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PLEXII BLOG

Welcome to PLEXII Blog, a Platform for Extractive Industries Information.

East Africa walking a tight rope

 

This past August, I was fortunate to be part of a regional discussion on East Africa’s budding extractives sector that was convened by Oxfam in Nairobi, Kenya.

The event’s timing and scope stemmed from the different developments being undertaken by partner states in the East African Region, either individually or jointly, to exploit their oil, gas and mineral resources. Uganda has its crude oil refinery and pipeline; Tanzania harbours plans of exporting its natural gas to the Region; Kenya is fast-tracking its crude oil production and also pushing ahead with the LAPSSET project. It is indeed the right time to share knowledge and understand what these developments mean on a national, regional, continental and global level. 

Many such discussions have been held across the Region, and I have participated in a number of them, but for me, this one was different simply because it was more solutions oriented. The agenda was crafted in such a way that the participants, who included civil society, high level representation from the Kenyan Government, media and grassroots communities from resource rich areas, contributed solutions to the challenges inhibiting the prosperity of the extractives sector in the East African Region.

Shaping a new, people-centred narrative

Africa is rising. Africa is ready for business. East Africa is the next oil and mining frontier.

These narratives have largely been shaped by the developed world and, to put it politely, are majorly aimed at exploiting the continent’s natural resources to the benefit of the developed world, with some little crumbs for the host countries here and there depending on the politics at play at the time.

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First things first; Government should sort out uncollected fees and royalties

Variances in gold export declarations by the Ministry of Energy and Mineral Development (MEMD) and the Uganda Revenue Authority (URA) continue to stress a missed opportunity in Uganda’s mineral resources. The Office of the Auditor General’s 2016/17 report highlights an 8,674.719kgs variance between the MEMD declaration (16.281kgs) and the URA record (8,691kgs). Similarly, the 2015/16 financial year highlighted a variance of 5,223kgs of Gold exports between the 93kgs of gold awarded export permits by MEMD and the 5,316 kgs of gold recorded to have been exported by URA.

Looking at the figures in kilograms, one may not realise the magnitude of loss we are in as a country. However, basing on the assumption that no royalties were paid on the gold export permits issued by URA, Uganda lost about USD 3.39m basing on the 1% applicable rate for imported gold or USD 16.95m in case the gold was locally mined. The dollar rate probably does not bring out the magnitude of loss quite well, Uganda lost between UGX 12.795billion to UGX 63.977billion.

What the law says

According to Section 98 (1) of the Mining Act 2003, all minerals obtained or mined in the course of prospecting, exploration, mining or mineral processing operations shall be subject to the payment of royalties. Despite this being clearly stated in the law, a number of people have evaded payment of royalties on the basis that they hold prospecting licenses and are merely on a mission to check whether the minerals actually exist and in what quantities and or grades. More than ever, Local Governments have noted the existence of companies prospecting year in, year out. Could this be a loophole being used to evade payment of royalties? 

Section 104 (1) of the Mining Act, 2003 provides for penalties on royalty defaulters ranging from barring the culprits from conducting any business in relation to mining until all outstanding fees are paid or until an agreement for payment of royalties acceptable to the Commissioner has been made. However, just like 2015/16 OAG report, the current report depicts no evidence of serious measures being taken to recover the losses from uncollected royalties.  

Important to note is the nature of the mining sector in Uganda which is largely informal and dominated by Artisanal and Small scale Miners. Because of this, it is extremely difficult to track output from the mines to determine and verify royalties. More to this, the Department of Geological Survey and Mines (DGSM) the body responsible for inspecting mines is understaffed and currently incapable of effectively delivering on its mandate reason for which many such cases of unpaid royalties, under declarations by mining companies and default on payment of annual mineral rents are going unpunished. In this regard, the report of the Auditor General notes a sum of unpaid royalties amounting to UGX. 679,694,100 by HIMA Cement caused by the failure of DGSM to enforce payments. 

In the recently launched second annual mineral development scorecard by National Planning Authority (NPA) in partnership with Africa Centre for Energy and Mineral Policy (ACEMP), mineral production, revenue collection and management scored an average of 19.7% categorised as inadequately addressed. In simple terms to mean, there are a number of issues yet to be addressed to enable Uganda earn from her mineral wealth. The indicators assessed under revenue collection and management included; revenue collection which scored 18.8%, revenue payments by mining companies which scored 32.2%, reporting on transfer of royalties scored at 27.7% and utilisation of royalties which scored 0%. All the indicators assessed scored below 50% which is symbolic of the fact that despite existence of mineral resources in various communities in Uganda, the mineral host communities still have high levels of poverty because of inefficient revenue collection and management systems.

