Botswana Diamonds

1. BotswanaDiamonds Letsema Mbayi MMCP March 2010

2. Hypothesis Diamond Beneficiation will enable Botswana to make the most of its remaining diamond resource if it results in downstream linkages that enhance and broaden the local economy’s benefit from diamond mining

3. Research Aims • the determinants to developing downstream activities with output from the diamond mining industry in Botswana; • the key challenges to the developing downstream activities in Botswana’s diamond industry; and • the policies and strategies that can be formulated to address these key challenges and enhance downstream linkages.

4. Specific Questions • What was the role of policy and ownership in creating and supporting downstream linkages? • To what extent is Botswana managing to create a diamond cutting and polishing industry and its related activities? • What problems are being faced in Botswana’s cutting and polishing industry and its related activities? • What role is the national system of innovation (NSI) playing in enhancing downstream linkages? • How are local skills being created and can these skills being transferred within the downstream linkages? • How does the global political economy of the diamond supply chain affect Botswana cutting and polishing industry and its linkages with local economy? • To what extent will the current financial crisis affect downstream linkages in Botswana’s diamond industry? • How will the depletion of Botswana’s current diamond reserves affect downstream linkages? What are the possibilities for new diamond deposits that can increase the time-path to depletion? • What are the policy implications of the above findings?

5. Methodology • Desktop research • Department of Minerals and the Diamond Hub • first point of entry into the industry. • Goal to interview all the key players in the existing downstream value chain, • the critical supplier (DTCB), • the manufactures (Sightholders), • the service providers (ancillary companies) • the institutions both public and private. • Challenges • Interviews were semi-structured and took from 30mins to 2 hours. • Interviews were conducted in English and Setswana • The data collected was overwhelmingly qualitative.

7. Supplier • DeBeers • Exploration • Mining • Sorting and Valuing • Rough Sales • Cutting and polishing industry • 1st attempt in the 1980s • 2nd attempt 2006 • Diamond Trading Company Botswana (DTCB) • 15% of supply

8. Aggregation

9. Buyers

10. Institutions

11. Pre-identified constraints • Skills • Assess to Finance • Assess to Technology • Business environment

12. Service Providers

13. Linkages • Linkages within the Botswana’s downstream diamond industry have recently been developed and are strengthening overtime. • Cutting and polishing industry is working to a large extent • Local cutting and polishing skills have grown from nearly non-existent and are growing over time but will continue to be a constraint for years to come • The Sightholders are well financed by their parent companies and access to finance and technology are not major constraints. • Quantitative data is not readily available and magnitude of the industry is yet to be determined. • All specialised inputs imported from major diamond cutting and polishing centres • None specialised inputs are imported from South Africa. • All Botswana offers the buyers is the availability of rough diamond supply and unskilled labour.

14. Linkages • All the factories interviewed: • imported their technology from the major diamond cutting and polishing centres such as Belgium, Israel and India. • None saw access to technology as a problem • “..if you have the money you can import the technology you need” • maintenance of the specialised equipment a constraint • lack of local technicians • cost of bringing in foreigners too high • visa process is a hassle. • existing servicing contracts with technology suppliers. • State-funded technician • Industry penetration

15. Linkages • The linkages between the downstream diamond industry and local economy are not extensive. • ‘enclave industry’ • capital is controlled by foreigners resulting in few linkages with the rest of the economy. • Local participation in knowledge intensive services is very low • companies relocated/expanded from South Africa’s cutting and polishing industry • set up front offices in Botswana to service their new clients • locals lack knowledge and understanding on the downstream activities • ill-equipped to take advantage of knowledge intensive opportunities in downstream industry. • high barriers to entry in the industry make it difficult for locals to become service providers

16. Supplier • marketing contract between DeBeers and the GoB, • the DTCB has the full distribution license to all of Debswana’s output. • the sole supplier of diamonds in Botswana. • 6 buyers of gem stones and one buyer of industrial stones. • market structure • supplier power • supplier driven value chain where the • governance structure of the value chain is controlled by one supplier • current marketing contract expires at the end of 2010 • renegotiated • to change the current structure of the value chain. • independent marketing channel outside of the DeBeers distribution channel • new producers African Diamonds and DiamonEx will be able to market their diamonds outside of the DTCB arrangement. • captive governance structure where • DeBeers sets rules • Price of rough diamonds • Quantity • Selling dates • Number of manufactures • Manufacturing companies

17. Buyers

18. Buyers • Vertically integrated • Rough and polished dealers • distribution offices • sales arrangements with jewellery manufacturers/wholesalers • own jewellery manufacturing factories • Design component of the manufacturing process • Technical abilities are critical • DTC Sightholder license • The best at the type of stones that they manufacturer. • Sightholder advantages • Branding • ForeverMark • Rough supply security • supply arrangements with jeweller manufactures. • Relationship between DTCB and the Sightholder • chosen out a potential 79 Sightholders (140) • supplier has a lot power • buyers need the supplier • “Headmaster/Student” relationship. • “Yes sir” • Threat of losing license

