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TAMBANG, October 26, 2010 | 19.54
Freeport’s Privilege Complained

Freeport Indonesia, Timika-Papua.

Abraham Lagaligo

The government has treated specifically the company for decades. The obligation to divest shares up to 51% becomes null following the promulgation of a relieving government regulation. Contribution of the company to Papua economy will be reviewed.

A friend narrates impressive experience upon working with Regional Office of the Ministry of Mining and Energy Jayapura (now Papua Provincial Mining and Energy Service). In 1978, he was a junior geologist assigned to undertake silent mission to obtain concentrate samples exported by PT Freeport Indonesia (PTFI).

At the time, PTFI was only known as a copper mining company in Papua. The company paid royalty to the government on the basis of the export volume of copper. However, following the outbreak of news that the giant company also extracted and exported gold, the assignment was made to verify the truth. ”Geologists in Irian Jaya were assigned intentionally because the mission would be known if the assignee resulted from Jakarta,” he said.

He later said that it was not easy to gain the concentrate samples because the company was extremely introvert. Limited entry access was applied, including to government’s employees like him. However, after approaching insiders, he could earn a bottle of concentrates belonging to PTFI. ”The friend reminds him of keeping it in secrecy because he would be dismissed if management of PTFI knows the scandal,” he went on.

The concentrate sample was later analyzed in laboratory and the result was really surprising. Gold content in mining area of Freeport in Papua was above 7 gram per ton, higher than the gold content in Cikotok, West Java (still operating at the time ). Ckotok could reach a break event point with gold content only seven percent. Freeport is surely more profitable because the gold content is higher.

The finding of the silent mission was reported to the government but nothing could be done as the first generation contract of work (KK) of PTFI, signed in 1967 expired in 1991. As a result, the government received only copper rotalty from PTFI for 25 years, while the US headquarted company earned double profit from copper and gold.

It’s difficult to stipulate the wrong in KK 1967 itu. Was Freeport dishonest or government too unadorned? Clearly, gold was extracted from Papua land without significant contribution to the Indonesian government, mainly Papuan people for 25 years. It may only dividend resulting from the 9.36% share belonging to the government. Gold royalty started to be applied to Freeport on the basis of KK extended in 1991. The value is only one percent of the net income.

The old wound arising from the unpaid gold royalty was recrudescent when Freeport disclosed a plan to divest 9.36% of the total share. Various parties, including legislators joint chorus to criticize the contribution of the foreign company already operating for 43 years in Indonesia. They also complained about various kinds of privilege granted by the government to Freeport so far.

Divestment Loophole

They question, among others, the reason of the government to extend KK Freeport on December 30,1991 whereas the company should be subject to a sanction because it did not pay gold royalty”. Another question is: why does the portion of share ownership by national party in Freeport remain unchanged? In the meantime,, other foreign mining companies have to settle dispute in arbitration in the framework of implementing the divestment obligation.

Mining expert Simon Felix Sembiring said that Freefort is also subject to the divestment obligation like other foreign mining companies. The divestment obligation is different in each companies, accoding to contents of the agreed contracts. Indeed, in the case of the First Generation KK of Freeport, the divestment has not been regulated as the company was only asked to grant share as much as 9.36% to the government.

Freeport divestment was just agreed in Extended KK 1991. Article 24 of the contract stipulates that Freeport will executed divestment in two phases. In the first phase, namely the first ten years following the extension of the contract (1991 – 2001), Freeport must divest 9.36% of the total shares to national party. In the second phase, as from 2001, Freeport must divest share as many as 2% every year until the total shares owned by the national party reach 51%.

According to Simon, the company has executed the first phase divestment in 1991 when Freeport released 9.36% of its share through national company PT Indocopper Investama. Since the government refused to buy the share, the acquisition of Indocopper was finally represented by national company Bakrie & Brothers. Indocopper was later bought by Bob Hasan in 1997. However, due to debt-receivable issue, Indocopper fell again on the hand of Freeport McMoran (foreign shareholde of Freeport) in 2002.

In 2004, the government forced Freeport to sell again the 9.36% share to the national party. The share is now divested by Freeport. ”The process has never been completed since the past,” said the Former Director General of Minerals, Coal and Geothermal of the Energy and Mineral Resources.

