Tuesday, September 29, 2020

“Botswana’s diamond success has brought problems of a monoculture economy” David Magang 1997 (Part 2)

Botswana has taken the view that its mines are best run for maximum efficiency by a management, which is commercially driven and oriented towards technical excellence and business efficiency. The Debswana Diamond Company, which is a 50/50 joint venture between De Beers and the Botswana Government, provides just this. The Government exerts its influence through an equal voice at the board table, but day-to-day management of the operations is left to the professionals.

The second and more controversial element is the MARKETING POLICY.

Ensuring that we achieve the best possible aggregate sales value for our diamonds in the long term is not necessarily the same thing as selling every parcel or every stone for the highest price we can get. I doubt that it would be appropriate to set up a stall in Gaborone and auction each week’s diamond production to the highest bidder.
To maximize the aggregate value over the long term, it is necessary to even out the peaks and troughs of the free market spot price in order to bring stability and predictability to the downstream segments of the diamond jewellery industry.

History has shown that, at particular times and for particular reasons, it is necessary to withhold certain quantities or types of diamonds from the market. There are times when it is desirable, in the longer-term interests of the strength of the industry, for producers to agree not to flood the market with diamonds, which cannot be smoothly absorbed into the manufacturing pipeline to feed the jewellery market.

Similarly, it has been found to be useful to categorise and combine certain types of stones for sale, in the interests of expanding the total size of the gem diamond market.

You will realise, of course, that the logic I am describing is not unlike that which led to the creation of the Central Selling Organisation as a “single marketing channel” more than 60 years ago. Some industry observers have remarked that if such a marketing channel did not exist Botswana would have had to invent one, and perhaps they are right. But in any case, Botswana’s diamond industry was born into a world in which the single marketing channel was already established with a successful track record of market management and price support. Indeed, looking back to 1970, if there had not been such a system in place, the high risk of starting new diamond mines in a poor, remote, newly independent State in a politically unstable region of Africa, might well have been too great for any investor.

What I can say is that hitherto, Botswana has determined that its best interest lies with the single marketing channel of the CSO. We have a very large production covering the full range of sizes, qualities and shapes; and we will continue to have such a production for many years to come. We need a strong diamond industry and a stable market. As a nation whose development budget depends largely on diamond revenues, we have a particular need for stability, predictability and sustainability. We believe that under present circumstances, the best chance of creating conditions lies in committing the production of Debswana Diamond Company for sale through a single channel.
We recognize two aspects of a market management operation on this scale. First, that it does not come easily or cheaply ÔÇô the cost of stock holding, advertising and research are substantial. And secondly that it is best done by a cohesive entity motivated by long-term profitability (and I would emphasise “long-term”), and not by a loose affiliation of diverse producer interests. As a large user of the Central Selling Organisation, Botswana also makes a large financial contribution to its costs. Nothing comes for nothing. And we recognize the need for the CSO itself to be a profitable enterprise if it is to continue to function efficiently on behalf of the major rough producers and the rest of the industry.

I said earlier that our diamond dependence focused our minds ÔÇô and I would venture to suggest that other major producers, both existing and potential, could do well for themselves and for the industry as a whole by looking realistically at the long-term benefits of single channel marketing. Once convinced of the benefits, perhaps they would logically see a case for contributing to its success.

The next element is TAXATION OF PROFITS

In order to maximize national benefits, we negotiate with our partners a satisfactory sharing of the profits. We are greatly assisted in this by the inherent quality and richness of our deposits. There is a very large profit cake to be shared and we negotiate proportions, which seem to us to provide a fair allocation between the stakeholders.

That of course means, in our view, that private investors should receive a generous return for their efforts while any so-called “economic rent” which remains, should accrue to the resource owners who, under our laws and Constitution, are the people of Botswana represented by the Government. Arguably, we have achieved this ÔÇô our mines provide, I believe, the largest contribution to the diamond account profit of De Beers Centenary as well as the largest contribution to Government revenues.

The final element in maximising national economic benefit is FURTHER VALUE ADDED.

From the time of the European Industrial Revolution, through to the present post-Independence era, the world’s less developed nations have been relegated to the role of raw materials suppliers. With declining terms of trade for primary commodities, third world nations have had to run very fast just to stand still relative to the nations of the first world ÔÇô and many have actually become poorer as the rich have become richer. Not surprisingly, we seek a link between economic advancement and the processing of raw materials to produce articles for intermediate or final consumption.

With an economy that is dominated by one world-class resource, we have to look to the diamond industry to meet a wide range of socio-economic objectives, which extend beyond the mining and marketing of rough gemstones. Obviously we have to ensure the health of the goose which lays our golden eggs, but as long as it remains strong we must look to it as a means of achieving broader objectives such as:

-Training and developing our young and inexperienced labour force;

-Extending our range of activities from primary extraction to secondary manufacturing and tertiary services;

-Forging linkages with other economic sectors, which will pull some of them into a high league of fully competitive, freestanding international industries;

-Opening up opportunities for citizen professionals and citizen entrepreneurs to begin the process of building a successful economic base for our country.

