Could Botswana be making a mistake in the diamond business?

It seems election season in Botswana is already in full swing. As negotiations between the government and De Beers about sales and long-term lease agreements near the finishing line, President Mokgweetsi Masisi has thrown a spanner in the works with his repeated declaration that he would walk away from the whole deal if the government-owned marketing company, Okavango Diamond Company, doesn’t get a bigger share of diamonds to sell.He claims this would be taking back ownership of Botswana’s diamonds. Whether the president is bluffing or not, we do not know. It is not clear who could take its place if De Beers exited. Russia’s Alrosa is out of the question, and Rio Tinto’s footprint in diamonds is small. There do not seem to be any viable alternatives. For the government to take on a greater share of the sales it would need to successfully match the extensive networks De Beers has in the market. That needs serious clout.The argument that Botswana has the skills and experience to share in more of the value chain has merit. And it may be that the recent buoyant markets are encouraging government to look elsewhere. But the president’s talking up of new entrants such as HB Antwerp makes little sense. It is difficult to understand how a two-year old company — not even a mining junior — with no experience in upstream and smaller than most of the major diamond dealers, can credibly compete.At the Mining Indaba in Cape Town in February, governance and stewardship of all mining revenue was discussed at great length. The current deal is seen as one of, if not the, best that a host government has made in the history of mining. No agreement is perfect, but on any fair read a host government sharing in up to 80% of the value of the minerals accompanied by a profound skills transfer, is a good deal. It has given Botswana stability, investment in healthcare, infrastructure and education, economic status and outsized soft power on the world stage. People are worried. As prominent mining lawyer Peter Leon once said, “resource nationalism tends to be contagious”.Southern Africa is littered with examples of governments falling for the rhetoric of resource nationalism and shooting themselves in the foot. We’ve seen it before in Tanzania under the late president John Magufuli, where he nearly drove out Acacia in 2017 through excessive and unfounded tax adjustments, claiming that existing mining arrangements came at the expense of the state.We’ve seen it before in Zambia — once the darling of Southern African mining, thanks to its successful stewardship of its copper resources — where the erstwhile Lungu administration took on international mining companies under the guise of supposedly unpaid tax bills and questionable liquidation tactics, stripped bare the infrastructure that supported the industry, and led the country to default on its external debt in 2020.Zambia is still recovering from this folly and struggling to pay off its debts. It will no doubt be a strong focus next week in the Summit for Democracy to be hosted in Lusaka. If the president is serious about walking away, Botswana’s economic benefit from this six-decade partnership is in jeopardy, unless his government’s due diligence of the alternatives shows otherwise. Under the current arrangements, Botswana netted $2.8bn from the De Beers partnership in 2022.It is not just the diamond industry that would be affected by a possible divorce. Current and future investors in critical minerals and coal will be watching this closely. All negotiations, especially where so much is as stake, come with a certain amount of back-and-forth. All sides are right to agitate for the best deal for their respective stakeholders. But in this case the negotiations are between partners. The government of Botswana — and therefore the people of Botswana — owns 15% of De Beers (whose parent is Anglo American).The government of Botswana and De Beers are equal 50% shareholders in Debswana, the guardian of the diamond mines. Economically, culturally and politically, the two are intertwined. If the partnership crumbles, both parties will suffer. And so will the natural diamond industry. Botswana has a history of sensible decision-making and sound democratic governance.Which is why the behaviour of the president and his government is so puzzling. The only reasonable conclusion is that he is looking to re-election in 2024. He wants to secure his legacy. Short-termism has never been a feature of Batswana thinking. Good times in the markets rarely last — during the pandemic, the value of rough diamonds dropped by 15%-27%. Producer countries stand to lose significant revenue if the tide turns. With more than 90% of Botswana’s exports coming from diamonds and constituting 30% of national GDP, the government should continue its careful stewardship of the market.There have undoubtedly been some unfair deals between mining companies and host governments in which the predatory practices of the foreign investor have limited the economic potential for the host government. This partnership is not one of them. In this time of global political and economic uncertainty, and as neighbouring SA falters, one has to ask whether now is the time for Botswana to kill the goose that lays the diamond eggs. • Wolfe, an international lawyer, is co-managing partner of Marlow Global. His opinion on this matter first appeared in Business Day

Explore

More

News

Could Botswana be making a mistake in the diamond business?