Botswana Clash With Billionaires Could Tarnish Its Reputation As Resource Investor’s Paradise

At first glance, there is simply no country like it in Africa. Within the continent, Botswana is considered to be the crème de la crème. It’s corruption perception score is better than every BRICS nation plus Mexico, according to Transparency International. It’s resource rich, known mainly for its diamond wealth, and has rolled out the red carpet for foreign firms with what seems like reliable, steady rule of law. This is the place to be.

Some say not so fast. Deloitte Botswana senior manager, Brian Watts, argues that appearance belies a true scale of graft. It is done by multiple actors all throughout the value chain. Watts estimates at least 5% loss due to fraud even in the private sector, in telcos. Most cases are not disclosed to the public, Watts said during an event for whistleblowers back in March.  In mainly state-controlled natural resources sector the stakes are much higher.

It might still seem low compared to Botswana’s neighbors. But unlike its neighbors, Botswana had over 100 companies and individuals, including court justices and local millionaires revealed in last year’s Panama Papers release.

Despite the commodity boom, the country is still extremely poor. The rise that lifted Botswana, mainly lifted the boats of the establishment. Youth unemployment is around 40%, according to the World Bank. A fifth of the country’s two million people live on less than $2 a day. Layoffs in the mining sector are testing people’s patience. Due to changes in the global commodity markets, some big firms like BP and Anglo American have been leaving.

London-listed Norilsk Nickel, world’s leading producer of nickel, platinum and palladium, entered the African market ten years ago, in the halcyon days of soaring nickel prices. The company was founded by Vladimir Potanin, the eighth richest man in Russia and the 77th richest in the world, according to FORBES.

Back in August 2007, Potanin’s company acquired Canadian LionOre Mining International and took over its assets: 85% interest in Tati Nickel in Botswana (the remaining 15% belongs to the Botswana government) and 50% in Nkomati mines in South Africa, across the border, with partner African Rainbow Minerals, owned by South African billionaire Patrice Motsepe.
After September 2009, when Lehman Brothers went under, commodity exporters from Brazil to Russia and – of course – Botswana, got soaked. Nickel prices plunged from an all-time high of $54,050 per metric ton in 2007 to just around $10,000. Norilsk downsized fast and in October 2013 said it was exiting from Africa. It found a buyer in Botswana.

In 2014, a fully owned by the Botswana government mining and smelting company called Bamangwato Concession Limited, or BCL, agreed to buy Norilsk’ Africa assets for $337 million and announced a $250-million bond sale to finance the deal. In return, Norilsk agreed to supply concentrate from the mines to the BCL smelter. BCL took over the assets. But they didn’t pay.

In 2015, they renegotiated the price down to about $279 million citing the declining metal prices. But still didn’t pay, Norilsk says. 

Eventually, in October 2016, BCL filed for bankruptcy. Now, it really can’t pay. The popping of the commodity bubble seems to have claimed another victim. Similar stories can be heard elsewhere, within varying degrees of financial crisis. General Motors recently had its properties taken over by Venezuela, and many foreign oil companies there are sending their expat workers home, as is the case with Spain’s Repsol, because the commodity crash has done a number on the ruling political party. The country is in chaos. Its reputation as a Latin American oil hub is likely ruined for years.

Like Venezuela, the Tati-Nkomati case casts a spotlight on Botswana’s image as trustworthy business partner. Norilsk is not the only one that has come to Botwsana because of its “best in class” status.

In a March report in the Journal of Contemporary African Studies, two academics, one from South Africa, the other from Botswana, looked back on the country’s 50 years of independence, and its stellar rep in world markets. They poked holes in the government of president Ian Khama.

“The accolades and praises lavished on Botswana are a result of mistaken identity,” says Monageng Mogalakwe, a professor in the sociology department at the University of Botswana, Gaborone. “It’s come a long way from its colonial infancy of neglect and indifference by its British overlords, but it is not what it appears or is said to be. A scratch beneath the surface and you’ll see that this is top-down presidentialism, with an emasculated parliament and corruption and poverty in the midst of plenty.”

