Namibia's Swiss Connection

Namibia’s Swiss Connection

International trade makes for some very odd and unexpected relationships. If you are very boring and spend time reading the country’s trade statistics you will find out some very strange things about Namibia. Our biggest trading partners are pretty much as one would expect. Most imports come from South Africa, with China a distant second place.  But even those figures probably miscalculate the size of South Africa’s exports because many goods coming into Namibia from RSA are of mixed origin. Our exports, on the other hand,  go first to Botswana which buys our diamonds but only because it has an agreement with De Beers (and hence we end up subsidizing Botswana through SACU) and second most import destination for our exports is South Africa. 

But it is some of our smaller trading partners that are not all they seem. The most recent Trade Report from  the NSA for 2015 says that the third biggest destination for our exports is Switzerland and our fifth biggest  source of imports is the Bahamas. Normally in international trade you trade with large and close countries and neither seem at all obvious candidates as significant trading partners for a country far removed from them as Namibia. They are even more improbable when you see what is supposed to be traded. The moment one see names like Switzerland and Bahamas as a major trading partner for a small distant country like Namibia one should become instantly suspicious.

These two countries along with other ‘respectable  tax havens’ like Luxembourg have probably done more  to facilitate the pillage and plunder of Africa than any non-colonial powers. Their secrecy laws and their tax provisions effectively shield companies and people from prosecution for economic crimes committed in developing countries with weak tax administrations. Whereas crime might not pay, helping criminals hide their loot certainly does. These countries have profited handsomely from the assistance to the plunder of their European neighbors as well as developing world as these are amongst the richest nations on earth.  Luxembourg, with no significant resources or industry,  is the second richest country on earth with a GDP/capita  in 2016 of US$ 94,000 based on what economists call ‘purchasing power parity’. ‘Poor’ Switzerland is ranked 10^th with a GDP/capita of US$57,000. The Bahamas, a tiny country that makes almost nothing, has a GDP/ capita of $21,000  ( Namibia was a mere US$8,000 in 2015).

Our trade statistics say that in 2016 we exported some N$ 13 billion (approximately US$1 billion) to Switzerland. While there were other exports such as diamonds, copper in various states,  made up some N$12 billion of our exports.  But when we go to the mirror data, i.e. what Switzerland says it imported from Namibia they say they only imported only US$1.2 million (N$ 17 million) from Namibia and there was no copper. Discrepancies in trade statistics are expected but this is not a minor discrepancy. What the Swiss say is that most of those imports are diamonds and some edible fruits. So if we exported N13 billion to Switzerland and the Swiss say they imported no copper who is not telling the truth? And if someone in Namibia is not being entirely honest in their import and export documentation then perhaps they should be asked to explain why.

But if that sounds curious then the import figures from Switzerland are even stranger. The Namibian trade statistics say that the country imported some N$ 743 million (US$50 million) from Switzerland. What our trade statistics say is that over half this figure in the form of copper ore and concentrate. This is very strange indeed not only because the Swiss figure say they exported no such thing to Namibia, they could not because there are, according to the most recent US Geological Survey report, there are no copper mines in Switzerland.

If you look at the Bahamas the figures become even stranger, if that is at all possible. Bahamas is Namibia’s 5^th largest source of imports and in 2016 it was reported to the NSA that we imported N$2.4 billion of goods from the Bahamas which is surprising given that Bahamas trade figures say they exported nothing to Namibia, not now, and  not in the last  three  years. So what was traded?  According to Namibian data almost all of these imports were vessels which could be vessels used by De Beers in Debmarine or fishing vessels. It is simply not known. Bahamas is what is called a ‘Flag of Convenience’ country like Panama or Liberia and there are numerous reasons, some worse than others, to register vessels in Bahamas. Many have to do with risk, insurance and taxes and fees. But many a sailor’s widow would regret the day that her deceased husband stepped foot on rust bucket registered in a Flag of convenience country,  some of which have only the most minimal of safety standards.

