Corruption in Namdia? Time to Exclude Dubai from the Kimberly Process

Corruption Investigation of Namdia

Several months ago The Namibian newspaper published an investigative article claiming that diamonds were being bought in Namibia  from the government’s new trading company Namdia (Namibia Desert Diamonds) reportedly by well connected individuals at a price of US$500/ carat and were then being sold out of Dubai for $2,500. It has been reported this week that the corruption investigation which was commenced has been brought to an end by the Anti-Corruption Commission, Director Mr Paulus Noa.

The trading price of the Namibian diamonds that was discovered by the Namibian's investigative team is itself is not abnormal. In 2015 the average price for Namibia’s diamonds, which are the best and highest price in the world  exported  by De  Beers was some US$569/ per carat according to the Kimberly process.  Thus these 2016 transactions that were subject of such controversy do not seem to undervalue, at least if we are talking about averages. But in the diamond trade there is no such thing as an ‘average diamond’. Diamonds vary in quality from cheap bort used in industrial production to the1,110 carat  ‘Lesedi La Rona’ diamond discovered in Botswana in 2015 valued in the millions of dollars. In fact if one uses the De Beers classification system there are over 5,000 grades of diamonds and so what was exported from Namibia  ay have been very valuable but unless each stone is carefully specified the authorities will never know.

For years before Dubai took its place as ‘launderer in chief’ of the global diamond trade  Switzerland and Israel that played this role and still to some extent do but these are now bit players in this  huge  and scandalous part of the trade. If you want to see the evidence of what Dubai does to the tax base of just about everyone involved in the diamond trade just go to most reputable source , the Kimberly Process statistics on the diamond trade. In 2015, the last year for which such data is available, the United Arab Emirates ( read Dubai) which produces no diamonds, imported some 62 MCT of diamonds, roughly half the world’s production of rough diamonds at a unit price of $87 per carat. This was worth some U$$ 5.4 billion. But in the same year Dubai exported almost exactly the same quantity of rough diamond, some 63 Mct at a unit price of $119 per carat. In other words Dubai exported US$7.6 billion. The average margin therefore is 40% considerably less than 500% reported in the Namibian transaction.

So what happened to the US$ 2 billion difference between Dubai’s imports and its exports  of rough diamonds? It certainly did not end up in the coffers of the Dubai tax authority as  they levy no tax on these transactions. It is transfer price manipulation in its purest and worst form and the proceeds went to private individuals as profit and the only important question is to whom? It is a question of direct interest to the Namibia Tax authorities and not the Anti-corruption authority because if the difference between the buying and selling price went to the off-shore accounts of the individuals involved then they will owe the tax authorities a great deal of money.

What normally happens to these profits depends on the agreement between parties to the transaction? They are distributed between the seller and the buyer. Dubai is not only a tax haven for the most scandalous sellers and criminals in Africa but also for the Indian  and Chinese  diamond cutters who the main buyers and who buy at inflated prices so as to assure that they pay no income tax in India or China. Dubai performs no productive role in the diamond value chain except shielding  those African, European  and Asian traders from investigation by their tax authorities. Dubai's  exclusion from the Kimberly process would not prove to be a loss to anyone but tax fraudsters.

Perhaps the most awful thing that one can say  of this this international tax fraud  in then diamond trade is that it is ‘normal business practice’. It would be nice to think that this sort of practice is confined only to diamonds but it is not and there is ample evidence that this is normal business practice in most commodity trades. The taxation authorities in Namibia should demand from the Dubai authorities an accounting for this transaction and an explanation of who got what. It is possible, though not probable, that the entire benefit of the transaction ie the difference between $500 and $2500 per carat went to the Indian buyer and not to the Namibians involved. If this is the case then this is purely a matter for the Indian tax authorities but they already have appropriate taxes that deal with this sort of regular fraudulent practice in the diamond trade. If Dubai fails to comply with  a legitimate request for assistance in a fraud investigation in Namibia then Namibia should take the matter to the Kimberly process and seek Dubai's suspension from membership which would end their diamond exchange and their global laundry service. While another country would inevitably take Dubai’s place that fact alone cannot be a reason to stop combatting tax fraud.

