The Debswana Deal:How Botswana Got The Short End Of The Stick

Botswana is often touted by the international community as a unique economic success story—an African miracle. The country's incredible growth after the discovery of diamonds less than 5 years after its independence has attracted much marvel from economists all across the globe, painting it as a model of what happens when countries properly manage their natural resources.

Unlike her African peers who succumbed to the so-called "resource curse" as a result of mismanagement of their natural resources, plunging into civil war and other forms of conflict in the process, Botswana used the riches from her shiny stones to go from one of the poorest countries in the world at independence to one of the fastest-growing economies globally after the diamond boom.

Good governance is normally pointed out by various academics as the reason Botswana has been able to escape the resource curse. Botswana's decision to not nationalize diamond mining but instead opting to allow international mining companies with more experience and expertise into the country is praised as a major contributing factor to the so-called success of the country's diamond industry management. However, when one learns the history of the country's deals with these companies, specifically De Beers, it starts to become apparent that the deals weren't as rosy and symbiotic as they have been heralded to be.

In 1969, the government of Botswana and the diamond giant signed an agreement to start a 50/50 venture to embark on diamond prospecting and mining in the country. This joint venture was a company called De Beers Botswana Mining Company, later renamed Debswana Diamond Company. On paper, the Debswana venture made perfect sense. Botswana had the diamonds and De Beers had the experience, expertise, and capital to mine them. 

The early days of Debswana saw an incredible amount of success. In just over 10 years, between 1971 and 1982, Orapa, Letlhakane, and Jwaneng mines were commissioned, opened, and operated by the venture. Orapa and Jwaneng turned out to be one of the richest and most productive diamond mines in the world and Botswana's economic trajectory after their operations started showed just how valuable they were. Positive and welcome as the results of the success of the venture were, it also brought about negative repercussions that the country is still trying to recover from to this day.

The diamond pipeline comprises various activities which add value to the stones at every stage. These activities include exploration, mining, sorting and valuing, cutting and polishing, jewelry manufacturing, and finally the marketing and retailing of that jewelry. The Debswana venture was solely focused on the first two stages in the pipeline, exploration, and mining, a decision which in retrospect seems like a missed opportunity for Botswana to have benefited so much more from its diamonds.

So why didn't the Botswana government, either independently or through the Debswana venture, try to pursue more activities in the diamond pipeline? This is where De Beers' bullying and cartel-like behavior becomes apparent. Before the early 2000s, De Beers was not all interested in getting involved in or even supporting local diamond beneficiation i.e. downstream processing of rough diamonds, despite its clear benefits to Botswana. Beneficiation was a potential risk to the profit margins they got from their Botswana operation and no amount of corporate social responsibility motivation could make them take this risk. Because of their oligopoly and strong market power in the industry, it was impossible, independently or otherwise, for Botswana to challenge De Beers' position and pursue this avenue. This stance on not supporting local beneficiation was echoed by the then De Beers managing director Gary Ralfe in a speech in the 1990s responding to talks of diamonds beneficiation:

"Particularly in the case of Botswana [the absence of manufacturing] is a recognition of economic realities. Botswana’s best interests are served precisely by having diamonds polished in the places where they can most economically be polished. Botswana is such a major [rough] producer and the Botswana government has such a clear view about these matters, that they recognize the truth of this. For a major diamond producer like Botswana, it would be national folly to prescribe that any percentage of their diamonds needed to be beneficiated locally. What Botswana, as the world’s major producer of diamonds needs to do, is to ensure that diamonds reach the place where they can achieve the highest price and that gives by far and away the best returns in terms of fiscal revenue."

De Beers knew that Botswana's hands were pretty much tied and took advantage of this. They realized that the lack of manufacturing industry in the country was the perfect rebuttal to any talk of beneficiating diamonds locally. The government too is partly to blame for this. Had they, after the beginning of diamond mining, focused on creating an enabling environment for beneficiating diamonds locally by investing in industrialization and creating a vibrant manufacturing sector in the process, they could have been able to force De Beers' hand in the matter. They became content with the tax revenue which was coming from De Beers and other mining companies, failing to realize that eventually, mining was going to cease as diamonds ran out, leaving the country in economic turmoil.

It was only in the early and mid-2000s that De Beers, seeing that their oligopoly in the diamond industry was dwindling, had no choice but to support beneficiation initiatives as governments like Botswana's now had more bargaining power. This saw Botswana finally starting various beneficiation initiatives including the Diamond Trading Company Botswana (DTCB) which allowed the sorting and valuing of rough stones locally, the establishment of the Botswana Diamond Manufacturers Association which facilitated the establishment of cutting and polishing firms in the country, establishment of Okavango Diamond Company which allowed Botswana to independently sell Debswana's production, etc.

In short, De Beers realized that instead of risking their control of diamond production, which is at the core of their business model, by refusing beneficiation, it was better to concede that position for the sake of keeping the Debswana venture alive. For Botswana though, this change in stance came perhaps a little too late, almost 40 years after the opening of the first mine in Orapa. Because of De Beers, Botswana lost all those years it could have used to build up its own vibrant diamond sorting, valuing, cutting, polishing, manufacturing, and retailing industries, establishing itself as the world's diamond center in the process.

It is truly a shame that a country that has been mining diamonds for 50 years only started exploring other value-adding activities only 10 years ago when diamonds are only 2 decades, at most, from being depleted. Imagine how much more Botswana would have benefitted had De Beers allowed and supported beneficiation initiatives from the onset and activities in the entire diamond pipeline had been established in the country all those years ago when the diamond boom began.

Contrary to the rosy picture that is normally painted by government with regard to its relationship with De Beers, the fact of the matter is that the diamond mining giant exploited Botswana and cost its people decades of socio-economic progress. While De Beers enjoyed the benefits of extractive mining through Debswana, whose production accounts for over 70% of their profits, Botswana was content with feeding on scraps when it could have benefitted so much more through beneficiation activities which would have also sustained the country way after diamonds are finished.

Diamonds, Botswana's main source of export revenue, government revenue, and the biggest contributor to GDP, are 25 years, at most, from being depleted. The country's economy is still largely undiversified from diamonds and in essence, does not currently look like it has a plan of what is going to be done when the last stone is mined or even worse, synthetic diamonds take over and the market for natural diamonds vanishes. As things stand, the future is looking gloomy for the once shining example and benchmark of how economic development should be done. How times change.

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