All of this may be perfectly normal as traders may be using Switzerland and Bahamas to defraud the tax offices of countries, other than Namibia and  that is none of our business. This may be the case with our tax free factories. But Mr Obed Kandjoze and Mr Immanuel Ngatjizeko  the ministers responsible for minerals and trade might want to help me, my students at UNAM and the public at large understand where exactly we are actually exporting our minerals to and where they are coming from. Right now it is a complete mystery. If we do not even know where our mineral exports are actually going and imports coming from and at what price it  would be difficult to be sure that we are getting the right amount of tax revenues from those in these businesses.

These are views of Professor Roman Grynberg and not necessarily those of UNAM where he is employed. This article was sent to officials in the Ministry of Minerals and the Ministry of Trade in Windhoek  for comment. Unsurprisingly, no comment was offered. This was also sent to Dundee Precious Metals, the main trader in copper in Namibia as well as to UNCTAD and AfDB and no reply was received. This apparent trade in copper is also happening in Zambia.

 

Saving Diamond Towns

Saving the Diamond Towns

Namibia has its fair share of ghost towns that have come about largely because a mineral deposit or precious stones has gone into terminal decline. The old diamond mines of southern Namibia of Kolmannskoop and Pomona declined purely as a result of the end of diamond deposits. It is said that at the height of the Klondike gold rush in Canada in the 1860’s Dawson (current population 1130) was the fourth largest town in North America. The decline and disappearance of some towns are not always a result of the end of a mineral deposit. The ancient town of Petra in the Jordanian dessert declined as a center it is believed because of  shifts in the spice trade. When the economic foundations of a town disappear, so does the town. But the people who live there hang on hoping that their homes will not suffer the same fate as those of who owned what was once precious property in Kolmannskoop.

Some mining towns do not go into terminal decline such as Johannesburg which has remained a thriving metropolis even as the great gold deposits of the rand mines become deeper and smaller. The continuing wealth of Johannesburg  stems from the fact that some 2 billion ounces, or half the world’s total production of gold  came from the Rand fields. When a mining town is able to continue for 135 years like Johannesburg then other sources of economic activity can replace the mines and prosperity can continue but it takes an extraordinary deposit like the Rand gold fields to sustain these  towns for the length of time needed for transformation.  Johannesburg remains a magnet for economic migrants, globalization has diminished its African trade role as a center for the purchases of manufactured products. In the 1980’s and 1990’s African merchants and traders would flood into Joburg but now the traders fly directly to Ghangzou in southern China and are able to completely undercut anything made or traded directly through South Africa.   Even Joburg will struggle to redefine itself in the world of globalization.

Governments, in fruitless attempts to placate the citizens of these dying towns, often try to help avoid economic reality by financing unrealistic economic diversification strategies through subsidy. In the Botswana town of Selebi Pikwe, the third largest town in the country, the government with the help of the EU has poured countless billions of rand  into resuscitating and diversifying the town away from nickel/copper mining. All the efforts failed and as grades of nickel and copper fell the BCL mine has been closed and the town now awaits what would appear to be its inevitable fate.

The subsidies that were provided to Selebi Pikwe failed to attract an alternative economic basis. The once thriving diamond town of Kimberly in SA has used ‘the Big Hole’ as a tourist attraction and has turned its infamous  history to its economic advantage in much the same way as tours of the ghost towns of southern Namibia attract numerous tourists. But they are no substitute for diamonds though tourism can be.

Swakopmund, which was very much in economic decline following the departure of the Germans and the end of its economic role as the capital of German south West Africa  also used tourism and retirement homes in a relatively pleasant environment as a basis for economic diversification.

The small town of Oranjemund in southern Namibia, at the mouth of the Orange River on the border with South Africa will also face this problem once the mining of diamonds from the  Orange river comes to an end, probably somewhere around 2050. The lesson form the experience of Selebi Pikwe are clear enough, subsidies to build factory shells that are commercially unsustainable won’t work and only end up as kick-backs and bribes to those officials building these rusting white elephants. The possibility of survival rests on connectivity of the town with the outside world and finding a genuine alternative commercial base for the town which is not one reliant on government hand-outs.

