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 “magic” 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 “the 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”. “This 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.
The writer is a senior editor at The Jakarta Post
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