A dark cloud hangs menacingly over the future of Botswana’s nascent diamond beneficiation and the truth must be told and credit given where it is due. The future of the project hangs in the balance and its failure seems predetermined because of inherent structural problems, choice of the most risky and least profitable part of the diamond value chain, and lack of support and ownership of the idea from those tasked with the responsibility of spearheading it.
Diamond cartel, De Beers, motivated by greed and self-interest and opposed to diamond beneficiation from the onset, seems to have found a perfect opportunity to give Botswana a rope to hang and assured the ultimate demise of Botswana’s attempt at diamond value add.
More importantly, Botswana and other diamond producing countries have missed the boat and been overtaken by events simply because the global diamond industry has changed drastically in the recent past. Diamond players are no longer content with concentrating their business on a single segment of the diamond value chain.
Diamond producers such as Botswana agitating for beneficiation, should have learned a long time ago that cutting and polishing are very risky segments of the business not without their own fundamental problems. Now best practices globally now are for more consolidation characterized by more vertical and horizontal integration along the whole diamond value chain.
Cutting and polishing segment is globally the least profitable realizing the lowest profit margins with some companies earning as little as 1-2 percent, while by comparison, upstream (mining and exploration) and downstream end of the value chain enjoy the highest profits margins of 16- 20 percent and 11 percent to 14 percent respectively.
Some things just did not add up from the beginning and it has never been difficult to discern that the project was not conceived in good faith. There was a lot of hostility at project conceptualization by and between Botswana government and De Beers who over decades were vehemently opposed to any calls for diamonds beneficiation dismissing them as both unworkable and illusionary and rubbishing everyone who dared advance a contrary view.
De Beers and their supporters in government and sections of the media pushed the anti-beneficiation paradigm with much vigor seeking to lock Botswana permanently relegated as a backward factor driven, and nineteen century mercantilist styled economy selling its diamond raw in the international market while De Beers, trying by all means to keep Botswana in the dark by parroting anti-beneficiation propaganda while it alone participated globally in all stages of the diamond value chain.
De Beers’ motive was clear according to diamond industry expert Chaim Even Zohar because, "historically Botswana provided up to two-thirds of De Beers profits. In all fairness, one can fully understand that the cartel went to any length to protect its interests, though it is hard to approve its methods".â€¨
There is therefore, a dichotomy that that the very staunch opponents of diamond beneficiation have now assumed the responsibility spearheading the very idea they were opposed to all along and even rubbished anyone who dared to advance opposite view.
There appears to be an unavoidable coincidence between the instability and uncertainty surrounding Botswana's belated and faltering attempts at diamond beneficiation and De Beers' historical opposition and disdain. Diamond beneficiation proceeded without thorough due diligence, choice of suitable, experienced and capable equity partner with a strong track record in diamond beneficiation.
De Beers was deeply conflicted and was never the right choice. Just as any project of that magnitude would require a social and environmental impact assessment, so too was a human resources impact assessment required but omitted in order to determine the number and appropriate skills mix to support the project.
So no concerted training to deliver the necessary skills mix was done nor were any training institutions identified to provide targeted and appropriate training in all aspects of gemology, either locally or abroad. Instead, heavy reliance was put on the benevolence of outsiders and imported workers in critical areas at high cost to the nation rather than the enterprise of citizens.
It is therefore no wonder that the beneficiation was programmed to fail from the onset because of lack of ownership and conviction from those tasked with its implementation and to make the idea work. De Beers derived huge and disproportionate benefits from the status quo and from the Botswana diamond industry in general and it was not surprisingly it had strong interest to keep things that way.
While De Beers globally participates in all stages along the diamond value chain, the greatest share of the value of the world diamond production it handles are derived from Botswana yet the company abused this privilege by seeking to hoodwink its leadership by hook or crook to perpetually lock her in the relatively inconsequential and less profitable mining and rough diamond aggregation and sales.
By contrast, Paul Rowley De Beers' executive Vice President of global sightholder sales let the cat out the bag recently when he told the Dubai Diamond Conference in April that De Beers was active in throughout the diamond pipeline, through targeted investment in diamond equity at the retail end, midstream in rough diamond sales and distribution and in mining expansion.
