Namibia’s $N2.2 billion  diamond subsidy to Botswana

A wonderful thing has happened to Botswana over the last three years. As a result of its suite of agreements with De Beers and the government of Botswana signed in 2011 Botswana rather than London has become the centre of De Beers diamond aggregation activity. It is right and fitting that Africa’s biggest producer of diamonds and the world’s second largest by value should now become the centre of the trade in Africa. It is something that all Africans should celebrate. All diamonds produced by De Beers have to be sent to Gaborone. This includes Namibian and South African diamonds as well as those produced in Canada.

As a result of this De Beers- Botswana agreement however all  Botswana’s neighbors in SACU are, based on 2017-18 data,  paying a massive subsidy of ZAR 3.3 billion to Botswana. Botswana is the richest member of SACU and is being subsidized. This includes some of the poorest countries in SACU such as Lesotho which is  losing some ZAR 750 million because of the diamond trade.  

Botswana has become the third biggest export market for Namibia. In 2016 Namibia exported N$ 10 billion to Botswana. Much of this was diamonds that previously went to London. And for every dollar we export to Botswana or any other SACU member we lose money from the SACU customs pool. Why, you ask? The SACU customs revenues that each country gets from the SACU customs pool depends on the size of the pool and on the share of intra-SACU imports. In other words the more you import from say South Africa the more revenue you get. This may help explain why so many comfortable and relatively well paid servants are in no hurry to assure we produce more and provide jobs.

Of the many strange economic ideas invented by man,  the SACU revenue sharing formula must surely rank high amongst them. Countries are subsidized to import essentially from South Africa. The more you import from SA the more money you get and the more jobs SA has. But if  Botswana imports more diamonds from South Africa and Namibia then it will be richer. Botswana has gone from getting 30% of all SACU revenue before the De Beers agreement to getting 36% based on 2017/18 results.

In a recent paper sent to both SACU and the Namibian Ministry of Finance called ‘Unintended  Consequences’ the present  writer with Dr Nyambe and Dr Kalihowa of UNAM have calculated the biggest loser  of the Botswana- De Beers marketing agreements is Namibia which based on 2017 data will lose $2.2 billion in revenue as a result of the diversion of trade from London to Gaborone. For those not accustomed to such large numbers what this means is that Namibia would be able to pay the entire budget of NUST and UNAM if the trade would revert to the previous situation where we sent Namibian diamonds to London.

Normally well informed sources who have access to the De Beers-Botswana Agreement indicate that legally Namibia, or any other country,  has the right to  step away from this agreement if it so wishes. Such a measure would damage Botswana and undermine its rightful  attempts to beneficiate and aggregate diamonds. More importantly it is completely unnecessary as there are several ways to deal with this that would allow Botswana to continue to be Africa’s aggregation centre and not have an effect on SACU revenues.

The first way is for SACU members to agree not to include diamonds in the calculation of intra-SACU imports but this would create a precedent. For the small SACU members the current formula, which is such a large part of government revenues  is sacrosanct and they will do nothing that undermines that formula. So politically it would be hard to reach consensus.

Another way to do this to tell De Beers and Botswana that these completely unintended effects were not foreseen and that while Gaborone should remain the aggregation centre for De Beers diamonds ways should be developed  around the ‘SACU effect’ the easiest way to do this is to first send the diamonds to London ( or at least outside SACU ) and then send them to Gaborone. This would have no effect on each country’s share of intra-SACU imports and would add slightly to De Beers costs.

Gaborone, like everyone else in the region, is fairly desperate for revenue and might dig in its heels, even though there was not the government of Botswana’s intention of obtaining a  SACU subsidy when it shifted aggregation  from London. But now that it has a subsidy it will not be happy to give it up. In that case Namibia has the legal right to walk away from the agreement and this would be a serious blow to Botswana’s development effort.

The movement of diamond aggregation to Gaborone is what Africa wants- more economic power to mineral and gem producers. That SACU members would even think of ending it shows once again how distortionary the SACU customs revenue sharing formula is and how absolutely essential reform  of the formula must be for the sound development of the region. The South Africans have long argued that it should become a development formula and not an apartheid era subsidy to the BLNS. They are absolutely right. 

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

Namibia’s Country Club ‘model’ -The future of SOEs in Namibia?

 

Some state owned enterprises (SOESs) are fairly obvious. With entities like Nampower, Namwater and Nampost government ownership is common in many countries  around the world. Others do not exactly jump off the page and really require a second look to understand how we got there. This is certainly the case with one of the poshest establishments in the capital, the Windhoek Country Club (WCC) which is 100% owned by the people of Namibia. 

 

The most obvious question is why would the state own a casino and  country club? It is certainly not at all a likely candidate for ‘nationalization’. The reason is historic. In 1994 Namibia agreed to host the Ms Universe contest but had no place to host it so with a period of 9 short months the hotel was built. The rest is history. 

 

But from a public policy standpoint was building the WCC with public funds just for a Miss Universe contest money well spent or was it just part of Namibia’s long problem with making highly political decisions on infrastructure project? But from a narrow commercial standpoint it was one of the more profitable investments made by the people of Namibia as unlike so many of the SOEs   this has  over the last number of years made a consistent profit.

 

Mr Jooste, the Minister of Public Enterprises  frequently uses the WCC as an unfortunate source of invidious comparison for so many of the other state owned hotels which do not have  a record that looks anything like that of the Windhoek Country Club.

 

But the interesting question is precisely why the WCC is making money and the state owned Namibian Wildlife Resorts (NWR) which holds some of the finest hotel and lodges in the country does not make money? NWR has become a financial albatross around the neck of the Minister of Finance and, according to senior government officials, has never made a profit? There is one obvious answer which jumps off the page and that is management and the board. In so many countries the Board of Directors of SOEs is stacked with politically appointed hacks, many from the public sector, who have no commercial ability and whose only interest is getting their board fees.

 

In the case of the WCC the management has long been in the hands of the Legacy Group which is a South African Hotel and leisure company with long years  of experience  of managing hotels in the region. NWR, on the other hand, while having a portfolio of some very fine properties in some excellent locations has never made a profit.  It has been and remains in the hands of government appointed managers.

