Freeport Arbitration Threats

Freeport McMoran has been beating the drum to bring the government to arbitration. The government has been accused of violating the contract of work (CoW) by requiring Freeport to change the form of its mining operation from a CoW into the special mining business license (IUPK). According to Freeport, this is the government\'s unilateral intention to terminate the CoW.

Freeport\'s accusation that the government has forced it to change the mining business form from a CoW into an IUPK is not correct. The government has instead tried to understand the difficulties that would be faced by Freeport when the relaxation given to the CoW holders ended on January 11, 2017.

Groundless

The base of the problem that caused the commotion lies in Article 170 of the Law on Mineral and Coal Mining (Mining Law), which determines that CoW holders who have been in production have an obligation to do purification in the country no later than five years after the enactment of the 2009 Mining Law. This means that in 2014 all CoW holders should have no longer been allowed to do overseas sales. However, in 2014 there were many CoW holders who were unable to do the purification process in the country. To overcome the problem, the government issued Government Regulation (PP) No. 1 in 2014 and its implementing regulations allowed the CoW holders to continue the overseas sales by paying export duties, but remained committed to build smelters within the period of three years.

Ahead of the end of the three years at the end of 2016, it turned out that a number of CoW holders had not built the smelters. Freeport was one of them, even though it had allocated funds for the construction of the smelter. Freeport did not build the smelter because it wanted to get certainty on the extension of

its CoW which will end in 2021. In Freeport\'s calculation without any certainty of the extension, the construction of the smelter will not be economical.

Facing a condition where the smelters had not been built while there were no changes in Article 170 of the Mining Law, the government searched for a way out of the CoW holders, who have not been able to do the purification activities in the country. Here, then there was the issuance of PP No. 1 of year 2017 and a number of regulations of the Energy and Mineral Resources Ministry (ESDM). In Article 17 of ESDM Ministerial Regulation No. 5 of 2017 it is mentioned that the CoW holders can sell their products overseas in a certain amount within five years at the maximum with provision to change the form of the mining concessions into IUPK and pay duties.

Closely observing the stipulation, there is no obligation for the CoW holders to

change themselves into IUPK. Freeport, for example, could continue to retain its Cow. In line with Article 170 of the Mining Law, Freeport can no longer carry out overseas sales. However, if Freeport wants to keep selling abroad, it has to transform itself from a CoW to IUPK. This choice is in the hands of Freeport and the government has not made the slightest attempt to force Freeport’s hand.

Therefore, Freeport\'s allegation that the government wants to put an end to its CoW before 2021 is not true. On the contrary, the government has sought a way out for the CoW holders amid the public\'s desire for the government to be firm to carry out Article 170 of the Mining Law. The government has been bombarded with criticism. Even ESDM Ministerial Regulation No. 5 in 2017 is brought to the Supreme Court for judicial review. In such a context how unfair it is for Freeport tothreaten the government with arbitration. No wonder that Energy and Mineral Resources Minister Ignatius Jonan called Freeport to fuss. Other CoW holders, such as Vale, who still maintain their CoWs, have met their obligations to build smelters. Meanwhile, PT Amman Mineral Nusa Tenggara (formerly owned by Newmont) has been reshaped into IUPK so that it can sell overseas.

Arbitration

Based on the above facts, the question is whether Freeport has strong grounds to sue the government to arbitration? Or is the threat of taking the government to arbitration only a mere bluff. A similar threat was done by Freeport in 2014 when

the export duties were imposed. In the end Freeport dropped its lawsuit. Freeport\'s threat against the government of Indonesia is a form of arrogance. Arrogance because Freeport feels to be in parallel with the government. The reason, because the CoW of the government is put in parallel with the Freeport.

Legally it does not make sense. How can a sovereign country with a population of 250 million is positioned parallel to business owners? Freeport has long been building a false perception by positioning the Government of Indonesia in parallel. Due to this, various laws and regulations issued by the government are asked not to be imposed on the basis of the sanctity of the contracts or special provisions which would disregard general provisions (lex specialis derogat legi generali).

In fact the special provision will disregard the general provisions if the legal products are similar. If an agreement is contrary to the legislation, based on Article 1337 of the Civil Code, the agreement will be dropped. Freeport\'s argument that the government is in parallel with itself is because Freeport ignores the two dimensions from the government which have to be distinguished.

The first dimension, the government as the subject of civil law. As the subject of the civil law the government makes agreements with other civil law subjects. For example in the procurement of goods and services. In the capacity as a civil law subject, the position of the government is in parallel with business owners. However, there is another dimension from the government, namely as a public law subject. As a public law subject, the position of the government is above the business owners and the people. The existing fiction of law: When the government makes the rules, everyone is considered to know without the need of approval. The government can impose the regulations it makes through law enforcement.

If the people or business owners object to the rules made by the government as a subject of public law, they can utilize the judicial review process either at the Constitutional Court or the Supreme Court, depending on the legal products. These two dimensions are denied by Freeport. It is no wonder that Freeport wants to shackle the legal sovereignty of the state of Indonesia with CoWs. If this is so, what is the difference between Freeport and the VOC during the Dutch era? It should be understood the government as the subject of civil law should still be

subject to the rules set by the government as the subject of public law, such as in the field of taxation.

Nationalism

Freeport\'s threat to bring the government to arbitration has even aroused the feeling of Indonesian public nationalism. The public are angry. At present the government has the support from the public to act decisively against Freeport. The public is not willing to let the government move backward, or even make a compromise, due to Freeport\'s threat. Freeport is supposed not to play its workforce, which are laid off on ground of efficiency to pressure the government. This is because the ball to continue operating is in the hand of Freeport. Freeport could survive with the CoW if it performs purification in the country or continue exporting by changing the status to an IUPK.

Freeport is also not supposed to play the Papuan issue, even through the deployment of US marines to Australia. There are three reasons for this. First, in the current commotion the government has been wise to give a way out for Freeport, which wants to win as it likes and demands that the government abide by the CoW by disregarding Article 170 of the Mining Law. Something which is impossible for the government to do in the democratic era of Indonesia. Second, now the government in Indonesia is led by someone with the background of entrepreneur like US President Donald Trump. President Jokowi is like Trump in making policies which can be very strict by putting the national interests or Indonesia first.

Third, Freeport cannot use the hand of its government to intervene because the company’s position is not so strong. How can the US government defend a business owner by intervening, even using violence, when the act of the business owner is wrong. The government of Indonesia does not want to oppress Freeport. Freeport should understand that this nation experienced the bitterness of colonialism in the past and the government cannot make any decisions without regarding the people\'s voices. An approach involving threatening or dictating, even undermining sovereignty, is not the right way if Freeport wants to stay in business in Indonesia.

Hikmahanto Juwana

Professor of International Law of the University of Indonesia, Depok