Freeport Share Divestment
Despite the HoA not being the definitive divestment of Freeport Indonesia’s shares, it has a certain symbolic importance in determining technical details. It is in these details that prudence and transparency are important so the divestment can be ultimately used to advance the people’s welfare.
A new chapter has begun in the divestment of PT Freeport Indonesia’s (PTFI) shares with the signing of a heads of agreement (HoA) between Indonesia and US mining giant Freeport-McMoRan (Freeport).
Despite the HoA not being the definitive divestment of Freeport Indonesia’s shares, it has a certain symbolic importance in determining technical details. It is in these details that prudence and transparency are important so the divestment can be ultimately used to advance the people’s welfare.
Among the criticisms often lobbed at the government over its negotiations with Freeport are those pertaining to the clarity and coherence of the information made available to the public. It needs to be said that the government has provided periodical updates on the negotiation process, but the information has often been ambiguous and unsynchronized.
Those who have watched the process closely, such as myself, often become disoriented, especially regarding the direction of the divestment. On several occasions, the government indicated that it wanted to purchase Rio Tinto’s participating interest (PI), but at other times, the government seemed to be planning a direct acquisition of PTFI’s shares. The government’s press statement on the HoA’s signing has at last shed some light on the divestment’s direction, namely that the government plans to purchase Rio Tinto’s PI and acquire PTFI’s shares by purchasing Indocopper Investama from Freeport.
Several important things must be noted regarding this direction. First, purchasing Rio Tinto’s PI does not necessarily mean share ownership in PTFI. This will be problematic, as the Mining Law stipulates that only a mining concession holder can conduct a shares divestment, which is PTFI in this case.
Second, a huge divestment process like that of PTFI’s shares always involves complicated processes and many parties. Based on previous PTFI divestments, it is important to push for full transparency to facilitate public monitoring and ensure that the people will ultimately be the major beneficiaries of the deal.
Rio Tinto’s participating interest
Purchasing Rio Tinto’s PI may be the most effective option in the PTFI divestment, compared to the option of directly acquiring the shares from Freeport.
I believe the decision was a rational one, considering that direct acquisition of PTFI’s shares will not necessarily mean the Indonesian government will own the largest portion of PTFI’s production output. This is because PTFI has control over only 60 percent of its production, with the other 40 percent under Rio Tinto’s control. This 60 percent of the production share must then be split with Freeport as another PTFI shareholder. As a result, the economic potential will not be optimal.
Nevertheless, the chosen route to purchase Rio Tinto’s participating interest is not without its problems. Rio Tinto’s PI is in the form of a contractually structured joint venture (JV). Under this model, parties do not establish legal entities to carry out business activities, but are structured based on their contribution to expenditures and split the production among themselves.
Put simply, Freeport gives 40 percent of PTFI’s production share to Rio Tinto under an ijon (debt bondage) system to support funding. Therefore, the 40 percent that is Rio Tinto’s “share” is not really shares ownership. Rather, it is ownership of 40 percent production.
Problems will arise if we use the Mining Law literally. This is because we are talking about divesting shares in PTFI as a concession holder. Purchasing Rio Tinto’s 40 percent participating interest does not mean purchasing 40 percent of PTFI’s shares. In this situation, it is important to flex our interpretation of the Mining Law’s divestment requirement in the expanded context of divestment through the implementation of Article 33 in the 1945 Constitution. The fundamental meaning of “under the power of the State” should not be limited to the concession holder’s control. This control should be contextualized beyond that with an emphasis on mining production control.
I believe that controlling participating interest is also a form of direct control as stipulated by the phrase “under the power of the State” in the 1945 Constitution, aside from controlling a concession holder’s shares. In addition, joint ventures always require holders of participating interests to be involved in making strategic decisions. Thus, the holder of a participating interest has indirect control of the concession holder. The government seems to have used this merely as an intermediate strategy, under which the government will change the contractual JV into an JV entity and the participating interest purchased will be converted into PTFI shares.
Total transparency
The second important point is to push for total transparency. It needs to be noted that this will not be the first divestment of PTFI’s shares. A previous divestment of 10 percent to Indonesia was carried out in late 1991. At the time, the divestment was mired in rent-seeking by “important Indonesian businesspeople with Jakarta connections” (Danise Leith, 2002).
Ironically, the divestment ended as a failure, as the end goal of the rent-seeking acrobats was to revert the divested shares back to Freeport through owning shares in Indocopper Investama. Surely, this should be an important lesson in divestment this time around. I can imagine that the government and Inalum will seek significant funding to cover the cost of purchasing Indocopper’s shares and Rio Tinto’s participating interest, which are worth US$3.85 billion. This will involve complex schemes and many parties.
It is here that the government must be completely transparent regarding the options it takes, who it chooses to deal with and how these parties are involved. Such openness is important to avoid any rent-seeking practices that will only harm Indonesia. On the other hand, Freeport should show its integrity by firmly rejecting all rent-seekers, as it did when it rejected Setya Novanto’s and Riza Chalid’s moves some time ago.
For the sake of long-term investment in Indonesia, Freeport and all other multinational companies must remember that buying political patronage is not the proper strategy in the current era of Indonesia’s democracy, as rulers come and go in the general elections.
Furthermore, with strong corruption eradication institutions, including Indonesia’s Corruption Eradication Commission (KPK) and the Foreign Corrupt Practice Acts in many advanced countries, using illegal means to reach a desired end will not be worth the significant risks they entail. Therefore, Freeport’s experience in the 1991 divestment of kowtowing to the whims of rent-seekers close to power, should not happen again.
Giri Ahmad Taufik, Lecturer, Indonesia Jentera School of Law; PhD Candidate, Griffith Law School, Australia