The Fate of Freeport in the Jokowi Era
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The government, through the Energy and Mineral Resources Ministry and the Finance Ministry, has reached an agreement with PT Freeport Indonesia on several crucial clauses in their contract renegotiation.
Important clauses agreed upon include the conversion of contracts of works (CoW) to special mining business permits (IUPK), divestment of 51 percent of shares, smelter development and increase in revenues (royalties and taxes). If these four conditions are met, Freeport will get a guarantee of a contract extension until 2041.
Nevertheless, Freeport believes the deal should be a single package, which means that the contract extension is an integral part of the changes of CoW into IUPK, share divestment, smelter development and the increase in revenues.
Freeport\'s request certainly makes sense. With the certainty of contract extension, Freeport will be able to realize the investment of a smelter factory with a capacity of 3 million tons of copper worth US$2.3 billion and a gold smelter in Gresik, East Java.
Freeport plans to invest between $17 billion and $20 billion from 2021-2031 for underground mine development: Grasberg Block Cave (45 percent reserves), Wild Cats (24 percent), Deep Mill Level Zones (18 percent), Big Gosan (6 percent) and Doz Block Cave. If the underground mine development is completed, Freeport will be able to produce about 230,000 metric tons of copper concentrate per day.
Between 2004 and 2016, Freeport invested $8 billion to build tunnels in underground mines to anticipate the peak of the mining life of the open-pit Grasberg mining site.
Freeport will be able to start commercial production from underground mines after 2022, while the return on new investments can only be made after 2031. Without the certainty of contract renewal, Freeport will find it difficult to build smelters and build underground mines because of funding difficulties.
Financial institutions such as international banks will be reluctant to provide loans because Freeport has not yet secured a contract extension from the government. There are two possible reasons why a contract extension is not part of an integral package with the four other clauses. First, Freeport has never complied with the government’s regulations.
In terms of divestment, for example, Freeport was previously requested to divest 30 percent of its shares to national parties, but the divestment could not be realized because the prices offered by the mining giant were unrealistically high.
As was the case with the government’s request to build a smelter. The government, since January 12, 2014, has banned all mining companies from exporting raw materials and obliged them to build smelters in the country so as to deliver multiple impacts for development. However, Freeport only promised to build a copper smelter.
The second reason is political pressure. It may be true that the government is willing to extend Freeport’s contract until 2041. But it needs to provide reasonable explanations to the public as to why Freeport’s contract should be renewed for this period. Without strong reasons, the issue of contract renewal could be used as ammunition by political opponents to damage the prestige and image of the government. Political opponents could blame President Joko “Jokowi” Widodo as the party most responsible for the extension of Freeport’s contract.
A better scheme
The public needs to give a thumbs-up to the Jokowi-Kalla government, more specifically to the Energy and Mineral Resources Minister and Finance Minister, who have successfully negotiated with Freeport. The contract renegotiation with Freeport has been ongoing since the era of Susilo Bambang Yudhoyono (SBY)-Boediono\'s leadership. However, renegotiations stalled because of a tug of war between national and global interests.
Agreements on important clauses in contract renegotiations, such as share divestment, contract extension and smelter construction, have never been achieved. During the first two years of Jokowi\'s leadership, led by Mineral Resources Minister Sudirman Said, contract renegotiations with Freeport also failed.
Although Sudirman granted an approval and a guarantee of contract extension to Freeport until 2041, the smelter construction was never carried out (read: Annual Report of Freeport McMoRan, 2015).
The new contract renegotiations gained momentum when the Energy and Mineral Resources Ministry came under Ignas Jonan\'s control. Jonan refused to be dictated to by Freeport. Jonan firmly stated that Freeport was obliged to divest 51 percent of its shares to national parties and build a smelter if it wanted to continue operating the Grasberg mine.
Even so, Jonan cannot do much without the President\'s support. Under Jokowi\'s leadership, the government has appeared to have the courage to challenge Freeport, not simply follow the will of the corporation. Under Jokowi\'s leadership, the government has shown its power to force corporations to follow the rules of its game.
The scheme of contract renegotiation is better and more constitutional. In the era of SBY, for example, Freeport was only ordered to divest 30 percent of its shares under the pretext of the company building upstream and downstream mining operations and underground mines. Regarding the extension of the contract, the SBY regime provided an extension until 2041. Under the Jokowi government, Freeport has been requested to divest 51 percent of its shares, been obligated to build a smelter and raise revenues. The government also requires Freeport to convert CoW into IUPK.
The conversion of CoW into IUPK will have direct implications for strengthening the role of the state. The state becomes sovereign and has the power to require companies to raise state revenues and build smelters. It is different from a CoW, which puts the government on the same level as companies. CoW has undermined the government’s control of its natural resources, with the implications being that the country’s rich mining potential has failed to raise the welfare of the people. It could also damage the environment and lead to unfair profit sharing.