 

Government ownership is not necessarily the problem with SOEs. Two minimal requirements for profitability are good management and a board of directors which is financially  astute and supportive of management. Until last year the NWR was run by a board of directors which was stipulated under the act and straight out of the ‘SOE Manual for Financial Disaster’. Under the NWR  Act (1998) the board was made of the Permanent Secretary of the Ministry Finance, Tourism , Lands Parks along with just one representative of businesses and labour. And the results were predictable- no profits. Last year, using the provisions of the new Public Enterprises Governance Act (2015) the government overrode the old NWR Act and appointed a new board made up of experienced people from the private sector.

 

However, by doing that the government has created a potential governance conflict at NWR. Do those on the board now reflect Namibia’s interest or simply that of the private sector? Tourism in Namibia is a peculiar business and for some private sector operators the fact that NWR resorts may not be well managed is a blessing in disguise. So if you own a private resort outside a national park, for example, and the NWR resorts in the park are not working effectively then you have an interest in maintaining the situation  exactly as it is. But those on the NWR  board do not appear to have an obvious interest in this sort of commercial sabotage. Those on the board from Avani or Swakopmund Hotel, for example,  have no obvious interest to support the  poor management at NWR.

 

If the recipe for financial success in SOEs as in private firms is based, at the very least, on having a good board and a good experienced commercial management, then why is NWR not making a profit? It is the second part of the equation that remains unchanged and the board has not yet brought in new management. Until professional management is brought in Namibia’s fine portfolio of hotels and resorts will remain a financial liability to the people rather than an asset. The question is why the board of NWR and the government have been unable to change the management and repeat the positive experience of the  Country Club? Perhaps Minister Jooste needs to consider the reasons why progress is not made in management reform. The longer reform is delayed the more resources government will have to pour into NWR rather than using them for important priorities like poverty alleviation. 

 

 

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

Of Fish and Diamonds

Several weeks ago Mr Daniel Kali, the resident Director of De Beers in Namibia wrote an article in The Namibian in June about the contribution of diamond mining sector makes to the economy of Namibia. In that article he claimed that the diamond industry had contributed some $N3.7 billion last year to the coffers of Namibia in the form of taxes and  other revenues paid. This was out of a total sales of some $N10- 11 billion and  no-one should have much to complain about with figures like that. But then Mr Kali made a comparison with another, unnamed industry, of similar value to the diamond industry which only made a meagre contribution of N$130 million. While the industry was unnamed the only industry of comparable value is the fisheries and this questions opens a can of worms, or a just a can of horse mackerel if you prefer. Fish are vitally important to Namibia and are the source of employment for 13,000 Namibians. More importantly, if we manage the nation’s fisheries properly, and that is a big ‘if’, the jobs will be there forever, unlike diamonds which are not forever.

Some might say that it is a bit unfair compare horse mackerel to diamonds and one can only reasonably expect that the diamond sector would contribute more to the economy. There is more in common between the two industries than immediately meets the eye. The fisheries sector generated some N$ 8.8 billion in exports in 2016 and yet it paid little in taxes. Needless to say the contribution of the fisheries is small but these numbers probably do not include income tax returns from all those beneficiaries of horse mackerel quotas who simply ‘flipped’ i.e. sold  their quota to actual fishing companies and received what was in 2016, a payment  of N$3,500 per tonne which is what was paid in Walvis Bay. In 2012 the last year for which data is available, the government earned only $130 million from the fisheries and it sold the quotas for N$109 million.  That means that given the total allowable catch of some 350,000 tonnes of Horse mackerel alone the government could have received N$1.2 billion if it were to auction these quotas at the going market price rather than allocate them to firms and individuals, some of whom who have the most tangential connection to the industry. Moreover, given the extreme reluctance of the Ministry of Fisheries to release the names of beneficiaries, it starts to bear a painful resemblance to the situation in the diamond industry.

This situation of opaque transactions and prices is very similar to the diamond industry. Namdia (Namib Desert Diamonds) was established by the government for one specific purpose and that was to sell 15% of Namdeb’s diamond production. The reason is, despite what Mr Kali says about the great contribution of De Beers to the economy, there has been the long held suspicion in government circles that the price De Beers pays for Namibia’s diamonds is below the market price. This mistrust of De Beers pricing is transnational in nature because there is only one price of diamonds and that remains the price established and kept secret by De Beers. Botswana, which owns 15% of De Beers and is a far larger producer of diamonds than Namibia, has also followed this route because, despite protests to the contrary, as it also distrusts its partner De Beers and the prices it sets. It has established a firm called Okavango Diamonds but unlike Namdia, Okavango auctions its diamonds and as a result there has been no controversy like that which has engulfed Namdia since its creation with continual allegations of underpricing and commercial impropriety. These allegation may be completely untrue and merely attempts by those not getting access to Namibian diamonds to discredit the process, as has been alleged by the former Diamond Commissioner and new Namdia CEO Mr Michael Hamutenya in recent press interviews.  But if the purpose of Namdia is the same as that of Botswana’s Okavango Diamonds i.e. ‘price discovery’ in the diamond industry which means finding out what the real market value is,  then Namdia’s approach of selling to a few buyers is not fit for purpose. President Geingob and the Minister of Mines and Energy, Mr Obeth Kandjoze need to look at what Okavango Diamonds is doing through its auctions in Botswana and they will conclude that the model should be copied by Namibia.  

But one should not assume too much. In both the fisheries and the diamond industry the purpose of policy may not be the efficient allocation of resources. It may be that government simply wishes to allocate both diamonds and fish to those who, for one reason or another will do as the government wishes as in the case of Fishcor or even Namdia, or are connected to the right people. It is a common objective of many post-independence states in Africa to create an indigenous commercial elite and these sorts of policies may well be designed to achieve this objective. The creation of such an elite is, simply put, a very ugly business as it requires transferring large, often public surpluses to them. It is akin to Count Bismark’s famous aphorism about making laws and sausages- both are best kept from the public eye. This policy will be opposed because the rise of this commercial elite may have nothing to with their commercial ability and everything to do with who they know. Moreover, if the elite is devoid of real commercial ability because it has accumulated wealth by favors rather than sweat, suffering or cleverness, then these people will not reinvest their surpluses effectively and are more likely to spend them on consumption.

