Namibia's New Diamond Trading Firm

Namibia’s new Diamond Marketing Firm

Several weeks ago a member of the Namdeb board asked me what I thought of the new ten year agreement between Namibia and De Beers. My very cheeky response was ‘Why don’t you give me a copy and I’ll tell you?’ Of course there was no way that the agreement would be revealed. It was an agreement that would be seen only by De Beers and a few government officials.It is normal business procedure that the contractual arrangements between the governments and De Beers aresecret  but the degree of secrecy in the diamond industrysimply beggars belief.

In comparison to Botswana, Namibia’s diamondindustry  has, by the exceedingly low commercial standards of the global industry, long been a ‘paragon of openness and transparency’  withNamdeb at least publishing its income statement and balance sheet. The equivalent company in Botswana, the 50%/50% De Beers/ Botswana partnership called Debswana has never published its accounts and neither the  parliament nor that country’s  Auditor General have any access to the most rudimentary financial accounts of the country’s biggest state owned enterprise. 

The new agreement between De Beers and Namibia stipulates that Namibia can sell up to 15% of its own diamonds through an independent local agency. This is proportionately more  than the original amount traded by Okavanago diamonds in Botswana  which originally  marketed 12% of national production of Botswana in 2012 is legally expected to grow to 15%  by the end of this year. The Botswana ministers MrKitsoMokaila has said he wants 25% of Botswana’s diamonds to be eventually marketed by Okavango,The Namibian equivalent of Botswana’s Okavango Diamonds is the recently created Namib Desert Diamonds (Namdia) which is a 100% state-owned company and potentially a source of considerable earnings for Namibia. It is estimated that Namdia will sell N$2.1 billion (USD150 million) in diamonds every year.  This is a considerable volume of diamonds and given that Namdia will almost certainly be buying its diamonds at a standard discount (normally 10% ) from the De Beers Price Book,  there is room for considerable profit for either the people of Namibia or the buyer, depending on how the diamonds are priced and sold . That Namibia benefits assumes a number of things which are not immediately given; namely that Namdia is run efficiently and on a sound commercial basis and that prices are set in such a way so as to capture the benefits of trading diamonds for Namibia’s people rather than  for those who may have connections.

At the moment we know almost nothing about how the government intends to market these diamonds. The minister Mr Obe Kandjoze has been quoted as saying that said that .“Namdia will for the first time in the entire history of the Namibian diamond industry be selling exclusively Namibian diamonds, with the primary objective of price discovery that will be used to inform government diamond policy, going forward.”

In Botswana the government has done precisely the same thing and  while it has not said so it is for ostensibly the same reason i.e. price discovery. The polite explanation is that both countries want price discovery which means that given that De Beers still sets the world price and most other producers tend to follow, a system of independent diamond auctioning would help these  countries  determine whether they are actually getting a fair deal or not for the diamonds they sell through De Beers.

If the intention of the government in establishing Namdia is price discovery then it will have a very difficult task.  De Beers sets its price by itselfand  in secret  and then on-sells to its siteholders and to the governments of Namibia and Botswana at a discount to the Price Book. Any auction will ultimately rest on that price. In some of the De Beers related companies such as Lucara, which also auctions diamonds supposedly independently in Botswana , the management uses the De Beers price as reserve price for its own auctions. In other words real price discovery is not possible as long as the central commercial artefact of the diamond industry remains  the De Beers Book Price. De Beers has long ceased to be a cartel  since 2000 and  it is now what economists  call a dominant, price leading oligopolist.

There is much to learn from Botswana’s experience with its recent marketing arrangements through Okavanago Diamonds. First,  Okavango is run by diamond professionals straight  from De Beers and hence is unlikely to ever stray too far from the parent. In some countries relatives of the president are given such plum jobs in these companies and in Namibia it is worth avoiding such tendencies as they give an unfortunate impression of entrenched cronyism. Second, there is a relatively open and transparent auctioning system in Botswana which assures that sales do not occur just to cronies of the government at discounted prices who then simply on-sell them at a much higher profit. But price discovery is for government, not for the public and so the prices remain secret. No doubt the Namibian diamond commissioner, Mr Kennedy Hamutenya,  who has recently been appointed as acting chief executive officer of Namdia, and himself a long time diamond professional, will  wish to emulate many of the better lessons from Botswana.

If Namibia is going to follow the Botswana model for Namdia then its buyers will not be obliged to beneficiate any of the diamonds they purchase from the company. This is unfortunate as beneficiation ( ie cutting and polishing ) will only be undertaken by De Beers siteholders. This in effect puts a tax on being a De Beers siteholder who cuts and polishes in Africa, which is becoming an increasingly rare phenomenon. As neither Namibia nor Botswana have the stomach to introduce policies that will make cutting and polishing thrive in Africa then it appears that the future will be in trading and there will only be a few jobs at the top.The jobs at the bottom will go to India.

Whether  diamond trading  becomes a vehicle for cronyism or a genuine asset  that will help Namibia’s people will depend on the rules that MinisterKandjoze and  MrHamutenya establish for Namdia. In an industry where transparency is considered to be merely a nice idea for children and  credulous politicians, and opacity is the general rule, one should not be overly optimistic.

These are the views of Professor Roman Grynberg and not necessarily UNAM where he is employed.