It is not an exaggeration to say that a corporation is like a cancer that only cares about its own growth and forgets that it lives in a social community. Through IUPK, the role of the state is bigger in imposing the constitutional order of the 1945 Constitution, which stipulates that strategic mining should be controlled by the state for the welfare of the people.
With the IUPK scheme, Freeport is obliged to build a smelter and divest 51 percent of shares to national parties. Since the Indonesian government already holds 9.34 percent of the shares, Freeport should divest another 41.64 percent. Under the regulation, the central government has the first right to acquire Freeport shares. However, it is not possible to carry out the divestment process in 2018 because the government has not allocated the required funds for the divestment in the 2018 state budget.
Moreover, the burden on the state budget is very heavy because of infrastructure development. The central government may follow the mechanism used when acquiring the 7 percent of shares divested by Newmont during the SBY administration era. At that time, the shares were acquired through the Government Investment Center (PIP).
However, the mechanism would be difficult to implement because the purchase of the shares must be financed by state funds and is subject to the approval of the House of Representatives (DPR). The best option for Freeport’s divestment is to allow state owned enterprises (SOEs) and local government companies (provincial government of Papua and Timika regency) to proportionally acquire the shares. From 41.64 percent of the shares, 31.64 percent could be acquired by state-owned enterprises and the other 10 percent by the Papua provincial government.
State-owned mining companies are currently preparing for the establishment of a holding company, which will be led by PT Indonesia Asahan Alumina (Inalum) with PT Aneka Tambang, PT Timah and PT Bukit Asam Tbk as its partners. The establishment of the holding company is intended to create a state owned mining corporation. If combined (book value, 2015), its mining assets would reach Rp 55 trillion and its total sales Rp 28 trillion. If 31.64 percent of Freeport\'s shares were acquired by state-owned companies, in the future, state-owned mining companies would be able to compete with global mining giant competitors, such as BHP Balliton with total assets of US$124.58 billion (2015) and Rio Tinto $91.56 billion (2015). With such enormous assets, mining SOEs would be able to raise fresh funds from banks and bond issuance to buy 31.64 percent of Freeport’s shares and prepare for investment with Freeport in an underground mine.
Freeport would be fortunate to partner with state-owned companies that also have experience processing mineral products. Inalum, for example, can reliably process bauxite into aluminum. Inalum and Antam are also building an aluminum Smelter Grade Alumina (SGA) facility in Mempawah, West Kalimantan. Antam and Bukit Asam are also developing a ferronickel plant in Halmahera. Bukit Asam is the supplier of the coal to be used for the power plant for the ferronickel plant.
Freeport and SOEs can complement each other. Copper derivatives managed by PT Smelting Gresik, for example, produce 1,800 tons of anode slime per year (for gold and silver purification). Antam has the capacity to build an anode slime factory. It may be the reason why in April 2017, Antam signed a memorandum of understanding (MOU) with Freeport and PT Smelting (a joint venture between Freeport and Mitsubishi) for the construction of an anode slime plant.
In addition, Freeport will be facilitated to build smelters because PTBA could supply the coal for the power plants. In short, partnering with state-owned enterprises would facilitate the expansion of Freeport\'s business in Grasberg in the future. The reason for giving a 10 percent stake to the Papua provincial government also makes sense. Papuans think the CoW is problematic. For them, the CoW is a one-sided agreement between the central government and Freeport, without involving the Papuan community. In fact, the operation area of Grasberg mine is on indigenous land owned by the Amungme tribe.
Papuans assume Freeport only comes to exploit the regions natural wealth, but does not want to develop Papua. For the sake of justice, it makes sense that the Papua provincial government receives 10 percent of Freeport\'s shares free of charge because it operates on the land of the Amungme tribe. With the free of charge divestment, the Papua provincial government would not need to team up with private companies to buy the shares. So, Freeport shares would not fall into the hands of local businesses that do not deliver benefit to the people.
By owning Freeport shares, Papua would have its own representatives in Freeport’s management and have voting rights in general shareholder’s meetings (GMS). In addition to obtaining financial benefits from dividends, Papuan representatives in the management could also bring up strategic issues and fight for the interests of Papuans.
President’s will
Under the pretext of underground mining investment and the use of high-tech equipment for processing, as well as the realization of smelter development, the government needs to provide a guarantee of contract extension to Freeport until 2041. Without such legal certainty, it is also uselessly urging Freeport to build a smelter.
Meanwhile, the President must be the one to decide on the divestment of Freeport’s shares. The President should look for the most profitable scheme and those most eligible to buy Freeport shares.
State owned companies should be given priority to buy the shares divested by a strategic mining entity like Freeport so they will be able to participate in the management of strategic mining assets and contribute to raising state revenues, as is the case with state-owned enterprises in China. Thus, the Minister of SOEs should seize this opportunity.
The idea of establishing a state-owned holding mining company should go beyond mere discourse, it must be realized. It is time for SOEs to synergize to grow bigger and become a mainstay. After that, the Freeport mine must be managed transparently for the welfare of the people.
FERDY HASIMAN
Researcher at Alpha Research Database, Indonesia
