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How Botswana Leverages Growth

By teaming up with DeBeers—as China's CNOOC did with oil giants—the country's government has created jobs and extra opportunities

In 1984 I went to China to undertake a dream research project in collaboration with a Chinese team. Our aim was to understand why the Chinese National Offshore Oil Corporation (CNOOC) was frustrated in its efforts to persuade the growing number of oil majors looking to invest in exploration licenses to transfer proprietary technology to CNOOC in return for oil exploration concessions.

It was all going terribly wrong. On the one hand, CNOOC (CEO) felt patronized by Western oil companies that wanted its employees to attend tedious classroom lectures by the hundreds. On the other hand, Western oil companies felt CNOOC had significantly overstated the "20 years of experience" of its engineers. They argued that in reality CNOOC's engineers had had one year's experience 20 times.

We recommended that the Chinese trainees and their Western counterparts collaborate as integrated teams of innovators on specific mid- to long-term research and development projects, which they did. Over the next several years, exciting innovations were developed in geophysics exploration and in complex-basin modelling.

A Chance to Gain Global Status

Nearly 25 years later, CNOOC has grown from producing less than 100,000 tons to more than 40 million tons (oil equivalent) per year and has made investments throughout Africa. If allowed it would have bought U.S. oil company Unocal (CVX) in an $18.5 billion all-cash bid. Such is CNOOC's appetite for expansion and enterprise. What the company is doing today should come as no surprise: Chinese cash reserves and the predicted end of easy oil in the Middle East, the North Sea and the Americas gave it an unequivocal negotiating edge.

China isn't the only place where ambitious national enterprises have the opportunity to gain global status through smart stewardship of natural resources and their wealth-creation capacity. There is perhaps no better example today than the African country of Botswana, which is looking to leverage its leading position in diamond mining into a host of ancillary businesses, from diamond processing to banking, security, information technology, and even tourism. As with CNOOC, a quarter century from now we may see this as a critical step in Botswana's—and indeed Africa's—economic development.

This story starts for me in 2007, when I went to Botswana for the first time to conduct a social audit and write a report about the role of diamonds in the country's national wealth. Even though I had traveled extensively through Latin America and other natural-resource-dependent countries in Africa, for me Botswana stood out. Its development path since independence has been built on diamond wealth, and its revenues have been managed and spent prudently on education, infrastructure, and health care.

Engaging With the Private Sector

Revenue from diamonds represents one-third of Botswana's gross domestic product. For the past 25 years, the country has had one of the fastest-growing economies in the world, logging 4.7% GDP growth last year, and it enjoys the highest sovereign credit ratings in Africa from Moody's (MCO) and Standard & Poors (MHP). It's also a well-governed democracy with strong rule of law, and it's among the least corrupt countries in the world, according to an annual ranking published by consultancy Maplecroft, of which I am the founding director.

A key part of Botswana's success has been its willingness to engage with the private sector. The national government and South African jewel giant De Beers Group operate a 50/50 joint venture called Debswana that is the world's largest diamond producer, accounting for 22% of global output. In exchange for its share of Botswana's output, De Beers provides technology transfer and training through an organization called the Diamond Academy.

Creating 3,000 Jobs by 2009

Now the partnership is deepening. De Beers is opening an $83 million diamond sorting and valuing center in Botswana's capital, Gaborone, called the Diamond Trading Company Botswana (DTCB); an enterprise that, as the country's former president, Festus Mogae, said at the opening ceremony will "…raise [Botswana's] global profile by becoming a benchmark brand."

The center won't only process rough diamonds mined in Botswana. With the capacity to handle 45 million carats annually, De Beers also plans to send most of its global rough diamond supply there—helping to create potentially 3,000 new local diamond-sorting and -valuing jobs by 2009.

What's more, Botswana is now moving further along the diamond value chain into more highly-skilled activities. A dozen new diamond cutting and polishing centers have recently opened there, adding to the four that already existed, and De Beers intends to ship a chunk of its global supply to them for processing. All told, by 2010 Botswana's nascent cutting and polishing businesses are expected to be handling more than $550 million worth of rough diamonds annually.

The essential message is that the government of Botswana is finding a way to create more value for the economy through diamonds. By vertically integrating diamond processing and creating a new pool of skilled local labor, the country's leadership aims to move Botswana from a miner to a global diamond center—and keep more of the profit generated at every step along the way. At the same time, it hopes the diamond trade will be a catalyst for foreign investment as well as for the emergence of other industries tied to jewels, such as financial services and information technology.

Looking Outside Botswana

To be sure, there are challenges ahead. Botswana still has to make its experiment fly. And the project is getting off the ground at a tough time for the global economy, when recession in the U.S. and weakness in Western Europe could suppress retail diamond sales. Growing demand from Asia and the Middle East may not be enough to make up the difference.

Could Debswana follow CNOOC's lead and start to invest outside Botswana? That would probably be premature, but the government has a powerful hedge thanks to its 15% equity stake in De Beers. Botswana thus stands to benefit from De Beers' new mines in Africa, as well as its existing holdings in Namibia, Tanzania, and South Africa. The government also will profit from the new joint venture between De Beers and luxury giant LVMH Moët Hennessey Louis Vuitton (LVMH.PA). Known as De Beers Diamond Jewellers, it has opened stores in the U.S., Japan, and the Mideast and is quickly earning a reputation for high-quality, ethically-sourced jewelry.

The lessons from CNOOC and Debswana are clear. Both China and Botswana have used their negotiating power and strong, state-owned businesses to transform their natural resources into national wealth through innovation. And they're doing it via strategic partnerships with the business leaders of their industries. The stories of both companies—and countries—hold out the promise of a sustainable route to development, as long as revenues are reinvested in development, and human rights are respected along the way. The next step is to draw lessons from the shining example of Botswana for the rest of Africa.

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