So what is the best chance for success?  The problem is that both Oranjemund, like the De Deers diamond town of Orapa in Botswana,  are closed to outsiders and you  require a permit to enter. This has been a policy imposed by De Beers and has been in existence in Namibia since German colonialism and is known as ‘Sperrgebiet’ ( German for ‘prohibited area’). The policy exists to protect the diamond deposits from possible theft. Yet the key to the long term survival of the town  is the opposite of Sperrgebiet- it is openness to the outside world.  In theory Oranjemund can follow the tourism path to diversification given its fabulous location. The key is to invest in the sort of infrastructure that links the border town to South Africa and the outside world. Selebi Pikwe in Botswana also flirted with tourism but after the engineers who built its BCL smoke stack down wind of this small town, tourism has always looked like a remote diversification strategy in a place plagued with acid rain and foul smelling air.

In the end most diversification strategies for one industry towns generally fail and mining towns normally become ghost towns once the minerals are exhausted.  The diversification strategies  are most likely to fail when they focus on the town itself rather than how to focus and change the economic base of the town on the outside world and how this can be done in a  commercially sustainable way.

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

The Death of a De Beers Director ... Seven Years On

The Death  of Louis Goodwill Nchindo - No second Cut of History

Seven years ago this month Louis Goodwill Nchindo, one of the most powerful figures in Botswana’s history, died in circumstances that remain mysterious to this day. His apparent death and the circumstances surrounding it, as reported in the media in Botswana in 2010, constituted the worst political scandal in the history of the country. Yet despite its importance in the history of Botswana and the diamond industry it has been noted but never researched by any scholar. All of the commentary and analysis contained here, like others stems from the newspaper accounts of the time. Despite the undisputed elements of what would normally be perceived  of as corruption at the highest level of the state and the role of De Beers in the removal of an unhelpful leader there was no subsequent investigation in parliament nor did the institutions responsible for  combating corruption appear to have taken any measures to investigate the circumstances surrounding Nchindo’s death. The continuing relevance of the affair stems from several factors that are essential to the diamond industry and Botswana- secrecy and an intimate relationship between De Beers,  the GRB and Botswana’s political establishment. The Nchindo affair is the only case in Botswana’s history where De Beers is alleged to have been financially involved in the departure of a Botswana Head of State.

The death of Louis Nchindo is also the defining political and economic event that shaped the popular perception in Botswana that to involve oneself in diamonds or the study of the diamond industry would result, as the Tswana metaphor says,  in one being ‘eaten by lions’. Diamonds remain the single largest export of Botswana and yet despite their obvious importance to the national economy they are incredibly under-researched by Batswana academics. This stems in no small part from the secrecy and absence of reliable public data  in the global diamond trade but also the palpable sense of fear amongst scholars. Diamonds were always discussed in hushed tones, behind closed doors.  

As a result of the popular fear of diamonds, De Beers  and the industry and the cultural unwillingness of Batswana to either investigate, let alone punish those who might have attained high office means that the only source of information regarding this affair is the very extensive newspaper coverage of the events as they unfolded. It is often said that journalism is the first cut of history but in this case there will almost certainly never be a subsequent cut. For those who were in Botswana in 2009/10 the affair was simply a breath-taking event for many reasons but certainly mostly because it served as such a dramatic counter-point to the image of Botswana as being the least corrupt country in Africa[1].

Even though the only research sources are newspapers the known facts of the case require discussion because they have come, rightly or otherwise, to be seen in the popular imagination in Botswana as defining the relationship between the state and De Beers. More importantly this now long ago event needs to be remembered by a younger generation that knows nothing  of this part of the nation's history  

1. Background

Louis Goodwill Nchindo was of Zambian origin but was born in Tlokweng in 1941 and  went on to study both politics and economics at Oxford. At Oxford Nchindo was already in close association with many of Botswana’s independence leaders . Following his studies he returned to Botswana following  stints in Caracas Venzuela and other parts of Africa with Proctor and Gamble. His career went through banking and finance and he rose to head Barclays in Botswana as well as Director of the Botswana Stock Exchange. He went on to become the resident director of Anglo-American and was instrumental in the establishment of Debswana in 1991 as a 50/50 joint venture between De Beers and the GRB. Nchindo joined the ruling Botswana Democratic Party and rose to a position commensurate to his commercial position becoming a presidential adviser. He was widely considered to be the ‘Kingmaker’ in Botswana politics. This was in large measure a result of the role he was to play in the departure of President Masire and coming to power of President Mogae and the then Vice President Seretse Khama Ian Khama.

