Botswana’s Financial Center Gains Momentum

Gaborone's Business District

A reputation for stability, fiscal incentives and the development of the diamond hub in parallel are already attracting global financial players to implant subsidiaries in Gaborone.

Botswana’s big idea for diversification of the largely mineral-dependent economy is the establishment of a world-class financial services hub in the capital city, Gaborone, to develop cross-border financial and business services within Africa. Although it has to compete with the region’s biggest and longest-established financial centre, South Africa, the hub has gained traction in recent years by attracting regional and global players. This has been helped by Botswana’s reputation for political stability, along with sound fiscal and economic policies, an excellent credit rating and its generally pro-business approach.

Another key driver has been the incentive package on offer for firms that choose Gaborone as their domicile. Established in 2003, the International Financial Services Centre (IFSC), now headed by acting chief executive Letsebe Sejoe, provides accredited companies with a sustainable low-tax environment, access to a growing double-tax-treaty network and other benefits.

Botswana’s standard corporate tax rate is 25 percent, but IFSC-accredited firms pay a discounted rate of 15 percent and are exempt from with holding tax (normally 15 percent) on interest, dividends, management fees and royalties paid to non-residents. They are also exempt from capital-gains tax (15 percent otherwise) and zero-rated for the standard 10 percent VAT.

Accredited firms include Aon Risk Solutions, a subsidiary of the US global insurance broker Aon Corporation, and African Alliance, part of the Johannesburg- and London-based merchant banking firm Brait Group. Others include investment-management firm Ariya, a subsidiary of Jersey-based Ariya Capital Group; micro-business and short-term finance provider Letshego; and offshore call centre PTA Solutions.

Another firm, Vantage Capital, is raising finance from international investors, including development finance institutions, to provide mezzanine finance – combining debt and equity – to medium-sized enterprises across different sectors in African target markets. Luc Albinski, managing partner of risk capital for Vantage, is considering Botswana as a potential jurisdiction for the Vantage Capital Fund II. The fund targets a closing of $250m by the end of March.

Last year it obtained an initial $25m funding commitment from theAfrican Development Bank. Albinski says Botswana is “quite cost competitive” and notes it has easy access to Johannesburg and Cape Town. But he says it is early days: “We’re going to have to see whether Botswana is able to attract a critical mass of fund managers.”

Some 45 percent of the fund is being allocated to firms located in member countries of the Southern Africa Development Community (SADC), another 30 percent to North Africa, and the remaining 25 percent is split between East and West Africa. Vantage expects that these investments will mobilise about $735m in capital for medium-sized firms.

The IFSC hub’s attraction will be boosted through the provision of better facilities in the new Gaborone Central Business District. The mix of office and retail properties includes the already completed Square Towers and Mall, SADC House and Industrial Court. Nearing completion are Masa Towers – which will add much-needed accommodation capacity in the form of a Holiday Inn hotel – Exponential Towers and Time Plaza. However, additional government investment is needed in new infrastructure, including sufficient road capacity, adequate power supplies and direct international flights to Gaborone.

At present, the only way to reach Gaborone by air from outside Africa is via Johannesburg. International flight connections will become even more vital if the Gaborone diamond hub, which is being developed in parallel and includes downstream diamond-cutting and polishing factories, is to prove fully successful.

Botswana is the world’s second-largest rough-diamond producer by volume and first by value. De Beers, which mines diamonds in a 50:50 partnership with the government as Debswana Diamond Company, is moving its London-based international sorting and marketing operations entirely to Gaborone by the end of 2013.

Under its latest 10-year sales agreement with Botswana, signed in September 2011, an initial 10 percent of Debswana’s production can be sold locally. Previously 100 percent of the diamonds were marketed internationally. Thus from 2014 or earlier, De Beers’ Diamond Trading Company clients will need to fly to Gaborone during sales weeks instead of to London