Cut 8 to dent gov't coffers

MBONGENI MGUNI
Staff Writer | Friday February 5, 2010 00:00

 

Last year, government expected P6 billion in mineral revenues (or 28.02 percent of total projected revenues), with Debswana contributing up to 95 percent of this figure.

Capital costs for the project, known as Cut 8, have been pegged at US$500 million (P3,4 billion) while all project stages from feasibility, design, equipment and mining operations, will require an investment of US$3 billion (P20 billion) over the next 15 years.

The project is expected to be financed from Debswana's balance sheet, meaning equity holders, Government of Botswana and De Beers, will bear the brunt of the expenses directly or indirectly.

This week, experts said government was likely to find itself shouldering a large portion of the indirect cost of the Cut 8 project, due to arrangements in place between the principal shareholders regarding Debswana. Diamond guru, Akolang Tombale explained that government's revenues from Debswana consisted of royalties, dividends, taxes and 80 percent of the profits from the diamond producer.

'Most of these projects are funded from the balance sheet, meaning reduced dividend flow to the shareholders. If this particular project is funded from the balance sheet, government will have to shoulder more.'If Debswana secures a loan for the project, it will be distributed 80/20 between the equity partners, unless there's another agreement in place,' he said.

Tombale revealed that for the funding of the Orapa No. 3 project, De Beers and government agreed to an agreement under which the diamond giant committed to shouldering 75 percent of the first P1 billion spent, while the second P1 billion would be shouldered 50/50.

Permanent Secretary in the Ministry of Minerals, Energy and Water Resources, Gabaake Gabaake, confirmed that Cut 8 would be funded from Debswana's balance sheet, but was quick to point out that government would not pump out any funds for the project.

'Indirectly, government revenues will be affected because those funds could have increased our dividends, but no money will be coming out of government to pay for the project.'Dividends are paid after all expenses have been taken care of, including the capital expenditure,' he said.

Debswana's Group Manager (Public & Corporate Affairs), Esther Kanaimba-Senai said funding for Cut 8 had been budgeted for.'As is the case with any company, we make budgetary provisions for our operating or recurrent expenses and then make provision for capital or development expenses. It is only after these expenses have been catered for that we make distributions/dividends to shareholders.

'The dividend/distribution will be distributed taking into account the revenue less all expenses (capital and working costs). The surplus is distributed as a dividend, which is part of the normal running of the business and not unique to this project,' she said.

Kanaimba-Senai said the Cut 8 project is aimed at securing the sustainability and future of Debswana.The reduced revenues to government come at a time when strategists in the Ministry of Finance and Development Planning are at their wits end in terms of hammering out a feasible budget. Lower mineral revenues ate into the nation's coffers, forcing government to run an estimated P14 billion deficit to support economic activities. While Botswana will feel the pinch from government's commitments under Cut 8, the project itself is expected to create 1,000 jobs and stimulate economic activities in Jwaneng, surrounding areas and the country as a whole.