Exemptions for what? 

In the past, Africa grappled to attract investors. Referred to as the dark continent, no one was willing to invest sums of money in a place characterised by war, disease and hostility. For this reason, governments all-over Africa gave tax holidays to companies and tax exemptions to attract Foreign Direct Investment (FDI). However, today, this is all in the past and for this reason, companies and countries are literally scrambling to get into Africa for among other things her natural resources.

Unlike other African countries like Tanzania and Zambia who have set out to seize bigger slices of the mining pie, Uganda seems to be moving the opposite direction. The 2016/17 OAG report highlights the issue of uncollected royalties from Africa Gold Refinery (AGR) which does not make any declarations on gold exports on the basis that they were given a tax waiver by the Ministry of Finance Planning and Economic Development (MoFPED). Because of such poorly thought decisions by government, the mineral sector continues to contribute less than 0.5% to GDP.   

On the other hand, Zambia, the second biggest copper producer in Africa is moving to increase mining royalties in order to reduce on the country’s budget deficit. In order earn more from mining, the Zambian government also plans to replace Value Added Tax with a non-refundable sales tax. By so doing, there will be no cases of VAT refunds which were being used by companies as working capital reason for which the Zambian Kwacha has depreciated. Mr. Joseph Nonde the Director Direct Taxes at the Zambian Revenue Authority noted that “mineral royalties will no longer be claimed against profits but have become a resource rent that sticks to the mining company.”                                                                                                          

It is not about attracting foreign investment anymore, natural resources are finite in nature and are getting depleted in many countries. With the growing automobile industry, companies are seeking to source these minerals from Africa where a number of reserves are still virgin. However, if tax exemptions become the order of the day, how will Africa benefit from her natural resource wealth? Uganda needs to borrow a leaf from her neighbors who have realized the potential of the mineral sector and are reworking laws and policies day after day to see to it that they benefit from their natural resources.

 

 

 Acomai Isabella

The Author is the Communications Officer,

Africa Centre for Energy and Mineral Policy (ACEMP)

isabella.acomaiThis email address is being protected from spambots. You need JavaScript enabled to view it.

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A SNAPSHOT OF THE MECHANISED STONE QUARRYING INDUSTRY IN UGANDA.

 

I have had the opportunity of reading the Baseline Assessment of Development Minerals in Uganda Volume I and The Baseline Assessment of Development Minerals in Uganda Volume II (Markets study and value chain analysis) both released in March 2018;it is very commendable work, but it totally missed the mark on its analysis of the stone quarrying industry in Uganda. The studies focused on the small scale hand crushers in the stone quarrying business totally ignoring the mechanized stone quarry operators whose value chain can equally benefit from the policy recommendations of these baseline assessments.

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State Participation in the Mining Industry in Uganda

In Uganda Minerals are owned by the state in trust for the people of Uganda as stated in the Mining Act 2003. However, there is no requirement for state participation nor to have a company or corporation that can hold the commercial interests of the state in the mining industry.

Bearing in mind the mineral sector contributed as much as 30% of Uganda’s GDP in the early 1950s in comparison to the current situation where it only contributes less than 1%, there is need to come up with catalysts that can stimulate the development of this once captivating Industry

In the petroleum sector, the need for the formation of national companies arose from the importance accorded to petroleum.  Petroleum was seen as such an important commodity that government control was deemed a necessity. State participation in the mining sector has not had the same verve as in the petroleum sector. However there is steady increase in state control around the world.

Initially countries were comfortable with legislation and regulations. This however seems to be changing-atleast in East Africa where the new mining act 2016 in Kenya requires that a national mining corporation is put in place. The purpose of the corporation is to be the investment arm of the government in the mining sector. The functions of this corporation includes but are not limited to; engaging in mineral prospecting and mining, investing on behalf of the national government, acquiring by agreement or holding interests in any undertaking, enterprise or project associated with the exploration, prospecting and mining among others.

Tanzania’s new mining bill has a number of mechanisms the government has come up with in the mining sector these include the Ministry, a Mining Commission (supervision and regulation), the Geological Surveys of Tanzania (Geological mapping, data collection) Gem and Minerals Houses, The Government Minerals Warehouse (central custodian of all metallic mineral and gemstones won by mineral right holders in Tanzania). All interventions made to ensure adequate state control.

