The Epic Saga of Freeport Contract

Freeport is a giant multinational corporation with the bargaining position equal to an international subject. Its roots and power has awarded it with an agreement that made it equal to a country. Country such as Indonesia. Where for decades, over the change of Presidencies, Freeport has established its rights with contract of work (CoA) which made them immune to many regulations designated for foreign corporations.

Contract of work is implemented when foreign investment established a national legal entity and it cooperates with another legal entity using national capital. Therefore, in the case of Freeport contract with GoI, Indonesia’s position becomes equal to a corporation, and not as a sovereign country.

However, in January 12 of 2017, the Government of Indonesia (GoI) has enforced new regulations in the mineral sector. The regulations are directly related with Freeport’s CoW, which are the Government Regulation Number 1 of 2017 (PP 1/2017), the Regulation of the Ministry of Energy and Mineral Resources Number 5 of 2017 (Permen ESDM 5/2017), and the Regulation of the Ministry Regulation of Energy and Mineral Resources Number 6 of 2017 (Permen ESDM 6/2017).

CoW enables Freeport to be in equal footing with Indonesia, because it binds Indonesia in a contract. Now, with the new law, Freeport is no longer in equal position because it requires Freeport to apply to Indonesia for permit.

Under PP 1/2017, all corporations under the CoW must change their contract in to Special Mining Business License (IUPK) if they want to have the permit to do concentrate export. If they are unwilling to obey the new law, they will be prohibited to do concentrate export. The procedures it selves are stated in Permen ESDM 5/2017.

Presiden Joko Widodo (Jokowi) himself has decided that the GoI will not allow PT Freeport Indonesia to extend their contract if they do not meet the requirements. There are five requirements that are obligated.

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freeport contract
Freeport operational area via voaindonesia.com

The first requirement is, the contract extension can only be done 2 years before the contract is finished. This is in accordance to the Government Regulation (PP) Number 74 of 2014. The corporation from the United States of America would only be able to extend their contract in 2019.

The second requirement is related to the utilization of goods and services by Freeport. In their operation, the GoI require the increase of local content goods and services.

Third, Freeport would need to wait until President Jokowi has decided based on the recommendations of Papua Development Team, on how Freeport should release their shares. There are several ways, either through stock market or other mechanisms.

Currently GoI only have 9.36 percent of Freeport’s share, hence Freeport would still need to release 20.64 percent of its shares out of the 30 percent of total divestment. The shares are valued US$ 4 billion.

Fourth, increase the royalty payment especially for three commodities, which are copper, gold and silver. GoI decided to increase the royalty for copper from 3.5 percent to 4 percent. Gold royalty is increased from 1 percent to 3.75 percent and silver from 1 percent to 3.25 percent.

The fifth one, Freeport is obligated to build smelters. It is a processing and refinement plant that is used to separate the concentrates from the mined minerals. It is particularly important because it will clarify the number of concentrate produced.

PT Freeport Indonesia finally agreed on the contract change. They need the contract to continue the copper concentrate export which has been halted since 12 January of 2017.

However, Freeport did not let go without no resistance. They have posed two requirements to the government. First, the taxation imposed to Freeport would not be changed from nail-down to prevailing. Secondly, Freeport will not build smelters if GoI haven’t guarantee the contract extension. The reasons they have conveyed are the assurance of legal clarity, and secondly because smelters need 2.2 billon USD while their contract ended in 2021.

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The truth is, Freeport does not want to change their contract not because of those reasons. The utmost reason is because with the new regulations, Freeport will no longer be able to export mineral concentrates. This is a disaster for them because that is their main revenue.

The second reason is, the new regulation would cost them more for retributions compare to CoW which gives them a very lucrative profit. IUPK would regulate all retributions such as royalties, fixed retribution, and local retribution. The taxes are also added which include property tax, value-added tax and income tax, and the amount is in accordance with the regulations in power (prevailing). While in CoW, Freeport was only being imposed with royalty and fixed retributions and the the taxes to be paid are less than IUPK and the amount will not change because it has been assigned in the contract (nailed-down).

Moreover, IUPK will not enable Freeport to obtain permit extension as much as CoW which can reach up to 50 years. while IUPK will only give 10 years permit with the option of two times extension, each of it is 10 years.

The mining area of Freeport would also be limited. Which is 25,000 hectare, a far cry from the current operation area of Freeport which is 90,000 hectare.

The GoI, of course, has strongly rejected Freeport’s requirements. The Vice Minister of the Ministry of Energy and Mineral Resources, Arcandra Tahar said that anyone under the territory of Indonesia should abide by the national law, without exception. This statement could not have been more correct.

 


 

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