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

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Diamond Beneficiation – Subsidizing the Living Dead

 

Earlier this year Mr Obeth Kandjoze, the Namibian Minister of Minerals and Energy very publicly tore strips off what remains of Namibia’s diamond beneficiation companies. It was a dressing down that the industry richly deserved. The office of the Diamond Commissioner indicates that only about 20 percent of the total beneficiation sales made by the Namibia Diamond Trading Company (NDTC) during 2016 was processed locally.

 

The Minister said  “We do appreciate the need for a flexible business environment that allows you to manage your Namibian business in a sustainable manner. However, the practice of exporting in some cases 100 percent of rough diamonds meant for beneficiation purposes is in our view totally against the spirit of beneficiation and I would like to put it on record that we condemn the continuation of this practice in the strongest terms,”

 

Namibia has allocated US$ 430 million ( to the 11 so-called diamond beneficiation firms)  that operate out of tax free zones in the country. This amount is supposed to be increased annually. So why are they selling their diamonds and not cutting them? The answer is simple enough. One of the prime reasons for being a De Beers (or NDTC) site holder is you get diamonds. But you can buy those same diamonds on any exchange whether it is Antwerp or Tel Aviv or Dubai so why buy from De Beers? The answer is simple – the De Beers prices are below the prices that these diamonds are exchanged on the secondary market. Diamonds are no different from any other commodity, they are cheaper at source. How much cheaper?  In a normal market, and the last couple of years  has not been a normal market you can flip a De Beers box for a normal gross premium of 8-10%. In good years it is much higher but in the last few years it was actually negative and site holders were losing money and walking away from their  allocations.

 

The main incentive for locating a factory in Namibia is that you get an extra allocation that is less than those normal De Beers site holders get and so the gross return the industry can make from just flipping the annual allocation of $430 million is between $30-40 million.  But the alternative is that they can set up a factory, some legitimate others mere ‘Potemkin factories*’, and cut stones here but it is far more profitable to flip the whole box or send it to a factory India for cutting where cutting costs are much lower.

 

In actual fact according to normally reliable sources in De Beers only 5, and industry sources suggest it is only 3, of the 11 firms operating in Namibia actually do any cutting at all. Yet under the  new policy which was announced by NDTC all of these 11 firms, even the ‘non-cutting, cutting’  firms will be rewarded by a minimum allocation of a minimum supply level of US$15 million ( $N200 million). The stated objective is to start all local diamond cutting and polishing factories off at a level of supply that ensures reasonable viability and sustainability.  Presumably this reward is because of their stellar performance of some of these firms in doing nothing for Namibia in the past. No doubt the new Diamond Commissioner will say she will monitor these firms.

 

If you speak to these firms some will tell you the reason that they do not beneficiate is they are not allocated the right type of diamonds for the purpose of cutting in Namibia. They can only make a profit from the larger  stones. De Beers on the other hand will tell you that they give allocations specifically tailored to the needs of the firm.

 

If one looks at the trade figures for polished diamond exports it tells a very sorry story of decline. Exports from Namibia of cut diamonds have halved over the last three years from N$1.7 billion in 2014 to N$875 million last year. Diamond beneficiation is in free fall.

 

Ironically last year the government of Namibia and De Beers gave the diamond cutting industry  a fabulous concession that amounts to a massive subsidy. In 2016 Namibia decided to give all its special stones i.e those stones above 10.8 carats that come from Namibia to be cut and polished by local firms. This is literally giving the local beneficiation firms the crown jewels. These huge diamonds are geological rarities (most diamonds are much less than 1 carat) and are enormously valuable but are amongst the most difficult to value. The government and De Beers need to assure close supervision of firms to make sure they are simply not ripped off by some of the firms in the cutting industry. According to  industry sources De Beers  is selling these special stones to local cutters at their  polished prices which decreases the profitability of the cutters. Access to these special stones is something the diamond cutting firms in Namibia have long sought but few of the 11 firms have the slightest technical capacity to cut diamonds of this size in the country. Some have been placing advertisements in the local paper to get local cutters ( almost none exist) with such experience in preparation for importing these cutters from Europe. Traditionally diamonds that large were sent to Antwerp, New York or Tel Aviv for cutting by an expert given that with a diamond that valuable you do not want a relative amateur doing the job. 

 

Just three years ago when the guru of the diamond industry, Chain Even-Zohar published in  Diamond Intelligence Briefs an article stating that the reason why these firms were locating in high cost Botswana and Namibia was because they were getting a  cross-subsidy from De Beers in the form of an occasional  special stone. At the time the De Beers spokesperson strenuously denied that this was happening, Now it is not just an occasional stone but policy.

 

The response of the demise of the industry in Namibia has been ever more subsidy. This is akin treating someone with a congenital skin condition with cosmetics. It is merely treating the symptom and not the cause, which is the lack of competitiveness.  As things stand at the moment we cannot possibly compete with the Indian goliath which has 800,000 people cutting diamonds, half of which originate in Africa.  To solve Namibia’s competitiveness problems is very hard work and very politically unpopular and hence there is no appetite amongst government officials to deal with this problem. They know the political and economic constraints. If you are a high bureaucrat and you try and fail to implement such a painful policy then your name will forever be associated with that failure, so why even try because failure will end your career. And so instead the nation fails to implement hard but necessary policy.

 

These are the views of Professor Roman Grynberg and not necessarily those of UNAM where he is employed.  *In the 18^th  century Count Grigory Potemkin, Prime Minister of Russia reacted to Empress Catharina  terrifying desire to ’see how the peasants lived’. He  built a village with fake fronts of  peasants houses  with happy dancing girls along the banks of the Dnieper River and moved it as the Empress proceeded to Crimea. 

State Enterprises In Namibia, India and China - who pays the losses

Public Companies in Namibia India and China- who pays for the losses?

