Papua told to issue bonds for stake

Rendi A. Witular, The Jakarta Post, Jakarta

The government has suggested that the Papua provincial administration seek financing in order to overcome its difficulties in securing a stake in PT Freeport Indonesia, a local unit of U.S. mining giant Freeport-McMoran Copper & Gold Inc.

Vice President Jusuf Kalla proposed the issuing of bonds as one way in which the province could get sufficient funds to quickly secure the stake.

"Freeport should sell some of its shares to either the government or local administration ... If the local administration is interested, it could explore various financing schemes, including the issuing of bonds," said Kalla, himself a businessmen.

Besides issuing bonds, the Papua administration could also use a reimbursement financing scheme, in which the administration could purchase the stake without having to spend any cash and pay for the stake later through the dividends it received from the company, Kalla said.

At present, Freeport-McMoran controls an 81.28 percent stake in the company with the remaining 9.36 percent owned by the government and another 9.36 percent held by locally registered investment firm PT Indocopper, which is controlled by Freeport- McMoran.

The Papua administration plans to acquire the 9.35 percent stake owned by Indocopper. However, the administration is facing difficulties in raising funds to finance the acquisition, which is estimated to be worth around US$700 million.

Papua Governor Jaap Solossa said in February that his administration had been conducting a selection process involving six investors that were said to be keen on forming a joint- venture company to secure the stake. However, the outcome of this process remains unclear to date.

Under the revised Local Autonomy and Fiscal Balance Laws, a provincial administration is entitled to issue bonds or seek external financing sources, excluding bank loans.

Several provinces, such as East Java, have been gearing up to issue bonds to help finance the construction of infrastructure projects, with the bonds to be redeemed out of the local budget or project yields.

Papua has requested what it deems to be a fair split of the profits earned by Freeport from mining gold and copper at its Grasberg mine, located in the mountains near Timika regency. The mine is the world's largest gold and second largest copper producer.

Aside from the royalty issue, the Papua administration has also urged the government and Freeport to show greater commitment to the development of Papua, the country's easternmost province.

With a stake of some 9.36 percent, the government takes in between $25 million and $30 million in royalty proceeds annually from Freeport, according to figures from the Ministry of Finance.

The government is only entitled to 20 percent of the proceeds, with the remaining 16 percent going to the provincial administration and 64 percent to the regency administration.

Aside from royalties, Freeport also pays corporate income tax to the government, which amounted to $168 million last year.

Should the Papua administration fail to purchase the stake, the government is preparing several other options, including allowing state-owned mining company PT Aneka Tambang (Antam) to buy the stake.