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International Update

Diamond in the Rough

In three years time, Botswana will celebrate its fiftieth year of independence. Before it sees another 50, the extensive diamond deposits that have been its source of prosperity will have long run out.

Diamonds, which have been sold as a 50/50 partnership between the government and diamond cartel De Beers since the country’s formation in 1966, currently account for about half the government’s earnings and 70-80 percent of the country’s export earnings. The country is one of the largest diamond producers in the world, but it is estimated that by 2029, most deposits could be used up.

In preparation for this, the country, like many other developing nations, wants to diversify its economy. And, again like many other developing nations, it wants the knowledge, experience and technical expertise that foreign direct investment (FDI) brings in order to do this.

Where Botswana differs from many other developing nations is what it has done with wealth already generated. The country has been called the true success story of Africa. Instead of funding golden palaces and high-end Mercedes, the Botswana government has ploughed funds into improving society, with remarkable success.

Roads Instead of Palaces

“It’s an African country that works,” says Ryan Hoover, portfolio manager at investment advisors the Africa Capital Group. “You can really see the progress. Just after independence the country only had a few kilometres of paved road, and now it has a fully developed transport system.”

The country prides itself on the kind of transparency that results in roads instead of palaces. Earlier this year, Transparency International released its Corruption Perceptions Index for 2012. The guide indexes the scores analysts, experts and business people give countries on levels of government corruption. Over the last decade, Botswana has consistently ranked as the least corrupt nation in Africa. In last year’s results, it came thirtieth in the world, putting it tied with Spain and above developed nations such as Portugal, Taiwan and South Korea.

“I was actually stopped for speeding with a radar gun in Botswana,” says Hoover. “I was impressed. I was shown how fast I was going, given a ticket and not asked for a bribe. It was a small example of how things are above board.”

Added to that, the country has one of the highest literacy rates on the continent with over 80 percent of the total population (and 94 percent of the population aged 15-24) capable of reading and writing, according to the World Health Organization.

So Botswana is a wealthy, stable, educated country in the heart of sub-Saharan Africa with extensive natural resources. Yet globally, few people know of it. According to Simon Anholt, creator of the Anholt-Gfk Roper Nation Brands Index, Botswana consistently ranks lower in reputation than reality simply because it is African. It can be hard to think of it as a good, stable democracy, he says. The country also suffers from being overshadowed by close neighbours South Africa and, in a more infamous way, Zimbabwe.

It also suffers from some geographical drawbacks that limit its potential as a destination for foreign investment and thus help to keep it in obscurity. It is sparsely populated, contains part of the Kalahari Desert and is landlocked. The latter can be a real problem for generating international investment. Over the last eight years, the country has ranked a middling fifteenth out of all African nations when it comes to attracting FDI, according to global consultancy Ernst and Young.

With no sea access and a limited domestic population, any manufacturer looking to locate there will either have to export within Africa or send product along the Trans-Kalahari highway to South Africa or Namibia. Although Botswana is a member of the Southern African Customs Union (SACU) allowing a single excise tariff, the additional road miles will inevitably add to costs.

“For the most part, it is a very small market, and it is affected by its reliance on neighbours, especially South Africa. But it is attempting to address this,” says Hoover. “For instance, it’s attempting to make itself into a regional financial centre.”

The country has worked out an agreement with De Beers so that it stays a major diamond processor after its own reserves run dry. It has established a low corporate tax rate of 15 percent, according to the Botswana Export Development & Investment Authority (BEDIA). It has also encouraged technological and financial start-ups such as the social media platform, Mobbo and consumer lending firm, Letshego. This has enabled it to move away from sectors manufacturing physical goods and towards products that do not need to be transported, says Hoover. “It’s a small market, so it may be more of a niche destination for people,” he adds.

Can a Pharmaceutical Cluster Take Root?

