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Freeport needs to stand up to Indonesia over the CoW issue

  • Will Hickey
    Will Hickey

    Associate professor for the School of Government and Public Policy in Jakarta

Jakarta | Mon, February 27, 2017 | 05:28 pm
Freeport needs to stand up to Indonesia over the CoW issue A copy of draft revision to Government Regulation No. 23/2010 on the management of mineral and coal businesses obtained by The Jakarta Post late on Thursday. (The Jakarta Post/Rendi A. Witular)

Normally, a 50-year mining project like Freeport’s Grassberg mine would deign it high time to turn its operations over to the local government, which would also be expedient politically.

However, in this case, Freeport is correct to stand its ground against Indonesia in insisting its contract of work (CoW) be honored, extended and not converted into a licensing agreement that has the potential to seriously disrupt operations.

Vincent Lingga in his Feb. 23 commentary in The Jakarta Post is wrong to paint this as an “arbitration ploy” by Freeport to block mining reform. Indonesia mining will certainly not reform with local owners bereft of legal enforcement. Why is this? Freeport is actually doing quite a good job with its localization initiatives in Papua, compared to that alternative, no localization. In other words, the operation is benefitting Indonesia not just with taxes, but also with human resource development.

It is commonly held knowledge in the Indonesian mining industry that Freeport and Theiss have the best mining training programs in Indonesia, followed by Newmont and BUMI Resources (courtesy of their legacy Rio Tinto and BHP operations). Western standards do in fact matter.

Freeport employs 32,000 people, many of them are well trained in best-practice mining standards and techniques, with good safety inculcated in their processes. This situation could/should be replicated in all Indonesian mining activities, not just Papua.

The real fear is that if this mine is nationalized (effectively what the divestment is), training and localization in Papua will suffer inversely. Localized owners will not carry the same safety and training mandates that Freeport does. They will also probably want to cut any “non-essential” (read: safety and environmental) staff to the bone.

If a licensing agreement (IUPK) is forced, local partners, via divestment, may insist on another avenue of production, with a lower environmental and safety risk profile, you can bet on that!

Finance Minister Sri Mulyani Indrawati is wrong to interject in this that a “management tweaking” is necessary. After her many run in with the Bakrie company she should know the reality.

These potential suitors (namely insider oligarchs favored by the Indonesian government) are playing the Indonesian nationalization card. That is simply a means to an end for them to gain control of operations either directly (Freeport divestment) or indirectly (licensing regime).

Once control is gained, any environmental promises or social obligations will quickly fly out the window because the Indonesian regulatory framework has weak enforcement power.

One needs only look further than substandard mining operations in Kalimantan that have cratered the earth with black, water filled holes for coal, or strip mined vast areas of pristine jungle for iron ore strip mining, in both cases, driving out many native and endangered species.

It is real and it has happened and will probably happen again. Freeport, as a US company, simply cannot play this game. If someone gets hurt, or standards are violated, they first of all will have to answer to the US Security and Exchange Commission (SEC) for any mal-activity that impacts shareholders.

Second, they would be subject to proceedings in a US court for personal injury, where awards damages may be unlimited.

An Indonesian company will be under no such qualms. The legal system on its own is far weaker here. If any doubt, consider the issue of uncontrolled peat burning in Sumatra, despite all the “laws” the all powerful palm oil industries continue to create haze unabated each year. Similarly, there will be no oversight authority looking out for the long-term welfare of Papuans.

Building a smelter is critical, but the focus cannot be based on hardware alone. Freeport is obviously opposed to building a smelter as the Indonesian government has proven wishy-washy on this critical investment issue for political, not economic, necessity, by allowing some concentrate to be exported.

If Indonesia is serious they need to have educational incentives in place that will enhance local know-how to actually run the smelter, lest they become giant turnkeys ran by foreign operators, mostly Chinese.

Ores or concentrate or finished product? What’s it going to be presents a “moving target”. Only the Chinese via their non-capitalism driven state-owned companies can afford to play this game of potentially unrealized “pseudo-investment” of smelter building. Of the 32 new smelters built in Indonesia since 2012, most are Chinese made.

Western companies that are responsible for quarterly profit statements to shareholders cannot take this risk.

Therefore, equating Chinese state-owned companies that operate on a realpolitik level, and not a “profit statement” like Western ones, is comparing apples to oranges. Chinese are interested in long-term resource access and they will give and take as is politically expedient.

Localization is the real key to the development of Papua, not more gimmicks like cheap fuel or cash transfers to locals.

Those things can be manipulated by insiders and rent seeking government officials, however a strong jobs program can turn the outlaid rupiah up to seven times in a community. That is what is really needed for this country.

By the time this goes to press it is unknown if Freeport will have either caved into Indonesia’s licensing demand and forfeit their longstanding contract or not. The Indonesian government should lay off Freeport until they in fact can offer a better jobs program for Papua locals than Freeport can. Right now, they can’t.

The Indonesia companies, if they gain control, that want a piece of this divestment, will not feel obligated, environmentally or socially for this same ideal in Papua, but rather in spiriting profits out as quickly as possible. Papuans will suffer with local ownership and no enforceable regulatory regime in place. That’s the bottom line.

***

The writer is associate professor at the School of Government and Public Policy, Jakarta and the author of Energy and Human Resource Development in Developing Countries: Towards Effective Localization, Macmillan, 2017.

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