TEMPO.CO, Jakarta - The willingness of Freeport-McMoRan Copper & Gold Inc. to relinquish 51 percent of the shares in PT Freeport Indonesia to the Indonesian government should not fill us with unbounded joy.
There is still much work to do: from negotiating a price, finding the funds and deciding on the tax regulations to preventing rent-seekers from joining the divestment scheme. If it is not managed carefully, instead of bringing benefits to the people, the divestment could empty the government's coffers or just enrich a small number of people.
The ownership of the world's largest gold and copper mine in Papua has long been in dispute. The latest drama began in January when the government banned Freeport from exporting copper concentrate. In line with Government Regulation No. 1/2007 on the Mining of Minerals and Coal, the mining company is not allowed to export copper concentrate without building a smelter to refine it. This ban led to Freeport-McMoRan CEO Richard Adkerson threatening to take the government to arbitration for breaking the 1991 work contract.
While both sides exchanged threats, time was wasted, and 60 percent of Freeport's products were kept off the market. Even worse, the smelter at Gresik could not be built because of a strike by employees. All activities at the Grasberg mine stopped. This uncertainty also delayed payments of taxes, royalties, and dividends to the government. This state of affairs forced both sides, Richard Adkerson, Finance Minister Sri Mulyani and Energy Minister Ignasius Johan, to sit down together.
The agreement reached in August was very good and ambitious. Freeport accepted the change of status from work contract to special mining permit (IUPK) until 2041. This is a fundamental change, given that Freeport had viewed the work contract as a sacred document that could not be altered.
The work contract system gave Freeport complete freedom to act, while the IUPK sets certain limits. There are six components: restriction of the area, an increase of tax liability, increase in royalties, increase in the use of local components, divestment of a 51-percent shareholding to the government and downstream processing of mining products. On paper, Indonesia won the negotiations on points.
Reaching an agreement is one thing, but monitoring and realizing it is quite another. For example, the government will have to decide on the share price. As it has a 9.36-percent shareholding, the government needs to buy 41.64 percent to reach the 51 percent. The government has promised to pay the market price. But Freeport is bound to set a high price by considering the cost of its investment and the potential for profit. The setting of the share price is a shortcoming in Law No. 4/2009 on Mineral and Coal Mining, which does not specify the way the share price is calculated.
For example, last year Freeport offered a 10.64- percent shareholding for US$1.7 billion, or around Rp23.6 trillion. The Energy Ministry then established a valuation team, which came up with a figure of US$630 million, or 37 percent of the Freeport version. This difference was the result of the two sides using different starting points for the calculation. The government based its figure on repaying investment costs, while Freeport included the copper reserves until 2041.
The setting of the price cannot be separated from the overall calculations of profit and loss. For example, how will the taking over of a 51-percent shareholding in Freeport generate more than income to date from dividends, royalties, and taxes? It is estimated that the government would receive revenues totaling US$1.4 billion, or approximately Rp19.4 trillion until the year 2021. The government must be able to guarantee that it will receive more income from its majority shareholding.
The source of funds is also a complex issue. With a slowing economy, it is thought that the tax revenue target will not be met and that the government will have problems finding funds to buy the Freeport shares. The government is putting together a consortium including the Healthcare and Social Security Agency (BJPS), state-owned enterprises such as PT Inalum and PT Aneka Tambang and regional government-owned companies.
If the funding is insufficient, private companies could be involved. Maritime Affairs Coordinating Minister Luhut Binsar has indicated this might happen. But this calls for caution: the involvement of private companies might lead to a rerun of the games played by rent-seekers.
What happened with Kaltim Prima Coal (2003) and Newmont Nusa Tenggara (2010) must not be repeated. The government's plan to involve regional government-owned companies in the ownership of Newmont, for example, failed because the Bakrie business group was behind the regional government-owned company. The same business group was involved in Kaltim Prima Coal.
The Constitution states that the land, water, and natural resources in them shall be managed by the state and used for the greatest possible prosperity of the people. President Jokowi must ensure this noble aim is realized.
Read the full story in this week’s edition of Tempo English Magazine