Having seen what could be done by such a Kingmaker , President Mogae removed Nchindo in September 2004 from the position of CEO of Debswana. Following his 'retirement', Nchindo was awarded Botswana's highest honour, the Presidential Order of Honour Award, by President Festus Mogae during the country's Independence Day celebrations, although he reportedly did not attend to ceremony[2]. At this point Nchindo assumed a private function as a property developer. The corruption scandal which ensued in the post-2008 period stems from Nchindo’s private land dealings as well as his time at De Beers.      

2. The Case Against Nchindo

Nchindo, both in his private position as property developer as well as earlier Managing Director of Debswana, was reported to have attempted to acquire relatively large tracts of land throughout Botswana for the purposes of tourism development. Some of these tracts of land were in the capital Gaborone. It was on the basis of his alleged corruption of public officials in the acquiring of that land in Gaborone that Chief Magistrate Lot Moroka heard some 32 charges, including corrupting public officials, against Nchindo, his son and two others for their corrupt and improper acquisition of that land. These charges stemmed not only from Nchindo’s time in private business but also from his activities with De Beers and Debswana[3]. At the time of his death he was slated to return to court by April 2010.  

3Masire and the Corruption and Impropriety Allegations

But what followed  in this case were allegations of corruption and impropriety made by Nchindo regarding President Ketumile Masire whose company, GM Five, had lost considerable amounts of money and  these losses, if made public would be an embarrassment to the ruling Botswana Democratic Party. It was alleged that masire had received considerable assistance from De Beers.

The financial assistance provided to Masire by De Beers was not a one-off event event. He and his company had been continually bailed out by De Beers in his time in office. Prior to the 1984 election De Beers facilitated a loan for Masire of P186,000 and it had also arranged a professional farm manager to assist Masire and GM5.  Had this been public at the time it had the potential to undermine the BDP at the 1984 election. Nevertheless, the BDP won and Masire remained President. Masire’s financial woes continued until 1987 when De Beers had secretly loaned GM Five P805,910 via a shelf company, Clairemont Corporation, located in Panama[4]. The loans provided by De Beers did not halt the financial problems faced by Masire. However, by the 1990’s after many years in office De Beers began to see President Masire as an electoral liability. De Beers reportedly commissioned a report from University of Natal academic Professor Lawrence Schlemmer,  who suggested a way to assist the BDP win the 1999 election when it was facing unprecedented opposition[5]. Facilitating the departure of Masire from the presidency, after he had been in power for 18 years was at the heart of the strategy. According to the public reports of Schlemmer’s strategy, Masire was to be replaced first by President Festus Mogae and then Lt General Seretse Khama Ian Khama, the current president and son of the founder of Botswana, Sir Seretse Khama. It was envisaged that Khama would also leave the army and assume, at least initially,  the role of Vice President.

 

While this certainly would have assisted the BDP and possibly De Beers by the mid-1990’s,  Masire was in such debt that his departure from the presidency would have almost certainly have meant personal bankruptcy. It is alleged that President Masire received a transfer of P3.7 million in 1998 (approximately USD 1.3 million at the exchange rate in  1998) in the form of a preference share injection by Clairemont into GM5. Unsurprisingly, Clairemont which was allegedly listed as a Panamanian company was not part of the 94 De Beers ‘legacy companies’ that were announced in 2016 during its Tax Report. Furthermore, the name Clairemont does not appear on the current registry of De Beers firms and in all likelihood it was either renamed or delisted after the affair.

 

While President Masire did not subsequently deny  receiving the financial assistance from De Beers he denied that it was a quid pro quo for him leaving office and he also stated that the funds were received after he had left office.  His press release at the time suggested that accepting the money from De Beers, had been ‘an error of judgement’.

