Be Wary of Freeport Negotiations
The government claims to have successfully secured Freeport\'s agreement on four crucial issues during their contract renegotiations at the end of August. The agreement includes: (1) willingness to divest up to 51 percent shares; (2) building a smelter for completion by 2022; (3) following the fiscal regime according to the prevailing scheme; (4) an extension on the Freeport contract until 2041.
However, is the government worthy of patting itself on the back, and can the Indonesian people rejoice in their "success"? Let\'s see.
First, in relation to the 51 percent shares divestment, the state should be entitled to ownership of the shares. In accordance with Article 33 of the 1945 Constitution, the state has full control over the country’s natural resources and has the full authority to make a policy on it, to manage and to supervise.
In conducting mining activities in Mimika, Papua, control over the 51 percent of Freeport shares must be in the hands of state-owned enterprises (BUMNs) and local government-owned companies (BUMDs). There is no alternative but to form a consortium of BUMN (mining holding company) and BUMDs (owned by relevant provinces and districts) to acquire 51 percent of Freeport shares. Apparently, no concrete step has been taken so that the constitutional mandate will be upheld.
Controlling shareholder
Second, with regard to corporate controls, if the 51 percent shares divestment has been executed, Freeport should be operated by a consortium of state-owned mining holding companies and BUMDs. Upon ownership of 51 percent shares, the consortium should become the controlling shareholder of the company, a common business practice in the world.
The inclusion of the clause for "divestment of shares up to 51 percent for Indonesian entities" in every contract of work (CoW) is clearly based on the constitution, the vision and the desire of past leaders that SOEs and the Indonesian people should be able to manage their own natural resources towards public wealth and prosperity. However, it is yet to be seen that this principle will be adhered to by Freeport or the government.
Freeport CEO Richard Adkerson has unveiled the company’s plan to sell its 51 percent stake on the Indonesia Stock Exchange (27/7/2017). He also stated that Freeport would remain in control of the mine, even after 51 percent of its shares have been divested (29/8/2017). Adkerson\'s position is clearly contrary to the constitution, the prevailing rules, and common business rules regarding the authority of the majority shareholder. This must be prevented, and the government must ensure that Adkerson\'s desire will not be realized.
Coordinating Maritime Affairs Minister Luhut B Pandjaitan has also expressed the possibility of a cooperation between BUMN and private companies in acquiring the divested Freeport shares (27/2/2017).
Private-sector involvement can eliminate the opportunity forBUMNs to become the majority shareholder, while also allowing Freeport to remain in control of the mine. Therefore, in the ongoing negotiations, the government must ensure that Luhut’s proposal will not be accepted.
The government does not have to fulfill Luhut’s or Adkerson\'s demands, which are based on the argument that the state/SOEs do not have enough funds so the private sector needs to be invited, but at the same time, Freeport will be able to maintain its dominance in Mimika.
Third, with respect to the price of the stock, the government should base its calculations on the value of mineral reserves and remaining contractual time by 2021. With this method of calculation, the proven mineral reserves under Freeport ownership will last only up to 2021. Therefore, the shares price should be based on "the fair value of the assets and (prospects)" of Freeport up to 2021. Meanwhile, the applicable share price in 2021 (when the contract expires), according toArticle 22 on the Freeport CoW should be based on market price and should not be lower than the assets’ book value in 2021.
Since the market price of the assets does not take into account business prospects, this value can be considered equal to the book value. The "fair value" of Freeport shares is based on its business prospects. With such a potential, the shares could be offered at a very high price so that it is no longer fair.
In fact, the agreement in determining a fair value has the potential to be open to corruption, collusion and nepotism (KKN) practices and rent-seeking by those who have moral hazards.
For example, the price can be agreed at a certain level, but the price announced publicly is higher than it should be. The difference between "agreed fair price " and "fair public price" can be “shared out” and "compromised" for corrupt purposes.
