Normally, a 50-year mining project like Freeport’s
Grassberg mine would deign it high time to turn its operations over to the
local government, which would also be expedient politically.
However, in this case, Freeport is correct to stand
its ground against Indonesia in insisting its contract of work (CoW) be
honored, extended and not converted into a licensing agreement that has the
potential to seriously disrupt operations.
Vincent Lingga in his Feb. 23
commentary in The Jakarta Post is wrong to paint this as an “arbitration ploy”
by Freeport to block mining reform. Indonesia mining will certainly not reform
with local owners bereft of legal enforcement. Why is this? Freeport is
actually doing quite a good job with its localization initiatives in Papua,
compared to that alternative, no localization. In other words, the operation is
benefitting Indonesia not just with taxes, but also with human resource
development.
It is commonly held knowledge
in the Indonesian mining industry that Freeport and Theiss have the best mining
training programs in Indonesia, followed by Newmont and BUMI Resources
(courtesy of their legacy Rio Tinto and BHP operations). Western standards do
in fact matter.
Freeport employs 32,000
people, many of them are well trained in best-practice mining standards and
techniques, with good safety inculcated in their processes. This situation
could/should be replicated in all Indonesian mining activities, not just Papua.
The real fear is that if this
mine is nationalized (effectively what the divestment is), training and
localization in Papua will suffer inversely. Localized owners will not carry
the same safety and training mandates that Freeport does. They will also probably
want to cut any “non-essential” (read: safety and environmental) staff to the
bone.
If a licensing agreement
(IUPK) is forced, local partners, via divestment, may insist on another avenue
of production, with a lower environmental and safety risk profile, you can bet
on that!
Finance Minister Sri Mulyani
Indrawati is wrong to interject in this that a “management tweaking” is
necessary. After her many run in with the Bakrie company she should know the
reality.
These potential suitors
(namely insider oligarchs favored by the Indonesian government) are playing the
Indonesian nationalization card. That is simply a means to an end for them to
gain control of operations either directly (Freeport divestment) or indirectly
(licensing regime).
Once control is gained, any
environmental promises or social obligations will quickly fly out the window
because the Indonesian regulatory framework has weak enforcement power.
One needs only look further
than substandard mining operations in Kalimantan that have cratered the earth
with black, water filled holes for coal, or strip mined vast areas of pristine
jungle for iron ore strip mining, in both cases, driving out many native and
endangered species.
It is real and it has happened
and will probably happen again. Freeport, as a US company, simply cannot play
this game. If someone gets hurt, or standards are violated, they first of all
will have to answer to the US Security and Exchange Commission (SEC) for any
mal-activity that impacts shareholders.
Second, they would be subject
to proceedings in a US court for personal injury, where awards damages may be
unlimited.
An Indonesian company will be
under no such qualms. The legal system on its own is far weaker here. If any
doubt, consider the issue of uncontrolled peat burning in Sumatra, despite all
the “laws” the all powerful palm oil industries continue to create haze
unabated each year. Similarly, there will be no oversight authority looking out
for the long-term welfare of Papuans.
Building a smelter is
critical, but the focus cannot be based on hardware alone. Freeport is
obviously opposed to building a smelter as the Indonesian government has proven
wishy-washy on this critical investment issue for political, not economic,
necessity, by allowing some concentrate to be exported.
If Indonesia is serious they
need to have educational incentives in place that will enhance local know-how
to actually run the smelter, lest they become giant turnkeys ran by foreign
operators, mostly Chinese.
Ores or concentrate or
finished product? What’s it going to be presents a “moving target”. Only the
Chinese via their non-capitalism driven state-owned companies can afford to
play this game of potentially unrealized “pseudo-investment” of smelter
building. Of the 32 new smelters built in Indonesia since 2012, most are
Chinese made.
Western companies that are
responsible for quarterly profit statements to shareholders cannot take this
risk.
Therefore, equating Chinese
state-owned companies that operate on a realpolitik level, and not a “profit statement”
like Western ones, is comparing apples to oranges. Chinese are interested in
long-term resource access and they will give and take as is politically
expedient.
Localization is the real key
to the development of Papua, not more gimmicks like cheap fuel or cash
transfers to locals.
Those things can be
manipulated by insiders and rent seeking government officials, however a strong
jobs program can turn the outlaid rupiah up to seven times in a community. That
is what is really needed for this country.
By the time this goes to press
it is unknown if Freeport will have either caved into Indonesia’s licensing
demand and forfeit their longstanding contract or not. The Indonesian
government should lay off Freeport until they in fact can offer a better jobs program
for Papua locals than Freeport can. Right now, they can’t.
The Indonesia companies, if
they gain control, that want a piece of this divestment, will not feel
obligated, environmentally or socially for this same ideal in Papua, but rather
in spiriting profits out as quickly as possible. Papuans will suffer with local
ownership and no enforceable regulatory regime in place. That’s the bottom
line.
The writer, Will Hickey is
associate professor at the School of Government and Public Policy, Jakarta
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