 

4 Enter President Festus Mogae    

 

The scandal pertaining to President Ketumile Masire and his debts and the role played by De Beers took a sharply different turn when former President Festus Mogae was publicly interviewed on 17^th January 2010 when it was revealed by the Sunday Standard, that De Beers had sought to get rid of President Masire from office in 1998 because he had become an electoral liability and it was felt that the BDP would lose the up-coming 1999 election if he were not replaced. However, in light of his considerable debts it was felt that without some financial assistance, Masire was unlikely to leave office of his own volition.

           

The public policy issue surrounding this case became clear when former President Festus Mogae was interviewed in January 2010 and publicly admitted that Nchindo had approached him and requested that[6]:

‘I should stop the prosecution (for corruption )and if I fail, he would reveal that President Ketumile Masire was bailed out, that BDP had been sponsored or funded by Debswana during elections. …. Nchindo even threatened to reveal ‘my personal private life that I have a girlfriend whom I used to meet at his lodge and so on and so forth…. So I said its OK you can go ahead. I cannot commit a criminal offence just to have those things hidden including issues of personal private life….( italics added)

‘ The second time around Kwelagobe (an MP and senior BDP official) came accompanied by BDP party treasurer, Satar Dada. Mogae says the mission was to persuade him to stop the prosecution against Nchindo as he threatened to spill the beans on the activities of De Beers and BDP.

‘Even if I were to do that, he would then keep on coming with more demands and ultimately he would reveal whatever secrets he knows. I told them (Kwelagobe and Dada) to tell him (Nchindo) he should go ahead, that I cannot destruct (sic) a government structure, commit criminal offences and violate the constitution in order to protect my embarrassment, so he is doing as he so pleases’

To his credit President Mogae resisted the demands of Nchindo to end the prosecution  against him and his family members. In a subsequent press release Nchindo denied the accuracy of President Moagae’s recounting of events[7]. De Beers in a response to a questionnaire put to it by Sunday Standard was quoted as saying [8]:

… the purpose of the loan was to help the then Head of State by relieving him of the burden of debt and providing him with resources for the farm to be independently managed and so enable him to attend to duties of his office and matters of national interest. Louis Nchindo put the idea to Sir Ketumile and also recommended the assistance to the company. This was done in his capacity as an employee of the company at the time. In the present day and age, the De Beers family of companies operates in a completely different environment with clear policy guidelines governing donations and for disclosure.

In response to queries on how and why De Beers used Clairemont Corporation used a company based in Panama, a secret tax haven, as a conduit for bail out money for GM Five Morapedi (De Beers spokesman) stated that:

… it is true that De Beers was once again approached by Louis Nchindo to grant financial assistance to the former Head of State shortly after his retirement.(emphasis added). Not only did this specific transaction take place after Sir Ketumile left office it was not at all linked to any negotiations between the company and the Government of Botswana for current or past commercial arrangements. As such De Beers did not benefit from the transaction in any way.’   

5 The Death of Louis Nchindo

Barely a week after President Mogae had made the startling allegations of official corruption and blackmail by Nchindo and two days after the public retraction Nchindo disappeared on or around February 10^th. On or around February 11^th parts of what were reported to be Nchindo’s remains were found next to his car in Pandamatenga in Northern Botswana. It was reported that most of Nchindo’s body had been devoured by wild animals.  A cartridge from a gun was reportedly found near the body. The press in Botswana reported that the official police verdict of his death was suicide. There was no official enquiry as the family accepted the verdict of the police enquiry that the death was suicide and the remains were quickly cremated and buried[9].

6) Conclusions

The death of Nchindo, a man of very substantial wealth and enormous political power and influence has entered into the domain of legend and myth in Botswana.  Whether Nchindo’s death was actually suicide or his behaviour had finally caused elements of the political elite to have him removed, as was widely  held at the time, or more fancifully, that Nchindo is alive and well and living elsewhere as is so commonly believed in Botswana, will likely never be known. From a public policy standpoint all that mattered were the unchallenged facts of the case. De Beers had significant amounts of secret funding to allow it to maintain a considerable slush fund, and it was ready to use those funds through companies based in secret tax havens like Panama. De Beers had subsidiaries operating in many secret tax havens.  Whether the existence of these tax haven companies and the transfers was to avoid tax or rather to manipulate the political system to assure the continuation of governments that De Beers considered favourable to its interests cannot be known. Further, whether in fact it used transfers through these jurisdictions as De Beers has argued, as merely an act of generosity to assist a financially troubled Head of State, is left for others to decide.

