Freeport's quid pro quo lands kudos, criticism

JAKARTA (JP): Analysts are split over the quid pro quo made by mining company PT Freeport Indonesia to increase royalties to the government in return for the license to raise ore output at its copper and gold mine in Irian Jaya.

Chairman of the Association of Indonesian Mining Professionals (Perhapi) Herman Afif Kusumo praised it as "a laudable feat of the government", but consultancy group Econit dismissed the "high sounding but empty deal".

Herman told The Jakarta Post on Wednesday that Minister of Mines and Energy Kuntoro Mangkusubroto deserved praise for securing higher royalties from Freeport, which he said were "the world's highest".

However, he noted Kuntoro would still have to determine Freeport's land conservation programs, including environmental protection, before giving the go-ahead for expansion to 300,000 metric tons per day (tpd).

"Kuntoro has successfully negotiated for higher royalties but he has still to ascertain that Freeport will be committed to land conservation programs before he issues the company permission for its expansion."

Freeport, a subsidiary of giant U.S. mining company Freeport McMoRan Copper & Gold, has agreed to double the royalties from its copper mine and triple royalties from its gold and silver mine if ore production at the Grasberg site exceeds 200,000 tpd.

The new royalty scheme will be backdated to Jan. 1, 1999, Kuntoro said.

Under the contract of work signed in late 1991, Freeport has to deliver to the government between 1.5 percent and 3.5 percent of its copper sales and 1 percent of its gold and silver sales in royalties.

Econit, chaired by economist Rizal Ramli, said in a statement sent to the Post on Tuesday that the government would not enjoy the increased royalties, even with the retroactive agreement, if ore output remained below 200,000 tpd.

Econit cited Freeport's 1997 annual report as saying that the company's ore output was 128,600 tpd for 1997, and added that it believed output was still below 200,000 tpd.

"As such, the deal is only a high sounding but empty deal. It looks to bring advantage to the government, but in fact it only gives promises."

Econit said the new royalty scheme should be applied to all levels of production.

No Freeport official was available on Wednesday to reveal the company's current ore production.

Freeport executive vice president Stephen M. Jones said in a news conference in July 1998 that the company's ore output reached about 200,000 tpd, with it expected to increase to 240,000 tpd by the end of 1998. The company completed the construction of its fourth concentrator for that purpose.

Econit regretted the government's failure to pressure Freeport for a higher share of Grasberg, especially because of its stronger bargaining position as the company desperately needed the license.

It said the international community would understand the move because Freeport was set to reap huge gains from the expansion while Indonesia needed considerable revenue to deal with the monetary crisis.

Freeport Indonesia is 81.28 percent owned by New Orleans-based Freeport McMoRan, 9.36 percent by the Indonesian government and 9.36 percent by PT Indocopper Investama Industries.

Indocopper is 49 percent owned by Freeport McMoRan, 50.48 percent owned by PT Nusamba Mineral Industries, a subsidiary of the Nusamba group, and the remaining 0.52 percent by the public.

Kuntoro has repeatedly promised to honor contracts to provide investment security in Indonesia.

Herman said the government's economic benefits from raised royalties would be "satisfactory enough".

"But, Freeport would do better to divest some of its shares to the Irian Jaya administration to create a sense of belonging among the Irianese to the company," he added. (jsk)