Corporate Diamond Interests Vs State Sovereignty in Botswana

The fundamental corporate interests of DTC Sightholders, the best national benefit of a diamond producer country, as well as those of De Beers don’t necessarily coincide. In fact, they seldom do. Botswana’s pleas for added value creation (i.e. the establishment of diamond factories) have traditionally been resisted by De Beers. [Actually, there is historical evidence that even those factories that were tolerated were not greatly encouraged to produce profits, as this would give rise to more demands for the expansion of manufacturing.]

For most of the past forty years, Botswana has faithfully played the role of partner of De Beers with great enthusiasm and fervor – but, until recently, it had failed to convince De Beers to recognize the nation’s needs to obtain substantial added value out of its diamond resources. Botswana is now waking up. Pressured by the International Monetary Fund (IMF), OECD and other international bodies, the government has been made to realize that it needs diversification; it needs industrialization – it needs to move away from its dependency on revenues from the exportation of rough diamonds.

De Beers realizes it has no choice – and is recognizing and accommodating southern African aspirations. So the tune and the music changed. De Beers' managing director Gary Ralfe recently stressed that “the challenge that comes to us in all three of our Southern Africa producer countries turns round the need to create jobs in those countries, which the politicians interpret fast into how do we manage to beneficiate more of our mineral product in Southern Africa itself, rather than being exported elsewhere in the world. For a long time, we've tried to counter this by advancing the economic arguments that diamonds are high value but low volume, and it is best that they should be beneficiated in the countries where it's most economic to do so. But we've changed our tune on this, and now we are very keen to become allies of the Southern African government in what I might call a reasonable via media of accommodating the political demands or the political imperatives of government, and yet at the same time, not harming the diamond industry in any way.” That statement was made in September 2005. It represents the policy of De Beers.

Botswana Makes its Own Selection

So when earlier this week, the deputy minister of minerals, energy and water resources, signed three manufacturing licenses to DTC Sightholders (The Steinmetz Diamond Group, Brian Gutkind’s SAFDICO, and India’s Suashish Diamonds Ltd.) this was the outcome of a long governmental selection process in which many applicants participated.

This process was wholly conducted within Botswana government circles, with its foreign investment promotion arms, and other offices. Simultaneously – but separately – De Beers made its own selection of potential diamond manufacturers in Botswana. The initial list of 12 was recently narrowed down to six – and these names were presented to the Botswana government earlier this month. Then De Beers learned that the Botswana government had its own list – and that it had applied different criteria in its selection. The Botswana government wanted the world’s largest or larger diamond conglomerates - companies that could produce value beyond, thus investing in a diamond factory.

Two out of the three newly licensed manufacturers have presented a business plan in which their factories will become part of a larger industrial zone. In the business plans these two companies submitted - and this is important to stress - there were, to the best of my knowledge, NO demands made on government to deliver rough diamonds, and no promises were made. [This may have changed this week when one of the three companies, Suashish, submitted a letter to the Botswana President, which, apparently, didn’t come over too well in London. However, we haven’t seen that letter.]

Has this triggered “a crisis” between Botswana and De Beers? Will De Beers be “forced” to change its policies as suggested in various publications? We don’t think so. First, it is not true that DTC Sightholders can only operate in one southern African country – they can only get a specific sight allocation for only one location. They can open as many plants as they wish. Clearly, the DTC would have preferred that Botswana would have accepted its recommendations for Sightholders, but it should have understood that the integrity of Botswana's selection process was of critical importance to the government.

The search by Botswana for suitable investors in developing a domestic diamond manufacturing (and jewelry manufacturing as well) had began well before the policy changes at De Beers. (At one point last year, the Botswana Export Development and Investment Authority (BEIDA) issued a tender for a feasibility study on the establishment of diamond cutting and polishing, and jewelry industries in Botswana and to identify suitable partners. That tender was eventually cancelled, but it clearly signaled the government’s determination to manage its own agenda and make its own choices.) Though there are presently four factories operating in the country, the government had little experience in attracting investors in industry.

Government Careful not to Upset De Beers

Anyone looking in from the outside must recognize that Botswana has made a compromise. Among the many business proposals on the table was a serious one by the Lev Leviev Group. That company promised to employ thousands of workers (4,000 – if I am not mistaken), and suggested that it would purchase the rough from Debswana “at Debswana export prices to the DTC.” Irrespective of the commercial merits, the Botswana government chooses not to award licenses to non-Sightholders at this time, and this certainly must be seen as a governmental concession to De Beers.

Moreover, the government hasn’t given the DTC’s list a flat rejection. On the contrary, it has intimated that out of the six suggestions, it will, eventually, accept three names. It isn’t clear when this will happen.

In the meantime, the companies that have been awarded licenses will have to start talking to architects, will have to finalize building plans, and will still have to build their factories. That may take up to a year – if not more. Therefore, nothing will happen in the near future.

The question that could be raised is whether Sightholders who are already operating in South Africa (Steinmetz, Safdico) were “risking” their relationships with De Beers by going directly to the Botswana government. De Beers is silent on the issue. It will recognize, however, that the situation in South Africa is fluid. Sightholders in South Africa have yet to get certainty that they will continue to receive a sight – and that they will get the goods they require. The Sightholder criteria have an item called “contingency planning”. Geographic manufacturing diversification makes a lot of corporate sense – and it is surprising that not more South African Sightholders are knocking on Botswana’s door. DTC’s managing director designate Varda Shine is in the process of trying to design a southern African diamond area, (with goods freely moving within that zone) which would include the three major De Beers producing countries. This week the South African president signed the Diamond Amendment Act, but no progress has yet been made on the development of the South African State Diamond Trader provisions. So the industry is in a state of flux, and Sightholders, governments and De Beers must all defend and protect their own interests.

Clearly, De Beers is not interested in Botswana governmental “experimenting” with supply commitments – but the government hasn’t done so, and is unlikely to do so. It will have a joint Debswana-De Beers diamond trading company in the near future, so it wouldn’t make sense for the government to jeopardize these prospects by independently making rough diamond commitments now.

Botswana currently offers the most exciting diamond opportunity by far – as beneficiation has become a matter of urgency. There is fear that diamond producing may have peaked. The president is under severe domestic pressure. Said Mogae in parliament: “We have no choice but to continue in our efforts to promote greater diversification by attracting additional domestic as well as foreign investment in the promotion of productive alternatives. In this we should not be confounded by the fact that our efforts, hitherto, have yielded more modest results than we might have hoped for.” The three manufacturing licenses issued this week will not be the last. Botswana ought to remain high on every manufacturer’s radar screen.

Have a nice weekend.