19. Buyers • Diamond industry • secretive • trust is critical • Production Information is not easy given out • Compete globally • Production figures valuable to the competition • Unable to determine each Sightholders production levels and capabilities. • All the Sightholders agreed that the biggest constraint • Hassle of doing business in Botswana. • Time is crucial • internet connectivity problems • or power cuts make a real impact on their timelines or turnaround times • Slow service delivery in general • Getting anything done is a real hassle • Reason for being in Botswana • availability of supply • strategic decisions still made by the parent companies • local operations focusing on production.

20. Service Providers • New ancillary services providers • Set up especially to meet needs of the new buyers • Reputation is everything in the industry • All the major service providers operate branches in all major diamond cutting sector • Recognised by the Sightholder • Already work with Sightholders in other cutting and polishing centres. • Barriers to entry very high. • Head offices located • South Africa • Major diamond cutting and polishing centre • Botswana • Front offices that focus • Servicing local clients

21. Major Changes • recession • production level. • 3300 jobs pre-recession • 2200 jobs post-recession • Survival mode • DDA Botswana did not survive the recession • license was taken over by Shernuj Diamonds • Botswana Diamond Manufactures • Botswana’s ‘diamond story’ branding campaign • Expansion halted • training more locals • retrenchments. • plan to rehire retrenched workers • rid of mediocre cutters and polishers. • Trading Platform in 2010 • Price discovery • Impact on Sightholders

22. Ownership Key factor to determining the breath and depth of linkages from the mining sector • Supply • Manufacturing

23. Ownership: Supply • ownership structure • interests of the GoB and interests of DeBeers are difficult to separate. • GoB interests • long term • welfare-driven • DeBeers shareholders • short-term • profit-driven • GoB’s 15% shareholding • conflict of interests • needs of the private sector vs. public sector. • threat of corruption • public servants • benefit from advancing the needs of DeBeers • Tombale • 1% benefit from DeBeers arrangement • “Suicide” of former Debswana MD • Leadership questioned

24. Diamantaire families foreign capital holding companies/parent listed in major stock exchanges maximise profits take advantage of the supply investment in Botswana was long term recover their initial investments majority of Own property limiting breadth and depth of linkages in the industry in knowledge intensive services limiting this knowledge transfer by focusing locals on local production only not the global aspects of the downstream industry local production managers very limited knowledge GVC chain operations of their parent company. strategic decisions parent company operations in Botswana only focus on production. foreign owners do not stay in Botswana Sight weeks important industry events like the Town Hall meeting. The GoB wants to create local expertise in the downstream diamond industry but the ownership structure is Ownership: Manufacturing

25. Infrastructure • Infrastructure does not appear to be a major factor in determining the breath and depth of linkages in the downstream diamond industry. • Lack of some infrastructure currently being addressed by the GoB. • Industry started necessary infrastructure was not in place • Informal exported • P40 million diamond security transfer facility • high security road connecting the airport and the diamond hub has also been built.

26. Skills Spillovers • Skill spillovers are not a major factor determining linkages in the current and polishing industry • some skill spillovers public servants trained in the mining industry • now working in the cutting and polishing industry • Industry specific skills • Piecemeal skills • Greatest potential in knowledge intensive services

27. NSI • Currently the NSI is not a major factor determining the breath and depth of linkages in the downstream diamond industry but in the future it is expected to become a more important factor. • The Innovation Hub • Knowledge intensive economy • Science and Technology Park • downstream industry • Oodi School of Technology • Courses that will provide skills for the downstream industry. • The importance of the NSI is determining the breath and depth of linkages is expected to grow over time.

28. Links with regional hubs • Links with the South Africa’s diamond industry play a factor in determining the breath and depth of linkages in the Botswana’s downstream industry. • inputs. • Two issues • Prices 15% to even 100% inflated in Botswana • time it took to get goods delivered • Service providers (AON, Marsh, ABN AMRO) with parent companies in South Africa and • employ South African labour

29. Policy • Policy is a key factor in determining the breath and depth of linkages in the downstream industry • Political will • Industry specific policy is not yet available • sensitive to the negotiations. • Incentives: • 15% corporate tax for manufacturing industry vs. 20% for the other industries • No export duties on polished diamonds • No import duties on equipment • No training levy • Training rebates • Tax on profits vs. tax on turnover (as in common practice in other cutting and polishing centres)

30. Additional MMCP Issues • Unavailability of quantitative data • Diplomacy

31. Still to do • Refine questionnaires • Complete interviews • Get more quantitative data • Understand traditional and untraditional cutting and polishing centres

32. Thank you