Governance in the Mining Sector -Mozambique and Botswana

Governance, Shmuverance

Last week the EU and US ambassadors in South Africa were reported to have  at the Ernst and Young  Strategic Growth Forum Africa 2014, saying that their private sector was really looking for places to invest but was highly concerned about good governance. The  EU ambassador to South Africa Roeland van de Geer was reported to have said last week “Governance, the political will and the political climate is incredibly important, and there is an increased interest in investing outside the EU in countries that are transparent and open. Money will go where it’s welcome,” he noted during a panel discussion at the EY Strategic Growth Forum Africa 2014. US ambassador to South Africa Patrick Gaspard was reported to have added that a combination of good governance and effective regulation in any State culminated in the “perfect storm” for attracting investment.

Responding politely and with all due respect to their excellencies, their conclusions  regarding the importance of corruption in determining investment seem to be at variance with the facts on the ground.  There is no doubt that the appetite for corruption varies from country to country and firm to firm and US and EU firms are under strict national laws such as the Foreign Corrupt Practices Act in the US not to offer bribes or involve themselves in corrupt practices when operating abroad. There is no way that large mining companies want to do business in the eastern Congo but there are people who will help. That is precisely why in every capital or every country in Africa and throughout large parts of the world you will find ‘brown bag men’ who are paid ‘commissions or finder fees’ to act as ‘agents’ for large transnationals and pay the bribes to corrupt officials, something that could not be done directly. In this way the good and the virtuous Americans and Europeans do not have to do precisely what businesses from Latin America and Asia have no compunctions or even national legal restraints in doing. Thus the commissions paid to the brown bag men are efficient ways  to operate in environments where their governments and share holders do not wish to dirty their hands with the reality of daily business.

Of Botswana and Mozambique

Perhaps no contrast is sharper than that between Botswana and Mozambique. On the Transparency International Index Botswana ranks as the least corrupt country in Africa with a position of 30^th in the Transparency International Index but  Mozambique on the other hand ranks as 119^th out of 177. It has minimal budget openness and while it is a  beautiful country, with fine food  and wonderful people  it is just not a country that has  developed a  reputation for the probity of its officials and ministers.

Corruption exists everywhere and Batswana complain bitterly about corruption in the country but they are simply not used to the sort of grand malfeasance found in Mozambique. It is simply on another plain, another dimension altogether from the corruption found in Botswana. Perhaps the best example from Mozambique of the nature of that country’s  corruption problem is the murder of Mr Orlando José, who was Director of Audit, Intelligence and Investigation of Mozambique. His responsibility had included the internal investigation of customs services. He was killed on 26 April 2010, only three hours after announcing on national television that three imported luxury cars had been impounded in Maputo for various illegalities. Regrettably the death of Mr Jose is not the only case in Mozambique’s struggle against corruption. The violence and level of corruption in Mozambique is simply off Botswana’s scale.

 Location, Location, Location!

If one believes their excellencies, and you have to be very young to do so, then all the good governance loving resource firms of the  developed world would be investing in Botswana and not touching Mozambique with a proverbial barge pole.  Yet the opposite is of course the case. Mozambique is experiencing a massive boom in foreign direct investment and it is expected that Mozambique will have a growth rate of 8.3% this year, up from 7.1% the previous year Why, one asks in  Botswana  which is not only highly placed by Transparency International but also by  Canada’s  Fraser Institute  which ranks it very highly as a place to do be involved in mining activities. So why is Botswana getting very little FDI and Mozambique is booming?

Botswana has Africa’s biggest deposits of coal,  with an estimated resource of some 212 billion tonnes though the known reserves are much smaller. Yet it is the smaller coal fields in Mozambique that are being developed by the Brazilian giant Vale and exports are expected to reach 50 million tonnes per annum within a decade. The answer is location, it will cost Botswana USD10 billion to build a heavy duty railway from the Eastern Kalahari coal fields to the Indian Ocean and then if we are lucky we will have to pay USD20 per tonne to get Botswana’s coal to Mozambique. Being landlocked is a real drain on the development of Botswana.  For that sort of money you can put up with a whole lot of corrupt officials and so the choice is obvious, the rich deposits of the eastern Kalahari are still in the ground while Mozambique’s coal is already on the market. On top of the coal Mozambique has huge off-shore gas fields which being developed by, you guessed it, European firms like ENI and American firms like Anadarko. 