Botswana-mapCredit-US-Army-Africa

Other areas are primed for investment as well. The country provides free medical care to citizens but imports most of its drugs. The government of Botswana wants to attract manufacturers through public private partnerships (PPPs) but has not had much success. Research and analysis firm Frost and Sullivan estimate that the market for generic drugs in Botswana will be worth £111.3M ($168.8M) by 2015. Branded drugs, more attractive to many pharmaceutical manufacturers, will trail slightly with an estimated 2015 market value of £76.5M ($116.1M).

Thus far, Botswana has not had much success in attracting a pharmaceutical manufacturer due to the small domestic market, the difficulty with exporting overseas and the need to reform patent laws. It has had two proposals for PPPs and one domestic manufacturer that is in the process of setting up.

Gemi Pharmacure, the domestic manufacturer, produces generic anti-retroviral, anti-bacterial and anti-malarial drugs, amongst others. It has started a manufacturing plant in the mining town of Selebi Phikwe that is intended to employ more than 1,300 workers. The project, in conjunction with the government of Botswana and the United Nations Industrial Development Organization (UNIDO), was set up in the town in an attempt to diversify its economy.

Although currently the only manufacturing facility in the country, Gemi CEO George Proctor is hopeful that international generic manufacturers can be convinced to set up African manufacturing centres in Botswana. The political and economic stability, high economic growth rate, excellent infrastructure, trade agreements and financial system all make it an attractive choice, he says. Indian and Pacific manufacturers are the most likely to set up in the country, he adds.

“With the experience they had with HIV, they’ve been very progressive in attacking health problems,” says Hoover.

Energy Diversification Plans

Meanwhile, Botswana is also looking to diversify power production. Currently it imports most of its power from South Africa, and what is generated domestically is done through coal combustion. Domestic demand is increasing in Botswana and Eskom, the South African utility company, has had to cut back on the amount of electricity it exports to its neighbour due to growing demand at home.

A second coal-fired power plant is still under construction but it alone will not be enough to meet power generation demands estimated by Frost and Sullivan to be increasing by 4.6 percent every year. As a result the Botswana government is planning to invest about £494M ($750M) in its domestic electricity industry before 2016.

It would like to diversify into renewable energy while doing so. The country is hosting a renewable energy expo later this year. As a concrete step towards generating its own renewable power, it constructed its first solar plant in 2012. The project was funded by Japanese Environmental Grant Aid. It was built by Japanese firms including the main contractor, the Itochu Corporation and Huji Furukawa Engineering and Construction. It cost an estimated £6.5M ($9.9M) and will generate 1.3 MW of power.

If Botswana is to grow as a destination for international investment, fixing its power problems should be priority number one. It is unlikely to attract top foreign talent and expertise if it suffers from rolling blackouts as a result of “load shedding” —systematic shutdowns of part of the grid in order to preserve the rest — from its domestic and imported suppliers. This is especially true outside of cities. “For a manufacturer coming in and looking to build a major installation, this could be a serious problem,” says Hoover.

With about three years before its fiftieth birthday, which is also the target for its current growth plan Vision 2016, time to address these issues is fast running out. The country which is Africa’s success story is going to have to work hard in order to ensure it stays a success story.

Rob Denman is editor in chief and CEO of London-based Pathfinder Business.

Snapshot

Diamond in the Rough

In the 1989 movie “Field of Dreams,” the story’s protagonist, a confused fellow by the name of Ray, is urged by a haunting, mysterious voice to build a baseball field in the middle of his Iowa cornfield.

Ray is told to follow his dreams by cohort Terrence Mann, a 1960s author and activist. “Ohhhhhhhh, people will come, Ray. People will most definitely come.”

In Wyoming, Mich., there is another field of dreams, one occupied by a now un-occupied General Motors stamping plant. The plant, originally built in 1936, was closed in 2009 to the shock and dismay of the community, putting 1,500 well-paid workers out of work.

Now the people dream that an investor will come. It is a shared dream by a community that understands itself, and that patience will be rewarded in the end.

First Class Manufacturing

General Motors announced in September 2008 that the stamping plant would be permanently shut down. Wyoming City Manager Curtis Holt says he was told just two weeks before the announcement by a senior GM executive that the plant was safe from closure because it was too valuable a performer.

