Will the extra 600 Mcts at Jwaneng and Orapa save Botswana?

Will the extra 600 Mcts at Jwaneng and Orapa save Botswana?

Up until about June of last year everyone believed that Botswana was going to fall off a fiscal cliff after 2029. This was at the heart of the economic thinking in the country’s 10^th National Development Plan.  When BIDPA presented the results of an analysis of Botswana after diamonds in November we were happily told that we were wrong and that diamond mining  would go on to 2050. According to the geologists there is enough diamonds at  Jwaneng and Orapa for these mines to continue for decades.

Few people seem to comprehend how far reaching the new deposits of diamonds announced by HE the president in his state of the Nation Address after the elections. He said quite clearly that the country will remain a major producer of diamonds until 2050. But what does that actually mean?  HE gave no figures and there is no way that Anglo-American or De beers will say until they have completed a bankable feasibility study that is compliant with its obligations to the stock exchange. Anglo cannot just bandy around numbers- they have to be technically verifiable. But this number is the most important one in Botswana. Fortunately, though Mr Masire of the Diamond hub indicated, in Zimbabwe late last year that Botswana will be producing at about the current level to 2050. That means around 24 Mcts per annum. That means that the current resource assessment will mean that we have an extra 600MCT more than we thought we had. What difference will 600Mcts really make to Botswana’s future and  most importantly the government’s finances which are reliant upon on the taxes and profits made by De beers and Debswana?

What is known in the quasi- public domain about these new reserves? The most important fact was stated quite clearly and publicly by the Debswana CEO at the National Business Conference in Maun last November. He made it quite clear that it will require massive investments to extract these resources from Jwaneng and Orapa. How much is the question and I am reasonably confident that as yet De Beers has not yet  done the technical studies for this expansion  but the answer is in tens of billions over  a very long period.  Cut 8 which will not deliver anything near 600 Mcts cost about P28 billion.

Given that we are not going to know for a while, if ever, what these resources are  it is vital for those considering the future of Botswana to model what will happen with the extra diamond reserves that we know are there. It has been said that there is one extra fact about the new reserves. Orapa has always been a more prolific mine than Jwaneng but the value of Orapa’s diamonds are low because most are  low quality industrial diamonds with only approximately 40%  being of gem quality.  Not only are there extra diamonds the expansion at Orapa will transform that  mine from one which produces 60/40 industrial diamonds to one that, at least for several years will be producing much more high value gem diamonds similar to those produced at the much richer mine at Jwaneng. Again how big and how much is not in the public domain.

The Orapa and Jwaneng mines are clearly nowhere near their end of mine life and no-one should be surprised if they continue to help the nation  for up to 100 years as was the case with other  giant Kimberly mine in South Africa. But how long these mines last  also depends on the value of diamonds. The bigger the hole you have to build the larger the capital cost in digging it and the higher the operating cost of extracting a carat of diamonds from the many tonne of ore.

If synthetic diamonds, which are better quality than the real thing and undistinguishable to the naked eye from the real thing penetrate the jewellery market, the fundamental economics of diamonds will change. Diamonds maintain their long term value because they are considered to be scarce. If they cease to be considered a rarity and become as cheap as bricks, being produced in some Chinese factory then there is no way Botswana’s diamond mines or its prosperity can be guaranteed.  

Right now the big diamond miners including Al Rosa, De Beers and Rio Tinto are discussing ways in which they can protect their mining assets. They are moving towards developing a new ISO standard for diamonds that may be able to protect the diamonds value changing from the illegal penetration by synthetics but unless this has the teeth of a legal process like the Kimberly process it will remain voluntary and ineffective.

What do you do when you are an economist and you do not know how much something is going to cost? The answer is simple enough- get rid of your problem by simply making  an assumption! Economists are infamous for their assumptions and when it comes to something like mine costs at such an early point they are no different. I, along with other economists did some analysis of what is likely to happen to government revenues as a result of these extra deposits.