To give primacy to the role of corruption in dissuading investors from exploring and developing highly profitable natural resources is simply disingenuous. But equally underestimating the potential longer term effects of severe corruption is commercial folly. Companies enter many countries expecting to deal with corrupt officials. But sometimes they find the level of corruption is such that it is simply not worth the effort of staying and they leave, no matter how rich the resource or the market. This departure of foreign investors happens frequently and often quite publicly in countries like Nigeria.

These are the views of the author and not necessarily those of any institution with which he may be affiliated.

 

 

 

 

 

 

 

A Tale of Two Breweries- The Limits of Sovereign Industrial Policy in a Globalized Market

(This story is from 2012/2013 and illustrates the, at times, predatory nature of industrial policy in Southern Africa)

 

It is with great sadness I found that Botswana has a structural deficit in the trade of beer. Year in, year out Botswana  imports much more beer than we export and the deficit is growing exponentially. In fact in 2011, according to CSO statistics, we imported Pula 124 million of beer up from a mere Pula 3.6 million in 2007. Exports on the other hand were a mere Pula 30 million, up from  Pula 0.5 million in 2007. Now the interesting question is why on earth Botswana imports that much beer? Is it because the local brewer Kalagadi Breweries Limited (KBL) which is a subsidiary of the global giant SAB-Miller  can’t keep up with demand for its chief brand  St Louis. Hardly! The reason is because its only real competitor ie Heineken Diageo which is in a strategic alliance with Namibian Breweries (NBL) has been making serious inroads into the local market. If you listen to KBL the only reason has been because of the way in which the alcohol levy was applied which gave the biggest import- Windhoek of which many Batswana are very fond. The alcohol levy used to be imposed on the import price of beer and on the retail price which gave NBL a massive price advantage over KBL. The other alternative explanation is that for years KBL has basically become a lazy monopoly in the market and could get away with one local brand St Louis* and really had to do nothing else until NBL and the alcohol levy shook the market.   

To thinking beer drinker ( i.e those before the third glass) the immediate response to this should be,  who on earth cares? Well it should matter but not to beer drinkers as long as we are allowed to choose where our beer comes from. But the trade statistics hide a genuinely fascinating story about business and government policy in SACU. The brewery game is dominated by two players in Southern Africa – SAB-Miller and Heineken Diageo which operates with NBL. Basically despite the variety of brands available on the SACU market to suit everyone from your day laborer to the CEO there are really only two commercial choices of breweries available and SAB-Miller remains by far the biggest player in the SACU market.  

But the really interesting beer story is not the Goliath of the industry ie SAB Miller but the David ie Namibian Breweries Limited (NBL). Unlike KBL, NBL is a local Namibian owned company which over many years has had considerable assistance from the Namibian government and has done  what almost no other brewery in Africa has managed to do,  which is to create a recognizable African brand across three continents. It now exports to over 20 countries. The Namibian government helped first by keeping SAB Miller from either buying NBL or establishing a brewery in Namibia in the mid-1990’s. The Namibian government then helped with a range of export promotion activities knowing full well the benefits to the country as a whole of having a globally recognized brand. But most breweries hate exports- they normally considered these junk volume sales because the profit margins are usually low due to  the transport costs of such a low value to weight items. This eats into the slim margins available in an industry that is so heavily taxed by government. But the real difference between KBL and NBL  was that the Namibian brewer had a tiny market of 2 million people in Namibia and it was either grow by export or die.

In Botswana KBL was never under such commercial pressure.  NBL, according to the company’s mangers derives some 60% of sales from exports  and its two biggest export markets are South Africa and Botswana. In 2010 Namibia exported Rand 1.3 billion in beer and it is one of the most important examples of the country's export diversification.

Why has NBL’s Windhoek brand been so successful? In part it has been what the beer marketing people call ‘premiumisation’. NBL took the German colonial origins of Namibia and turned it onto an advantage. The Rheinheitsgebot   which is the 16^th century German beer making standard is used for making Windhoek which assures that only water, hops and barley are used  which assures purity.  This has been a major selling point for Windhoek at the premium end of the market. In Botswana, KBL has, twenty years too late, discovered  that it might be losing the market not just because of price and taxes and has recently introduced a new premium St Louis Export which has started winning awards.   

           The economics of trucking huge volumes of beer across the Namib and the Kalahari from Windhoek to Gauteng and Gaborone is really poor. Because beer is a low value to weight item you simply destroy your profit margins. It is one of the reasons that SAB Miller’s business model in Southern Africa is based on  breweries in each of the countries in which it operates and then those breweries will produce not only the local brand but also the whole stable of SAB Miller products. This model is not unique to SAB Miller and almost all breweries look for local firms to produce their products under license. Guinness, the world famous Irish black beer is produced under license in a score of countries with no access to Liffy water as the basic ingredient for all Guinness purists.