Namibia, India and China have one thing in common- all have had, at one point or another, a strong socialist ideology that has meant that government has created a very large number of state owned enterprises (SOEs). These were seen as vital building blocks necessary to help the country develop and transform that could not be provided by the private sector. In the case of Namibia there numbers have grown from a mere 11 enterprises in 1990 to well  nearly 98 today. The governments in all these countries have not hesitated to use state ownership and monopoly as a means of achieving its objectives.

In India there are some 244 SOEs. Few of these Indian SOEs are considered to be paragons of high productivity but the government of India has created numerous monopolies and provided considerable assistance to its publicly owned firms to keep them afloat. Some 80% of the total profit made by state-owned firms in India or 1.2trn rupees (N$300bn), comes from coal, petroleum products, power generation and oil where the government has granted considerable assistance or straight monopolies. In India SOEs made an average return has declined from over 17% of equity a decade ago and this has declined to  what is now slightly over 11% in 2016. 

 In China the SOEs are a complete contrast to the situation in Namibia and India and have been a vital engine of economic growth, government revenue and employment for the country. In 2015 the Chinese SOE sector contributed 15% of the central government’s revenue, something that would have Mr Schlettwein green with envy. Averages always tend to hide significant variation and this is certainly true in China where many of the SOEs are mere 'corporate zombies' - the walking dead . But the government of China is only willing to move slowly with consolidation into what is emerging, because of employment effects. The largest SOEs will become global economic giants that once privatized will be able to compete fully on  a global scale. In China it has been the massive profits of state monopolies such as exist in tobacco, railways oil, mining as well as the very significant returns from state owned banks that have generally provided the profits that have allowed the government to fund its operations as well as the many smaller companies that the government is unwilling to privatize.  

While the exact number of SOEs in Namibia is contested, with IMF claiming it is 33 but a complete list of the 98  Namibian SOEs on the Ministry of Public enterprises web site.  The most profitable ‘SOE’ is of course Namdeb which, the De Beers resident director Mr Daniel Kail recently claimed, contributed $3.7 billion in 2016 in taxes royalties and payments to the coffers of Namibia. But Namdeb is not really an SOE, because the government owns 50% rather than 51% of the equity in the company. That 1% is what really makes a difference because it means the government has the right to obtain dividends but not to manage the enterprise as it wishes. Because of the relationship, which comes very much from the relationship between De Beers and neighboring diamond rich Botswana, management must be by consensus and that consensus is that Namdeb must be run on a commercial basis.

But when you start to go down the list of public companies that are owned by the state there are very few where the contribution is positive. Some have made modest positive contributions like Nampower, Namport and Nampost. Others have become a financial albatross around the neck of the Ministry of Finance. Air Namibia, Road Contractors National Wildlife  and Namcor have placed a significant financial burden on the nation over the years. Air Namibia alone has needed some $4.7 billion of financial injections since 1997 and there appears to be no end in sight.

None of this is of course news and these habitual SOE losses are common throughout Africa and certainly not unique to Namibia. But these losses are only possible if you have an economic sector from which the surpluses are generated to make it possible to pay for the losses. In China and India these are the commanding heights of the economy and state monopolies which are themselves heavily supported by government. And in our case it is in effect Namdeb that pays for the losses of the rest of the parastatal sector of the economy. Without the diamonds it would be difficult for government to sustain the level of subsidies that are offered annually by the Minister of Finance to these companies. Put another way Namibia is paying for the losses of its public enterprises with something even more precious than the nation’s diamonds, it is the most valuable of things- time. It is time that we have little of, as the diamond deposits will eventually end, the time that we are prosperous and being able to make sensible decisions by ourselves. The day will come when the diamonds are gone and if we continue on the current path of unsustainable losses by SOEs the decisions will then not be made by Namibians but by those who will dominate policy making in the country and that will be the boys (and girls) from Washington, the International Monetary Fund.   

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

What went wrong with Botswana?

What went wrong with Botswana?

 I dedicate this to my brother in law Thabo from Fancistown and who is a graduate of a good commercial tertiary institution in Botswana but with the exception of a couple of internships and short term contracts has been unemployed for five years. He is a very bitter and angry young man whose story is so painfully common in Botswana. May God help Botswana!

If you look at the university enrolment figures for Batswana at universities it is the highest rate in Africa. On average only 8% of Africans of the relevant age group go to a tertiary institution. In the developed world this averages 30% and Botswana, which is the best performer in Africa the number  was around 28%. Those from the international community  are effusive about Botswana’s education success but that is only because they can never bother with details and prefer ‘the big picture’ from Europe and America. In fact the high rate of tertiary enrolment in Botswana  is the starkest testimony to the nation’s utter failure to diversify its economic base and create jobs for the young. This university enrolment figure is as high as it is in large measure because the government gives cash grants to students but there is no relief once they graduate. They have internships but no almost no prospects for getting full time employment  so many continue to study as the only economically rational alternative to returning to the village or starving in town.

But why are there no jobs in Botswana? It is after all the same international community that lauds Botswana for its absence of corruption, for its fine economic policies and its excellent macroeconomic management. But in 2017 with the closure of BCL the country is now more dependent in diamonds for its exports that at any time since the opening of the Orapa mine in the late 1960’s.So what has gone wrong with the country that had so much going for it.

In 1979 President Masire began the FAP ( Financial Assistance Policy) which provided subsidies to those starting businesses that would diversify the economy away from diamonds. He was keenly aware that diamonds are not forever and that without diversification the next generation would have no employment prospects. The program failed completely because of abuse of the subventions provided, outright corruption and because Botswana was a completely uncompetitive . The program was abandoned in 2000 and replaced by CEDA ( Citizen Entrepreneurial Development Agency)

This is where Botswana’s problems began. President Mogae made a fundamental policy mistake. He accepted the advice that  the sort of highly interventionist assistance provided by the FAP was flawed and should be replaced only with  a sop to Batswana entrepreneurs starting out in business ie. CEDA. For the last 17 years there has been nothing that resembles a real industrial policy in Botswana, only empty policy documents. This was in effect a complete abandonment of industrial policy and neither President Mogae nor subsequently President Khama have done anything vaguely looking like a comprehensive diversification policy.

Corruption- what corruption?