In the meantime, the second phase divestment obligation, according to Simon, has become null indeed because Article 24 of the Extended KK (regarding divestment) stipulates that in the case of a relieving regulation being issued following the signing of the contract, Freeport may follow the regulation. The government issued Government Regulation Number 20 Year 1994 in 1994. The regulation rules that foreigners are permitted to own companies operating in Indonesia up to 100%.

According to Simon, the Director General of Mineral, Coal and Geothermal once questioned the issue to the Investment Coordinating Board (BKPM). Though a letter, Deupty Head of BKPM assumed by late Andung Nitimiharja justified that Freeport must have implement PP 20/1994. As a result, Freeport is no longer obliged to divest share by 2% per annum, which should have started in 2001.

Revision of PP 20/1994

Commenting about the issue, a member of the House’s Commission VII Muchammad Romahurmuziy conceded uneasy to see a fact that the Indonesian government has controlled only a 9.36% stake in Freeport even though the company has operated for 43 years in Indonesia. In his point of view, divestment is not only related to maximization of state revenue. Moreover, it constitutes a mechanism to affirm national sovereignty on all companies operating in Indonesia.

According to him, in the interest of the state and nation, the extended KK Freeport 1991 must be renegotiated. Contents not in line with the divestment obligation should be amended. So is PP 20/1994 or other regulation not in line with the divestment obligation. ”As long as it’s not a holy book, I think it’s not forbidden to revise,” he told TAMBANG Magazine on Tueday, October 5, 2010.

Simon Felix Sembiring also shares of the same opinion. In his point of view, the word “relieving” in Article 24 of the contract remains debatable because it contains a definition that the divestment obligation is something burdening for Freeport. ”We buy the share, not free of charge,” he said, adding that mining companies should be excluded from PP 20/1994.

Unfortunately, Simon said that he was only an official equivalent to head of section when the Extended KK was prepared so that he was not involved in signing contract with foreign companies. However, upon assuming the Director General of Minerals, Coal and Geothermal, he tried to improve matters seemingly in favor of Freeport, such as forcing Freeport to resell Indocoppper to national party in 2004.

At the time, Freeport McMoran (foreign shareholder of PT Freeport Indonesia) sought a license from the government to consolidate Indocopper into PT Freeport Indonesia (down merger), on the pretext of efficiency. Simon denied firmly the application and asked McMoran to resel Indocopper to the Indonesian party. Even, he threatened to impose default and termination unless Freeport fulfills the order.

According to Simon, Indocopper has been over if the company was consolidated into Freeport so that divestment of 9.36% share is only a history. Should Freeport refer to PP 20/1994, repurchase of Indocopper remains illegitimate because Indocopper has been belonging to Indonesian party in 1991. The once-time director general (2002) should disapprove the repurchase of Indocopper by Freeport. ”However, it has been over so that I improved when I assume the post,” he said.

Director of Mineral and Coal Exploitation Development Bambang Gatot Ariyono conceded his side is currently renegotiating the whole KK and Contracts of Work of Coal Mining Management (PKP2B). However, revision of PP 20/1994 constitutes a domain of BKPM. ” The government regulation refers to foreign investment law,” he told TAMBANG Magazine on Tuesday, October 5, 2010.

If the provision on divestment by Feeport is revised, the reference is Law Number 4 Year 2009 regarding Mineral and Coal Mining (UU Minerba), which requires, among others, foreign companies to divest minimally 20% of their share to national party in five years after securing Mining Business License. However, Article 169 of the Minerba Law also requires respect to the existing contracts. ”Indeed, we must sit together to find the best,” he went on.

World’s Lowest Royalty

Related to privilege of Freeport, Romahurmuziy thinks that the complained issue is not only divestment but also contract period, royalty, deadrent, and compliance to the environmental protection and management lawn (PPLH). Firstly, in the case of royalty of gold, Freeport is only subject to one percent of the selling price multiplied by tonnage whereas pursuant to Government Regulaton Number 45 Year 2003 regarding Rates of Non-Tax State Revenue (PNBP)within the Ministry of Energy and Mineral Resources, gold royalty accounts for 3.75% of the selling price multiplied by tonnage.

Compared to other countries, such as South Africa, Namibia,and Tanzania also rich in minerals, the amount of royalty for gold, which is stipulated in PP 45/2003 is actually low because the rate of gold royalty in the countries is 3 – 8% of the gross income. In the case of Freeport, the gold royalty is counted from net income, and it’s only one percent. ”It confirms Indonesia as a country apply the lowest royalty in the world,” said politician of the United Development Party (PPP).

