Jakarta. As the government continues its negotiations with Freeport Indonesia, the local unit of US mining giant Freeport-McMoRan, and there are reports that the company will likely have its operating permit in Papua extended for another 20 years, observers are urging caution.
An official with Indonesia’s Energy and Mineral Resources Ministry said on Wednesday, after a two-hour meeting between Freeport Indonesia executives and ministry officials in Jakarta, that the miner agreed to work under a Special Mining Business Permit (IUPK), to replace its current “contract of work,” which is due to expire in 2021.
The IUPK will give the Indonesian government leverage over Freeport, unlike in the case with the contract of work, which means the two sides are on an equal footing, ministry spokesman Dadan Kusdiana said.
The old contract has long sparked nationalist sentiment, and resistance against Freeport’s Papua operations, among Indonesians who say the country did not receive a large enough piece of the pie.
“The ‘contract of work’ is based on equality between the state and the investor, but the special mining permit puts [the state in a] stronger [position] because the state can revoke the permit any time,” Dadan told a press conference.
With Freeport agreeing to work under an IUPK, the government is willing to extend its operating permit, although a final word on this is pending approval from President Joko Widodo, he added.
University of Indonesia (UI) law professor Hikmahanto Juwana is among those who were quick to urge caution in the ongoing negotiations. He said that despite the government’s claims of IUPK advantages, there were several issues that needed to be watched closely.
“Is this change of [contract] not a form of legal manipulation by Freeport to secure an early extension [on its operating permit]?” Hikmahanto asked, in a written statement.
He said based on prevailing regulations, the miner should only be able to request an extension to its working permit in 2019, two years prior to the expiry date of its current contract.
“But President Jokowi’s term in office will end by [that time]. In that situation, the president cannot make strategic decisions,” Hikmahanto said, referring to Joko with his popular nickname.
He added Joko and other government officials involved in the process might be facing charges if they sign deals they are not legally authorized to make.
Pointing out the far-reaching consequences, Hikmahanto said that if Freeport secured the IUPK this year, it would be able to continue its operations in Papua through 2035, and then get another 20-year extension until 2055.
He said that would be against the aspirations of the majority of the Indonesian people, who wanted the government to take over mining operations from foreign companies once their contracts expired.
State as majority shareholder
Marwan Batubara, the executive director of the Indonesian Resources Studies (Iress) think-tank, similarly warned both Freeport and the government of the possibility of legal violations as part of the mining giant’s attempt to have its permit extended before the due date in 2019.
The head of the energy think-tank said he understood Freeport’s need to ensure the economic feasibility of its planned investments in Indonesia — which included $15 billion for underground mining activities and $2.3 billion for the construction of a smelter in Gresik, East Java.
“If it has a contract lasting only for another six years, it won’t be economically feasible for them,” Marwan said. “They do need certainty.”
He warned, though, that regulations remained regulations and that these must be obeyed, suggesting that the president revise them by issuing a government regulation in lieu of law to accommodate Freeport’s needs without breaching any law.
Marwan also argued that in exchange for “loosening” the regulations, any new contracts must guarantee reasonable advantages for the people of Indonesia. One way to do this, he said, was by requiring Freeport to divest its shares to the Indonesian government and making the latter the majority shareholder.
Currently, the Indonesian government holds only a 9.36-percent stake in the miner, with Freeport-McMoran controlling the rest.
Under a 2014 government regulation on mining, Freeport Indonesia is required to divest 30 percent of its shares to Indonesian entities, with the government being the priority, by 2019. Freeport earlier this year announced it would divest 10 percent of its shares before October.
Legal revisions are also needed if the government plans to grant Freeport an IUPK, with current regulations stating the special permit is only meant for companies exploiting a maximum of 25,000 hectares of mines, Marwan said.
“Freeport, though, currently controls at least 125,000 hectares of mines in Papua,” he said. “The divestment should therefore include a clause where the government takes over 100,000 hectares, or at least 75,000 hectares of the mining areas to boost profits [for Indonesia].”
Several lawmakers welcomed the planned new framework, saying they were confident it would give the government sufficient leverage over Freeport.
“We think the state’s sovereignty will be more apparent with the [IUPK], compared with contracts of work,” said Satya W. Yudha of the Golkar Party.
“We appreciate the developments in the negotiations between the government and Freeport, with Freeport recently willing to change its contract before the expiry date,” Satya said. “That means Freeport is still committed to investing in Indonesia”
Another lawmaker, Kurtubi of the National Democratic (Nasdem) Party, said he also considered the IUPK option progress, although he admitted there were still some flaws, citing production cost calculations as an example.
“How much a mining business spends under an IUPK or contract of work [is unclear], the state doesn’t have that information. It doesn’t know — there is no control [over actual spending],” said Kurtubi, who was an independent energy observer before he was elected to the House of Representatives last year.
“There may be unusual costs which can reduce state revenues,” he added.
Ministry spokesman Dadan on Wednesday said it was still unclear when the IUPK would be granted and when it would take effect. But he added that the ministry and Freeport were aiming to finish all contract amendments before the end of July, based on a previously agreed memorandum of understanding between the two parties.
“The ministry has been looking for a solution so that Freeport’s operations can continue without violating any regulations,” Dadan said.
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