What should have been done in 2000 is straight forward enough. The failure of virtually every industry developed under the FAP was a result of the fact that there was no reason to be located  in Botswana and whatever could be made in Botswana and provide jobs could be done cheaper somewhere else. Thus there was no attempt to address this problem of the fundamental cost structure of Botswana and as a result the subsidies would have to continue indefinitely which every beneficiary understood was impossible. The Ethiopians, unlike Botswana,  have tried to directly address their cost stucture. They are providing cheap electricity, cheap water and cheap labour to industry so that the fundamental infrastructure and costs make Ethiopia the sort of place where investors will come without significant subsidies. Instead Botswana tried to solve its water issues with  the North-South water carrier and Moropule B. The former was developed using plastic Corning pipes against all the technical advice of all the engineers and was such a dramatic failure during the recent drought. This was because one very senior politician had shares in the company. Moropule B  construction contract was given to a Chinese company that had never before built such a large power station.  It too was a failure and now the government intends to privatise the project. So corruption  is not a problem in Botswana but if ever there were honest investigations of these two key infrastructure projects then the myth of an honest public service driven by the public good would be exposed. But in Botswana it would never happen because the heads that would have to  roll after such an investigation are very big indeed and they are just too big to fall.

In  2010 I convinced the Ministry of Finance to ask an unthinkable question- why is the cost structure of Botswana so high that people do not wish to invest? And after years of research and a major international comparative study of costs  we found  that the main reason was not transport or even infrastructure though they did matter. The biggest reason  for Botswana firms being uncompetitive was the high cost of  professionals and management in Botswana and not the cost of unskilled labourers whose wages were, on average actually lower than India. We recommended policies that would break the cosy cartels of lawyers, accountants, architects and  engineers and managers that made Botswana so internationally uncompetitive. You could not do this by just training more Batswana, you had to bring in foreigners who had their qualification recognized unconditionally upon arrival because they would gladly undercut their local competitors. But to Botswana’s contented elite bringing in thousands of Zimbabwean and Zambian professionals to compete with them and lower their salaries was simply unthinkable.

When such microeconomic reform is not politically possible then there is a standard but far more brutal macroeconomic tool  that will deal with the same issue of lack of competitiveness. That policy is one of continual currency devaluation until the local prices, including wages and salaries, adjust downwards to the point where the country is internationally competitive and investment begins. But there is no institution that more typifies the contented Botswana elite than the Bank of Botswana. Its main aim is the containment of inflation, and  that it continually argues is its main contribution to the nation’s development. During the last three years of Zuma-induced rand devaluation, the pula has appreciated against the rand and inflation lowered in the country. But it has made Botswana even more uncompetitive ( in dollar prices)  against any of its  neighbours.

Botswana will never be internationally competitive until its elite and its people are willing to pay the very high price for competitiveness. It is not free and the journey will be ugly with no guarantee of success. But the contented elite want nothing of this. They have created what economists call an efficient economy where the country’s diamond revenue is relatively well managed and distributed to them. However,  in terms of dynamics, ie transformation of the country, the economic policies of the last 17 years have been a complete and utter failure.

Lies we tell our children

For years good parents have told their children a story that belongs to another age. ‘Study hard at school,  go to university, get a degree, get a good job and you will live happily ever after!’’ It is a story that was perhaps true in another time but in the 21^st century in Africa  in the age of robots  and automation and Chinese  competition to African industry  it looks more like a fairy story. But this myth is also the basis of Botswana’s development policy as it is through large swathes of mineral rich Africa. Just educate the youth with the diamond revenue and the next generation will create the opportunities that will bring Botswana even greater prosperity. This is the same advice given to mineral rich countries  all over Africa. And when you have temerity to ask the smug representatives of the international community where those opportunities might be, given the pace of automation and the impact of China on costs, the answer is invariably the ‘The market will provide’.

 But the unemployed university  graduates do not believe this. Instead they believe the north and west African version of the 20^th century fairy tale  which goes ‘’go to university, get a degree and then get on a boat to Europe  where, if you survive the crossing , you will  have the privilege  of doing the same menial low paid jobs for white people that Africa’s  ancestors, who were forcibly shipped across the Atlantic, did two hundred years ago”.

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

The World Bank and the De Beers Cloak of Secrecy

The World Bank and the De Beers cloak of Secrecy

          In early May, the World Bank took a rare swipe at Botswana, its star pupil in Africa. Mr Nils Handler, a consultant for the World’s Bank complained in his report ‘Botswana Mining Investment and Governance Review’ that Botswana kept its mining contracts secret and that even the country’s Auditor General was unable to review them. One could just as easily replace the word Botswana with Namibia and say precisely the same thing.

         But whose fault is this? After all De Beers was, until the Oppenheimer family sold its 45% share to  Anglo-American in 2011, a supporter and founder member of the Extractive Industries Transparency Initiative (EITI) , an international organization which supports openness in mining contracts. Anglo-American remains a member of EITI but supports the De Beers impenetrable cloak of secrecy that completely envelopes the diamond trade. When questioned De Beers  points out that countries are the real driving force in the EITI and none of the diamond rich countries in southern Africa have joined what is widely seen in the region as an ‘arrogant post-colonial instrument of European domination’. 
         The World Bank is a strong supporter of transparency but in this case it is completely missing the point. Assume the unthinkable and  tomorrow Namibia and  Botswana decide to publish the contract it has with De Beers. This of course assumes that De Beers would agree to what they would surely see as a reckless act of commercial folly. The simple fact is that it would make little  difference at all to the diamond revenues in either country because just about every other aspect of the international trade in diamonds is cloaked in such commercial secrecy that knowledge of the terms of the contract  does not make it easier to understand the trade.
         The secret 2004 agreement between Botswana and De Beers which lasts 25 years, is said to give Botswana 81% of the Free cash flow ( cash flow minus CAPEX) from its mines. One can reasonably assume that Namibia would not settle for a worse deal and that its agreement is virtually identical but if I am wrong I am happy to be corrected. In any other mining industry such a split of revenues (81%/19%) would seem absolutely brilliant and would show how well Botswana  and presumably Namibia negotiated their contracts with De Beers. 
         In diamond trade the first question one has to ask is 81% of what? The answer is 81% of whatever De Beers says the diamonds are worth. But in the diamond industry what the price is and what the volume are less than transparent. The De Beers Price Book is a commercial  secret. In 2014 there was a massive scandal in the diamond industry in southern African when the De Beers Price Book was leaked and the company threatened to take legal action.  To anyone in the minerals sector the idea that the price of a product is secret seems like a medieval throw-back  but diamonds  may be mined but they are  certainly not a mineral. There are over 5,400 varieties and grade of diamond and the De Beers Price Book remains to this day  the central commercial artefact of this opaque industry.  The competitors with De Beers such as Al Rosa and BHP Billiton time their diamond sales around the De beers sales. De Beers, since 2002, is no longer a cartel but it remains what economists call a dominant oligopoly in the diamond industry and still effectively controls price. 

