Mining And Minerals: Why production sharing agreement is bad for Uganda

KAMPALA, UGANDA | THE INDEPENDENT | Researchers have cautions against Uganda against production sharing agreement mode of benefit sharing for the minerals and mining sector.

The government is currently engage in negotiating a production sharing agreement with the Sarrai Group for the take over Kilembe Mines.

The caution by researchers from the Natural Resources Governance Institute (NRGI) comes as National Mining Company which is to take care of the government’s stake in the mining sector takes shape.

Thomas Scurfield, an Economic Analyst at Natural Resource Governance Institutes says while production sharing agreements are common in the oil and gas sector, they have been rare in the mining sector.

Production Sharing Agreement (PSA) is one of the tools for establishing legal relationship between host governments and International Oil Companies (IOC) for exploration, development and production of natural resources. They are currently being used in Uganda in oil and gas licensing.

PSAs were recently adopted as part of the new Mining Act. NRGI researchers who include Dr. Paul Bagabo have just compiled a report on the global experiences with National Oil Companies.

It is hoped that Uganda can draw lessons from experiences from the 58 countries studied as it establishes the National Mining Company.

The reports was on Wednesday presented to a stakeholder’s engagement on equitable value addition in the mining sector. The engagement was convened by the Uganda Office of natural resources Governance institute and the Advocates Coalition For Development and Environment (ACODE).

Dr. Paul Bagabo told Uganda Radio Network that the government may face unforeseen challenges if it insists on pursing the Production Sharing Agreement arrangement of sharing benefits from the minerals.

“There have been challenges on how to share benefits in form of royalties etc. But we are now moving from one hole to another. Because PSAs in my mining have risks. So we really need to sit down and think,” he said.

Bagabo explained that part from copper which has an international prices, the rest of the minerals are very difficult to market.

He explained that Uganda currently doesn’t have capacity to store, value and market minerals in form of ores. “So why don’t we fort develop the capacity before we go into this. PSAs are very good. They allow you to take a share but we need to be very careful. How do we ensure that we use that path to succeed? One of them is growing the capacity, quantify, value and to report,” Bagabo suggested.

From the NRGI report, countries like Azerbaijan, DRC and Myanmar have experimented production sharing agreements in the mining sector. Egypt replaces its production sharing agreement sharing regime with a royalty tax regime, while Cote d’voire included a production sharing in daft update to its mining code but removed it. The researchers says Uganda’s intention around production sharing remains unclear.

The Ministry of Energy indicated that the introduction of production sharing agreement regime in the mining sector was aimed at maximizing the country’s benefits.   What options if Uganda insists on PSAs.

Thomas Scurfield while presenting the report virtually said production sharing arrangement can be configured differently. He explained that the government can chose to take their production share in kind and receive physical minerals.

“If a government decides to receive physical minerals, the country’s National Mining Company tend to be responsible for  managing and marketing them This may require transportation and warehousing of minerals and negotiate sales contracts” he said. The reports suggests over ten recommendations that Uganda should consider if the National Mining Company is to succeed in executing its mandate.

Energy Ministry Reacts 

Dr Gerald Banaga-Baingi, the Assistant Commissioner, Technical Planning at the Ministry of Energy and Mineral Development did not comment about the recommendation about production sharing agreement. He said the reason why the government established the National Mining Company is to maximize value from the country’s mineral resources.

Banaga-Baingi, who is also the acting chief executive officer (CEO) at Uganda’s newly formed National Mining Company (NMC) said his administration will study the report and consider if some of the recommendations can be adopted.

The National Mining Company has just made one hundred days since it was formed. “We need evidence from the field so you can say this thing does not work. Mayne within one year, the company will have taken shape we shall come back and show you” he said.

He revealed that there have been deliberate effort to ensure that the board members of the National Mining Company are carefully selected to ensure efficient operations.

“When we selecting the board of this company we were very clear on who should be there. So rest assured. The governance structure is good enough” he said.

National Mining Company board is chaired by James Mukasa Ssebugenyi and deputized by James Byagaba. Other members are Francis Twinamatsiko, Dr. Alex Kwatampora Binego, Wilfred Kokas Aupal, John Fisher Kanyemibwa, Kevin Aanyu, Agnes Alaba and Maria Kiwanuka, the former Finance Minister Others are Helenah Nyangoma, and Winnie Nabukenya offering administrative support.

The company this month advertised the position of the Chief Executive Officer, the four deputies and positions for the senior management team.

Senior inspector of Mines at Ministry of Energy and Mineral Resources, Engineer David Sebagala said some of the proposals in the report are good and that some are not good.

“We shall weigh. We take what we think is good and what we think helps us to act in the best interest of Uganda” said Sebagala who is also on the implementation committee of the National Mining Company.

He explained that the government is trying to ensure that there is no mixing of roles when the National Mining Company begins to operate.

“The roles of the regulator should be the roles of the regulator. And the roles of the national mining company should be the roles of the national mining company” he said.

The new Mining law provides that for all medium scale and large scale mining licenses that were granted after 2022, government has automatically 15% stake.

Sebagala however explained that the 15% stake is an option meaning that the government could chose to exercise it.

. “Which means for every one of those projects, we go back, get the details of the studies, mine development, look into the economics  and we see if it adds value for us to exercise that option” he said. The law also give the government to acquire equity in the mining operation up to 30%.

“There are some projects that we know have some bit of information, they are struggling with very little financing that government can raise but have a very huge potential, the government can join. In some projects we will even have controlling stake” said Sebagala who also revealed that the National Mining Company will be open to mergers and Joint Ventures.

The National Mining Company according to Sebagala also want to involve its self in the entire process on gold mining and value addition.

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