In 2008 NBL saw the enormous advantage of trying to produce its products in South Africa rather than reducing its margins and shipping beer to Gauteng. So when its partners Heineken Diageo decided to establish a Rand 7.7 billion brewery in Sedibeng in Gauteng in the run up to the World Cup, NBL decided to shift a part of its production to Gauteng. The decision over where to establish the brewery was not purely a commercial one. The government of South Africa, according to NBL as well as DTI reports, provided considerable tax concessions to set up in such a high unemployment area. Since 2008, if the Namibian trade statistics are to be believed, both the value and volume of beer exports from Namibia have been flat. NBL says the figures are inaccurate but refused to provide its own. The bigger bottles are now being produced in Sedibeng and for the moment the smaller bottles are still coming  across the Kalahari. But eventually the transport economics dictates that exports from Namibia should diminish greatly.

Since the move to Sedibeng in 2008 there has been a perceptible shift in policy towards competition to NBL in Namibia. In 2010 the government of Namibia authorized the building of a brewery in the country by SAB Miller which it had previously blocked in the 1990’s. The SAB Miller brewery has not yet started construction.

There are at least two lessons from the SACU beer saga. The first is that South African tax concessions only strengthen the natural commercial forces that drive business to areas of high economic density like Gauteng. The government of South Africa might wish to stop aiding the loss of diversification from one of its neighbors. For all the smaller SACU partners all this is part of century long process of Pretoria behaving in a commercially predatory manner and is nothing new. It should also be an object lesson to those in Gaborone designing the current Economic Diversification Drive that foresees the establishment of local firms first that produce for the local market and then is a second and later stage move into exports. The experience of KBL and the whole SABmiller business model simply means that this will never happen because more exports mean less profits for the group as a whole. There is no avoiding the lesson of Namibia that a lean and hungry business helped by government to export can do much better in terms of export diversification than any inward looking approach to diversification. NBL exports ZAR 1.3 billion from Namibia and KBL exports P 30 million  from Botswana – the  numbers speak volumes.

[*According to senior officials from KBL the local Botswana  bee,r St Louis is named after city in the USA, not the French patron saint. Why one asks, would anyone in Botswana name the national beer after a big but relatively uninteresting American city? The response given to me by those officials was that this was done because Batswana like big American cities. This seems curious and if anyone has a better and  more credible explanation it would be appreciated]

Deflated Egos- the Place of South Africa in the African Economy

Deflated Egos- South Africa within the African Economy

And finally when Pretoria starts to think like Tswane it will also recognize the recalcitrant and ugly facts … it is now number two in Africa and it really needs its neighbours as partners to even stay second!

Some numbers actually do make people and countries change their whole way of thinking about their relations with other people as well as themselves. Take the GDP of China as compared to that of the world’s number one economy, the USA. Economists have spent the last few years speculating on when the day will come when China, with its fabulous rates of GDP growth, would finally resume its rightful place as the world’s biggest economy which it was for many centuries until European, Japanese and American colonialism systematically plundered the country in  the 19^th century. When that day comes and it will certainly come at some time between 2020 and 2030 the US will become  something that is not part of its national psyche, it will become number two!

In Africa we have had the same situation with South Africa and Nigeria.  For years, South African officials and politicians as well as the public, whether under apartheid or under democracy, could take for granted that their country was number one in Africa and that anyone north of the Limpopo was small stuff and could be taken for granted. It has resulted in an insufferable level of hubris and arrogance in Pretoria towards its neighbours that was painful to not only those in Botswana but throughout southern Africa. But suddenly in early April Nigeria recalculated its GDP and overnight its GDP  went from 42 billion naira to 80.2 billion Naira. The Nigerian economy had grown 90% overnight and South Africa was in a new position- number two in Africa!