          But the cloak of secrecy is not just around a price, it is also about the size of reserves and the quantity that is and will be traded. De Beers power stems in part from its on-going relationship with the countries that supply it with diamonds and this in turn depends on just how many diamonds are in the ground. In 2015 when reports were released that diamond production would come to an end in Botswana in the 2020’s a new ‘resource assessment’ was suddenly released by the government that in fact diamond production diamond production in Botswana would continue until 2050.The report said that Botswana would produce another 600Mcts of diamonds over and above what was expected.  Of course because this so-called 'resource assessment' was not compliant with the standards of the Johannesburg stock exchange where Anglo is listed meant it had to be  released by Botswana government officials and not by De Beers or Anglo American.
        Yet there is an even stranger and more difficult question that would undermine any assessment of what Botswana or Namibia actually get of the fabulous wealth that lies in both countries. The articles of association of De Beers in Luxenbourg from 2002 state that ‘DEBSWANA will be a Business Partner of the (De Beers) Group for so long as the DEBSWANA Group sells its entire annual diamond production (excluding, for these purposes, Special Stones)’

This implies that there was another marketing channel for ‘Special stones’ which are  considered the most valuable of diamonds( defined currently as diamonds above 10.8 carats) and this raises a question of how these diamonds were marketed and who benefited from this trade? Was there a similar and separate marketing arrangement for Namibia’s extremely valuable diamonds?

         But even if all the questions about the real price and quantity of diamonds were answered would knowing the contract make the slightest difference? Not really. The accounts of Namdeb are at least public but the accounts of the much larger Debswana in Botswana remain secret even following the 2015 EU Transparency Directive which obliged all firms like Anglo listed on European exchanges to publish their accounts and revenues this did not occur for Debswana.   At that time Anglo disclosed the revenues and profits from Botswana but not much else. What the Anglo American report of 2016 did state was that of the 94 De Beers related companies that it had inherited some 30 odd, were located in tax havens or countries with secrecy provisions. 
           They are very nice people in Washington at the World Bank and their calls for transparency in contracts are admirable but in the Byzantine world of the diamond trade we stand far from  the light because for almost 150 years De Beers and it cloak  of secrecy have stood as barriers to the people of Africa knowing the real value of their diamond wealth and it is likely they will never know. Secrecy creates market power and hence profits and will not be abandoned easily.
These are the views of Professor Roman Grynberg and not necessarily UNAM where he is employed. 

Nampower Turkeys Vote for Early Christmas

                      Nampower Turkeys Vote for Early Christmas

Last week’s announced electricity price increase of 8%, which is above the current rate of inflation of 6.7%, is part of a long painful series of price increases that has been demanded by Nampower. Last year the approved increase was 16%. These huge price increases are driven by a number of factors including catch-up on past electricity prices. Nampower has a plan to increase the price of electricity to consumers at a rate of 15% per annum until 2020, that is assuming that the Electricity Control Bard (ECB), the government’s regulator, will allow them to do so. But even if this commercial folly is permitted by the regulator there have been some fundamental technological changes in electricity generation that set clear limits to the path of price escalation that Nampower is pursuing.

On the supply side the country remains dependent upon two source of power. One is form the Ruacana Hydro projection the Kunene which supplies some 345 MW of power, another 80 MW comes intermittently from the Van Eck coal fired plant in Windhoek. Both of these work intermittently depending on the rains in Angola and the supply of expensive trucked coal for Van Eck. This creates potential installed capacity of approximately 480 MW  in 2016. While peak demand in July 2016  was approximately 600 MW. The second source of power is based on imports mainly from South Africa which in a “normal” year supplies 60% of the country’s energy needs . While Namibia is committed to increase domestic capacity, the situation which existed from 2008 onwards when  Eskom did not have the capacity to supply South Africa’s demand, let alone the neighbouring markets of Namibia, Botswana and Zimbabwe has now completely changed.

 Demand for electricity in South Africa has started to fall while capacity has started to increase substantially. Eskom now proudly says that it has 4GW of excess power and this is only set to increase. By 2022 the two thermal  mega-plants at Kusile and Medupi are set to be operating at full capacity. South Africa’s capacity will then rise to 55GW, almost double current demand. The decline in demand in South Africa is a disaster for all concerned, as much as the load shedding was of several years ago. The excess demand is a sign of the weakness of the South African economy.

Electricity consumption is always a good indicator of just how  an economy is doing and the decline in demand is widely seen as a ‘Zuma’ effect and the lack of confidence in South Africa by the business community.

 As a result, Eskom is now hungry to sell its excess capacity to its neighbours and this will make developing local capacity all the more difficult as it will now be willing to make contracts that are cost reflective but coal fired plants are still amongst the cheapest. This will only encourage a return to the bad old days of  complete  dependence on South African supply and will  only breed future energy insecurity because when Zuma finally  leaves and simultaneously the economy begins to recover, South Africa’s appetite for electricity increases, we could see a repeat of the situation that existed over the period 2008-2015. This is a complete  reversal of the situation just two years ago where South Africa’s neighbours, including Botswana and  Namibia, were forced to buy electricity from Eskom at ‘spot’ prices, i.e. the highest prices which are linked to the cost of generating electricity using diesel generators. It was these exorbitant prices that were charged to Botswana and Namibia to keep the lights on that Namibians seem to be paying for now in higher prices agreed by the Electricity Control Board.