The second is contract period of Freeport. If the First Generation KK 1967 was effective for 30 years and can be extended twice for ten years each, Freeport’s contract will expire in 2017. However, 1991 is counted as the beginning of KK Freeprot so that KK will expire in 2041. He supposes conspiracy upon the extension of KK Freeport in 1991. ”We may complain about government officials handling the extension of the contract,” he said.

The third is deadrent. In mining areas controlled by Freeport, the amount of deadrent imposed on general susrvey ranges from US$0.025 – 0.05 per hectare/annum and the rate UUS$0.1 – 0.35 per hectare/annum for exploration, US$0.5 per hectare/annum for feasibility study and construction and US$1.5 – 3 per hectare/annum for production exploitation.

It means the company pays maximally US$3 or Rp 30,000 for every hectare so the amount of levies yet to be paid by the company for all mining phases ranges from only Rp 232 – Rp 27,900 per hectare/annum. “Surely, it hurts sense of justice”, he said. If the right is granted to national company, everybody could pay deadrent in such amount. He promises to bring the issue to the Mineral and Coal Ad Hoc Committee of DPR.

Head of the State Revenue Sub-Directorate of the Energy and Mineral Resource Ministry Paul Lubis said that the royalty and deadrent of Freeport have come into agenda of KK and PKP2B renegotiation currently taking place. In the case of gold royalty, his side recommended the amount in accordance with PP 45/2003, namely 3.75%, while deadrent will be stipulated in accordance with PP 45/2003, not negotitiation, namely US$2 per hectare/annum for exploration phase and US$4 per hectare/annum for exploitation.

However, Paul Lubis conceded it’s good if Freeport is ready to increase gold royalty to 2%, given that the extent of change in content of KK is dependent heaviliy on approval of Freeport. Separately, Bambang Gatot said that holders of KK in the course of renegotiation have agreed to increase their royalty even that the amount has not been agreed.

Environmental Issue

Fourthly, according Romahurmuziy, Freeport remains in trouble in the implemention of PPLH Law because the company has disposed around 300,000 tons of tailing into rivers every year. Sharing of the same view, Forestry Minister Zulkifli Hasan, after visiting Papua on Monday, October 4,2010, has asked Freeport to minimize impact of tailing disposed into Arafura Sea after channeling it through rivers.

TAMBANG Magazine also finds that Freeport still encounter a problem related to forestry because the company has not applied for license leasehold 10,000 hectares of production operation area in Mimika and 202,950 hectares of exploration land in Mimika, Paniai, Jaya Wijaya, and Puncak Jaya to forestry authority whereas Freeport has operated on the 10,000 hectares land categorized as protected land since 1991. The condition has encouraged the Forestry Minister to issue admonition in August 2009 but the reminder is responded cooly by Freeport Management.

On February 23,2010, Freeport management claimed that they committed no violation with respect to their mining activity in the protected forest area, given that Freeport has exclusive rights according to KK, signed long before Law Number 41 Year 2009 regarding Forestry was issued. In addition, Freeport also has exclusive right to undertake mining operation inside KK areas in KK Freeport signed in April 1967.

In this case, Freeport seeks shelter behind privilege granted by the government. Freeport management also argued that Law Number 19 Year 2004 was issued in the President Megawati Soekarnoputri era. The law stipulates Government Regulation In Lieu of Law (Perppu) Number 1 Year 2004 regarding the Amendment to Law Number 41 Year /1999.

Perppu 1/2004 supplements Articles 83A and 83B stipulating that all license or agreements in the mining sector in forest area already existing before the enforcement of Law Number 41 Year 1999 are declared to remain valid until the licenses or agreements expire. Even the Constitutional Court (MK) has stipulated the legitimacy of UU 19/2004.

Due to the seemingly conceited answer, the Forestry Minister planned to issue the second warning. However, before the second warning was issued, Freeport settled quickly the required forest area leasehold permit. The company secured a recommendation from Papua Governor to settle the leasehold license and is now waiting for the settlement in the Forestry Ministry.

