Friday, October 23, 2020

“Botswana’s diamond success has brought problems of a monoculture economy”An address to the World Diamond producers (London)

David Magang 1997 (Part I)

An address to the World Diamond producers (London)

May I first say that I regard it as an honour to have been invited to speak at this Second Financial Times Diamonds Conference? To have been asked to open the batting is an even greater honour but I am conscious of the responsibilities that go with it. In describing what is happening in Botswana, I hope also to convey something about why it is happening and what our motives and objectives are.
The history of Botswana’s diamond industry is relatively short but has been extraordinarily eventful. It is scarcely thirty years since De Beers geologists first discovered diamonds in Botswana. The announcement of a discovery at Orapa was made in 1967, the year after Botswana’s independence. Development of the Orapa Mine was completed and production commenced in 1971.
Within a very short time, plans were made to double Orapa’s production and also to develop another smaller mine at nearby Letlhakane. These projects were completed in the mid-1970s and, very shortly thereafter, the discovery of an even richer deposit at Jwaneng was announced. Construction of the Jwaneng Mine began in 1979 and it commenced commercial production in 1982. Within a few years, its capacity was expanded by the addition of a recrush circuit and then, in the early 1990s by the addition of a fourth treatment stream.
Almost as soon as that was completed, work began on planning a major expansion of Orapa to double its capacity again (from about 6 million carats per year to about 12 million by 2000). This project is one of the largest single diamond mining projects ever undertaken anywhere in the world – it is well under way and scheduled for completion towards the end of 1999.
We have other smaller diamond mining developments in the pipeline, but more importantly for the longer term, the industry is expanding a great deal of effort and money in prospecting for new diamond deposits. A recent tally showed nearly 30 companies operating in 347 separate prospecting license areas and spending in the order of US$16 million per annum. And their results are encouraging. To date, more than 200 kimberlites have been discovered, most of them diamondiferous, and the count is rising with every month that goes by. There are, of course, no guarantees in that business, but there is a strong likelihood that more good commercial discoveries will be made.
I would like to emphasise here that we welcome a diversity of companies provided they bring with them the technical capability and the financial strength to carry out world class prospecting work. De Beers may be responsible for all of our existing mines, and they are certainly very active in prospecting, but we believe that diversity of approach and cross-pollination of professional ideas are important in maintaining a cutting edge in the prospecting business.
At present all of our diamond output is produced by the Debswana Diamond Company, a 50:50 joint venture between De Beers Centenary and the Botswana Government. Debswana’s production has grown steadily, starting from nothing in 1970 and rising to 17.7 million carats last year. In terms of carats, this places Botswana in the top three of four producing countries.
But in terms of aggregate values, Debswana’s sales revenues in 1996 were 5.2 billion Pula, equivalent to just over 1500 million US dollars. This places us first in the world by value, ahead of Russia ($1150m), Angola ($1050) and South Africa ($1000m). Botswana’s production was equivalent to about one third of CSO’s 1996 worldwide sales of $4800 million. We are confidently anticipating a further strengthening of our position in the years ahead.
In any country, the meteoric rise of a brand new industry makes a fundamental impact on all areas of the economy. But in Botswana, which was one of the very poorest countries in the world before the discovery of diamonds, the macroeconomic impact has been spectacular. Diamonds now account directly for approximately 30% of our gross domestic product, about 50% of all government revenues and about 70% of national merchandise exports.

But even these figures understate the importance of diamonds in our economy. For example, much of the GDP arising in other sectors such as construction, trade, banking and services, results from the spending incomes and revenues arising from diamonds. And our second largest source of Government revenues is the profit of the central bank, which consists almost entirely of earnings from the investment of Government’s budgetary surpluses, resulting from diamond revenues. Suffice it to say that without diamonds, Botswana might still be one of the world’s poorest nations. It is important to understand this, because it inevitably affects our approach to the diamond industry and our future aspirations for it.
Not only is Botswana the world’s largest producer by value – Botswana is also relatively more dependent upon diamonds than any other country in the world. Russia, Angola, South Africa, Namibia and the Democratic Republic of Congo all exhibit significant dependence on diamonds, but not to the same extent as Botswana. And because our minds are that much more focused, we think that possibly we see more clearly than most the necessary ingredients for an industry that is strong and stable in the long term.
Of course, our position as the source of the world’s most valuable, lowest cost and most profitable production of rough gems, with probably the largest known remaining reserves, means that the global diamond industry is more dependent upon Botswana than on any other producer. This close interdependence requires, in our view, a long-term, stable and mutually beneficial relationship between the major producer and the global industry that it supplies.
I would like to develop some of these ideas a little and to explain more about our objectives.
Firstly, notwithstanding the value of our diamond resources and the rate at which production has grown, Botswana remains a small, upper-middle income country in terms of the standard World Bank classifications. The arithmetic is fairly simple.
One and a half billion dollars of annual diamond sales for a population of about one and a half million people amount to a thousand dollars worth of diamonds per annum for every citizen. With diamonds accounting for about one third of total GDP, the GDP per citizen is around $3000 per annum.
This puts us well above the bottom of the league – we stand at more than ten times the level of low income countries like Bangladesh or Kenya; but Botswana’s GDP per capita is still only about one tenth of that in high income economies like Denmark or Japan. Quite simply, for all its diamond wealth, Botswana remains a relatively poor country, with a great need for further diversified development and, at present, only one world-class resource on which to build that development effort.
Secondly, Botswana’s success in developing its diamond mining industry has brought with it the problems of the monoculture economy and the special problems associated with commodity booms. We are very dependent on diamonds, and we desperately need and want diversification, yet diamonds retain their dominance in the economy, because in recent years, other sectors have not kept pace with new diamond developments. We do not want to suppress diamond development, because diamond mining is what we do best. We need rather to accelerate the development of other sectors. But we find, as other Governments have found before, that the very existence of a highly successful commodity sector, be it oil or gas or copper or diamonds, in some ways exacerbates the difficulty of developing other economic activities.
Given the quality and quantity of our known diamond resources, not to mention those still to be discovered, we believe that our best development strategy is to take up all possibilities of profitable production now, when we know that we can sell the diamonds for a very large profit, and reinvest a large part of that profit to create a more diversified portfolio of assets.

Obviously, it is a cardinal duty of Government to ensure that when any non-renewable resource is sold, the overall economic benefit to the nation is maximized. This is not quite as simple as it sounds. Let me explain some of the considerations.

The first element is EFFICIENCY AND PRODUCTIVITY

In order to maximise our diamond profit flows over the long term, we must ensure that our mines are run with optimal efficiency and at minimal cost. There can also be trade-offs here in that maximum long-term efficiency usually requires investment in new technologies and improved working methods. This means foregoing some present profit in order to make more future profit. For example, Debswana is in a process of replacing 85-ton haul trucks with 177-ton trucks. In the long run, this will dramatically improve productivity and reduce mining costs – but it requires the diversion of current income into capital expenditure. Fortunately, with its cushion on financial reserves, Botswana can afford to forego current income in the interests of longer-term efficiency.
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 partnership 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.

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