In a secure facility on the edge of Gaborone, protected by towering walls and rifle-toting guards, an international team of experts sift through thousands of rough diamonds from the rich seams of Botswana. Just minutes away, amid the constant hum of machinery, dozens of Indian and African workers toil side by side, cutting and polishing the precious stones for sale on the international market.
In past decades, the raw, uncut diamonds would have been immediately whisked to Botswana’s airstrips and flown to the diamond centres of Europe for processing. Today, policymakers say that the polishing facility of India’s KGK Diamonds and the sorting and sales operations of the Diamond Trading Company – repatriated from London amid great fanfare – are evidence that the country is finally adding value to its exports.
“We’re trying to diversify from the export of diamonds into things like beneficiation, cutting and polishing,” says Biggie Ganda Butale, Botswana’s assistant minister for investment, trade and industry. “We want to turn Botswana into the diamond capital of the world so that when you mention Antwerp and other such cities, Botswana will be on the same keel.”
Such lofty ambitions have gained increasing prominence as Botswana embarks on economic diversification, an increasing necessity given the finite nature of the nation’s diamond resources. With estimates suggesting that the stones could run out by 2050, the government believes that beneficiation – the process of transforming raw diamonds into finished products – could prolong an industry that accounted for $4.6bn of exports last year.
Yet creating value-addition around dying mining operations is fraught with peril. As reduced demand for polished stones and a glut of diamond jewellery led to rough diamond price falls of up to 30% from 2014 to 2015, many of the companies in Botswana closed operations and laid off staff.
“Beneficiation is possible but the government have done nothing to address the productivity and cost issues which are the main reasons the industry is in decline,” says Roman Grynberg, an industry expert and professor in economics and management sciences at the University of Namibia. “Many firms shut this year and last, and employment in Botswana fell from about 3,000 to 1,500.”
Challenging the hegemon
As operating margins in the sector are squeezed to almost zero and industry leverage decreases by some $3bn to $13bn, according to consultancy Bain, Africa’s cutting and polishing operations have been pushed to the brink. In neighbouring Namibia, numbers are down to several hundred, while in South Africa, once the centre of the global diamond industry due to rich deposits, around 200 workers cling to their jobs.
All struggle to compete with India, the global hegemon of the trade and host to an estimated 800,000 employees. “India still has low-cost labour, but today it’s very skilled,” says Edahn Golan, a diamond industry analyst.
“So if Botswana wants to become a polishing centre, its challenge is to have the same kind of efficiency, cost of labour and skills that they have in India. It’s a very big challenge and at the moment it’s not doing well … historically manufacturing goes to where it’s cheapest.”
Grynberg believes that if Botswana is to have any chance of becoming a global beneficiation centre capable of competing with India, it must grasp the nettle of high costs and low productivity by opening up serious discussions with organised labour in order to hammer out a compromise.
“Part of the problem is the extraordinary high cost of skilled labour in Southern Africa. You have to provide massive assistance to lower the costs. The government needs to sit down with the unions and come up with productivity agreements, and link wages to productivity. Unless we address the issues, all the talk of beneficiating anything is way off.”
In a bid to sidestep this cost and productivity deficit, the government has launched a raft of generous incentives to lure companies to Botswana, including tax breaks for businesses and relocated workers. Central to this effort to woo foreign investment is an agreement with De Beers, the multinational mining house that retains a dominant industry position via its shareholding in Debswana, a joint venture with the government and the country’s largest extractor.
Under the agreement, companies that opt to base themselves in Botswana are eligible for a higher allocation of diamonds from De Beers. While that would appear to give a significant boost to beneficiation efforts within Botswana, critics say that the agreement imposes almost no mandatory commitments on companies to add value within the country.
As a result, while many companies retain their trading operations within Botswana, few feel compelled to put down permanent roots, especially when the market takes a downturn and the lure of additional diamonds decreases. Unless Botswana is able to leverage its power as a major producer to force change, says Grynberg, companies will continue to exploit incentives while putting little back in.
“The first thing you have to do is get rid of the system and tell the sightholders, sorry, no more diamonds unless you beneficiate them in Africa – then things will change. As long as the vast bulk of De Beers’ allocation comes with no obligations to beneficiate, when demand is contracting, they will shut the expensive operations in Africa.”
Capitalising on expertise
Against this backdrop, optimism among industry analysts remains rather more muted than that of ministers. With China entering the global diamond market as a world-leading producer of synthetics – factory produced diamonds which are increasingly finding a market among the wealthy – Botswana faces yet another challenge in proving its relevance both as an extractor and manufacturer.
Golan argues that although Botswana should diversify away from diamonds, perhaps focusing on education and agriculture, it should also look to Israel as an example of how to retain value in the minerals industry. Never a major producer and since eclipsed as a polisher by India, Israel remains a centre of global diamond expertise. If policymakers have the ambition to widen their gaze beyond manufacturing, he says, Botswana could profit from its accumulated industry expertise.
“Israel was the biggest manufacturer in the past, but today it has financing, knowledge and technology. A wide base was created which today supplies the industry worldwide. Botswana could be a resource for knowledge to supply the rest of the world, particularly in technology development.”
“Botswana has an advantage – it knows what it has, it can look 20 to 30 years into the future knowing diamonds will last that long. The knowledge that something will end usually pushes you to do something, and most countries don’t have that.”