W

hen it comes to the sanctity of a contract, the devil is always in the detail. With both hands tied by legal constraints, the government had few options other than forging a deal with US mining giant Freeport McMoRan Inc. last week to assure the contract extension of its local unit PT Freeport Indonesia (PTFI).

The '€œhigh-level deal'€ has served as an amicable way out of a 1991 contract that has legally positioned
Indonesia on the losing end with few legal avenues to negotiate a better position and the threat of international arbitration should the government fail to honor the contract.

The deal has also severed any chances for recalcitrant politicians, bureaucrats and certain Cabinet members to personally profit from Freeport amid circulating reports suggesting that several political elites have demanded shares in PTFI in exchange for helping the company extend its contract.

It was not until a recent meeting between President Joko '€œJokowi'€ Widodo and Freeport'€™s board chairman and founder James R. Moffett, accompanied only by Energy and Mineral Resources Minister Sudirman Said, that the deal was forged, according to Sudirman.

Under the deal, a copy of which was obtained by The Jakarta Post recently, the government allowed PTFI to submit the proposal of contract extension after a revised 2010 government regulation governing coal and mineral resources was passed, at the soonest. It also said that the '€œthe government would not unreasonably withhold or delay approval'€.

'€œIt is further understood that the approval will ensure the same rights and the same level of legal and fiscal certainty as contained in the contract of work (CoW),'€ it said.

After operating the world'€™s biggest integrated gold mine in Indonesia'€™s poorest and most remote province of Papua for over 40 years and directly employing some 11,000 workers, for the past couple of years PTFI has been seeking government approval to extend its contract set to expire in 2021.

The extension request is to guarantee its planned US$18 billion investment in underground mining and copper smelter.

Problems, however, have emerged as the demand goes against a 2010 government regulation on mineral resources and coal operations requiring that an extension application be lodged two years prior to contract expiry at the earliest.

If Freeport complied with the regulation, it could only apply for the extension in 2019, a time when Indonesia will hold both legislative and presidential elections, and issues related with Freeport will be politically sensitive due to company'€™s long-standing stigma as the symbol of US business imperialism in the archipelago.

Nevertheless, Freeport'€™s latest CoW carries serious legal requirements for the government.

Signed in 1991 by then energy and mineral resources minister Ginandjar Kartasasmita during the Soeharto dictatorship, the contract was almost a carte blanche for Freeport'€™s operations, including a clause guaranteeing that a contract extension could be lodged at any time.

'€œIf we dig deeper into the matter, we are in a weak [legal] position. If our decisions go against the contract, they can take us to arbitration,'€ Minister Sudirman told the Post recently.

'€œThe deal has nothing to do with the supremacy of the United States. It'€™s more about common sense. We have to abide by the terms of the contract if we don'€™t want to be internationally isolated,'€ he said.

According to Sudirman, the ministry was in the process of amending the 2010 regulation by extending the timeframe to submit a request for contract extension to 10 years from the current two years before a contract is set to expire.

The revision is not only aimed at accommodating Freeport, but other mining companies also facing similar problems.

Contract extension and the company'€™s future tax arrangements remain the most contentious and unresolved issues after PTFI inked a memorandum of understanding (MoU) with the government on July 25, 2014, adjusting the terms of its CoW. The MoU was first made during the administration of President Susilo Bambang Yudhoyono.

PTFI has mostly agreed to demands made by the government in the MoU such as an increase in royalty payments to 3.75 percent from 1 percent for gold, 3.25 percent from 1 percent for silver and 4 percent from 3.5 percent for copper.

Conditions relating to smelter construction and surety bond deposits worth US$115 million, as well as the gradual divestment of 30 percent of PTFI'€™s shares to Indonesian holders, are also included in the MoU.

The company has also agreed to lower its working concession areas by around 58 percent to 90,000 hectares, prioritize the use of local materials and hire more local workers.

Settlement of the Freeport issue has preoccupied Jokowi lately. Coincidentally, he is slated to fly to Washington DC next week to meet President Barack Obama for a working visit.

The '€œhigh-level deal'€ is expected to illustrate Indonesia'€™s commitment to honoring contracts and providing a safe business environment for foreign investors.

'€œI have asked the President four times on different occasions. More or less, he said that not granting the extension doesn'€™t make any sense. For the benefit of the Republic and to ensure a better investment climate, the extension is the most sensible option,'€ said Sudirman.

'€œWe should all return to common sense. We are inviting foreign investors through various breakthroughs in regulations. Logically, those who are already here should be maintained.'€

While the implementation of the extension deal will still subject to the amendment of the 2010 regulation on mineral resources and coal operations, Freeport has thus far welcome the positive signal conveyed by the government.

'€œThe minister'€™s statement has give a sound signal from the government to PTFI to continue our investment moving forward,'€ PTFI spokesperson Riza Pratama said.

Mining expert Simon Sembiring, former director general for coal, mineral and geothermal at the Energy and Mineral Resources Ministry, warned the government not to hastily approve the Freeport extension, saying that legal details should be thoroughly examined.

'€œEverything must be evaluated thoroughly, what Freeport will do, in what stages and how much benefit the state will receive,'€ Simon added.

Since 2009, under Yudhoyono'€™s administration, the government has assigned eight different teams to renegotiate contracts with big miners, including Freeport, in order for the country to more greatly benefit from their operations. But, few have ever progressed.

'€œThe government has set up this team and that team since 2009. But in the end, they were only playing around as there were no decisions made and the company [Freeport] was squeezed into an ATM,'€ Sudirman added, declining to speak further on the matter.

The aim of the '€œhigh-level deal'€ was also to ensure that all settlements with Freeport were above-board and transparent.

The deal comes in the wake of reports that certain Cabinet members with no authority to manage the mining sector had allegedly lobbied Freeport to help the firm secure the extension in exchange for a certain amount of PTFI shares.

'€œThis senior minister has demanded stock and several projects from Freeport in exchange for his service,'€ said a Golkar Party politician who claimed to have knowledge of the backroom dealings.

At the recent meeting between Jokowi, Moffett and Sudirman, Jokowi also affirmed his administration'€™s commitment to good governance saying that he had no personal interest in Freeport, a rumor he said was spread by irresponsible individuals.

'€œThe President has conveyed his message to Moffett that Freeport shouldn'€™t take offers from any individuals [outside those authorized in the sector] claiming to be able to help the firm secure the continuity of its operations,'€ said Sudirman.