Freeport and Test of Sovereignty
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Energy and Mineral Resources (ESDM) Minister Ignasius Jonan visited the United State on July 22-28, 2017. During the visit, Jonan held meetings with a number of companies, including Freeport McMoRan, the parent company of PT Freeport Indonesia (FI).
PT FI is currently in the process of renegotiating its contract with a team led by the ESDM Ministry. The ongoing renegotiation deals with the extension of contract, smelter construction and 51 percent divestment to the national parties. The public hope that in the visit of Jonan could reach an agreement with Freeport.
Based on reports of the renegotiation team, Freeport agreed to extend the contract only up to 2031 (not 2041) and build a copper smelter with an investment of US$2.3 billion in Gresik, East Java. However, Freeport has not agreed with the divestment of 51 percent of shares.
The divestment of 51 percent shares of PT FI constitutes the heaviest test for the sovereignty of the Republic of Indonesia over a mining corporation which confiscates Indonesia\'s natural resources. The government has instructed PT FI to convert its contract of work into the special mining license (IUPK) with the obligation to divest 51 percent of its shares to the national parties; the central government, regional governments, state-owned enterprises/regional-government-owned enterprises, and national private parties.
However, Freeport insists to still become the majority shareholder in the Grasberg mine in Papua. Papua only wants to divest 30 percent of its shares to the national parties. Actually, the divestment of 30 percent of Freeport shares is the mandate of the Government Regulation No. 77 of 2014, which was issued by the government of Susilo Bambang Yudhoyono-Boediono as a way out of the contract renegotiation deadlock which has taken place since 2012.
With the enactment of Government Regulation No.1/2017 on Mineral Resources and Mining, automatically Government Regulation No. 77/2014 can no longer be used as a reference for divestment. Government Regulation No. 1/2017 on Mineral Resources and Mining obliges Freeport to change its contract of work scheme into IUPK.
The change of status is an order of Law No. 4/2009 on Mineral Resources and Mining. Article 169b of the law instructs the government to renegotiate contracts with mining companies in the contract of work regime. It means, the contract of work regime has to change into the mining permit (IUP) regime. While IUP is issued by regents/mayor and governors, the IUPK is still controlled by the central government as it is considered to be vital and strategic assets.
The contract of work regime refers to Law No. 11/1967 on Foreign Investments. The law was issued in the New Order era and was considered to be very liberal. The position of corporations and the government in the contract of work regime is equal. It means, the government cannot demand much from the corporations, including raising taxes and royalties. The contract of work was later considered to have violated the 1945 Constitution which gives a mandate that strategic mines have to be controlled by the state for the welfare of the people.
Divestment and sovereignty
Nevertheless, the 51 percent of divestment of the shares of Freeport remains to be most difficult option. It is difficult because Freeport involves the interests of global-local business people. The Grasberg mine constitutes a luxurious goods and has a bright future. Its copper reserves reach 32.7 billion pounds with gold of about 33.7 million ounces.
The Grasberg mine\'s total investment is very large. As of 2015, the total assets of the Grasberg mine reached US$8,626 billion. Grasberg is one of the most profitable mines in the world. In 2014 it enjoyed a net profit of US$3.98 billion and in 2013 it reached $3,441 billion. Since 2014 Freeport\'s profit has fallen down. In 2014, for example, it was minus $745 million due to the mineral export ban policy.
However, it does not mean that the Grasberg mine is no longer potential. The Freeport mine in Grasberg is a mine with bright prospect and future. During the second contract of work, Freeport operated an open pit mine with reserves amounting to only 7 percent of the total reserves of Freeport. Meanwhile, for the remaining 93 percent there is the underground mine which start commercial production in 2017. Freeport has built a Deep Ore Zone (DOZ), the biggest underground mine in the world, with a capacity of 80,000 metric tons of ores per day.
A mining operation conducted by PT Freeport Indonesia in Timika, Papua, recently. Freeport Indonesia’s contract will end in 2021, but it can propose an operation extension in 2019 at the earliest.
Meanwhile, from the underground mines in Cave Grasberg Block, Big Gosan, and DMLZ the production will reach 24,000 metric tons per day starting in 2017. If Freeport has built a smelter domestically, the underground mines will become its mainstay and also a source of money for the company.
