Freeport and Indonesia\'s Legal Position
HANDINING
Negotiations with PT Freeport Indonesia in connection with adjustments to Freeport\'s 1991 contract of work in accordance with the 2009 Law on mineral and coal mining has entered a new phase.
After more than seven years of the government renegotiating with Freeport, negotiations are deadlocked as shown by the recent Freeport press conference. In 2010, the government started to renegotiate with various mining companies as part of efforts to implement the mandate of Article 169 of the Mining Law. Against Freeport, it is done only through the approval of a memorandum of understanding (MoU) on the renegotiations of an amendment to the contract of work in 2014. The MoU agreed the scope of negotiations, such as reduction in the area of work, divestment provisions, tax regulations and changes in the legal form from the regime of contracts to the license regime (Sukhyar, 2015).
The deadlocked negotiations includes many layers of legal dimensions in relation to the 1991 contract of work vis a vis the 2009 Mining Law. Neither Freeport nor has the government given any explanation related on the violation of the 1991 contract of work, which has been used as the basis for Freeport to take the problem to arbitration.
I speculate -- based on the readings of the contract and existing dynamism -- Freeport will at least file two claims related to the breach of contract. The first is related to the demand for a Freeport contract extension based on provisions of Article 31, Paragraph 2 of the 1991 contract of work in which one of its points is that Freeport can request a contract extension whenever it wants. This certainly contravenes Article 45 of Government Regulation (PP) No. 23/2010, which outlines the business license extension can be done two years before the expiration of the contract and Article 169 of Letter b, which orders the changes from the contract of work to a license regime.
The second is related to a policy on the imposition of export costs as part of the implementation of Article 103 of the Mining Law. This is contrary to Article 11 Paragraph (1) of the 1991 contract of work, which gives rights to Freeport to market its products (exports) without any financial (monetary) constraints.
In principle, the issue deals with state sovereignty (right to regulate) vis a vis the stabilization clause, a clause on the long-term investment contract, which is intended to protect investments and projection of benefits to be taken from the negative impacts from the existence of changes in regulation/government policy in the future. The international legal development in connection with this shows the state sovereignty to make changes on its police/regulations can still be carried out as long as the enactment of the changes against the existing contracts is implemented in a fair and equitable treatment (FET).
State sovereignty over natural resources
On October 31, 1956, thousands of British and French soldiers moved to invade Egypt. The invasion occurred on account of a feud between Egypt and Britain-France over the ownership of the Suez Canal. A year earlier, President Gamal Abdul Nasser nationalized the Suex Canal, which had been under British-French control for 87 years. The Suez crisis was a not a single incident. The nationalization of that era was the tendency of newly independent nations that wanted to strengthen sovereignty over natural resources, such Indonesia with Bremen Tobacco (1959), and the oil and gas industry nationalization of Iran (1951).
Not infrequently the Western countries\' response was shown by committing aggressive military acts, such the Suez Canal case or political intrusion, such as in the Mohammad Mossadegh coup in Iran. These events awakened the new countries with regard to the importance of an international legal guarantee on their sovereignty on natural resources they own. The awareness was later incorporated into two international legal documents, namely the 1803/1969 General Assembly Resolution on Permanent Sovereignty over Natural Resources and 3201/1974 Resolution on Declaration on the Establishment of a New International Economic Order. The two documents emphasized the sovereignty on the right of sovereign nations to control their natural resources for the prosperity of their people.
The principle of the state sovereignty is not a unilateral claim, but has been accepted and confirmed in several arbitral verdicts. For example, the verdict on
Parkerings v Lithuania (2007) emphasized the state sovereignty to regulate constituted undeniable rights and privilege. However, the application of the principle of the state sovereignty does not necessarily provide absolute authority for the states to act arbitrarily. Restrictions on this principle needs to be carried out to give certainty and security for investors to obtain the revenue forecasts expected from the investments in the future.
The international legal position related to this is a balance between the guarantee on the expected profits (legitimate and reasonable expectation) and the state\'s right to regulate the public interest, as confirmed in several arbitration verdicts
{Saluka v the Czech Republic (2006) and Suez v Argentina (2010)} (Hirsch, 2013).
FET standard
One of the developing principles to balance between state sovereignty vis a vis the certainty of business is to develop a FET standard. In principle, the FET standard emphasizes several principles which need to be considered for the states to implement their sovereignty on the way they regulate, which can have impacts on the stabilization clauses of a contract. These principles include non-discriminatory, guarantee on the certainty of profit projections, and are not arbitrarily.
This principle limits Indonesia\'s ability to force Freeport to adjust to the Mining Law. First, the non-discriminative principle requires that the Indonesian government not apply the rule to Freeport alone. Second, the principle of guarantee for the certainty of investment profit projection requires that Indonesia abide by the profit projection to be gained by Freeport when the investment is made. Third, the principle to implement not arbitrarily requires that the government\'s acts have to be through the fair and decent process.
Looking at the process, it can be said Indonesia actually had implemented the FET standard in implementing the Mining Law. In the non-discriminative principle, the implementation of the Mining Law is not only applied on the subject of foreign law alone, but also on the Indonesian legal subject. In the second principle, we can see that actually all obligations in the Mining Law are stated in the 1991 Freeport contract of work. For example, the purification obligation (Article 10 Paragraph 5 of the 1991 contract of work) or the obligation for divestment (Article 24 of the 1991 contract of work).
The fact that the provisions are not operational is caused, among others, by the stabilization clause, which even gives an unfair position to Indonesia, which seems to say that only the changes of policy/government regulation favorable to Freeport will be applied if there are regulation changes (Article 24 Letter d of 1991 contract of work), whereas in 1994 there were regulation changes related to foreign ownership so that the obligation to divest was "nullified".
Therefore, it can be concluded that at the time of the signing of the 1991 contract, Freeport had owned its profit projection, if the obligations had to be implemented, so that the government\'s intension to impose these things should not disrupt the projection of Freeport on profits to be earned.
Another fact that can support Indonesia is that Freeport has operated for 25 years (under the 1991 contract) without any substantive policy changes. This is also an important variable to strengthen the position of Indonesia. This is caused by the fact that changes in the Indonesian mining law do not take place in a short period, thereby potentially providing a roller-coaster effect and disturbing profit projection of Freeport (PSEG v Turkey, 2007).
Last, on the principle of implementing arbitrary action, the negotiation process, which has taken place for about seven years, shows the government has actually carried out the process properly. Even during that process, the government has given certain privileges to Freeport compared to other multinational companies, even to domestic companies in Indonesia.
The decision to accept arbitration challenges from Freeport is the right step, should negotiations fail. The stance to abide by the threat from Freeport, for example by revising the Mining Law, is not an option. However, going to arbitration requires thorough preparations by exploiting various scenarios and legal argumentation. Keep in mind that even though Indonesia has a more powerful position, in general arbitration verdicts tend to show a narrower interpretation of the FET, which protects the stability of foreign investors (Johnson & Volkov, 2013). Therefore, the option for a peaceful solution through negotiations still has to be done, but without compromising the position of Indonesia as a sovereign state.
GIRI AHMAD TAUFIK
Researcher of the Center of Indonesian Law and Policy Studies/Lecturer of STIH Jentera and PhD Student of Griffith University, Australia
