Uganda is negotiating a Production Sharing Agreement (PSA) with the Sarrai Group for the takeover of Kilembe Mines.
But experts are raising alarms about the potential risks of using this model in the country’s mining sector. PSAs have been widely used in the oil and gas industry.
However, their application in mining remains controversial. Researchers from the Natural Resources Governance Institute (NRGI) have cautioned that the government may face unforeseen challenges.
The PSA model establishes a legal relationship between governments and international companies. It is commonly used in the oil and gas sectors but is new to Uganda’s mining industry.
The government recently included PSAs in the revised Mining Act. This model is expected to play a role in Uganda’s newly formed National Mining Company (NMC).
The NMC will manage the country’s mineral resources. However, NRGI researchers are urging caution.
Experts Warn of Risks
Thomas Scurfield, an economic analyst at NRGI, explained that while PSAs are common in oil and gas, they are untested in mining.
He urged Uganda to carefully consider whether PSAs are suitable for the mining sector.
Researchers, including Dr. Paul Bagabo of NRGI, raised concerns about Uganda’s lack of infrastructure to store, value, and market minerals.
While copper has an established international market, many other minerals are difficult to sell. Bagabo stressed that Uganda should build capacity before committing to PSAs.
“PSAs have advantages, but Uganda must be cautious,” Bagabo said. “We need to ensure that we can manage our resources properly before entering such agreements.”
Global Experiences, Valuable Lessons
The NRGI’s recent report draws on case studies from Azerbaijan, the Democratic Republic of Congo (DRC), and Myanmar.
These countries have used PSAs in mining. However, countries like Egypt and Cote d’Ivoire have abandoned the model due to challenges. The report suggests Uganda may face similar difficulties.
Uganda’s situation is unique. PSAs could provide a share of profits from mining. But the country’s lack of expertise in managing raw minerals could limit the benefits.
Government Defends PSA Approach
The Ministry of Energy and Mineral Development supports the decision to use PSAs.
Dr. Gerald Banaga-Baingi, Assistant Commissioner for Technical Planning, said the government’s goal is to maximize the country’s mineral wealth.
He acknowledged the concerns raised by NRGI but pointed out that the NMC is still in its early stages.
“We will study the report and consider its recommendations,” Banaga-Baingi said, adding that by next year, they will have more concrete evidence to guide our decisions.
Banaga-Baingi highlighted that the government carefully selected the NMC board members. The board includes experts from the mining and energy sectors. The NMC has also advertised for senior management positions, including the CEO.
National Mining Company’s Role
The NMC will oversee Uganda’s stake in the mining sector. Under the new Mining Act, the government holds a 15% stake in medium, and large-scale mining projects granted after 2022.
The law allows the government to increase its stake to as much as 30%.
Engineer David Sebagala, Senior Inspector of Mines at the Ministry of Energy, explained that the 15% stake is an option.
The government can choose whether to exercise it based on the project’s economics. In some cases, the government may decide to take a controlling stake, especially if a project has potential but is struggling financially.
Sebagala also emphasized the importance of separating the roles of the regulator and the NMC. This will prevent any conflicts of interest as the company becomes fully operational.
Uganda is negotiating its first PSAs in the mining sector. The debate over whether this model is the best path forward is ongoing.
Experts argue that the government must first build the necessary capacity to manage its minerals. If not, PSAs could limit Uganda’s ability to negotiate favorable terms in the future.
With the NMC still in its infancy, it remains to be seen whether the PSA model will help Uganda extract value from its mineral resources.
The government must proceed carefully and learn from global experiences. Transparency and planning will be key to ensuring that Uganda’s mining sector benefits its people for generations to come.
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