Thu, 30 Mar 2006
How mining companies could avoid political minefields

Winarno Zain, Jakarta

Investors seeking mining concessions in Indonesia have reason to envy the unique position that PT Freeport Indonesia, a subsidiary of U.S.-based Freeport McMoRan Copper and Gold Inc. has been in for the last four decades. When Freeport signed its Contract of Work with the Indonesian government in 1967, Freeport served as a symbol of a new era for the Indonesian economy after it collapsed under president Sukarno's rule. President Soeharto, who had just taken power, and who was anxious to get the economy moving again, hoped that Freeport's operation would serve as a magnet for foreign investment.

Freeport's current concession, centered on the monumental Grasberg mine site, is considered by far the largest known deposit of gold in the world. Its copper production is second largest in the world. Its open-cut operation sits 4,270 meters above sea level. The Grasberg deposit of gold and copper are so large that the company's operation is predicted to last at least another 30 years. The site is located in the heartland of a group of West Papuan tribes with the unique cultural traits, the Amungme and the Komoro tribes.

It sits on the richest mountain, the cornerstone of economic importance of Papua province, from where wealth is supposed to shower the West Papuans. As it has turned out thus far, things are not so simple. Freeport found itself at the center of a heated dispute between Papua and Jakarta when a different political landscape emerged in 1999 brought about by the return of democracy and regional autonomy. The Papuan dream of getting rid of poverty, backwardness and ignorance remains a dream.

Freeport Indonesia has been under the spotlight lately as it grapples with several issues: Environmental, community development and security. These are the most contentious issues that any mining company could face in Indonesia.

Freeport's operation has repeatedly been blamed for causing massive destruction to the environment. However, the extent of the destruction has never been made precisely clear as claims by the company and those from independent bodies contradict each other. Some NGOs claim that 700,000 tons of rocks are being cut out each day from Grasberg Mountain. A U.S.-based environmental group alleges that Freeport dumps 110,000 tons of mineral waste every day into the Ajkwa River, so that its water is polluted with toxic metal waste up to 40 kilometers down river.

Freeport Chief Executive Officer Richard Adkerson, in a letter to The New York Times in January 2006, claimed that annual audits on the environment are periodically conducted, where ecological and social impacts are assessed. He wrote that studies conducted in 1998 involved 40 separate studies with 200 world-class scientists. If this is the case, then it appears that a comprehensive study on environmental impact was conducted 30 years after Freeport Indonesia began its operation.

Similar studies were conducted in 2002 according to Adkerson, but this time, it involved only 100 world-class scientists. Adkerson was vague in stating that Freeport's mine tailings did not cause environmental damage. He only wrote that native plants and various vegetables could still grow in the affected area, and that in the downstream part of the tailings, a bio-diverse ecosystem is still functioning with abundant species of fish and shrimp.

The problem here is that it is difficult to gauge the credibility of those claims. While the NGOs could not provide a clear methodology and their sources for arriving at their mind-boggling figures, Adkerson's remarks as CEO of the publicly listed company, are under the watchful eyes of the Securities and Exchange Commission. Any slightest remark that could mislead the public could trigger an inquiry by the SEC.

Even if Adkerson's remarks lend credibility, it is alarming that the environmental audit and monitoring have been conducted in a sporadic manner and on an ad hoc basis. Provisions on Contract of Work should include mandatory comprehensive audits and monitoring of the environmental impacts, that to be undertaken by independent professional bodies using internationally accepted procedures.

Stiff penalties should be imposed against any violations. Considering that environmental degradation has reached such a disastrous level in this country, the government should develop a zero tolerance stance for any acts that cause environmental damage.

The other issue that should be addressed in the Contract of Work is mandatory community development. Currently, community development activities are financed through the Freeport Partnership Fund for Community Development, an entity set up by the company for these purposes.

Since 1996, the Fund has spent US$200 million, from which US$ 40 million, or one-tenth of one percent, of the company's sales in 2005 was disbursed in 2005 alone. However, these activities are voluntary in nature, depending on the generosity of the company. To avoid mishandling and to make these programs more effective, a new approach is needed.

In the future, these activities should be mandatory, and not to be considered as philanthropic activities of the company. Its budget should be related to the company sales, with progressive rates. The company should be directly involved in designing and planning the programs. Its implementation should be under the direct responsibility of the company directors. This is to ensure that the programs achieve their objectives, which must be to promote the well-being and prosperity of the surrounding local people.

The third issue relates to security. The mining operation takes place in remote areas, and Grasberg Mountain is one of the most difficult areas to work in the world. It is out of reach of government security services. The law prohibits a company from setting up an armed security force, and that is why, for practical purposes, Freeport has resorted to hiring the Indonesian Military to guard its mining site. To prevent the military from being hired improperly in the future, the company may be given permission to have their own armed guards, but with strict conditions and supervision.

The writer is an economic analyst.



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