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Jakarta Post

View Point: Freeport imbroglio: Sanctity of a contract should not always be honored

  • Vincent Lingga

    The Jakarta Post

Jakarta   /   Sun, December 6, 2015   /  02:38 pm
View Point: Freeport imbroglio: Sanctity of a contract should not always be honored

Should the sanctity of an investment contract always be honored and should business contracts be held sacred? Not always, assert Louis T. Wells and Rafiq Ahmed, business management experts, in their book Making Foreign Investment Safe: Property Rights and National Sovereignty.

They argue that the '€œmagic'€ of property rights in industrialized countries comes not from being absolute, but rather from a balance between individual or corporate rights and fairness, and, especially, overall economic benefits.

When circumstances change after a contract is signed, making it impossible or impractical, or uneconomic or inefficient, to comply with contractual obligations, courts may relieve a party of its commitments.

Consequently, Wells and Ahmed further argue, a nation may be excused from honoring a treaty if, first, the existence of the circumstances that changed constituted an essential basis of the consent of the parties to be bound by the treaty and, second, the effect of the change radically transforms the obligations that are to be performed under the treaty.

Even courts in industrialized countries may excuse parties from fulfilling contracts if they were entered under compulsion (duress) or corruption or if one party is not competent, the book states. Sometimes in such cases, a high standard of proof is not required as courts may simply assume that something is amiss when there are at least substantial hints of compulsion or corruption and the terms of investment arrangements seem imbalanced.

The book contains real case stories on a telecommunications and power generation contracts the Indonesian government awarded to foreign investors in 1967 and 1992-1994, respectively, under Soeharto'€™s authoritarian rule, when corruption, collusion and cronyism were considered to have been rampant.

Wells was one of the foreign advisers hired by the Indonesian government to renegotiate the contract with International Telephone and Telegraph (ITT) and nationalize the ITT subsidiary in 1980 into a state firm now renamed PT Indosat Ooredoo.

Ahmed, an experienced manager, worked for Exxon Corporation for 20 years, including five years in Indonesia in the 1980s.

The ITT subsidiary was nationalized in 1980 without causing any damages to Indonesia'€™s credibility and reputation because the deal seemed to have been based on a greedily lucrative contract that gave the US company an annual rate of return on equity of over 80 percent.

But how are these points of argument relevant to PT Freeport Indonesia (FI), the local unit of US-based mining giant Freeport-McMoRan, which has mined the world'€™s largest gold deposits in Papua since 1972?

The first Freeport contract was signed in 1967 and its renewal was made in 1991 for another 30-year tenure also under the authoritarian government of Soeharto.

Right or wrong, the public has perceived even until now that most major mining companies that obtained their concessions during Soeharto'€™s rule in 1967-1998 had bulldozed their way through the corrupt licensing
system to obtain all the necessary permits for their operations in collusion with corrupt officials.

As Denise Leith observes in her book The Politics of Power: Freeport in Suharto'€™s Indonesia, in the early years of Soeharto'€™s New Order regime, the government used the vast mineral riches of Papua as collaterals on foreign loans aimed at holding the archipelago together.

In the government'€™s eagerness to steer the country toward economic stability and international credibility, generous concessions were granted to FI in its first contract of work in 1967. This contract of work had been portrayed by many analysts as a blank check for Freeport to operate in any way it chose with little regard for the consequences.

By 1991, when the contract was extended for another 30 years, Leith argues, FI had become an integral part of Soeharto'€™s patronage system, an integral cog in the politico-business machinery of the New Order.

None of the allegations made against the New York-listed mining company have ever been proven in court. But blatant unfairness could be easily seen in the terms of the renewed contract that were mostly to the disadvantage of the Indonesian people.

Being just and fair is even more crucial in FI'€™s case because mineral resources involve national patrimony.

Certainly FI, which has invested hugely in Papua but has also reaped whopping profits there over the past 45 years, will fight at any cost to get its contract another 30-year extension because it plans to invest another $17 billion in its mining expansion.

The problem, though, is that the 2009 Mining Law stipulates that negotiations for extensions can start only two years before a mining contract'€™s expiry, which in FI'€™s case is 2021. Hence, FI can start contract negotiations only in 2019, which will be an election year when nationalist sentiments usually peak.

The dilemma facing the government is that the FI 1991 contract allows the American company to ask for contract negotiations any time and it has implicitly threatened to bring any dispute to international arbitration.

But the public has demanded that the government stand firmly by the 2009 Mining Law and start negotiations only in 2019 and make good preparations to gain a fair share of the benefits from the huge Ertsberg and Grasberg gold deposits in the next contract extension.

Historian Greg Poulgrain of the University of Sunshine Coast in Brisbane suggested in a recent article in this paper that during the upcoming negotiations on the FI contract extension, the government should demand clarification about the gold concentration of the copper concentrate FI extracts in Papua.

Poulgrain, who has interviewed Jean Jacques Dozy, the Dutch geologist who discovered the Ertsberg and Grasberg gold reserves, says in his article that '€œthe Ertsberg gold concentration was stated to be around 2 grams/ton yet the concentration in official Dutch reports and confirmed during my interview with Dozy was 15 grams/ton'€.

'€œThis discrepancy needs to be clarified ['€¦] The Ertsberg and the Grasberg, it should be stated, have geologically developed from the same subterranean source,'€ Poulgrain says.

The government, therefore, should force FI to build a smelter in Indonesia, as required by the 2009 Mining Law, so that the government will be able to ascertain the difference between official and unofficial FI gold production.
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The writer is a senior editor at The Jakarta Post.

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