were to be paid out as part of the transaction.
The Slaughter & May report also highlights the potentially conflicting interest of Oppenheimer, a shareholder in De Beers, Executive Chairman of De Beers and Chairman of Debswana.

The report suggests that the De Beers delisting transaction violated both the law and the Debswana articles of association. Debswana “directors did not act in the best interest of Debswana in securing the best deal. They needed to decide whether to join the consortium, whether the terms of the deal represented best value for Debswana or whether to negotiate for a larger shareholding”.

Both independent legal advisors and financial advisors for Debswana were appointed in November 2000 and were proposed to Nchindo by De Beers financial advisors.

As a result, the government of Botswana did not have independent legal and financial advice on the deal, and depended on De Beers who had different objectives.

The Slaughter & May report expresses concern that Debswana Board Chairman, Nicky Oppenheimer, never raised the De Beers privatization transaction at Debswana board meetings, although he has extensive board experience. “In fact, it appears from the board minutes that this very complex and important transaction was not discussed in detail at any board meeting.”

Following the De Beers delisting deal, the mining company’s relationship with the government of Botswana has become increasingly gripped by a vicious circle of secrecy, and suspicion, which chokes off trust and belief in the partnership.

In their place a culture of mutual cynicism flourishes virulently. There is a sense that the partnership desperately needs to draw breath, learn some lessons, and do things better.

On paper, the partnership is a match made in heaven. Debswana is very important to the economy of Botswana. Diamonds contribute 75% of foreign exchange earnings, 45% of government revenue and 33% of the country’s GDP.

Debswana is also the single largest employer after government. Debswana is also the biggest cash cow of the De Beers Group. Botswana provides its rich diamonds deposits while De Beers brings expertise in diamond exploration and mining. Access to such expertise is vital to Debswana. There is however a slight problem; the two partners are marching to the beat of different drummers. While De Beers is operating the mines to meet commercial targets, the Botswana government on the other hand strives to meet a different set of objectives.

At present, Debswana is dependent on key managers seconded from De Beers. The experience and expertise provided by these employees is vital to the success of Debswana. It is however, natural to expect that De Beers secondees will have their primary allegiance to De Beers. “More than one seconded executives have admitted to being under pressure from head office (with whom their ultimate careers lie) to follow the group policy” states the Slaughter and May report.

This conflict of interest affects the effectiveness of the Debswana board. “Botswana government representatives on the board rely on information they receive from management. This makes the quality of information they receive critical to enable them to carry out their tasks” states the report.

“The apparent ineffectiveness of the board is also affected by an apparent imbalance of experience between the two representative groups. Government representatives include civil servants representing the Ministry of Minerals Energy and Water Resources and the Ministry of Finance and Development Planning. There are also representatives from the academia and the Bank of Botswana.

“De Beers representatives on the other hand have more focused commercial experience in the mining sector. To some extent this reflects the different roles played by these representatives.

Government representatives are striving to ensure that Debswana meets government objectives, while the De Beers representatives are operating the mines to meet commercial targets.

“These roles are not always complimentary and often times do not have mutually inclusive objectives” stated the report.

In one example, the report details how De Beers nominees in Debswana lined their pockets at the expense of the Botswana Government by pushing up production at Debswana mines even when the price of diamonds was going down.

Former Permanent Secretary in the Ministry of Minerals, Energy and Water Resources, Akolang Tombale explained that “De Beers bonus scheme (share options) was a major concern because it was based on production levels.” The De Beers nominees were pushing Debswana to drive up production while the carat/dollar ration was falling, “a move against the interest of the Botswana government”.

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Sunday Standard September 27 – 3 October

Digital copy of Sunday Standard issue of September 27 - 3 October, 2020.