REMOVING A PEBBLE IN THE SHOE

Commentary by Wayne Forrest

Back in the Soeharto era, Indonesia’s very gifted diplomat, Ali Alatas, used to say about East Timor ( a province with a strong separatist movement that caused major diplomatic problems) that it was “the pebble in Indonesia’s shoe”. East Timor achieved independence after Soeharto’s successor B.J. Habibie agreed to a UN-organized 1999 referendum.  Major positive changes in Indonesia’s relations ensued. 
Many of us at AICC were pleased to see the Indonesian government and Freeport-McMoRan (FCX) sign a “heads of agreement” (HOA) on July 12 over ownership of the world’s second largest copper (and gold) mine, Grasberg.  The document, although non-binding, was the culmination of years of hard discussions and negotiations reconciling the 51% divestment clauses of the 2009 Mining Law and its subsequent regulations with Freeport’s existing COW (contract of work) and its conversion to the new permit system.  The agreement covers pricing, governance, fiscal terms, operations, and environmental issues and begins a process that should lead to a win-win solution for the major parties:  PT Freeport Indonesia (PTFI) and its parent (FCX), Rio Tinto (owner of a 40% production interest in PTFI), PT Inalum (state-owned mining holding company), and the people of Indonesia.  Assuming that closing documents can be successfully produced, the $3.85 billion transaction should put to rest a dispute that has weighed heavily on the thinking of investors for years.  It was not that long ago that international arbitration was a very real possibility and nationalistic rhetoric was dialed up to such a point that some senior officials were stating that another Indonesian company could easily operate the mine even though none exist with underground experience. Even words like “expropriation” were tossed around.
With this agreement Freeport remains Grasberg’s operator with fiscal guarantees until 2041, Rio Tinto exits the venture at an acceptable price, the Republic assumes majority ownership of the shares, and it receives the smelter it very much wanted Freeport to build.  FCX shareholders, whose board must ratify the agreement, should be satisfied that their ownership in PT FI is not really dliuted at all as FCX’s 90% position was slated to go eventually to 52% if Rio remained a partner but now will be at 49%.  The investment climate should now improve.
Some of us may have an issue with the economics of the resource nationalism represented by the 2009 Mining Law and its implementing regulations requiring smelter construction, and others have all along questioned why the government of Indonesia should divert badly needed funds from infrastructure, health, and education to owning shares of a commercial enterprise.  Nevertheless, we must respect the pride this deal represents: for the first time the people of Indonesia –through their government– will be majority equity owners in a world class enterprise. This begins a new era for the country as well as Freeport, one that certainly could be quite positive if handled correctly.
The 3 ministers- Mines and Energy (Ignatius Jonan), Finance (Sri Mulyani), State-Owned Enterprises (Rini Soewandi)- who for the past year had the task of negotiating the PTFI divestment- have delivered a pre-election gift to their President.  As he approaches his campaign for a second term Jokowi can now point to the July 12 agreement as a big win for the country.  But only time will tell if politicians and the public at large will accept it.  What will they make of the fact that apparently mostly foreign money, possibly from China, will be used to finance the purchase.  Will this become a rallying cry that Indonesia is somehow still hostage to foreign interests ?
My instinct tells me that no matter what, this new arrangement for Freeport, similar to the old one, will have to be continuously negotiated, only now the big difference is that the Government (both national and regional) is a partner.  That could become very useful in settling local disputes that flare up from time to time.
Kudos to Freeport and the GOI for achieving this important milestone. A pebble in Indonesia’s shoe has been removed.
(The writer’s opinions do not necessarily reflect those of the American Indonesian Chamber of Commerce or its members)

About the Author:

Wayne Forrest is President of the American Indonesian Chamber of Commerce, a private not for profit membership organization based in NY.

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