I assumed that the  new 600 Mcts could not be extracted without a capital investment  equivalent in real terms to the equivalent of three Cut 8s i.e. about  100 billion real pula over and above what investment was likely to be in early resource assessment until the end of the mine in 2050. Even if you assumed that the quality of the Orapa diamonds would increase for a number of years the surprising result is that the revenue projection for Botswana is not that much different than that  which existed without these discoveries. There is still a decline in government revenue over the next  35 years but not a fiscal cliff.

This of course makes perfect sense if you understand the logic of mining. Operating costs and Capital expenditure (capex) is going to rise as the mine gets bigger and deeper. Under the 25 year contractual agreement between the Government and De Beers in 2004  the government of Botswana gets 81% of what is called ‘free cash flow’. Free cash flow is the operating profit minus the capital expenditure or Capex. So as the costs rise as the hole gets bigger government will get less revenue. One day even Jwaneng and Orapa will close and unless we have diversified the economy or created a Fund for Future Generation like the Norwegians and the Qataris then Botswana’s children could well be much poorer than they are today. But there is no fund for future generations and that is why economic diversification is so important. Unfortunately after 35 years of trying the government has not succeeded in diversifying the economic base of the country. Botswana is now as dependent, if not more,  on diamond exports than it was 30 years ago.  

The extra 600Mcts of diamonds will not save Botswana, they will increase revenues by several tens of billion pula over what we could have otherwise expected but it is unlikely to make that much difference. In my estimates the extra revenues are equal to approximately of P42 billion over 35 years. If the capital cost of  expanding Orapa and Jwaneng is significantly lower (50%) then the benefit of the extra diamonds will be a more significant at some P80 billion over 35 years and while it is a significant increase in revenue it is still not enough to turn the country around.

As much as those economists in the government enclave would like to avoid what so many of them say is the impossible problem of Botswana’s economic diversification they cannot because the increasing numbers of unemployed youth will find a way of reminding them. In the end the obligation of those who govern must be to diversify the economy is the one thing that will provide jobs and along with it the peace and stability of the nation.

These are the view of Professor Roman Grynberg and not necessarily any institution with which he may be affiliated.    

The State of the Botswana’s Minimum Wage and the Working Poor

The State of the Botswana’s Minimum Wage and the Working Poor

A very wise economist once taught me that if all that it took to eliminate poverty amongst working people was to pass good laws then they would have been passed by good men and women a long time ago. If we want to raise the standard of living of those at the very bottom of the nation’s wage structure then the solution lies is simply raising their wages and their poverty would go away. Right? Well many economists would argue that if you raise the minimum wage significantly then workers will be simply be laid off and replaced by machines or the businesses would simply close. In some cases this is absolutely true. In many businesses the cost of wages paid to workers on or close to the minimum wage is such a low proportion of total cost that it frankly almost does not matter. But an increase in minimum wages will also results in what economists call changes in wage relativities ie. the wage of the person at the bottom compared to those above that really is the main effect of raising minimum wages.   

Falling Real Minimum wages

Why do countries like Botswana have a minimum wage? It is for reasons of fairness and justice. As those at the bottom of the wage structure usually have no unions and no economic power to negotiate a living wage with their employers the only institution that can protect them from an exploitative wage is the state. While there is a conflict between the competing pressures on government of protecting the poor from exploitation and not leaving business uncompetitive Botswana has done poorly in terms of protecting the wages of  the weakest workers. Between 1993 and 2014 the minimum wage went up for most of the categories ( excluding agricultural workers , domestic workers etc) from P1.25 to P4.50/hr. If however, you are a domestic service worker the minimum wage in 2014 was  P2.5/ hr or P20 per day. This is slightly higher than the global level of absolute poverty of $1.25 (P12.5) per day but not by much.  But when you look at what has happened to  the minimum wage after you take into account inflation, the so-called ‘real minimum wage’ then the worker at the bottom is much worse than in 1993 and he or she can buy much less. It would take an increase of approximately P1.40 per hour just to get the people on minimum wages back to where they were 20 years ago. The whole world has become more unfair and more unjust than twenty years ago and Botswana is certainly no exception.

