Anatomy of Freeport Divestment

KOMPAS/DIDIE SW

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Since its establishment in 1980, the Indonesian Business Data Center (PDBI) has specialized in reviewing government policies on managing the strength of the national economy through Indonesia Inc.

Indonesia Inc. is modeled after Japan Inc. and Korea Inc., corporate concepts that the United States and the European Union (EU) also implement in a more democratic form.

The Japanese have sogoshosha and zaibatsu, such as Mitsui, Mitsubishi, Marubeni, Itochu, Toyota and Hitachi. Korea later imitated these with chaebol such as Hyundai, Samsung, LG and Lotte. The EIC and VOC, which the British and Dutch empires assigned as monopolies to manage their business transactions with traditional and feudal authorities in India and Indonesia, became the embryonic model for state-owned companies (SOEs).

The two monopolies were later dissolved because of corruption and overreach, and were replaced by private corporations: "The Big Three Banks" in the Netherlands (NHM, NHB and Escompto). Their affiliates in Indonesia were nationalized and metamorphosed into Bank Mandiri in 1957.

Meanwhile, the Big Five Trading Houses – Geo Wehry, Internatio, Jacoberg and Lindeteves – operated like Japan’s sogoshosha . After they were nationalized and then liquidated, they merged into PT Indonesia Trade Center (ITC), but this was far different from sogoshosha.

Indonesia was the only colony that had to take over the US$1.15 billion debt burden of the Netherlands Indies as part of the agreement reached at the Round Table (Meja Bunder) Conference of December 1949. Indonesia agreed to take over the debts because the US had promised financial assistance. However, this aid arrived only in the form of export credit and feasibility studies for the Semen Gresik and Pupuk Sriwijaya plants.

However, Indonesia maintained its diplomatic and commercial ties in good faith to strengthen the national economy.

In 1953, the government purchased De Javasche Bank at a nominal price on the Amsterdam and Jakarta stock exchanges, which was later nationalized to become Bank Indonesia.

The honeymoon period for Indonesia and the Netherlands stalled after Indonesia carried out a nationalization program without compensation during the West Irian (now Papua) confrontation in 1957.

Indonesia took over all Dutch companies and their negative impacts are still being felt today. Shipping service KPM disappeared without a replacement, which made Indonesia’s inter-island logistics the most expensive in the world. Furthermore, the economic system left behind led Indonesia to a difficult situation, as many resources were allocated to turn its Air Force and Navy into the strongest forces in the southern hemisphere.

After West Irian was returned to Indonesia through negotiations with President Kennedy as mediator, Bung Karno (President Sukarno) continued Indonesia’s confrontation with Malaysia. The confrontation, combined with hosting the Asian Games IV/1962, drained the national savings. The G-30-S coup and sanering (the rupiah cut) led to Bung Karno’s replacement by Soeharto on Dec. 13, 1965.

All Dutch companies that had not gone bankrupt from mismanagement were returned to their owners in 1967 to stimulate and encourage foreign investment inflow, which had almost collapsed. Among the new arrivals was Freeport, which secured a contract of work (CoW) without having to establish a local subsidiary in Indonesia. The 30-year contract was based on the Foreign Investment Law, with the hope that after 30 years, the company could be nationalized under a legal, respectable and unforced nationalization.

Indonesia has much experience in bilateral conflicts with states and private corporations. One of these was the unilateral decision to move the Indonesian tobacco auction from Rotterdam to Bremen. In response, the Netherlands took Indonesia to court in Hamburg. The Indonesian legal team was led by Prof. Dr. Gouw Giok Siong, who faced his former professors at court. Luckily, the German judges were more aligned to Indonesia, as Bremen benefited from the auction’s relocation and rejected the Dutch appeal to return it to Rotterdam.

Ibnu Sutowo led the Pertamina team to negotiate the purchase of Shell\'s assets from $150 million to $110 million. The purchase was paid through installments that ended in 1970, although Ibnu was later fired in 1976 due to a short-term debt mismatch and long-term debt default.