 

Through these recent interventions, Kenya and Tanzania are ensuring more control in the mining sector. In order to effectively talk about state involvement in the mining industry, it is important to determine two concepts; ownership and control. Ownership is determined by the fact that the minerals are owned by the citizens.  Does ownership tantamount to control? Is the setting of effective regulation and monitoring adequate control?

There is a strong correlation between the need to nationalize and the price of the minerals. When the metal process or mineral prices are high, the need to nationalize the mineral sector is fever pitch. When the prices drop, the interest in nationalization reduces as well. Demand for minerals has also increased. This has raised further national interest in the mining industry.

 

While it is easy to form a national petroleum company due to the fact that petroleum is a homogenous substance, this is not the same with the mining companies.  Minerals are varied in nature and as a result, there is a need to have different technologies for the different minerals in terms of extraction.

 

The case for a national mining company in Uganda is as follows

 

Currently, the Directorate of Geological Surveys and Mines undertakes regulation in the mining sector. The commercial aspects are left to the miners i.e. they can look for the market and undertake their own mineral processing. The closest Uganda has to a national mining company is Kilembe Mines Limited. - A company currently undertaking care and maintenance of the vast Kilembe Mine complex.

 

In Uganda, the National Mining Company would go a great extent in developing national, social economic and political objectives. However, balancing the commercial and noncommercial aspects is normally the most difficult part of any national enterprise-this does not mean that it cannot be achieved.  Section 18 of the Mining Act 2003 allows for the development of a mineral agreement. However, this seems to be an option rather than a requirement. Currently there is no model mineral agreement that Uganda could follow or apply.

 

For any mineral agreement signed, there should be a requirement for state participation in the commercial management and development of its mineral resources. This will not only ensure sharing of knowledge and technology but it will be necessary when the International companies walk out or stop production. It is a characteristic of the extractive industries that if for any reason the production companies can no longer make the required profits, they close shop even if the petroleum or mineral resources are still in the ground.

 

The technical know-how developed by the National Mining Company will be able to be used for continued development of the industry. Furthermore, this will provide an opportunity for the state to directly spur development in the sector through its direct participation.

While state participation does not necessarily lead to a spur or development in the sector, the stage in which Uganda mining industry is, state participation is welcome.

 

In order to effect state participation, it is imperative for adequate financing to be provided.

For example a number of agreements could require that the interest of the state is carried up until that time when the state is ready or up till production. In that way the carried interest is recouped during production. Additional mechanisms can be provided which mechanisms are intended to ensure that the state benefits from the mining industry. These will not be discussed further in the paper.

 

Furthermore, it would be prudent for the government to establish if it wishes to acquire the right for exploration only, refining/ beneficiation or for both these activities. Some states prefer to only get involved in the refining and beneficiation and not venture into the highly risky exploration stage.

There is a further need for priotisation. The government could choose what minerals it should best invest in on order to priotise its involvement. Uganda is endowed with more than 20 mineral capable of providing adequate economic returns for all involved.

 

 

Conclusion

As Uganda’s mining Industry is in what should be considered a ‘budding’ stage. The need to introduce a National Corporation/Company should be undertaken specifically to ensure that the commercial interests of the state are effectively managed.

There are countries where national Mining Companies have had a successful “union with privately owned companies as is the case for Botswana and Namibia with companies appropriately names Debswana and Namdeb. This could be easy in a way that they both trade in only one commodity-diamond. It is however necessary for skill development for Uganda to acquire a National Mining Company/Corporation. Its objectives and mandate should be well laid out in legislation. Direct state participation might be a much needed firip in Uganda’s Mining Sector.

 

 

Luwemba Henry Kasule

Senior Auditor

Office of the Auditor General

                       

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Mountains of Despair and Valleys of Death: DRC’s Bloody Minerals Sector

The Eastern Democratic Republic of Congo’s North Kivu Province is renowned for its expansive equatorial rainforest, rich and virgin agricultural highlands, a web of fresh water rivers and immense mineral wealth. Most notably, the Region hosts the so-called conflict minerals namely Tin, Tantalum, Tungsten and Gold, also known as the 3TGs.

Embedded with a team of International Conference on the Great Lakes Region (ICGLR) Regional Certification Mechanism, we set off from Goma, the main business and administrative centre of North Kivu to inspect one such source of conflict – a mining site deep in the jungles of Rubaya, a distance of over 120 Kilometres from Goma. This same jungle has been home to the perpetrators of the 1990 genocide in Rwanda as well as former M23 rebels and other militia groups.  

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