“When they closed the stamping plant down, we were very surprised,” Holt says. “I had a close relationship with a senior executive at the plant who told me that he could not foresee closure because the plant was the No. 1 performer in terms of cost, productivity and with the least amount of defects.

“The day before the announcement, he called to tell me what was going to happen. He also said he had resigned because he could not believe that he worked for a company that would do this.”

It was scrambling time in Wyoming, and to the astonishment of officials there, GM was not making things any easier.

“We got nowhere with GM. They had no desire to work with us,” Holt says.

That all changed after the company filed for bankruptcy on June 1, 2009, and Motors Liquidation was formed to dispose of surplus company property. Local officials were soon gratified to learn that the concerns of the community were now being listened to by this new company.

“I think it soon became apparent to Motors Liquidation that we were eager and aggressive in our desire to get this site redeveloped. We also realized pretty quickly what a gem of a site we really had,” Holt said.

Because of GM’s manufacturing requirements, the 90-acre (36-hectare) site had enormous electrical capacity, excellent highway access situated just off a freeway exit ramp, and more than adequate sewer and water capacity. The site was also served by rail. Soon a consensus was formed that the site, minus the building, had all the makings for a first-class class manufacturing location, Holt says. That‘s not to say there weren’t other views.

“We had people who said to look at a Wal-Mart or look at a casino, but our reply was that it would be a waste of a valuable site. Why would we waste this kind of valuable infrastructure on a Wal-Mart or a warehouse or a casino for jobs that simply don’t pay good living wages? We want manufacturing jobs for this site. We want people with jobs who can go to a restaurant and go to stores within our community,” Holt says.

Thankfully, Holt says, community leadership and city elected officials agreed to that end game. Just as important, so did the developer chosen by Motors Liquidation to transform the property. With the selection of Lormax Stern Development Corp., the city of Wyoming had found another partner, a connection not dissimilar to the relationship it had formed with Motors Liquidation.

“The situation we have with the city is that they have certain desires on what they want to see happen with this property,” says Chris Brochert, a partner with Lormax Stern. “We bought the property from Motors Liquidation, but also wanted input from the city because they are most desirous of having an industrial facility.”

Everyone agreed that the 2-million-sq.-ft. (185,800-sq.m.) building had to come down, an expensive venture to be sure, estimated at $10 million for demolition.

“We knew that our chances of getting someone in there to use 2 million square feet was very remote,” says Holt. “Besides, the building was obsolete. The original part was built in 1936 and it had a different ceiling. There was a basement under a large part that was really not usable. So it became apparent to us that we needed to get the facility on the ground.”

The good news was that the building was full of steel and copper, recoverables whose value could cover a large part of the demolition costs if not all of it, Holt said.

“The last thing in the world we wanted was for a salvage operator to come in and strip the building and leaving us with a worthless hulk that would be an eyesore to the community,” Holt says.

Lormax Stern was also onboard with the idea of razing the site, with the shared goal of finding one future manufacturer to occupy it.

“We are not looking to put up a bunch of 50,000- to 100,000-square-foot buildings on the site,” Brochert says. “We are looking for a major manufacturing facility or R&D facility that is going to create living-wage jobs and replenish those jobs lost with the closing of the GM plant.”

Generators of Wealth

Enter into the picture the third partner for the shared dream: The Right Place, Inc., is the local economic development organization, based in nearby Grand Rapids.

Birgit Klohs, president and CEO, jumped at the chance to be a part of a collaborative effort to transform the site with the goal of bringing back high-quality manufacturing jobs.

“This is a tremendous arrangement and it makes the three of us — the city, the developer and the economic development organization — a team in redeveloping what is one of the most critical pieces of property in our area,” Klohs said.

The Right Place’s role is to market the property to industrial end users nationally and internationally, Klohs says. In short, the Right Place is to find the right company.

Because of the robust infrastructure on the site, the makeup of the community and a moral calling to bring back quality jobs, Klohs agrees that manufacturing is the correct answer.

“We want the kind of jobs that we lost. We have enough retail. Besides, retail follows good jobs. And retail is not a driver of economic wealth. Rather, it is a recipient of the drivers of economic wealth, which are job generators that export their goods or services,” Klohs says.