Not that authoritarian-run societies with loose ties to the democratic tradition are shunned by foreign capital. They seldom are. Anglo American is vacating not because of distrust in the government, but because it is streamlining due to the same pressures of weak commodities.
But if the Russia-South Africa case against BCL Group ends up in a London court, it will tarnish the reputation of a country already losing its shine due to weak commodity prices and other lackluster deals with mining giants.

“Rescission of contracts is always a highly controversial matter,” says Markus Funk, chair of the Africa practice at Perkins Coie. Funk was in Botswana last year for a World Bank monitor advisory role regarding a privately held company. He did not say which one. Much of his litigation is in the mining space. “The ground rules change a lot, and this can test people’s faith,” he says.

Botswana’s been a headline for the past two years because of commodity price falls and Norilsk and African Rainbow Minerals. Russia replaced it as the world’s top diamond producer in 2015. Diamonds account for more than half of Botswana’s exports.

In 2015, a four year old deal between Botswana and De Beers, the nation’s biggest diamond company, allowed for rough diamonds to be shipped to India and Thailand for polishing. That’s hurt the local industry and made the Botswana Democratic Party (BDP) unpopular. They’ve ruled for about 50 years, ever since independence from the Brits.

If its rivals were to unite, the BDP could be pushed out of government in 2019. As its grip on power is weakening, the BDP is beginning to dabble with repression. Journalists complain of arrests and harassment, while the independence of the judiciary is under attack and falls in line with the president Ian Khama, Mogalakwe wrote.

At the time of the last election in 2014, BDP responded to the prospects of its electoral loss with intimidation of opposition politicians and journalists, revealing “a significant gap between Botswana’s reputation and reality”, the Washington Post published an op-ed as saying.

In Botswana, the liquidation of BCL is a bad for Khama. Some 6,000 people are projected to lose jobs pushing country’s unemployment rate higher. Business Botswana, an NGO, forecasts that BCL’s closure would have a profound negative spillover effect, damping growth and exacerbating poverty in the region where the mines are located

Similar to other emerging markets, where non-transparency rules the roost, the government that decided to lay off BCL workers apparently due to the lack of funds was recently caught spending around $7 million on a luxury private jet, according to local press reports.
Botswana is reeling. The last 24 months have been particularly stressful. The Economist noted that Botswana’s diamond days were drawing down. “With its well-educated people, Botswana could live up to its promise as a model that combines democracy and good governance,” editorial writers wrote. “But if it falters, it will struggle to attract the investment it needs to put the sparkle back in its economy.”

A headliner lawsuit revealing is the last thing it needs.

A London-based risk analyst wanted to remain anonymous says that the London lawsuit, besides its negative reputational impact, would mean more uncertainty about the country’s finances.

“If disputed $300 million become part of public debt it will translate into about 15% increase in Botswana sovereign liabilities”. He says that could add to budget deficits woes, projected to be as much as 4% of GDP. That’s a good number for another commodity exporter, Brazil. But Botswana hasn’t seen numbers like that in years. He says he wouldn’t rule out a lower credit rating. Fitch noted in April that the economy is on path to grow around 3.4%. Botswanan debt is rated A, one of the best in the world.

“I think this dispute is more about a bad deal than a bad government,” says Douglas Boggs, co-chair for the Africa and MENA practice at Manatt, Phelps & Phillips, LLP in Washington. For Boggs, the legal imbroglio was made worse by “poor execution on the government’s part”.

 

“Botswana certainly has not handled this well and should settle this matter,” says Boggs. He hopes that, if settled, the long-term effect of the BCL dispute on Botswana’s reputation will be minimal “…unless more issues like this one arise.”

Source: https://www.forbes.com/sites/kenrapoza/2017/05/22/botswana-clash-with-billionaires-could-tarnish-its-reputation-as-resource-investors-paradise/amp/

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