"At De Beers, we continue to make investments throughout the value chain that we believe will drive our success in the years ahead and all participants in the diamond industry have a chance to of likewise".â€¨â€¨
Logic dictates that it is simply unbelievable that those who were so vehemently opposed to the beneficiation of Botswana diamonds, namely De Beers and Botswana government supported by some conservative sections of the media and who thoroughly discredited and rubbished anyone who held a contrary view would now by any stretch imagination be convincingly tasked with the responsibility of spearheading the implementation of the very idea they had thoroughly discredited.
For decades both De Beers and Botswana claimed that beneficiation was not feasible and that Botswana, a world leading diamond producer of the best quality diamonds by value did not enjoy any comparative and competitive advantage other things being equal.â€¨
They shied away from the stark reality that the mark-up of diamonds increases exponentially as it passes through the value chain. Beneficiation is the creation of activities beyond mining the natural resource in producing countries as a means of adding value. Out of the ground, rough diamonds move through the pipeline from dealers to diamond cutters and polishers, to jewelry manufacturers, retail stores and finally to consumers.
According to authoritative diamond industry report Bain and Company, the value of diamond increases significantly as they move along the diamond chain from the mine to the final market, nearly quintuple over the course of the journey.
The great value – US$25 billion or more in both cases is added at the jewelry manufacturing and retail stages, Jewelry manufacturing is estimated at approximately 65% of the retail sales based on historic average.
By way of illustration, Bain and Company when rough diamond production generates revenues of $14.8 billion, the revenue will grow to $47.2 billion when the diamonds are manufactured into jewelry and grow again to $72 billion when the jewelry is sold at retail, quoting IDEX; Tacy Ltd and Chaim Even-Zohar and Diamond Value Chain of 2010.â€¨â€¨Maximizing return on assets of rough diamonds very valuable but the ending price of diamond jewelry is worth much more, according to mining academic Rudnicka (2010).
The trend in the world is to shorten the supply chain between the rough coming out of the mine and the shop window through vertical and horizontal integration of the production value chain. By way of example, Rudincka says, Lev Leviev, chairman of Leviev Group of Companies, controls the biggest pit mine, is the world's largest polisher and cutter of diamonds, and own Leviev boutique in London and New York.
De Beers owns diamond shops in London, Paris, Tokyo and Los Angeles (Doulton, 2006). Tiffany and Co for the last 172 years avoided cutting and polishing its own diamonds, but has since decided to move backwards in the supply chain.
In 2002, it began opening cutting and polishing plants in Canada, Belgium, South Africa and Vietnam and later adding operations in China and Mauritius (O'Connely, 2009). Harry Winston Diamond Corp, now owns 40% of Davitz Diamond mine in Canada and retail stores in New York, Paris, Tokyo and planned to open others in the United States, Beijing and Hong Kong.
This has given the company access to the more profitable ends of the diamond value chain – the contract wholesale and retail business because the highest potential for profit lies in retail, because as a rough diamond moves from the mines, it increases exponentially by 320 percent at retail (Covert, 2007).
Bains and Company argue that diamond jewelry manufacturing and retail is the highest level of production that many countries aspire to upgrade to and manufacturing centers hold a lot of power in the final distribution of diamonds which has the highest potential for profit.
Although rough diamond production remains the most lucrative in terms of profit margins estimated at between 16 -20 percent, the only other segment that generates comparable margins is retail, where large chains such as Tiffany and Company and Cartier can archive margins of 11-14 percent. â€¨
Concentrating on mining alone is outdated on the evidence of diamond industry experts and policy makers. To meet the challenges of getting adequate supplies of the right mix of diamond jewelry, some large retailers have extended their operations upstream, investing in mines and in cutting and polishing companies. Tiffany and Company is one retailer who had made such and investment.
Hong Kong Chow Tai Fook, the world's largest vertically integrated jeweler and has responded to the supply challenge by securing long term supply contracts with ALROSA to supplement earlier agreements with De Beers and Rio Tinto. About half of the polished diamonds used in Chow Tai Fook jewelry were produced in-house.
Chow Tai Fook, and Tiffany and Company have already invested in mining operations and integrated backward by acquiring mines and eventually middle market operations. As rough diamond sales are likely to decline, the victim of consolidation will be cutting and polishing firms.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”