When I spoke to one senior government economist about this he said the reason is that during the recession that started in 2008 the government did not want to see more people lose their jobs so it capped minimum wages right up until 2012 when it began to note the obvious fact minimum wages had fallen massively in real terms after the 7-10%  inflation of this period . This meant a very substantial fall in real living standards of the poor during this time was evident. The real minim wage in 2013 was some 28% below the 1993 level after taking into account inflation. If the low minimum wage policy had been associated with a period of rapid employment growth then the policy may be understandable and perhaps forgivable but this has certainly not been the case. Employment has been pretty much stagnant between 2009 and the end of 2013 with 390,00 employed at the beginning of the period  and 399,000 at the end.  Economists who defend the low minimum wage policy argue that the results would have been worse if they had allowed minimum wage to rise.

Nominal and Real Minimum Wages in Botswana

Increased Wage Inequality

But how does the person on minimum wage actually compare with the average Motswana? It would not be quite so bad if everyone were suffering and all earnings were falling after taking into account inflation. But this is not the case. The average Motswana who is in paid employment was 34% better off in 2013 than in 1993 in terms of real cash earnings after taking into account inflation. So in other words while the average Motswana was better off over 20 years the people at the bottom of the wage scale became considerably worse off. What this means is the ratio  of the minimum wage ( when multiplied by a hypothetical 176hours of work per month) to the average monthly income  has been falling dramatically and so Botswana is becoming much more unequal. In 1993 the minimum wage would have given you a monthly  pay packet of P220 whereas the average citizen was making P740 in terms of average monthly earnings. In other words the minimum wage was some 30% of the average. Fast forward to 2013 and the minimum wage would have earned you a monthly pay packet of approximately of P792 as compared to the average citizen who was making cash earnings of P5,009. In other words by 2013 the minimum wage had fallen to16% of the average or just over half what it was in 1993. By this standard  Botswana has become much more unfair and this really needs to be resolved for the most important economic reason.

By any international standards Botswana has one of the lowest minimum wages in the world when compared to the average income. When comparing the minimum wage as a percentage of GDP/capita, a common measure of average income, Botswana comes out as one of the lowest  amongst the 192 members of the to that of other countries. (http://en.wikipedia.org/wiki/List_of_minimum_wages_by_country). Only four or five countries like Kuwait where the minimum wage only applies to foreigners or Uganda which is a least developed country have a lower ratio of minimum wage to average income than Botswana.

What sort of minimum wage policy in Botswana ?

Some economists will tell you that you will get rich if you work hard and save and yes while it is important the most important factor in assuring the prosperity of a nation is peace, order and good government so that the citizen and business can thrive. This sort of policy induced inequality harms Botswana because it undermines the basis of social cohesion and undermines the stability of the nation. To its credit the government has already started moving in the right direction slowly by raising minimum wages since 2012 but this is just not enough. If government is modest in its objectives a P1.40 increase in minimum wages is needed just to return the poorest workers to the 1993 levels of purchasing power. If the government wanted to maintain the same ratio of the minimum to average earnings as existed in 1993 the minimum wage would have to increase to about P9/hour.

Clearly these sorts of increases in one shot would result in unemployment. They need to be introduced with time to allow the private sector to adjust where the sector uses large numbers of unskilled workers who are paid wages that are close to the minimum wage. But the government equally must be seen to recognize that we have a problem that undermines social cohesion and  the peace of the nation. This it must do publicly.

In those industries where there are many workers who are close to the minimum wage and would be effected by an increase such as in diamond cutting which competes directly with India  the government needs to help the union and the employers introduce productivity bargaining and move the entire sector to a tax free export processing zone as is the case in Namibia. (Almost no diamond cutting firms pay corporate taxes so little would be lost in terms of government revenue).

Neither  charity nor good minimum wages … just good jobs!

In the end though the condition of the poor in the country can only be alleviated by sustained economic growth. Minimum wages must protect the weakest in society and the evidence is that they have failed to do so in Botswana which, according to international measures ranks amongst the most unequal nations on earth. In the end though, neither acts of charity nor good minimum wage will help the poor. Workers the world over know that it is good, productive and well paid jobs  that is the only thing that will eventually drag them out of poverty. And in this we have failed the most.

These are the views of Professor Roman Grynberg and not necessarily those of any institution to which he may be affiliated.