Big doesn’t mean Rich

Unfortunately Nigeria has developed the reputation of being Africa’s home of ‘shonk’ and ‘dodgy deals’ and the sudden doubling of its GDP was initially seen by many who did not understand as something could be not possibly be accurate. However,  this recalculation was not a product of Nigerian fudging of numbers but the exact opposite, their statistics office finally got the numbers right. The old GDP estimates were based on weightings from a 1990 base. These weights should be recalculated every 5 years to reflect the change in the economy but statistics being what they are, i.e. a very low priority for every government, this was not done for almost quarter of a century. In 1990 Nigeria had no telecoms, no Nollywood to speak of and no booming and aggressive financial sector. This all changed in 20 years  with a new 2010 base,  lo and behold Nigeria was found to have a larger economy  than South Africa. This meant that the usual measure of how rich a nation’s citizens are, its GDP/capita went from USD1,500 to USD2,688 in 2013.  Of course it does not mean much because South Africa has some 53 million people and Nigeria 170 million and approximately 61% of those Nigerians are estimated to live on less than one dollar (9 pula) per day. This is up from 10 years ago when it was only 54%. The GDP per capita in South Africa  was US$ 5,920  and so we will have wait for  a very long time before the average South African worker would voluntarily swap places with his Nigerian counterpart no matter how big his economy may be.

Despite the brave face put on his country’s relative decline in economic importance in Africa by then South  African Finance Minister  Pravin Gorham you could almost hear the South African egos deflating  all the way from Pretoria. The sound will be much more audible from Washington when China overtakes them as the egos are much, much bigger.  But like his South African counterpart the average American worker is still a very long way from wanting to voluntarily swap places with his Chinese counterpart.

Hiding the Trade Numbers

Some statistics are just so embarrassing that its better to just hide them from the public. For years it has been impossible to get any reasonable estimate of South Africa’s exports and imports from its SACU neighbours, Botswana Lesotho Swaziland and Namibia i.e. the so-called BLNS. Like most commercial acts there was a good and a real reason for why these figures were not public. The good reason offered by South African officials is that all five SACU countries  are part of a customs union i.e basically one economy and officials in SARS could say that there was no need for SARS to separate these numbers. In 2009, before I was blacklisted by the South African Treasury and never again allowed to work on SACU issues, I was conducting an agriculture study for SACU and despite desperate attempts could not get access to South Africa’s agricultural exports to the BLNS. I was told first these did not exist, then I was told these were confidential. Then I was told that the data is completely inconsistent between one country and another, which is entirely true. Given that some ZAR 20-30 billion in SACU customs revenue is distributed to each of the 5 SACU members every year on the basis of the share of intra-SACU imports, the fact that the trade figures should not be public in countries that claim to be accountable for their finances seemed scandalous. But I suspect the real reason for the secrecy is that the import statistics of the all SACU members were so inconsistent between one country and another with SA and Namibia, for example,  never being able to agree that the actual distribution of the SACU customs pool was in effect not by any given formula but rather by agreement over which set of import statistics should use.

At the SACU centenary celebrations in Pretoria in 2010, the last SACU event to which I was ever invited, I publicly asked why such figures are not in the public domain in four countries that are democratic and respect the rule of law. My complaint and that of others was finally heeded by SACU which soon after started publishing some trade data and at the end of last year South Africa finally started to publish detailed trade data with and without the four BLNS.

Pretoria needs its Piddling Neighbours!

When you look at the South African trade figures you start to understand that there was yet another reason for keeping the figures out of public view. The trade figures show how important Africa in general is to South Africa and just how important the BLNS are to maintaining South Africa’s economic stability and a manageable trade deficit.  There are no full year figures yet available  on BLNS trade as they only started late last year. What the available figures say is that for the year from January to August 2014 South Africa’s trade deficit was a mere ZAR70 billion. But if you exclude the SACU partners the trade deficit  would have  been ZAR 137 billion. In other words South Africa on net has exported this year ZAR 67 billion to the BLNS more than it imported and that is one of the main reasons why they agree to pay the substantial transfers to the BLNS. South Africa’s trade deficit with every other region of the world is subsidized by its surplus with Africa and the BLNS countries. And that is why the South Africans fight so hard to maintain their rail monopolies and their dominant position in Africa in general and Southern Africa in particular. It is Africa and the BLNS and that trade surplus that allows Pretoria to maintain its trade deficits with all the other regions with which its trades.

It is time for South Africa to conclude that it needs its neighbours, not just as markets but as partners to its own economic development in which all must share- not just South Africans. This is a position that has long been recognized by countries like Kenya which have moved to a deep integration with its east African neighbours in the East African Community but not by South Africa in the context of SADC. And finally when Pretoria starts to think like Tswane it will also recognize the recalcitrant and ugly facts … it is now number two in Africa and it really needs its neighbours as partners to even stay second!

These are the views of the author and not necessarily those of any institution with which he may be affiliated.