 But something almost unnoticed has also happened in Namibia. In 2015 the government agreed to the development of what is called a ‘’feed in tariff’’ to allow the development of solar PV and wind powered systems. License holders can charge 1.37 Nam$ per kWh generated from a 5 MWSolar PV plant. These were prices that were considerably above the price normally paid for electricity by Nampower from Eskom.   Four small 5 MW plants are already in existence in Omaruru, Otjiwarongo, Tsumeb and Grootfontein and a total of 70MW of similar types of plants are expected to go on grid by mid 2018. On top of this, the regional electricity distributors to which Nampower sells,  such as the City of Windhoek along with other towns  have agreed to pay a price for electricity generated into the local grid by private suppliers at what is called the ‘’avoidable cost’’ which is approximately $1.13 per kw hour. This will mean that when I set up a solar unit on my roof and I generate more electricity than I need at home my electricity meter will start going backwards and I will be credited $1.13 for every kwh that I generate at home.

 What is happening to electricity generation  globally as well as in sun-blessed Namibia is nothing short of  a brave revolution where solar power will  do to Nampower what the cell phone did to landlines and to Telecom Namibia. I will soon be both a producer and a consumer of electricity. The only real question is does this make any commercial sense for me personally? Installing a solar system including the most important component, which is a solar hot water system, will pay me back in 5-7 years. By that time I will have paid back the $80,000 or so investment and stopped paying the City of Windhoek anything significant and they will start paying  me.

While  the capital cost of installing a solar system at home is still fairly high it is now appearing like it is viable here. You can get a tailored loan from banks like FNB to install home solar systems. What is certainly the case is that the price of installing solar costs is continuing to fall and it will, in a few years, become normal for people in Namibia to generate their own power at home.

 

Namibia, has committed  at global  climate change conferences to have 70% renewable power by 2030. Given the relatively  high price that was agreed initially to be paid for solar, N$1.37per kWh for a 5MW facility,  as solar  expands Nampower will no doubt be coming back to the ECB asking for ever greater electricity prices which will only accelerate the switch from them to home generated power. Nampower’s pricing policy of asking for 15% per annum is like the proverbial turkey voting for an early Christmas.  

 There is a more important development issue as Namibia plans to be not only environmentally sustainable but also to industrialize. If one looks at the history of resource rich countries that have actually transformed their economies, whether it is Malaysia or South Africa they have done it with cheap electricity. There is nothing cheap about the green road Namibia is now travelling and it will only serve to make manufacturing in Namibia even more expensive. Namibia cannot industrialize with expensive electricity and certainly it will not be able to beneficiate base metals which are particularly energy intensive. The best way around this is a clear two tiered pricing system based upon high prices for consumers and much lower prices for industry based on the cost of generating hydro power from Ruacana. Hydro remains the cheapest way to generate electricity and a price of electricity based on this will help give industry some relief from the high cost of environmental sustainability to which the government is committed.

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

Lies we telll our children!

Lies we tell our children!

For years good parents have told their children a story that belongs to another century. ‘Study hard at school, we tell them, go to university, get a degree, get a good job and you will live happily ever after!’’ It is a story that was true in another time but less and less in the 21^st century and  certainly not now in Africa. The facts are well known to many graduates. Young people have believed the stories that their parents told them and done as they were told. But legions of them have come out of Africa’s universities and found nothing but unemployment facing  them in future.

The Supply Side- Blaming the Victim

The question is what is the cause of this situation and what should be done to give young Africans a brighter future than what currently awaits them?  There are two explanations that are offered. The first is supply driven and that is that we have simply created too many universities which have created an enormous supply of young graduates many of whom lack even the most basic of skills that are of use to either government or the private sector. Between 1990 and 2007 the number of universities in sub-Saharan Africa has grown from 24 to 460. Most of these universities are private and many are of the most questionable standard. At present the estimates are that there are over 680 universities in sub-Saharan Africa. All of sub-Saharan  African has a tertiary enrolment rate of only 8% of the relevant population which is much lower than the rest of the world. If Africa met the world average of around 30% we would have twice as many unemployed graduates.

It is easy enough to paint a picture of many African university graduates who have weak mathematical skills and who are incapable of writing a complete and coherent paper. While there can be no doubt that in some cases this is true in many cases this amounts to blaming the victim. It is precisely this problem that so many observers try to depict as the fundamental cause of unemployment throughout Africa. The argument goes that if we could just produce better graduates then all will be good and the good ones who will go to the ‘Centres of Excellence’ that the World Bank hopes to create in West Africa will all find jobs. In other words  the unemployment is a supply side problem. Just produce a better graduate and the demand will be there.

But will it? There is no doubt that the involuntary unemployment amongst graduates from the elite institutions in the developed and the developing world is almost zero. But what of the rest of the graduates? No-one has a comfortable answer to this question. The rest are just getting an education and only those who will come from elite institutions will find jobs.

Demand Side Problems -Its the Model!

 Why are there so few jobs created in Africa, whether they are for graduates or otherwise?  

The free market, liberal economic model we are in creates few private sector jobs in anything other than the world’s low cost centres, mostly in Asia. Manufacturing in Africa is virtually non-existent, extinguished in the 1980’s and 1990’s under World Bank policies and the effects of trade liberalization in the 1990s. We make nothing except holes in ground and a narrow but traditional  range of raw agricultural products. We export minerals using capital intensive techniques that create few jobs and import manufactured good from Asia. In mining technological change from underground to open pit mining has decreased employment levels enormously.  The globalized free market economic model emphasizes efficiency and Asia, in particular India and China, are simply more cost efficient than almost all Africa countries.

 Donald Trump is the American worker’s response to this economic model which has taken their highly paid jobs and moved them to lower cost China and Mexico where dynamic growing economies have emerged as a result. In return Americans, like Africans, get cheap consumer goods which they can afford to buy if they still have jobs. This model is efficient but hopelessly unsustainable and it is at the heart of why the world is becoming more politically unstable. No amount of blaming African graduates or building elite institutions will solve the demand side problem because it is a product of the global economic model we live in.

