Concerns Surrounding Production Sharing Agreements in Uganda’s Mining Sector

This article discusses the concerns raised by researchers regarding the potential drawbacks of implementing production sharing agreements (PSAs) in Uganda’s mining sector. As the government negotiates a PSA with Sarrai Group for Kilembe Mines, experts caution about risks, emphasizing the need for enhanced local capacity in mineral management. A report by NRGI suggests learning from global practices, while the establishment of the National Mining Company aims to improve resource management.

Researchers have advised the Ugandan government against the implementation of production sharing agreements (PSAs) in the mining sector. Currently, the government is negotiating such an agreement with the Sarrai Group for the management of Kilembe Mines. This caution emerges as the National Mining Company is established to manage the government’s interests in mining.

Thomas Scurfield, an Economic Analyst at the Natural Resource Governance Institute (NRGI), noted that while PSAs are typical in the oil and gas sectors, their use in mining is uncommon. These agreements facilitate legal relations between host governments and international oil companies for the exploration and production of resources but pose unique risks in the mining context.

The NRGI has compiled a report assessing global practices from 58 nations regarding national oil companies, suggesting that Uganda can learn from these experiences when forming its National Mining Company. Dr. Paul Bagabo from NRGI emphasized the challenges that might arise if the government rigidly pursues PSAs, particularly concerning shared benefits like royalties.

He remarked on the complexities of mineral marketing, stating, “There have been challenges on how to share benefits in form of royalties etc. But we are now moving from one hole to another.” Bagabo also highlighted the lack of capacity in Uganda to store, value, and market minerals effectively, cautioning against rushing into PSAs.

The report discusses the experiences of other countries with PSAs, citing examples like Azerbaijan, DRC, and Egypt, which have resorted to royalty tax regimes instead. It expresses concern over the ambiguity regarding Uganda’s stance on such agreements. Although the Ministry of Energy aims to increase national profits through PSAs, the effectiveness of this intention is yet to be determined.

Thomas Scurfield further illustrated that the configuration of PSAs can vary, proposing that the government may opt to take its share of production in physical minerals, which the National Mining Company will manage and market. The report contains over ten recommendations for the successful execution of the National Mining Company’s mandate.

Dr. Gerald Banaga-Baingi, the Assistant Commissioner at the Ministry of Energy, highlighted that the National Mining Company’s establishment aims to optimize mineral resource value in Uganda. He assured that the administration would review the NRGI report and consider feasible recommendations for implementation.

Banaga-Baingi, also the acting CEO of the newly formed National Mining Company, shared that efforts have been made to ensure the board is composed of qualified individuals for optimal governance and operational efficiency. The company has recently advertised key management positions, including the CEO role.

Engineer David Sebagala, Senior Inspector of Mines, acknowledged that while some proposals from the report are beneficial, others will require further scrutiny. He affirmed the importance of delineating roles between regulatory entities and the National Mining Company as it becomes operational. The new mining law automatically grants the government a 15% stake in medium and large-scale licenses awarded post-2022, although this is regarded as an option rather than an obligation.

Sebagala noted that the government would need to evaluate each project’s viability before exercising its stake, potentially acquiring equity up to 30%. He also indicated interest from the National Mining Company in participating thoroughly in gold mining and value addition processes.

In summary, the ongoing discussions regarding production sharing agreements in Uganda’s mining sector raise significant concerns, as expressed by researchers and industry analysts. While there is potential for maximizing benefits through PSAs, the associated risks and Uganda’s current capacity limitations necessitate cautious consideration. The establishment of the National Mining Company aims to enhance mineral resource management, yet clear governance and strategic planning are essential to overcome the challenges ahead. The Ministry of Energy is tasked with ensuring the effective deployment of these strategies, balancing national interests while optimizing resource potential. Ultimately, Uganda’s path forward in the mining sector will depend on learned lessons from global experiences and careful evaluation of local capabilities.

Original Source: www.independent.co.ug