The most disturbing element of the Nchindo case was the haste with which the matter was laid to rest. In the tradition of Botswana there would be no parliamentary enquiry into the relationship between De Beers and the political elite. The institutions of governance in Botswana rallied behind the political elite and the hard questions that should have been asked in any democracy after such an affair were never asked. If one accepts the explanation of Nchindo’s death as suicide and the payments made to President Masire merely a way of helping a financially troubled friend then the view, so commonly held by the international community, that there is no serious corruption in Botswana can be supported and that the relationship between De Beers and Botswana as one that has been entirely and undisputedly beneficial to Botswana. If once accepts the alternative view that Nchindo was killed after he pushed the ruling elite too far and after having blackmailed a former president over the bribery to leave office of another, completely undermines the commonly held view of Botswana.

In defence of Botswana, few countries in Africa or elsewhere for that matter would have done anything other than sweep this sordid matter under the carpet. In Africa only neighbouring South Africa has sufficiently vigorous democratic institutions that it would have been possible to really investigate so  scandalous a case. But there is also  a pan- African issue regarding Nchindo. There would seem little doubt that if Nchindo  had been a European director of De Beers, rather than an African,  and had he died under such suspicious  circumstances there would by now likely have been at least six books written, two Ph.D. theses , an  EU inquiry and at least one Hollywood movie. But  Nchindo was an African and sadly in Africa, 'black lives don't matter as much as white ones' and so this this  affair remains an almost forgotten footnote  in Botswana's  history.
 

 

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[1] Molebatsi R.M & Dipholo K.B.  (2014) ‘Least corrupt Botswana: image betrayed?, Journal of Public Administration, Vol. 49,, No 3. Much of the Nchindo affair is also discussed in Chapter 6 and 7 Yolande Kyngdon (2014) From Ultimate Rent Seeker to Positive-Sum Stakeholder? The Ethical Evolution of the Modern Diamond Industry –Ph D thesis University of New South Wales. In all academic citations in the above,  the sources are from newspaper accounts at the time. 

[2]Former Debswana chief receives top honour. Daily News (Gaboronne) 4 October 2004.

[3]Tshepo T. GwatiwaIntelligence operations as terrorism: Emerging state terrorism in Botswana Journal of African Studies and Development Vol. 3(9), pp. 176-186, September, 2011

[4] Sunday Standard Reporter (2010,  18 January). ‘De Beers, Masire in shady deals.’ Sunday

Standard. Retrieved 18/07, 2013, from

http://www.sundaystandard.info/article.php?NewsID=6698&GroupID=1 downloaded

[5]  Sunday Standard (2010, 24 January). ‘BDP in De Beers, Debswana slush funds scandal.’ Sunday Standard. Retrieved 20^th April  2015, from

http://www.sundaystandard.info/article.php?NewsID=6793&GroupID=1.

[6] Ramadubu D ‘ The Fallout- Mogae speaks out about his soured relationship with Nchindo’  Botswana Guardian, Friday 29^th January 2010. The substance of the quotation and the allegation contained in it have  not been denied by President Mogae.  It should be noted that it had  long been suggested that in the press that there was considerable pressure on government to withdraw the charges against Nchindo though there was no public discussion of how this pressure was felt. The Guardian interview with Mogae was the first substantive allegation of how Nchindo had been pressuring Mogae.

[7] E. Tsimane’ De Beers Saga – Khama, Nchindo repond , Botswana Guardian, 5^th February 2010.   

[8] Sunday Standard ‘ Nchindo- closer to the president, closer to the bullet’  January 17,  2010, page 8. The title of the article is chilling in light of Nchindo’s death three weeks later.

[9] It is the author’s understanding that Louis Nchindo’s father had also committed suicide therefore adding some credence to the allegations.

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.