 There is an ’alternative Nkrumahist fact’ that is particularly relevant in explaining Africa’s predicament. Between the Congo River and the Cape are 250 million hard working, industrious and very entrepreneurial people who have good land, water and every conceivable minerals that should make them as rich as any developed country and yet, by and large, these African citizens of the SADC region live in poverty. It is only because Africans live in tiny countries, defined by white colonialists 150 years ago, and are ruled by what are too often malicious and corrupt elites that no  solution to Africa’s situation is found.

 Only a change of Africa’s economic model to one, paraphrasing  Donald Trump’s words, where ’Africans puts Africa first’ and seek to develop a large competitive African market, focus ruthlessly on  developing competitiveness and our manufacturing capacity will the myths of the last century have any meaning to our unemployed children. Until that time comes, the North and West African version of the 20^th century story  will remain the most relevant to our children  ‘’go to university, get a degree and then  when you find yourself unemployed, get on a boat to Europe  where, if you survive the crossing,  you can work illegally,  doing the same menial jobs for white people that the ancestors did when they were forcibly taken across the Atlantic 200 years ago”.  

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Why Rio Tinto Must Go !

Why Rio Tinto must go!

It should be noted that in 2018 it was announced that the Rossing mine  will be sold to Chinese interests. 


Subsequent to the submission of this article to Rio Tinto and the Namibian newspaper  here in Namibia, Rio Tinto published its  annual returns which show that the company made a not insignificant profit in 2016 after two years of losses. The turnaround in Rio Tinto changes little in this argument as  both spot and contract prices of yellow cake are in decline.

As you stand at the edge of the tailing dam at Rossing uranium mine in Erongo, above the processing facility which  makes the yellow cake which is sold by Rio Tinto, the future of uranium becomes clear. When you peer into the distance you can see the giant Husab uranium mine which  the Chinese owners say will eventually be the world’s second largest uranium mine after the Mc Arthur river mine in Canada.

It is only when you look at the accounts of Rio Tinto that you begin to realize just how hard the times have been. In 2015 the Rossing  mine lost N$351 up from a loss of a mere N$91 million the previous year. When you start to look at the production. In 2015 Rossing produced 1,245 tonnesof uranium oxide (yellow cake). This is less than half the production coming out of the mine in 2012 when Rossing produced well over 2,600 tonnes of yellow cake. But that was ‘then’ ie  before the effects of the Fukushima ‘incident,  as Rio euphemistically calls the worst  nuclear disaster since Chernobyl, and what will almost certainly be a defining moment in the history of the nuclear and uranium industry.

Fukushima Daichi disaster has redefined the entire prospects of the nuclear industry and by extension uranium mining with much of the developed world  now highly skeptical about the future safety of the technology. It has a resulted in a sea change in thinking in the developed world. The argument in the public mind is simple enough- ‘if even the very technologically advanced Japanese could not control this technology then nuclear power must be inherently dangerous.’ It was this that lead to a mass desertion of nuclear power. First by Germany, under pressure from Angela’ Merkel’s Green Party coalition partners but then by other countries  such as Switzerland and Italy.

The nuclear industry and the uranium which feeds it have gone into secular decline in Europe and the US since Fukushima. But it was not just the Fukushima and the growing public perception of risk that is the only cause for the woes of the nuclear industry. Just twenty years ago nuclear power was amongst the cheapest ways to generate what engineers call ‘base load’ ie electricity that be cranked up and  decreased at will. Other sources such as geothermal power were always cheaper but less significant. But things have changed and a modern nuclear plant is now simply no longer a cheap option with the ever increasing costs of capital and de-commissioning costs after they have reached the end of their economic lives (usually about 40-60 years) has meant that the cost of electricity generated by nuclear power has increased drastically.

In its most recent annual 2016 ranking of which source of power is cheapest in the US,  the  authoritative US Energy Information Service findings are that nuclear power is horrendously expensive when compared to say gas powered plants.  This decrease in the cost of gas is because of the new and highly controversial fracking technology used in gas extractionthat  has lowered US prices substantially.  Generating electricity from nuclear power now costs are almost double that of gas.

The Rossing mine is simply experiencing the long term effect of what is certainly a dying industry. Rio sells most of its uranium from Rossing to the US and the EU and only a small portion to Asia.  In other words, Rio is selling uranium, a dying product into a dying market. Yet the Chinese market is different. China is bucking the global trend and is rapidly expanding its nuclear capacity and that is why the Husab mine is opening when others  appear to be on their last legs. The Chinese government has a problem; its citizens would like to breathe fresh air and not what passes for it in many of their hideously polluted cities. It now needs an energy source that does not create the level and type of  air pollution that its coal fired power plants have until now. As result China is  massively expanding the number of nuclear power plants to supply these needs. It is expected that China will more than double its nuclear capacity by 2020.

The Chinese owners of Husab mine are, unlike Rio Tinto,  not miners, they are owned by Taurus Minerals Limited of Hong Kong. Taurus is in turn a subsidiary of the China General Nuclear Power Company (CGNPC), Uranium Resources Co. Ltd. and the China-Africa Development Fund.ie the Chinese state power company. The difference between Rossing and Husab is the business model of their owners. The Chinese business model is vertically integrated and ultimately wants the uranium to assure security of supply for its expanding power industry. While the cost of uranium is a tiny portion of the total cost  of the electricity it generates  its regular supply is fundamentally important because you cannot just turn off a nuclear reactor for a week if you have no enriched uranium supply.  For Rio Tinto uranium is the only source of revenue from Rossing. On the other hand  uranium is a mere 10% of total cost of nuclear power for the Chinese. But it is an indispensable part of the electricity generating process and hence China must have  a reliable source of supply from a politically close source. Because the Chinese are in the electricity business the low price of uranium is a minor issue, for Rio it is a matter of life and death for its Rossing operations.

Rio Tinto is in the wrong business and must ultimately sell Rossing. Eventually, when it is even in a worse financial position than now  a willing buyer will scoop up the Rossing Mine at a low price and he will  very likely be Chinese. Namibia, Rossing and its employees will be better off when someone who owns the mine is in another business.

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