In short, we must seek out any and every opportunity to generate greater value added from our diamond resources.

What we would like to be able to do is to build upon our positions as the world’s leading supplier of rough gems and to extend the range of activities which can be undertaken on an internationally competitive basis in Botswana. A logical strategy would be to move “downstream”. A substantial diamond cutting and polishing industry, combined with the manufacturing of diamond jewellery, could genuinely add value to our rough stones and, at the same time, provide productive employment for many of our citizens.

For all its many virtues, our diamond mining industry generates very little direct employment relative to the scale of investment and the value of its output, and therefore, in a sense, it is failing to contribute to one of our foremost economic objectives namely employment generation.

Diamond cutting on a fully competitive basis could have the potential to contribute much more to our employment needs.

Our experience in Botswana has been that every P10m of capital employed in the diamond mining industry generates 23 jobs and about P20m of annual sales revenue of which about P17m is profit. By contrast, for our existing cutting factories, every P10m of capital employed generates 170 jobs and about P15m of annual sales revenue ÔÇô but this level of revenue is insufficient to cover the operating costs of the factories, resulting in financial losses.
These figures confirm, firstly, that rough producers have been quite successful in accruing for themselves the greater part of the inherent value of the rough gems; and secondly they confirm that in present circumstances, the Indian cutting industry sets a standard of competitiveness in the polishing of small diamond that no other cutting centre can match.

It is no secret that our existing factories, two of which are quite large and quite new, have been making losses ÔÇô and polishing diamonds at a loss does not add value to anything. We are looking carefully at them to see how their viability can be improved. I believe the solution will probably entail an improvement in skills and a move towards larger, higher value stones.

We would very much like to have new, free standing internationally competitive cutting factories in Botswana, but they must be genuinely viable, otherwise we would end up detracting from the value o our existing rough production rather then enhancing it. Perhaps we want to have our cake and eat it too, but as I have said, when you have only one major resource, you have to find ways to make it serve many different objectives.

RELATIONSHIP WITH DE BEERS

Here I should perhaps comment upon an aspect of Botswana’s diamond arrangements, which might be of some interest to this audience ÔÇô the relationship between the Botswana Government and De Beers. Obviously it is a very close relationship:

We are equal shareholders in Debswana which is a substantial mining company of international standing and which owns and operates all of Botswana’s existing diamond mines.

Debswana in turn owns about 5% of the De Beers parent companies and nominates two members to the boards of De Beers and the Diamond Trading Company, so there is a significant inter-linking of Debswana with the wider De Beers group of Companies.

Debswana also has had a series of five-year sales contracts with the Central Selling Organisation.
The analogy to a marriage is so well worn that it has become a clich├®. But the point I want to make is that, even if we are partners in a marriage, we remain two separate people. Some of our interests are shared but some are different.

Obviously we share the most fundamental interest in the long-term future of the diamond market. No other country and no other major international corporation has the same degree of dependence on that market, nor the sale interest in its stability and strength over the very long-term.

We have a common interest in ensuring maximum profitability of Botswana’s mines, and in managing Botswana’s diamond assets as efficiently as possible.

On the other hand, in instances where Debswana’s interests come into conflict with those of other producers, especially producers in which De Beers have an economic interest, our interests may diverge.

There is also an obvious potential for conflict in the way in which the profits from Debswana mines are shared out.

In summary, Botswana is appreciative of the success of the CSO, which, for sixty years or so, has coordinated the most successful co-operative commodity marketing arrangement in history. For this they deserve our commendation. BUT, that system could not survive, as we know it today, without extensive cooperation, including financial support, from the world’s major producers. As the major producer, Botswana is prepared to play a full role in the market management function, but it will not accept the burden of acting as the swing producer and buffer stock for the industry.

Other producers admit that they benefit from the activities of the CSO but in practice give it less than full support or no support at all. Occasionally, our antenna picks up the sentiment that “Botswana is the most dependent on diamonds, they will have to pick up the tab” ÔÇô but in truth the diamond industry is also dependent upon Botswana diamonds; and we shall always require a fair deal and will protect our own interests when necessary.

Our ambition is for Botswana, as the leading source of rough gems, to become a major world centre of all aspects of the trade. For us, it is not just a preference, but also a political imperative that our citizens should be active in substantial roles in and around the industry, which supports our economy. This applies to citizen businesses playing an increasing role in the diamond industry and to citizen professionals becoming fully engaged with the industry both at home and abroad. Such considerations will have an influence on Botswana’s approach to the diamond industry in the years ahead.

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