To illustrate, for example, the market value of the asset based on the book value of Freeport shares in 2021 is US$4 billion, so the price of 10.64 percent of Freeport shares is only $426 million. Meanwhile, the "fair price” of 10.64 percent of shares as offered by Freeport under the divestment obligations stipulated inRegulation No. 77/2014 was $ 1.7 billion in January 2016. With such a wide range of "book values" and "fair values", ($426 million and $1.7 billion, with a difference of $1.27 billion), the "compromised price" that can be announced to the public can be manipulated and involve corruption.
Therefore, if it wants to be considered to have gained a success in the negotiations, the government should at least be able to guarantee that the agreed fair price of shares should be free of moral hazards and corruption.
Fourth, In order to obtain a truly fair price, the government must hire independent appraisers and negotiate transparently in accordance with the principles of good corporate governance (GCG). The shares that must be acquired are 41.64 percent (because the government already owns 9.36 percent), and can be done at one time or gradually, such as within two years.
Compensation
Fifth, the government must ask Freeport to pay fines for environmental damage worth $3 billion to $ 5 billion that have been agreed on and "almost" executed during the administration of Abdurrahman Wahid alias Gus Dur (1999-2001).
The execution failed because Gus Dur "stepped down". During the Megawati administration (2001-2004), Freeport\'s commitment was "unclear". To gain Freeport\'s commitment, the Jokowi government needs to involve former coordinating economic minister Rizal Ramli on the current negotiating team, because he headed the government team when Freeport expressed its willingness to pay the compensation.
If the Jokowi administration succeeds in getting Freeport to pay the compensation, the BUMN-BUMD consortium will not need to spend their own money to acquire 41.64 percent of Freeport shares.
Stock can be obtained for free. With its case of environmental damage, the country has the opportunity to force Freeport to sell its shares at a price no more than their book value.
If, on the other hand, "we" pay a far higher price, or more than a third of the price offered by Freeport in January 2016, people should suspect moral hazard and corruption in the deal.
Sixth, with regard to fiscal/tax issues, the government should ensure increased state revenue in accordance with Article 169 of Law No. 4/2009 on Mineral and Coal Mining (Minerba). Therefore, the government must adhere to the provision that all state revenues from (a) central government revenues and regional revenues pursuant to Article 128 of Law No. 4/2009 and that (b) 4 percent of net profits to be given to the central government and 6 percent to local governments in accordance with Article 129 of Law No. 4/2009, are greater than if the fiscal scheme remained (nailed down) according to the existing CoW.
Seventh, in relation to the smelter construction requirement, the government should ask Freeport to immediately prepare a comprehensive development plan or blueprint with targeted completion by 2022. On the other hand, the government must also do its part to ensure smooth construction of the smelter in terms of location, permits, land acquisition, fiscal incentives, import duties, and others legalities.
The government should also assign a BUMN to own a stake in the smelting company, so that it is eligible to appoint at least a director for ensuring that the principles of GCG are upheld and the practice of concealing products/minerals, which may still occur, can be prevented.
Taking into account these seven strategic issues, the public should not be misled and fooled by the euphoria of the "success"achieved in contract negotiations with Freeport, as the government has claimed. In addition to the fact that we have been unable to obtain the many things that an owner of natural resources should get, the euphoria can make us lower our guard, and being fooled by the propaganda of rent seekers should be avoided, because it could later harm the country and the people.
Therefore, several steps are needed to be taken soon, including the issuance of a government regulation or PP, or a ministerial regulation that the buyer of the 51 percent of Freeport shares should be a BUMN-BUMD consortium and that the shares price is to be determined by the assessment of an independent consultant, based on the value of proven reserves up to 2021 and deducting the environmental damages to be paid by Freeport.
If it is still possible, we can ask the government to involve the KPK in the negotiation process. Let us closely monitor the Freeport negotiations so that Freeport will not become the target of rent-seekers, oligarchic interests or electoral logistics, political interests, business interests or foreign domination.
MARWAN BATUBARA
The Director of Indonesian Resources Studies, IRESS