The recent announcement by PT Freeport Indonesia that it plans to sell a 9.36 percent stake to the Papua provincial government has revived the question: How many shares is the company obliged to sell to Indonesia under its contract?
While all foreign mining companies who signed contracts of work (CoW) under the 1967 Mining Principles Law have to sell a stake to Indonesian parties (either the central government, regional governments, state-, provincial- or regency-owned companies or Indonesian-controlled private firms) under the so-called “divestment obligation” after a certain period of production, Freeport claims it has no such obligation.
“Although we are not required to sell an interest under the contract of work, we have been engaged in good-faith discussions with the province of Papua to determine if a sale of an interest to the province at fair value is feasible,” a spokesman of the American mining giant Freeport McMoRan Copper & Gold Inc., which controls PT Freeport Indonesia, was quoted by Dow Jones newswires as saying.
The 1967 law has been replaced by the 2009 Mineral and Coal Law which maintains the divestment obligation although the amount of the stake that foreign mining companies have to divest under the new law has been reduced to 20 percent from the 51 percent under the contracts signed under the previous law.
The central government already has a 9.36 percent stake in PT Freeport Indonesia.
PT Freeport Indonesia, the operator of the world’s largest gold mine and third-largest copper mine in Papua, signed its first CoW in 1967. The contract was renewed at the end of 1991.
The content of the second contract was not divulged to the public until the middle of 1998 after the forced resignation of Soeharto, who was known to have good relations with Freeport’s management.
It was American scholar Jeffrey A. Winters who first set off the controversy over Freeport’s contract by saying Freeport’s second contract came as a result of collusive practices.
Ginandjar Kartasasmita, who was Soeharto’s energy and mineral resources minister from 1988 through 1993 and thus responsible for the extension of the Freeport contract, explained that, like any other foreign mining companies, under the contract extension, Freeport was obliged to divest up to 51 percent stake to Indonesian parties within 20 years, that is, by the end of 2011. (The Jakarta Post, Oct. 19, 1998)
If Freeport sells 20 percent of its shares on the Indonesian Stock Exchange, the contract stipulates the company is only obliged to divest 45 percent of its shares.
The remaining 25 percent can be sold to the Indonesian government, or firms through direct
placement.
Different from contracts awarded to all other foreign mining companies however, Freeport’s renewed contract, a copy of which was made available to this writer, has the so-called “escape clause” which reads: “If there is a regulation which imposes more lenient divestment terms [for foreign companies], the lenient divestment terms will be applied.”
Freeport’s then president Adrianto Machribie confirmed the existence of the escape clause to the writer.
Three years after Freeport got its second contract, the Soeharto administration issued the 1994 government regulation, which eased mandatory divestment requirements for foreign companies.
According to the regulation, Indonesian shares in foreign companies can be kept as small as 5 percent.
Following the issuance of the regulation, Freeport’s management requested the Investment Coordinating Board (BKPM) free it from the divestment obligation under the 1991 contract
The BKPM issued a letter stating the escape clause applied.
Machribie said since the BKPM had issued a letter confirming that the escape clause applied, Freeport was no longer required to divest up to 51 percent of its shares. (The Jakarta Post, Oct. 20, 1998)
Machribie’s statement sparked protests from legislators, who insisted that Freeport’s contract was categorized as a lex specialis (special law) or equal to a law. Because of its high status in the country’s legal system, all provisions in the contract could not abrogated by a lower ranked government regulation.
They said the application of the 1994 government regulation to Freeport’s second contract remained invalid until after it had been approved by the House of Representatives. Under the previous law, all CoWs awarded to foreign investors should first gain approval from the House.
It remains unclear if the House later approved the application of the 1994 governmental regulation to Freeport’s second contract.
The controversy over the Freeport contract later waned as the legislators did not see the urgency of the issue, given the fact the deadline for the divestment was still many years away.
Furthermore, even if Freeport was willing to divest up to a 51 percent stake, the legislators
doubted if there was any parties in Indonesia who could afford to buy the stake.
Now, however, the situation has changed. Local companies have become stronger financially, which was evidenced by the success of the Bakrie group together with the West Nusa Tenggara provincial and regency administrations, backed by Chinese sovereign funds, in acquiring a 21 percent stake in PT Newmont Nusa Tenggara.
Soon after the acquisition of the Newmont stake, unconfirmed rumors had it that Bakrie was eying the Freeport stake and the Papuan provincial government would rather cooperate with Bakrie in buying the Freeport stake like the West Nusa Tenggara administrations did, than do so on its own.
The question is: How many shares is Freeport obliged to sell to Indonesian parties? Is it no shares, as claimed by Freeport? Or 51 percent as stipulated in the 1991 contract?
Or 20 percent as stipulated in the newly issued 2010 government regulation on the execution of mineral and coal mining business activities, which is one of the regulations implementing the 2009 Mineral and Coal Law?
And will there be a court battle to settle the issue?
The author is a staff writer
at The Jakarta Post.