But let us assume for a moment that these well connected  Namibian individuals have made a considerable killing on this diamond transaction and that this was actually the intention of government. The famous 19^th century German chancellor, Otto von Bismarck, was  once quoted, probably incorrectly, as saying  ‘Laws are like sausages. It's better not to see them being made. To retain respect for sausages and laws, one must not watch them in the making.’ The same unfortunately is true of the creation of an indigenous economic elite in Africa. It is an ugly process but an indigenous economic elite is needed to develop Namibia. The only serious question that a ‘development cynic’ should really ask is whether these illegal profits made in Dubai are brought back to Namibia and invested in projects that will make more profits and thereby develop the country or whether they end up, as is so often the case in  their tax haven bank accounts, safe from the eyes of Namibian tax authorities.

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

De Beers – Losses are Forever?

In 2014, in perhaps one of his most provocative articles, Chaim Even Zohar, one of the great gurus of the diamond industry published, in his newsletter Diamond Intelligence Briefs, published  an article in which he revealed that since De Beers had started the retail marketing of diamonds as part of its post-cartel ‘Supplier of Choice Strategy’  it had lost $500 million dollars over the period 2002-2103. These figures were breathtaking first and foremost because no-one had ever published such detailed annual profit, or more correctly loss, figures for the secretive De Beers Group of Companies. De Beers never confirmed or denied the accuracy of Mr Even-Zohar’s figures but there were certainly  many people inside De Beers who hated the Supplier of Choice Strategy who could have been responsible for the leak.

Even more breathtaking is what the figures appear to reveal i.e. that De Beers seemed incapable of retailing diamonds profitably. Worse still it suggested that those in charge of De Beers wereunwilling to abandon a marketing strategy that was losing a fortune.  In its 128 year history De Beers had never before 2002 been a retailer of diamonds, so one could expect that when entering a new part of the diamond trade it might face teething problems and in fact make initial losses.  But twelve years is a considerable length of time even for a company,even one with deep pockets like De Beers, and half a billion dollars  is not small change, even in the diamond industry.

There were a number of reasonable explanations for these high and mounting losses of the De Beers retail arm.  De Beers had acquired some of the most expensive locations on earth for its stores. Its flagship London shop, for example,  was set up on the corner Piccadilly and Bond St with its stratospheric rents. This is a location hardly likely to sustain what was reported to be a gross margin of 46%.  But what it had done in London De Beers  repeated in some 45 major and very expensive locations around the world, from Tokyo to New York.

 But it was not until the sale of the 40% share in De Beers by the Oppenheimers to Anglo American in 2012 that a small measure of transparency began to emerge as Anglo had reporting obligations to London Stock Exchange. It was no longer possible for De Beers to hide behind the status of a private company based in the tax haven of Luxembourg.

The real transparency bombshell came with the introduction of the EU Transparency  Directive of 2015 when companies in the extractive sector and listed on European exchanges had to list all their activities by company and country. This included Anglo American. It was then that it became clear the losses of De Beers might have another possible explanation. For the first time ever Anglo revealed the corporate structure of the De Beers Group of Companies and it was so complex and involved some 31 companies domiciled in tax haven  or low tax jurisdictions. This number includes tax havens such as  Luxembourg, Hong Kong  etc which the OECD refuses to define as tax havens because some are members of the OECD.

With such a complex web of some 94 companies ( in 2014) many domiciled in tax havens, some with virtually  impenetrable secrecy provisions, the possibility that the De Beers losses from diamond marketing might have another explanation, that they were accounting losses also needs to be considered. Anglo American which has for many years been at least 40% owner of De Beers for many decades explained the companies in tax havens in the following manner in its taxation report. ‘The use of tax haven companies plays no part in our tax strategies. We accept that we have a small number (sic) of so-called tax-haven entities in the Group’s structures today that are largely the result of legacy structures inherited from acquisitions and that are now mainly dormant, are planned to be liquidated or re-domiciled. Such entities are disclosed in full to appropriate governments and agencies, and any remaining entities are fully subject to UK tax. As such, we secure no tax benefit from these remaining entities.’

If these 31 companies registered in tax havens or very low tax jurisdictions are ‘legacy structures’, as Anglo American calls them,  then this begs the obvious question of what precisely are they a legacy of? De Beers was one of the founder supporters of the so called Extractive Industries Transparency Initiative and now through its parent Anglo American continues to do so and yet runs amongst the most secretivecompanies in the world. Diamond prices are secret, the accounts of the main contributing company Debswana (65-70% of De Beers output) remain secret, and of course contracts with governments are secret. On this basis one can choose between incompetence and/or financial folly as an explanation of how De Beers lost half a billion dollars in the retail trade and the possibility that these so called ‘legacy structures’ were part of a system of transfer pricing arrangements.