Ibnu’s mistake left the Indonesian government with $10 billion in debt. A joint team of technocrats and tycoons – including Radius Prawiro and Liem Sioe Liong – was needed to settle the debts to purchase an oil tanker from Bruce Rappaport, the Jewish shipping magnate.

The Salim Group received an order to build a refinery in Dumai with a Spanish contractor. Ibnu Sutowo promoted Habibie as Suharto\'s new golden boy. Habibie established the IPTN aircraft factory lighthouse project and consolidated 10 SOEs under the Strategic Industry Management Agency (BPIS). Unfortunately, the experimental leap into advanced technology was stalled by the monetary crisis.

Malaysia actually imitated Pertamina during the Ibnu era in establishing Petronas, and in 1981, Mahathir Mohammad made a breakthrough by nationalizing the largest plantation company in the world, Guthrie, through the acquisition of its shares on the London stock exchange. The "dawn attack" left then-British prime minister Margaret Thatcher furious but helpless.

Indonesia was also embroiled in a dispute with Canada’s Amco Asia in the Hotel Kartika Plaza project, which it built in cooperation with Inkopad. The land on which Kartika Plaza (now UOB Plaza) was built belonged to Old Order businessman Teuku Markam, which Inkopad later confiscated and acquired. The conflict was caused by BKPM chairman Ismail Saleh’s asset seizure. It took 10 years (June 24, 1982 to Dec. 17, 1992) to settle the dispute through the ICSID (World Bank arbitration tribunal).

Freeport’s case

In the case of Freeport, the 1991 nationalization process was smooth. Then-mines and energy minister Ginandjar Kartasasmita transferred part of Freeport’s shares to Aburizal Bakrie, who in 1996 sold it to Bob Hasan. Ironically, the profits received from Freeport were “dumped” into a failed oil exploration in the Gulf of Mexico.

However, amid the fluctuation of share prices on Wall Street, corporate raiders like Carl Icahn profusely enjoyed the benefits after he carefully observed and tamed the stock market turmoil for his interests as Freeport\'s controlling shareholder.

Indonesia’s weakness in the global business game is that we are not as creative and as active as Malaysia was in the acquisition of Guthrie. In Indonesia, the political elites are divided into several factions composed of individuals that fought each other for short-term interests – since the "Ginandjar Boy" era with the transfer of Freeport shares to Bakrie. The shares were sold at higher prices to Bob Hasan, who then resold the shares back to Freeport.

All are interpersonal affairs that do not benefit Indonesia Inc. in the sense we agreed, in terms of Indonesia\'s strong and sophisticated economic power. Breakthroughs such as the Guthrie acquisition could only be done in confidence, because if it was disclosed, it could be judged as insider trading.

Indonesia does not have a sovereign wealth fund likes Temasek Singapore or Khazanah Malaysia. The SOEs have not been consolidated like Temasek. As a result, it is difficult to act on the opportunity to take corporate action by exploiting policy as pressure, and as Indonesia Inc., in a direct “raid” on Wall Street.

KOMPAS/EDDY HASBY

Christianto Wibisono

Now, all the cards are on the table. We must be satisfied with the Freeport share purchase, like in 1953 when we bought De Javasche Bank and turned it into Bank Indonesia. Fortunately, this conflict is peaceful, and does not involve dispute arbitration like in the Karaha Bodas geothermal project. That project was taken to the arbitration court because it was canceled on the order of the International Monetary Fund (IMF), but Indonesia was instead punished with a fine of about $500 million.

This is the lesson of the history of bilateral economic conflicts, between the Indonesian government and investors. It requires expertise and will be costly if we are not prudent in managing issues and conflicts of interest that involve billions of dollars.

Christianto Wibisono, Founder and Chairman, Indonesian Business Data Center