TEMPO.CO, Jakarta - The government's enthusiasm to acquire a 51 percent in Freeport Indonesia shares deserves praise, although there is a potential trap. Instead of being acquired by the state, the Freeport shares could fall into the hands of rent seekers. Indonesia had the bitter experience with the divestments of two other mining companies: Kaltim Prima Coal (KPC) and Newmont Nusa Tenggara.
The government must be ready to anticipate the same occurrence. Coordinating Minister for Maritime Affairs Luhut Pandjaitan has said that private companies might buy the Freeport shares if the government cannot find the money to do so. This is worrying because it seems the practices of the rent-seeking regime could be happening again for the third time.
In the cases of KPC and Newmont, it was the Bakrie conglomerate that took over the shares of the two mining companies in 2003 and 2010, respectively. The government's plan to involve a local government-owned company in Newmont's ownership failed because Bakrie was behind the regional company. In the case of KPC, Bakrie bought shares in the coal company directly from the owners for much less than the starting price. We do not want these two cases to be repeated with the Freeport divestment.
So far, Freeport-McMoRanFreeport Indonesia's US shareholder has only been prepared to relinquish 30 percent of its shares because it is adhering to the 2014 rules on its Contract of Work (CoW). The government is insisting it wants a majority of Freeport shares it already controls 9.36 percent by altering the CoW to a special mining business permit (IPUK).
Last mid-January, President Joko Widodo issued a new regulation when Freeport's permit to export concentrate expired. The green light to resume exports will only be given if Freeport agrees to the IPUK, which obliges it to divest 41.36 percent of its shares and build a smelter. If the two sides refuse to compromise, the dispute will go to the international court of arbitration. The government has said that it is ready to face this challenge.
There is nothing wrong with resolving a conflict through arbitration, although it will require careful calculation and hard work. The arbitration hearing will be under the spotlight. Through the Freeport case, the world will see the government's commitment to foreign investment. If it does not move carefully, the government's image in the eyes of the world could be damaged and the confidence of the business community in Indonesia would fall drastically.
The government tasted victory in the dispute over the divestment of Newmont's 17 percent shares in 2009. The judges accepted the government's reasoning on the importance of controlling Newmont shares for the maximum benefit to the Indonesian people in line with the Constitution. The government has the right to dictate the terms of contracts that have a major bearing on the national interest and that are beneficial to state finances.
The same reasoning could be used in the Freeport arbitration, as long as the government is consistent in its stance that the Freeport divestment is truly intended to benefit the people.
The problem is that the investment requires considerable funds. The 41.64 percent Freeport shares are worth Rp60.1 trillion. The government has said that Inalum and Aneka Tambangtwo state-owned mining companiescould pay this price. But the fact is that the value of these two companies is not enough to obtain sufficient credit to purchase the Freeport shares. The government could establish a parent company by combining the assets of Inalum, Antam, Timah and Bukit Asam. It is estimated that the combined assets of these four companies would be worth Rp22.7 trillion more than enough to obtain Rp60.1 trillion in loans.
Another way would be for the government to call for public involvement through a bond issue. Pension fund companies could be invited to participate. This would make it possible for the government to protect the national interest from the rent seekers. The people of Indonesia would have an opportunity to take part in managing their natural resources.
As the regulator, the government can also apply limits on the value of investments for individuals and institutions, provide incentives to persuade endowment funds to enter the market and impose limits on the resale of the shares.
In this way, Indonesians would be the majority shareholders, in line with the aims of the divestment. These shareholders would also become managers if the government fails to run the company effectively.
It is time the benefits of natural resources were enjoyed by the people. (*)
Read the full story in this week's edition of Tempo English Magazine
