Botswana May 2017

Norilsk Nickel, World Bank turn spotlight on Botswana mining sector

Russia-based mining group Norilsk Nickel sues the Botswana government over its default on a deal to sell state-owned nickel mining company BCL. The World Bank’s Mining Investment and Governance Review (MinGov) has ranked Botswana low in accountability and inclusiveness and advises Botswana to improve transparency and accountability by making details of mining contracts publicly available.

Russian mining group sues Botswana government …

Russia-based mining company Norilsk Nickel sued the Botswana government on 27 April over an alleged breach of contract in 2014. Investors will watch the case closely, since its outcome will reflect the extent of the country’s rule of law, business risk and safety of investments. The lawsuit follows a 2016 deal in which Norilsk agreed to sell its operations, including a 50% stake in South Africa-based Nkomati mine to the state-owned BCL Group, for $271m. However, BCL filed for liquidation in October 2016 before the completion of the transaction, citing its inability to pay the purchase price. The government also reportedly owes Norilsk $6.4m from the sale of the Tati mine in Botswana. BCL has always depended on government subsidies, and the government also reportedly acted as guarantor to BCL during negotiations of the sale of Norilsk’s assets. However, it allegedly neglected to inform Norilsk of the decision to liquidate BCL, despite the ongoing transaction, which only learned of it through the media. Norilsk CEO Michael Marriott accused the government of recklessness by entering into the deal while it was unsure of its ability to afford it.

“The government displayed a complete disregard for the fair, frank and reasonable dealing with outsiders that BCL’s insolvent circumstances demanded…Botswana has a reputation as one of the safest and best places to invest in the whole of Africa, and it has earned the strongest credit rating on the continent on that basis. The way that the government of Botswana has acted over BCL brings the validity of that reputation into question.”1

The government had indicated in February that it was on the verge of securing new investment from unnamed investors in the Middle East, although it is yet to confirm if it has secured new financing. However, Norilsk indicated that it will block any agreement that the government tries to enter into before it compensates the company for the failed deal. The lawsuit will challenge Botswana’s reputation as a safe investment destination. The Canada-based Fraser Institute ranked Botswana as the best mining investment destination in Africa, and ranked second to Australia on regulatory certainty worldwide. The case also shows the extent to which the non-disclosure and public audit of mining contracts may result in disputes that emanate from administrative or legal missteps.

… as World Bank recommends transparency in mining contracts

The World Bank advised Botswana on 4 May to make details of its large mining contracts publicly available in order to promote transparency. The World Bank’s recommendations challenge the popular belief that Botswana’s public institutions are inclusive and transparent. World Bank consultant Nils Handler criticised the government’s secretive conduct in contract negotiation processes, especially for large-scale diamond mining, sales and marketing, in a report titled “Botswana Mining Investment and Governance Review” (MinGov). Handler recommended that the government implement a more open process in which contracts are made public, which will improve transparency and accountability.

“Although it is well-known for having a ‘vibrant’ democratic political system, Botswana’s public institutions, especially those responsible for managing the mineral sector are anything but transparent or accountable to the public. For example, there are several instances where the government has granted licences for diamond mining in protected areas, such as the Central Kalahari Reserve, without publicly disclosing the contract details. This has often led to the forced removal of rural communities, especially the Basarwa indigenous people.” 2

The government has never publicly revealed details of its largest diamond sales contract, signed with De Beers in 2011, in which the company transferred its sorting and marketing operations from London (United Kingdom) to Gaborone. The decision resulted from the government’s ongoing drive to diversify the economy through allied economic sectors and non-diamond related industries. Although the government’s deal with De Beers became one of the most successful examples of beneficiation in the African minerals sector, Handler notes that it came at the expense of transparency and inclusiveness. He also noted that the country ranks “low” in the MinGov report’s rankings on accountability and inclusiveness, which reflects concerns that civil society organisations, industry members and some ministries expressed. The MinGov report also indicated that the government marginalises rural communities from earning mining revenue, despite their experience of negative effects from mining operations, which mostly take place in rural areas. Botswana earns 89% of its foreign income and 30% of national revenues from mining, especially diamonds. The MinGov report highlights the negative consequences of president Ian Khama’s (2008-present) authoritarian governance style, which is pronounced in the minerals sector. The Botswana government will need to revamp its domestic regulatory framework, and ratify global instruments for transparency and good governance in the extractives industry, such as the Extractives Industry Transparency Initiative (EITI).

1. [Norilsk Nickel Africa CEO, Michael Marriott quoted in Business Day, 2 May 2017.]

2. [Source, analyst, Botswana]

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