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

 

So Mr Schlettwein, what  do you  tell the Class of 2021?

On Monday 6^th  February 2017  some 1,000 young,bright and enthusiastic high school graduates will start studying Basic Microeconomics at the University of Namibia (UNAM) . Most don’t care much for the subject but are there because they are obliged to be as they wish to become accountants or study politics or specialize in business and management. It is vital that they understand economics and  that is why so many will be in my class. It is not for the love of knowledge, at least for most but the chasing of an increasingly illusive dream that they are in my class. It was a dream that I am sure many your and my generation believed and passed to our children and grandchildren. ‘Work hard and study, learn , get a university degree and then one day you will get a good job and  eventually have  a nice house in a leafy suburb and live happily ever after’

My dreams came true in many ways but the dreams of the children who are entering UNAM next week, I fear will not. When I left university I had nine job offers within the first week. It was not that different here in Africa in the 1970’s. The post-independence African model of development that existed at  the same time guaranteed similar outcomes. Bright young African graduates in the 1970’s and 1980’s were automatically guaranteed good government jobs based on the revenue that the government was making from mining and agriculture.

But last year Mr Schletwein, when you delivered the budget you put a freeze on hiring and many of the vacant government jobs will not be filled because of the immediate fiscal pressures. In many ways  your speech signaled the end of the post-colonial  economy in  Namibia. It was a confession that given the current development model in Namibia we have ie based on extracting economic rents from mining and  SACU  has run its course and reached its fiscal limits. This is a similar situation in many neighboring countries like Botswana where thousands of bright young people graduate from the University of Botswana  and face nothing but unemployment or low paid internships.

UNAM, like elsewhere is suffering, from the government budget cuts but these are  needed to bring the budget back into something resembling balance before the IMF does it for us with far greater ferocity and lack of care for the poor. I have no computers for my students in their E learning facility and some  staff have no offices  and that is the problem. You are right, between higher pensions for the poor and more money for universities on the other, you have made the right choice. I may be in  pain but I am with you!

The problem is not the current crisis but the dream. If the government is not going to hire the thousands of students coming out of university annually who is going to hire them? The simple fact is that the private sector is not going to hire them either because we have less and less private sector that is not directly linked to government spending. The government pays consultants to write glossy reports about beneficiation and industrialization but you and I know that almost nothing is happening and nothing will happen  until the government addresses the fundamental reasons that the private sector is not expanding in Namibia.

But Mr Schletwein this question of Namibia’s cost structure  is so politically sexless, and the answer even less sexy,  that no-one in government even wants to talk about it. But for the sake of the political stability  of the nation and the future of the kids, you and I must. The reason why no investment was occurring, even before the current crisis, is simple enough. Namibia is just too expensive to make anything that is internationally competitive and hence we are confined to the bottom end of the global value chain making holes in the ground and selling minerals so the  Chineseand Europeans can use our resources for their own development. Part of this stems from our small size but a large part is self-inflicted. We need an infrastructure policy that makes water, power and transport cheap for business. But thisis  anathema to the ideologues who think business should pay full cost for everything. But why invest in Namibia if you payfull cost recovery? 

But the biggest part of the cost of doing business, Mr Schletwein is not water or power or transport . The fundamental reason we are so internationally uncompetitive is because of the very high cost of management and professionals. Whenever this ‘post-apartheid factoid’ is publicly stated, the old white elite and those black Namibians who benefit from it and are hence  at the heart of the nation’s cost structure give a shrill response,  like one would hear from the congregation when someone begins swearing in church. The rich, do not want to hear that they are the problem and will resist any solution that may lower their standard of living. The solution is simple enough but it is  fundamentally ‘un-Trump and anti-Brexit’. Namibia needs to create unilaterally a SADC quota for several thousand African professionals coming  to Namibia and have their national qualifications recognized by automatic mutual recognition so they can work in Namibia. This will massively lower the costs of management and help transform Namibia into a far more vibrant, dynamic and competitive place. No small nation succeeds without being open to foreign talent. Just ask the Singaporeans

And so this incredibly politically sexless solution to the nation’s cost structure  is totally unpalatable to an elite that prefers to sing the AU anthem at meetings but no foreigners please. Yet this answer is not as unpalatable as what you, Mr Schletwein or your successor will have to tell the  graduates in 2021 when they graduate and come demanding jobs that do not exist. You will have to tell them to go back to the village! What a dreadful waste.

