Tuesday, January 10, 2017

Indonesia should not cave, must tell Freeport to sell 51% stake, or else

Indonesia should not cave, must tell Freeport to sell 51% stake, or else

Hardly any other element exerts the same level of attraction for mankind than gold. Economist John Maynard Keynes coined the commodity as a “barbarous relic”, yet people in modern times will still kill for it.

It is perhaps the interminable allure of gold that has once again placed gold and copper producer PT Freeport Indonesia, a unit of politically wired United States miner Freeport McMoRan Inc. (FCX), in a far more superior curve when dealing with Indonesia.

Freeport, Indonesia’s oldest foreign investor and biggest taxpayer, operates the world’s biggest integrated gold and copper mine in Indonesia’s most remote and poorest province, Papua, generating 98 percent of FCX’s consolidated gold sales and 19 percent of the company’s copper supply worth more than US$2.7 billion in 2015.

Since commencing operations more than five decades ago, Freeport is synonymous domestically with gold, not copper, and is usually perceived with suspicions. All affairs related to the company have always been political, with many Indonesian politicians and activists referring to it as a symbol of US economic imperialism in Indonesia.

Given the enormity, coupled with the geopolitical dynamic where several US policymakers have affiliation with the company, it is hard not to suspect the “Freeport factor” to be at play nowadays in the government’s upcoming plan to bend the 2009 Mining Law just to allow the company, and a few others, to continue to elude a ban on raw and partly processed mineral exports.

Indonesia has been under global investor scrutiny in the past couple of weeks as they await to see whether the country is committed to indiscriminately enforcing the rule of law as it rushes to decide whether to maintain the current relaxation or to fully enforce the ban, as mandated by the law before the Jan. 11, 2017 deadline.

The law stipulates that mineral ore miners must complete their smelters by 2014, when the export ban should have been fully put in place. The smelters are expected to bring in added value to the end products, as opposed to exporting ore in its raw or partly processed form.

However, because none of the proposed smelters had been completed, including one by Freeport, the deadline was extended to 2017 by president Susilo Bambang Yudhoyono through a government regulation, allowing Freeport and its fellow US miner Newmont to continue the exports despite no progress in their smelter constructions.

If President Joko “Jokowi” Widodo maintains the relaxation, he will draw criticism similar to that raised in 2014 when Yudhoyono was accused of violating the law because a government regulation cannot overrule a law.

However, a circulating draft government regulation has indicated the President may continue with the relaxation as well as provide many clauses that appear to benefit Freeport more than others.

For example, according to the draft regulation, Freeport will not only be able to resume its exports but the company will be allowed to sell its shares based on a new calculation that will see the price soaring to a level where domestic buyers cannot afford them.

Perhaps it is a mere coincidence that the draft was churned out after a letter from US Senator John McCain to Jokowi on Dec. 23, demanding Indonesia to facilitate Freeport, and the appointment of US billionaire Carl Icahn in late December as special adviser on regulatory reform to US president-elect Donald Trump. Icahn is a major FCX shareholder.

Regulatory privileges for Freeport are not without precedent. Based on its contract of work (CoW ), the company was required to sell 51 percent of its shares to local shareholders by 2011.

However, a string of regulations were issued along the way that eventually allowed Freeport to dodge the requirement to this date, and almost no officials have made a big deal out of it. FCX owns 90.64 percent of the company, while merely 9.36 percent is owned by the Indonesian government.

No one expects Freeport to cease operations or to pull out from the country, as it is in the best interest of all to see the company remain profitable and employ many Papuans.

However, the fairness surrounding deals with Freeport have always been put into question.

Jokowi can continue with the ease in the export ban to facilitate Freeport, but he should not throw in the towel by not demanding more, particularly to force it to immediately sell 51 percent of its shares to local shareholders as stated in the CoW.

After all, Freeport has always demanded that the government abide by the CoW, and it is fair to request Freeport to similarly do so.

The main stake at play is no longer smelter construction and export permits, but divestment. This is where Freeport tends to hide from its obligations and uses other issues to distract the public from the real one.

Perhaps the President needs to be reminded that such divestment is obligatory under the 1945 Constitution, Article 33 point 3: The land, the waters and the natural resources within shall be under the powers of the state and shall be used to the greatest benefit of the people.

With many of his signature policies running aground, the last thing Jokowi wants is to be on the list of Indonesian leaders that have caved to US business interests.

Rendi Witular

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