Tue, 28 Jul 2015

If we look deeper into the context of PT Freeport Indonesia’s contract amendment, it is related to the issuance of the 2009 Mining Law. The law obliges mining companies to process their mining products in this country before exporting them, but Freeport had been in operation and was bound by a contract before the law was implemented.

Talks about adjusting Freeport’s contract to bring it in line with the law have been going on for a long time. The government said an amendment to the contract needed to be made and a deadline was set for Jan. 25 this year. However, due to the transfer of power in October 2014, when President Joko “Jokowi” Widodo took office, the deadline was extended for six months. So, on July 25, the amendment of the contract — not the extension of the contract of work (CoW) — should have been in place.

There were points discussed as preparations were made for the amendment. They included the construction of smelters, an increase in the government’s stake from 9 to 30 percent, the use of local products in Freeport’s operations in Indonesia and issues related to work safety.

Of those sticking points, the construction of smelters is the most crucial. Had the amendment been made, the smelters would have had to have been in place by July 25, or else no amendment could be made. In fact, even up to July 24, there was no clarity on the planned development of smelters in Gresik in East Java or in Papua.

Technically I do not know for sure what the challenges are that Freeport is facing in building the smelters. There seems to be a strong indication that Freeport does not want to amend the contract accordingly because it is already 2015 and the company’s CoW is due to expire in 2021 and any negotiations on a new contract can only begin in 2019 at the earliest. The company does not want to make an investment simply for it to be forgotten.

There is a strong impression that Freeport wants to merge its obligation to abide by the law that requires an amendment to the contract with the deadline for renegotiating the CoW. The company wants to make sure that its investment (in building a smelter) will not come to an end in 2021 before it receives a return on the investment.

As far as I can read from the government’s point of view, there is a strong desire on the part of the government to make Freeport Indonesia more Indonesian. The aforementioned points, which were proposed by the government, indicate so. This does not necessarily mean nationalization, which is commonly marked by a takeover.

With regard to the smelter construction, for example, the government cannot just force Freeport to invest. As a business entity it has business calculations to consider with. With regard to the proposed increase in the government’s stake in the company, similarly, the government has to calculate where the money to buy the extra shares will come from and which government institution or state-owned company will conduct the purchase.

With regard to the use of domestic products in Freeport’s operations in Indonesia, the government has to be clear about which products and how to ensure the products meet Freeport’s standards. Everything has to be carefully calculated so as not to create new conflicts in the future.

If making Freeport Indonesia more Indonesian is really the target of the Jokowi administration and Freeport trusts the government that its investment will not be terminated and the CoW will be extended, I see no problem. Although the smelters have not yet been constructed, Freeport has allocated US$115 million for the smelters to show its good faith.

When talking about Freeport the key is the CoW. The questions will be what is in the contract and who drafts it. As far as we know, the extension of the contract in the past was problematic. It was signed without involving the public. As a result, we know only a little about it, no transfer of technology was stipulated, the Papuan people suffered, etc. What is happening now I think is the new government is trying to make amends for the past mistakes.

To be fair, however, few can deny that Indonesia depends on the extractive economy. We live by exploiting natural resources. Our problem with the extractive economy is that almost all the products we extract are for export, while for domestic needs we rely heavily on foreign loans, which must be paid using foreign reserves.

This is a matter of sustainability. If Freeport stops production, the company will not be the only party to suffer losses. Indonesia will also lose one of its income sources. As a consequence, we may not be able to pay our debts; the rupiah will depreciate and so on.

Forcing foreign companies to build smelters and use domestic products in their operations is fine, but it has to be supported by monetary policy in particular. Otherwise, we will be trapped in the so-called backwash effect, in which the money distributed to regions will be re-allocated to Jakarta thanks to the centralized monetary system.

In the case of Freeport, if the government is really serious about distributing the cake of development to Papua, it has to oblige Freeport to have its headquarters in Papua rather than in Jakarta. It also has to force the company to employ locals as it will automatically empower them. Locals will never be empowered unless they are trained.

The writer is a lecturer at Gadjah Mada University’s school of economics, Yogyakarta.