It is an old concept that continues to ring true — that base economy jobs, those that create wealth, are found in such sectors as advanced manufacturing, life sciences, medical devices, food processing, and alternative energy. These are target areas for the Right Place.

“It is only when you have these kinds of wealth-generating jobs that you can then afford to buy things at retail establishments,” Klohs says. “The city made it very clear that they will not budge from their desire for these kinds of jobs. It may take longer, but it will be worth it.”

Lormax Stern is aligned with those same goals because the company wants to diversify into developing rental properties for high-tech manufacturing, company exec Brochert says.

“The type of user that is going to go into this site is going to be a Fortune 500 company or a multinational corporation that is very well financed,” Brochert says. “We will enter into an absolute net where we build the building to their specifications, deliver the premises to the tenant and they will commence paying rent.”

The partnership between Lormax and the City of Wyoming enables both organizations to realize goals — diversification for Lormax, a recovery of manufacturing jobs for the city.

Will Knowing How to Make
Things Make Things Happen?

Despite the attributes of the physical site and its strategic location in western Michigan — it is two hours from both Chicago and Detroit — incentives will be offered to the right party, Holt says.

“We are going to be patient. We know this is not about recovering all the jobs we lost tomorrow. This is about long-term good for the community. So we are willing to give in order to get,” Holt says.

The property will be deeded to the City of Wyoming on April 1 for $1. In return, the city will be paying the property taxes. From the date, Lormax Stern has five years, with the help of The Right Place, to find a user for the property. Holt said the city would be willing to give the site away to a future manufacturer with deep pockets and a commitment to create good-paying jobs.

“We want jobs. We want good sound investment. We want commitment,” Holt says.

But is that any different from what most communities nationwide want? Holt, Klohs and Brochert all concede that their common dream is indeed common for others. The difference, they say, is their exceptional site and their exceptional work force.

“We are not new to competition,” Klohs says. “West Michigan has an exceptionally robust manufacturing sector in spite of what has happened in the past few years. We still have nearly 20 percent of our work force employed in manufacturing.”

According to a blog maintained by Holt, such companies as Weller, Stockwell Manufacturing, Detail Technologies, Wolverine Glass and Gordon Food Service are growing their footprints and creating jobs in the community. And an announcement is planned for this month regarding a new investment by Kellogg Co.

Klohs says in the seven-county region including Grand Rapids and Wyoming, there is a population base of 1.3 million. Of the area’s nearly 2,000 manufacturing firms, 60 percent are family owned.

“That means a very different kind of work style, really a terrific work ethic,” she says. “So we know our business when it comes to making a high-tech product — from optical measuring equipment to the best office furniture in the world to high-tech auto parts. We know how to do all that because we have the skills in this community — and protect it as if it were gold.”

According to Klohs, the stars are aligned right for good things to happen to the Wyoming site. The dream will take longer, but it will happen. Brochert agrees.

“We are just at the threshold right now. We have a long way to go, but I believe we’re going to succeed here,” he says.

Holt looks at today’s efforts to redevelop the GM property in an historical context in which his generation will be serving the next by making the dream for this property happen.

“We’ve done a great job with this city for the past 50 years. And it’s true that we have been hard hit by this economic downtown. But now we have the chance to set the bar for the next 50 years, and we don’t want to blow that. We want people living here 50 years from now to look back and recognize what a great decision we made here.”


Editors note: For a glimpse of the kind of dream Wyoming would like to make come true, read “Driving Home for Thanksgiving,” our report on Fisker Automotive’s location of an electric-car manufacturing operation at another shuttered GM plant in Wilmington, Del. Earlier this month Fisker welcomed another $150 million in funding to go along with $530 million from the federal government and another $325 million raised from other investors. Plans call for manufacturing to start by the fourth quarter of 2012.


Dean Barber is the president of Barber Business Advisors, an economic development and site selection consulting firm in Red Oak, Texas. He can be reached at dbarber@barberadvisors.com or at 972-890-3733.