The big potential of the mine of course make local-global businessmen to keep an eye of Freeport shares. At the global level, the US as the country of origin of Freeport does not want that the Grasberg mine be handed over to the domestic parties because it will reduce taxes for that country. Grasberg\'s contribution to the parent company Freeport McMoRan (FCX) is very big.
By the end of 2015, from the combination of the sales of gold and copper PT FI got $3.11 billion. Grasberg mine contributes greatly to FCX compared with FCX other mines in Morenci, Bagdad, and Miami (the US) for copper mine in Cerro Verde (Peru) and El Abra (Chile). I think one of the most important agendas of US vice president\'s visit to Indonesia on April 20, 2017, was to safeguard the fate of Freeport.
Aside from that, there is a possibility that there will individually be the interests of global businessmen in the divestment of Freeport. Carl Icahn, a special staff member of US President Donald Trump, certainly has a big interest to defend Freeport. Icahn controlled 7 percent of Freeport McMoRan shares and was registered as the main shareholder. Moreover Trump has close friends in the House of Representatives and one of the big businessmen, who in the 2014 presidential elections and 2017 regional elections, was in the opposition camp of President Jokowi.
The interest of Freeport can possibly penetrates the opposition camp. If not carefully observant to this mapping, the position of Jokowi can be squeezed. Probably that is why the execution of the 51 percent divestment of Freeport shares is then sluggish, even though at the beginning it was very aggressive. Therefore, the first of the most formidable tests for the government will be how to counter the test from outside, namely how to counter the American hegemony and superiority of foreign corporations.
Meanwhile, in the national level, the government is faced with a difficult test to face local businessmen who attach like parasites in the government of Jokowi. The Freeport divestment will be contested by state-owned enterprises, Papuan government-owned enterprises, and local businessmen. The local businessmen will compete with the strength of state corporations in fighting for Freeport shares, depending on each political power to raise values of their bargain to the government. It can be that local businessmen enter through regional administration of Timika and provincial administration of Papua, such as happening in the divestment of other mine company shares in Indonesia.
The encirclement by local businessmen to control strategic mines in the country is not without reference. The gold and copper mine, Batu Hijau, which used to be controlled by Newmont Nusa Tenggara, is now changing hands to local business entity Medco Group. Medco through PT Amman Mineral controls 82.2 percent of the potential mine in West Sumbawa, West Nusa Tenggara. Actually Newmont, previously was still involved in the contract renegotiation with the central government, but in the middle of the process, Medco was successful to make a business lobby with the government and was finally able to control Newmont\'s shares.
Another example is the gold and copper mine of Martabe in Batang Toru, North Sumatera, which used to be controlled by a Canadian company, G-Resources. G-Resources sold the Martabe mine to Djarum Group and Wilmar Group during renegotiation with the government. The two examples show how the government gives strategic mining concession to the local businessmen. The public need to monitor so as to prevent the long renegotiation with Freeport from having similar fates with Batu Hijau and Martabe mines, simply because the government does not have money to buy.
For the Papuan citizens, Freeport is a company which does not only seize gold and copper, but also destroy environment, cause social conflicts, and violate human rights. The central government, by the Papuan citizens, has thus far been considered to have helped and facilitated the natural wealth plundering in Papua. We do not want the Grasberg mine to fall into the grip of local businessmen who have the same character of the global corporations, confiscating the natural resources excessively, destroying environment, and causing deforestation.
Benefits from divestment
The President must have a good intention to enable the state to get benefits from the divestment. The President must not allow strategic mines to fall to the hands of local businessmen through previous techniques.
If it has to hand over them to the national parities, the 51 percent divestment of Freeport has to be handed over to state-owned enterprises. In the oil and gas sector, for example, the government of Jokowi is successful to entrust the management of the Mahakam block (East Kalimantan) to state company PT Pertamina.
Hopefully the Mahakam block can become a reference so that the strategic mines can to handed over to companies owned by the government. The state-owned mining companies need to establish a holding company let by PT Inalum to acquire the shares of Freeport so that the state companies become a mainstay in the future.
The 51 percent divestment of Freeport shares to the state-owned enterprises is important in the framework of preventing excessive natural resources exploration. The gold and copper mines in Grasberg has also taken into consideration the damages of forests, environment, and given a sense of justice to the Papuan people.
FERDY HASIMAN
A researcher of Alpha Research Database, Indonesia