Responded to privilege granted to Freeport, Senior Advisor of the President in charge of Regional Development and Autonomy Affairs Velix Vernando Wanggai said that it’s not inseparable from operation history of the mining company in Indonesia. Freeport is the first largest investment in Indonesia and Papua. It became the initial business entity playing role in driving up the development of New Order when the government still lacked currency reserve and financing. ”We must concede Freeport plays important and strategic position in initial development of Indonesia,” he told TAMBANG Magazine on Friday, October 1, 2010.

Amid the unfavorable condition, the government later created regulation framework providing privileges for Freeport. In addition, Indonesia had no regulation ruling foreign investment at the time. Indirectly, Freeport took part in encouraging the government to prepare legal umbrella for foreign investment. However, when everything has been arranged, indeed it is necessary to review the granted privileges. ”The breakthrough must be taken in the near future,” he said.

PT Freeport Indonesia has not responded to complaints addressed to the company until this article is written. Contacted early October 2010, Spokesperson of Freeport Ramdani Sirait asked TAMBANG Magazine to send writtend questions. However, the written questions were not responded because of internal preoccupation.

Ramdani promised to send written answers upon meeting TAMBANG Magazine in Jakarta on Wednesday, October 13. However, he sent only releases and report titled “Working Towards Sustainable Development 2008”. A quotation of the releases reads, total financial liabilities according to KK 1991, which have been paid by Freeport to the government from 1992 to June 2010 reached US$10.4 billion. Another release reads Freeport contributes direct benefit worth US$1.4 billion to the Indonesian government in 2009.

Political Support

Early March 2010, Head of Research BNI Securities Norico Gaman disclosed that that PT Freeport Indonesia (PTFI) is the largest contributor of revenue in Freeport McMoran. Some 50% of the total income of the multinational company headquartered in Phoenix, Arizona, US results from gold and copper mining in Papua Land.

Data at Freeport McMoran also show that income of PTFI reached US$5.9 billion in 2009. The amount is higher than income from mining of Freeport McMoran in North America, reaching US$4.8 billion, while mining of Freeport McMoran in South America reaped only US$3.8 billion. Freeport mining in Europe contributed only US$1.89 billion in 2009.

Legislator Muchammad Romahurmuziy said that the reality is extremely ironic as income received by Indonesia is far below profit enjoyed by Freeport. “If we refers to Article 33 of the Constitution of 1945, the share of the state from the whole income of extractive industry is minimally 51%,” he said.

He quotes contant of Article 33 of the Constitution saying that land,water and wealth therein are controlled by the state and managed optimally for the people’s welfare. In his point of view, the word “optimally” means 100% (for the people’s prosperty). If not, it’s 51% at the minimum. The portion has been accomplished in the management of oil and natural gas. However, in the case of minerals and coal, mainly from Freeport in Papua, it has not been.

In relation thereto, the Mineral and Coal Ad Hoc Committee expects the government to have moral and political power to renegotiate KK Freeport definitely. DPR does not want renegotiation to be protracted without agreement thus forcing the government to give up. ”If we refer to the Constitution of 1945, the contract (Freeport) may be nullified for national interest,” he said.

The young politicial affirmed that his statement is not baseless nationalism but asserts that national interest of a sovereign nation and according to the constitution must be granted. In so far as Freeport is not affected, and the government is not in state preventing them, contract must be possible to renegotiate.

International Law Professor in Jakarta based University of Indonesia (UI) Prof Hikmahanto Juwana said that contract can be revised theoretically. The reference is article ruling the amendment of contract in KK, surely based on agreement of both parties. However, a problem comes when various kinds of privilege obtained by Freeport in KK turn out to contravene legislation, such as PP 45/2003.

Principally, contract may not contravene legislation. Article 1337 of the Civil Code stipulates that contract or agreement may not contravene fitness, morality and legislation. In the case of any clasu of contract contravening legislation, fitness or morality, the clause is invalid.

Nonetheless, problem arises from the implementation of the principle in Indonesia. Folowing the enforcement of KK for the first time in Indonesia, the government always said that contract will apply in the case of the contract contravening legislation. The government always argue that contract is a specific law (lex specialis), while legislation is general law (lex generali). In law doctrine, specific law will negate general law.

However, the point is that legal product of the two laws must be the same, such as between Law and Law, or between Presidential Regulation and Presidential Regulation but it is not available between agreement and Law or government regulation. ”However, since it has been long applied and the government continues arguing that KK is lex specialis, it applies even though it’s not principle or doctrin compliant,” Hikmahanto told TAMBANG Magazine on Wednesday, September 20, 2010.