Overseeing Freeport Divestment
Under the heads of agreement with Freeport-McMoRan and Rio Tinto, Inalum will not immediately own the 51 percent stake in PTFI. This is an important point, so that the public does not become excessive euphoric that the majority stake in PTFI has come into Indonesian hands.
On July 12, 2018, PT Indonesia Asahan Aluminum (Inalum) signed a heads of agreement (HoA) with Freeport-McMoRan and Rio Tinto. The ministers of finance, energy and mineral resources, and state-owned enterprises witnessed the signing.
Under the agreement, Indonesia, through Inalum and a joint venture between Inalum and the Papua government, will acquire a 51 percent stake in PT Freeport Indonesia (PTFI).
No purchase agreement
One thing that needs to be clarified for the benefit of the public is that the HoA is not a share purchase agreement. Under the HoA, Inalum will not immediately own the 51 percent stake in PTFI. This is an important point, so that the public does not become excessive euphoric that the majority stake in PTFI has come into Indonesian hands.
The HoA essentially arranges only two things. The first is the divestment structure, and the second is the divestment value. The next step after the HoA is to sign more detailed agreements on the participating interest, shareholder agreement and exchange agreement.
This is where the juristic adage holds, that the devil is in the details. Legal experts representing Inalum should be competent and clever, so as not to be defeated by the legal experts hired by Freeport-McMoRan (Freeport) and Rio Tinto.
As background, Rio Tinto’s emergence is the result a participation agreement signed with PTFI on Oct. 11, 1996. Under the agreement, Rio Tinto provided funds to PTFI. In return, Rio Tinto would receive 40 percent share of the production output above certain levels until 2022. After 2022, the amount earned would be 40 percent of PTFI’s total production.
I don’t know clearly when this agreement will end. Although I did not see the contents of the agreement between PTFI and Rio Tinto, I expect that it is the participating interest that will be converted into Rio Tinto’s stake in PTFI. Through this process, Inalum will buy Rio Tinto\'s participating interest and will thus receive a stake in PTFI.
Based on the HoA, the price Inalum must pay for Rio’s participating interest is US$3.5 billion, while Inalum will use its remaining $350 million to buy Freeport’s 5.616 percent stake in PTFI through its affiliate, Indocopper Investama.
In the end, Freeport will own 48.78 percent of PTFI, Inalum 5.616 percent and the Inalum-Papua joint venture 45.616 percent. State-affiliated companies will own 51.232 percent and Freeport will hold the remaining 48.78 percent.
Please note that the various divestment steps detailed in the HoA for can be implemented only when the three conditions the Indonesian government and Freeport agreed on Aug. 29, 2017 are fulfilled.
First, PTFI’s special mining license (IUPK) is to be extended to 2041. Second, PTFI is constructing the smelter. Finally, Freeport has demanded certainty in tax and royalties payment from the government.
Problems
Although the signing of the HoA should be appreciated, the divestment process under the HoA still has a number of problems. First is the extension of the IUPK until 2041. The government will extend the IUPK 2x10 years only after all the agreements necessary for the divestment have been implemented.
Meanwhile, from the Inalum management\'s side, the agreements can be signed after the government has granted the IUPK extension. This is understandable, as Inalum has agreed with Freeport and Rio Tinto that the $3.85 billion payment stated in the HoA is based on PTFI operations until 2041.
If the IUPK is not extended, the $3.85 billion payment is a fantastic amount, considering that PTFI’s permit will expire in 2021. If this amount is paid without certainty of the extension, it is not impossible that in future, the Inalum management might be alleged of being involved in corruption because it has caused state losses.
The second problem is that related to the statements Freeport and Rio Tinto made to the capital market authority, saying that the HoA is a non-binding agreement, while the State-Owned Enterprises Minister said the agreement was legally binding. This should be clarified, because binding and non-binding agreements have different legal consequences in dispute settlement, if the HoA is ever disputed.
Legally, it would be better if the HoA is not a binding agreement, because the $3.85 billion is not a fixed price. This is an indication that the parties can still negotiate over the price.
Thirdly, if the divestment is completed and Indonesia (through Inalum and the Inalum-Papua joint venture) owns 51 percent of the shares, will the majority shareholders have control over the company?
It could happen that, even through Indonesia is the majority shareholder, it will not have the right to control the company. This could occur if such a decision is taken under the articles of association at general meetings of shareholders, board of commissioners and directors that are attended by all parties. Or, it can be arranged in such a way so that the minority shareholders can make decisions, as long as Freeport is part of it.
Freeport has demanded since the beginning that it retain operational control, even though Indonesia would be the majority shareholder. This certainly would not benefit Indonesia. If Indonesia wants to make a decision but does not have Freeport’s approval, then it cannot take the decision. Another example would be when the directors request additional capital injection, Indonesia will have to contribute more. Therefore, it is important to know that majority ownership does not only mean earning dividends, but also in other aspects of corporate action.
The fourth problem relates to Freeport’s request that there be an agreement on investment stability. The central point of this agreement is that Freeport will enjoy fixed tax and royalty payments until at least 2041. Acceding to this request would mean that the agreement would be the same as a contract of work (CoW). Such agreements are outdated in the present era. It is strange, because that would mean that a private entity can control a nation’s sovereignty, much like the power the VOC held during the Dutch colonial era.
Moreover, under the Coal and Mineral Mining Law, agreements that are the same as or resemble the CoW are no longer allowed. The solution for the government is to enact legislation that will specifically regulate the tax treatments and royalties in the mining sector.
However, the problem is whether Freeport would accept this, given their concerns that regulations would change upon a change in the administration. However, the government certainly should not bow to Freeport’s demand. The government must protect its sovereignty, including its laws on taxation and royalties.
The fifth problem is, if negotiations are not completed and the agreement is not signed by the end of the year, what would be the fate of the divestment under the HoA – not to mention, if there is a change in the government. Will the new government be tied to the HoA?
Guard
After the HoA deal, Inalum\'s directors should not be pressured by anyone, including the government. They do not need to be given a deadline. A deadline would weaken Inalum\'s bargaining position. The public interest should be the Inalum directors’ first priority during the divestment process.
What are Indonesia’s interests? For this, the directors need to grasp the directives of the head of state while listening to the people’s aspirations at the same time.
One thing that would be contrary to Indonesia’s interests is for Indonesia to become the majority shareholder in PTFI, but it actually loses out in the deal. Therefore, the public and various components of the nation should oversee the government and the Inalum directors’ every step in the post-HoA divestment process.
Hikmahanto Juwana, Professor of International Law, University of Indonesia