Post-Arbitration Scenario
The dispute between Freeport and the Indonesian government has entered the phase in which the two entities may face each other in an international court of arbitration. In this case, Freeport is the party to submit the dispute to the court.
Freeport has given the Indonesian government 120 days to renegotiate and find an alternative solution. Looking at statements from high-ranking officials and the “patriotic” support from the general public, it seems to be impossible for the government to soften up.
I believe that Freeport will not soften up either by accepting the requirements set out by the government, namely to replace its contract of work (CoW) with a special mining license (IUPK) and divesting 51 percent of its shares. Freeport demands legal certainty and financial obligation certainty. This means Freeport wants a legal foundation in the form of an exclusive contract or agreement, which is unlikely to be approved by the government.
Two scenarios
As per usual in legal proceedings, one party will win and another will lose. Let’s look at the scenario should the government win. In such an event, Freeport will be required to meet the government’s demand of changing its CoW into an IUPK and divesting 51 percent of its shares, as stipulated by prevailing regulations, as well as build a smelter. If Freeport does not wish to adhere to these rules, it must cease all of its mining activities in Papua.
Another possibility is that Freeport will be taken to court as it violates prevailing laws in Indonesia. If Freeport loses in court, the government will put the CoW’s default clause into effect, meaning that the CoW must be dissolved, with Freeport bearing all financial consequences.
Whether its contract ending in 2021 or through a default, can Freeport just walk away unscathed? The CoW contains a clause on Freeport’s obligations if it terminates the contract, including in land conservation or rehabilitation. Law No. 4/2009 on minerals and coal mining does not include similar stipulations. Another option that can be implemented is the issuance of a ministerial regulation on post-mining land conservation.
Say there is a handover of a mining project in Papua from Freeport to the government after all of the requirements are fulfilled – in this case, it is understood that the gold mines in Papua will return to state management through state-owned companies. Afterward, the government can distribute shares to private entities or sell some of it to the capital market to get initial capital for operations and investment. The amount of shares offered in the market will depend on the prospects of the Papuan mining business.
The next question is what entity will be tasked by the government with managing the goldmine’s operations? Will it be entirely state-owned companies (individual or joint ventures) or will foreign entities be involved?
It needs to be noted that Freeport does not manage the Grasberg mine by itself, as Rio Tinto is also involved through a production- sharing agreement. Theoretically, the government can appoint a state-owned enterprise to own and manage operations at the mine in collaboration with Rio Tinto. The question is, will Rio Tinto be willing to do that? Rio Tinto’s willingness will depend on the availability of certainties, in the sense of whether Rio Tinto trusts the Indonesian government enough to be willing to work together with us. Thus, we return to the issue of trust.
After Freeport leaves Papua, we cannot expect immediate production as examinations and rearrangements take time. During the production downtime, production and support facilities must be maintained and the cost will not be insignificant. State-owned companies must provide the funding for this. Apart from that, a new arrangement for the human resources that have been let go after the concentrate export ban was imposed by Freeport must also be made.
What if Freeport wins the arbitration? In this case, Freeport may only have until 2021 when its CoW expires. The possibility of the government extending Freeport’s CoW is small, except if there is a revision to Law No. 4/2009. Therefore, things will be pretty much the same as if the government wins the arbitration. Grasberg ownership will return to the state and its operations – with all of its complications – will be handled by state-owned companies. In this case, Freeport will not have to suffer from a default.
The next question is that, without any prospect for contract extension post-2021, will Freeport make new investment in the underground mine in Grasberg? Surely, Freeport will not do this. Then, the next question is, what will be the fate of the existing reserves in Grasberg without further development? Will it be neglected in its current condition?
Such questions bring us to the conclusion that, if Freeport decides not to make further investment in Grasberg, will it not be better for the government just to take over its ownership immediately? This is a dilemma for the government as Freeport’s CoW will still be in effect until 2021. Within the next four years, the government cannot “evict” Freeport unless by declaring an event of default. Even if the government wishes to take over Freeport right now, it still needs to provide funding to continue production. Apart from that, the government (or, specifically, state-owned companies) construct a smelter and ensure copper concentrate purification to maintain consistency with the mandate of Law No. 4/2009.
The context of development in Papua
Through the argument above, I wish to say that, regardless of victory or loss, prospects for operation at the Grasberg mine will be difficult for both Freeport and the Indonesian government. This means that filing a case with the arbitration court is a lose-lose situation for all parties involved. Freeport’s halted production during the arbitration process also halts delivery of concentrate to the smelter in Gresik. This will bring consequences to the people who work at the affected sites.
Is there a chance to find an alternative solution between the government and Freeport in 120 days? I see that such a possibility exists by bringing the issue to a wider context, namely that of development in Papua. If the Freeport issue is still tackled as a corporate issue, it will be difficult for President Joko Widodo to be free of political consequences.
Therefore, it is possible for President Jokowi to issue a governmental regulation in lieu of law (Perppu) on Papuan development that involves large corporations operating in Papua, which includes Freeport, the Tangguh gas project and forestry and plantation companies. In the context of Papuan development, the companies are positioned as opportunities for Papuans to be more prosperous.
It is in this context of Papuan development that the concentration of Freeport’s usefulness must be reformed. Its usefulness must focus on the availability of a multiplier effect on economic development, social development and human development in Papua, instead of on state revenue in taxes, dividends and royalties.
Therefore, Freeport’s rights and responsibilities must be reassessed. It is these rights and responsibilities that become points for renegotiation within the 120 days. Results from the renegotiation are put into a Perppu on the role of natural resources in developing Papua.
In this case, the government must be “directly involved” in the economic development, social development and human development in Papua. This means the government must not entirely surrender the management of multiplier effects to companies, as is the case thus far. This new paradigm of the role of natural resources’ concession holders in Papua must be in line with the government’s Nawacita policy that was started with President Joko Widodo’s high concern on Papua.
Such an idea is a possible alternative. Whatever the decision the government makes, hopefully it will be a solution that benefits everyone, especially Papuans.
RACHMAN WIRIOSUDARMO
Natural Resource Policy Analyst
