(JG Graphics/Josep Tri Ronggo Laksono)
Perhaps unbeknown to many, the chief executives of both Freeport McMoRan Copper & Gold and Newmont Mining have been jetting in and out of Jakarta recently to conduct high-level talks with the new coordinating minister for the economy, Chairul Tanjung. While the local media speculates on whether Richard Adkerson, CEO of Freeport, has been lobbying the minister to have its contract renewed beyond 2021, the talks primarily dealt with the resumption of Indonesia’s exports of copper concentrates, which stalled after the new mining regulation came into effect in January.
The new regulation, which requires foreign mining companies to build smelters, is part of the government’s patriotic push to maximize revenues from the mining sector. The nationalistic bend is likely to be picked up by the new government after the July presidential election as both candidates for the country’s top job seem eager to be seen as putting national interests above those of foreign companies.
The biggest foreign stakeholder in Indonesia’s mining sector is without a doubt Freeport Indonesia which is the operator of the world’s largest gold mine and third largest copper mine at Grasberg in the province of Papua. The US company’s 40-odd-year operation has indeed become a polemic among Indonesians, many of whom see the company as a symbol of foreign exploitation of the country’s natural resources, leaving behind an environmental time bomb in its wake.
But to be fair, Freeport also sustains 30,000 odd jobs for Indonesians, is the country’s single biggest taxpayer and spent $39.4 million in 2012 on community development projects for the benefit of the local Papuans. Indeed the company has long pledged 1 percent of its profits on community development in the province. Nonetheless, questions are being asked whether a mere 1 percent is any longer sufficient considering the environmental damage to the land as a result of the company’s mining operation.
The 1977 dynamite attack on Freeport’s facilities by local separatists, along with more recent attacks, clearly indicate that many Papuans see the company’s existence as more injurious than beneficial to them. Resentment towards the company is reportedly rife among the Free Papua Movement supporters who believe that Freeport is enriching the central government of Indonesia at the expense of the Papuans.
This view becomes particularly persuasive when one considers that the thirty-odd million dollars spent on local projects as part of the company’s corporate social responsibility programs are trifles compared to the nearly 4 billion annual net profits booked by the company.
Freeport’s position in the country is further complicated by Jakarta’s desire to quell Papuan separatism with further concessions that may appease the locals. Consequently, the next government may channel more funds to help develop the province, and as such Freeport will be expected to contribute its share.
It might be wise for Freeport to increase its CSR pledge for local development significantly in a bid to strengthen local support for the company. A generous voluntary pledge of its net profits to benefit the Papuans could clearly be a valuable bargaining chip for Freeport when it renegotiates with Jakarta for extension of its operation in 2019.
A strong pro-Indonesian image is definitely needed by the company as the next government will clearly be under public pressure to strike a patriotic pose at the 2019 negotiation, especially in an election year. It is essential that Freeport is seen doing more things that benefit Papua particularly and Indonesia generally before then.
As a company Freeport Indonesia currently pays 25 percent on its income, admittedly a higher rate than most companies pay in the country. Under the current contract, the Indonesian government has 9.36 percent of the company’s shares, a figure that a nationalistic future government may want to increase.
However, the figure of 51 percent of shares for the country that has been proposed is also unrealistic at best. Although its Indonesian operation accounts for 20 percent of its revenues globally, it is difficult to see Freeport cede the majority of its shares to the Indonesian government.
The crunch of the matter is the need for realism for both the government and the mining companies. The relatively new player Newmont, for example, has protested against the new regulation that requires the construction of local smelters by temporarily ceasing its mining operation, putting thousands of local jobs in jeopardy.
As the Indonesian government embraces more public transparency, multinational mining operators must realize that a more nationalistic mining policy is inevitable. The issue has become a crucial point with the Indonesian constituency as a benchmark for the government’s defense of national interests and sovereignty. At the same time, the country still needs foreign expertise and capital to pry out most of its natural resources. Hence, for better or worse, a compromise must be worked out, one that satisfies the Indonesian public and is acceptable to investors.
Johannes Nugroho is a writer and businessman from Surabaya
By Johannes Nugroho on 09:57 pm Jun 15, 2014
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