In an imperfect world unintended consequences are sometimes inevitable, however, that does not mean that they should inevitably be accepted as such and good old human intervention can always be remarkably effective in restoring credibility to any process. Pre SoC I don’t remember anybody at DTC ever using the phrase ‘unintended consequences’ in relation to outcomes that had adversely affected a client’s core business or made little commercial sense. If there was a problem and it was recognised as such it would invariably be fixed without fuss.
One of the questions the DTC included in the second profile assessment was that clients were asked to explain their contingency planning. In a world where governments and major corporations and businesses so often get their own planning horribly wrong, it struck me as a very corporate approach (possibly directly influenced by the ‘Bainwashing’ that seemed to be rather prevalent at that time).
There is a sort of ‘Masters of the Universe’ mood that takes hold when everything is going to plan – bankers, hedge funds, business consultants – all are very susceptible to this attitude, where everything appears to be controllable and foreseeable if you are clever enough and big enough!
Unfortunately it is apparent that we are all paying the price of a credit crunch which is the result of financial promiscuity and over confidence, when so-called experts clearly didn’t understand the complexity of many of the financial instruments they were trading in.
If big corporations and governments, with all the resources at their disposal, are unable to predict or prevent ‘unintended consequences’, how can Sightholders have been expected to do so? Actually, rather well. Smaller companies led by entrepreneurs who have fought their way to the top often have an instinctive feel for contingency planning because they are so close to the reality of their businesses.
However, one of the most basic concerns that big and small companies share is diversifying risk to avoid, as the saying goes, ‘putting all your eggs in one basket’. We all understand what drives the beneficiation policy and indeed wanting to sort diamonds and manufacture some of them in the places where they are mined does make a lot of sense. However, if you attempt to put all your manufacturing eggs in one basket by pushing the beneficiation manufacturing agenda too far the possibility of a major schism between the beating heart of the diamond manufacturing industry in India (which has successfully added value to the producers and the entire diamond industry for the last 30 years) and the producers becomes a very real prospect.
SoC is built on the premise of leveraging rough supply to marketing effort but if the rough supply level drops significantly so does the influence over marketing and manufacturing in general and it was Gareth Penny who reminded the audience at the recent conference in Israel that the markets of China and India had the best prospects for growth in polished sales.
Much of the success in India in driving polished demand can be attributed to Sightholder’s efforts from manufacturing through to retailing, and that should not be overlooked in the context of the beneficiation agenda.
The critical mass of investment, experience and commitment in India (Mumbai and Surat in particular) will not simply disappear for lack of rough supply due to beneficiation being promoted beyond its natural limits. Other avenues will be explored and other sources developed and the consequences could be quite unintended, and most unwelcome to many.
Thursday, 5 June 2008
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1 comments:
Dear Mark,
Your wise, well-thought, and valuable observations have quickly made your blog required reading for anyone trying to understand what is happening at the DTC and beyond. Your remarks about contingency planning remind me of a discussion I had with (then DTC managing director) Gareth Penny on “contingency plans” and “fall-back positions”. When SoC was launched, there was no plan B, no exit or alternative if things went wrong. The prevailing euphoria at the time never considered serious systematic problems, which were eventually acknowledged – and also addressed.
It took years for the attitude to change and SoC was repositioned as an “evolving structure”, which didn’t prevent u-turns on verticalization, “return on capital” (the more borrowed money, the better) and many other issues. BPP has become a promotion device rather than a guideline for mandatory behavior. The beneficiation you mentioned was categorically not a part of SoC strategy. The DTC, De Beers and the Oppenheimers fought it all along. When realizing there was no choice, they became pragmatic and now they are positioning themselves as the greatest advocates and principal promoters of a policy they eschewed only days before. [The favorite term to describe African beneficiation at the time (Gary) was “folly”; diamonds “must be processed where it makes the most economic sense.”]
When SoC was planned, the demise of the DTC was not an integral part of it. De Beers was shocked when, in the Jwaneng license renewal negotiations, which led to a change in the relationship between De Beers and Botswana, the Botswana government refused to accept a De Beers request for Botswana to take an equity stake in the DTC. Running the DTC administration came close to $200 million annually and it was surely the most expensive (while not the most efficient) rough marketing system in the world. New income streams were invented (VAS), while cost cutting was done at a speed “as if there were no tomorrow”.
The current marketing reality, Mark, doesn’t only contain a number of “unintended consequences”, but also evidence a loss by De Beers and the DTC itself over their own destiny –and policies are now being driven by policies and demands set by their corporate partners.
I expect that we can expect more surprises from the direction of corporate partners. The market has been quiet lately on the Oppenheimer management contract. It is in the present month (June 2008), that Anglo American and Botswana can serve the one-year termination notice on Nicky. I want to make it clear that (a) he will get that notice and (b) that this has nothing to do with performance and should not be interpreted as a vote of no-confidence in the Oppenheimer leadership. The lucrative (and strange) contract initially came about because of certain legal contingencies, which made it better for Anglo to distance itself from the De Beers active management. These legal contingencies don’t exist today.
Anglo American will want to be more involved in managing De Beers, which has become the worst performing asset in the Anglo stable. This may lead to ownership changes (the Oppenheimers may be looking for an exit), but it will certainly lead to more changes. Debswana has taken the services of external consultants to contemplate its future. More unintended – but probably unavoidable – consequences.
I am looking forward to reading your next blog.
Chaim
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