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

Is Economic Stimulus the Solution or the Problem in Namibia?

Over the New Year period arguments have been made in the local  Namibian media suggesting that the government needs to implement a stimulus package to put the economy back on track.  Mr Milner Siboleka, an economist at First Capital Treasury Solutions was quoted as saying “What we need now in Namibia is stimulus expansionary fiscal policy (increase government spending) to reverse the recession and keep the economy afloat. For as long as we borrow for a good cause to invest in the growth we want for our economy, then accumulated debt will be sustainable”.This is a useful argument of only to help explain why Namibia is in its current economic mess and why most of 2017, will at least from an economic standpoint will almost certainly look as bad as 2016, if not worse.

The problem it can well be argued is that the stimulus that has been provided by government has been not only excessive but has failed to focus on solving Namibia’s fundamental barriers to its economic development and transformation. A stimulus package in the usual sense of the word means an expansion of government spending often also associated with a decrease in government revenue collection or, more commonly, an increase in debt. Everything about the Namibia’s public accounts suggests that this is precisely what has been the problem to date. Government expenditure grew rapidly from  25% of GDP in 2007 to over 40% GDP in 2016. While expenditure expanded enormously, often for good reason to deal with poverty, government revenue did not and over the same period  was almost totally flat at around 30-31% of GDP. The widening deficit has been what has caused the current crisis and so the advice to have even more stimulus at this point is economic folly. This unprecedented expansion in the size of government, combined with a decline in SACU revenues is what has created the current fiscal crisis that we are now in. It is not an absence of stimulus but an excess of unsustainable spending that has brought Namibia to its current situation.

The government revenue and expenditure figures speak for themselves and if they do not their mirror, the balance of payments also speaks precisely the same language. Namibia’s balance of trade has worsened at an exponential rate with the trade deficit rising from a small and easily manageable N$375 million in 2007 to N$ 40 billion in 2015. The deficit has eased in 2016 but still remains at worrying levels.

The government has been the main source of economic growth in the country and it has reached the limits that the current development model permit. There are simply not enough mineral exports to cover the increased imports that stem largely from increased government spending. The government also remains highly dependent upon SACU transfers from Pretoria which declined in 2016 and on the mineral sector where commodity prices have yet to recover to pre-recession levels. Given the constraints of borrowing from either the domestic or foreignmarkets that are imposed by the continual scrutiny of the ratings agencies there is no reason to believe that at the present the government has much room for further increases inexpansionary fiscal policy. It has reached the end of the very short leash that the international banks will allow and calls for more stimulus are wrong headed.

Mr Siboleka is right to suggest there is nothing wrong with government debt so long as it goes to infrastructure and development projects that stimulate growth and are hence repayable. One is however obliged to ask what there is in the choice of government projects for development that gives anyone such confidence in the wisdom and prudence of officials and policy makers to rank these projects according to their benefit to Namibia’s growth and not some other objective. What the country needs are infrastructure projects in power, water and transport and an accompanying pricing policy that will lower business costs and make investment in Namibia more profitable. But such arguments fall on deaf ears in government circles where the choice of which project goes ahead is not based on net economic benefit.

The cause of the current crisis comes not from insufficient stimulus but a massive expansion in spending which is in large part aimed in no small part at poverty alleviation. The government is to be congratulated for trying to alleviate poverty but condemned for its haste and the resulting financial excesses of the last few years. It took many years of hard work for the German colonial and apartheid regimes to create the levels of poverty we see in Namibia and it will not be eliminated overnight but Namibia’s financial stability might. The next step by government will almost inevitably be a Solidarity tax to help balance the books and fund the expansion in poverty programs. How can any person who believes in poverty alleviation and justice disagree? While the objective is right the government needs to focus, not on itself as a solution to the nation’s problems but on the development and transformation of the private sector which needs a policy context where it can play its proper role in economic growth and poverty alleviation.

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