Indonesia’s Neverending Freeport-McMoRan Saga

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Indonesia’s Neverending Freeport-McMoRan Saga

The 50-year relationship between Indonesia and its largest taxpayer comes under scrutiny.

Indonesia’s Neverending Freeport-McMoRan Saga

Trucks are parked at the open-pit mine of PT Freeport’s Grasberg copper and gold mine complex near Timika, in the eastern region of Papua, Indonesia (September 19, 2015).

Credit: REUTERS/Muhammad Adimaja/Antara Foto

The drama started nearly two years ago, when Setya Novanto, the speaker of the Indonesian Parliament, was forced to resign after being caught trying to extort U.S. mining giant Freeport McMoRan, which was looking to extend its contract in Indonesia. Things heated up again earlier this year, when, alongside nationalist-tinged protests, it looked like Freeport was on its way out. Then, unexpectedly, a deal seemed to be reached. It was too good to be true, and again, today, the situation is unsure. After years of on-again, off-again negotiations between the Indonesian government and its largest taxpayer and longtime partner, things look stuck right where they started, with both sides intransigent and blaming the other.

The relationship between Freeport, Indonesia, and the restive West Papua region where most of Freeport’s mines are located gives a glimpse into the development policies of Southeast Asia’s biggest country, and the still-ongoing challenge of moving on from the brutal legacy of resource extraction and militarism of the Suharto era.

A Troubled History

Freeport’s entry into Indonesia came at a critical time, just years after a bloody coup toppled founding President Sukarno and brought to power General Suharto, who would rule for more than three decades. At that time, not surprisingly, few Indonesians had a say in the deal.

“In the previous contracts [negotiated in] 1967 and 1991, Suharto’s administration did not need to accommodate the concerns of Indonesian people, ” said Dr. Zulfan Tadjoeddin, senior lecturer in Development Studies at the University of Western Sydney. “They pragmatically agreed to the terms they thought were good enough for Indonesia.”

In a poor country with limited infrastructure and little industry, resource extraction was to become a key facet of Suharto’s cronyist New Order regime, who, for all their abuses, did help improve the lives of many Indonesians.

“Suharto’s early development programs concerning basic health, education, agriculture, and rural infrastructures were made possible by the mining and oil boom of the 1970s,” said Tadjoeddin.

Freeport’s operations also helped cement Indonesian control over the disputed region of West Papua, the western half of the island of New Guinea. It has, at various times, been controlled by Germany, the Netherlands, and Australia, before it was handed over to Indonesia in 1963, and formally incorporated in a 1969 military-run election in which about 1,000 hand-picked representatives were forced to vote for ascension. With assistance from the Indonesian military, with whom the company has also had a long relationship, Freeport began construction of the Grasberg mine in 1970, without the consent of West Papuans.

“Freeport’s operations are historically based on… corrupt ties with General Suharto, and have involved siphoning off huge profits into Western capitals at the expense of the environment, the local people, and Indonesian political integrity,” said Benny Wenda, a West Papuan living in exile and a spokesperson for Free West Papua.

The 1970s and 1980s were a dark time for many West Papuans, who were forced to face a relentless military presence and the massive influx of migrants from wealthier East Indonesia. Revenue from the the mine remained in the hands of Jakarta. In fact, the power of the Indonesian military – key to Suharto’s control – was closely connected to Freeport’s mining operation, with numerous documented instances of human rights abuses at their facilities.

“Freeport is deeply embedded with Indonesian security forces in the region, paying them for ‘security’ arrangements — which basically means crushing local Papuan resistance to Freeport’s operations,” said Wenda. “There’s a sordid history of shootings, arrests and disappearances around the Freeport mine.” Even today, the military gets the majority of its revenues from its business operations, including providing security in West Papua.

One of the key problems stalling negotiations today is that the Suharto regime negotiated Freeport’s last contract in 1991, with the terms not so different from 1969 – heavily tilted in Freeport’s favor and with few environmental and social protections. In 1998, however, during the Asian Financial Crisis, Suharto fell, and today, Indonesia is a democracy, having elected its first president with no direct ties to the New Order, Joko “Jokowi” Widodo, in 2015. Jokowi immediately began looking at the Freeport contract as a revenue source to fulfill his massive infrastructure and economic development plans.

“President Jokowi’s administration has been negotiating with Freeport for improving the benefit of the relationship for Indonesia; this is a step in right direction,” said Tadjoeddin.

The question is – what exactly does the new Indonesia want from Freeport, and will they be able to get it? And are the threats to nationalize the operation, or hand it over to another (perhaps Chinese) company rhetoric, or genuine threats?

What’s Next?

Unfortunately, human rights and the concerns of West Papuans, who have seen little real progress since 1998, are not factoring into the negotiations so far. Instead, talks are focused on a few key points, namely, revenue — both how much Freeport must pay the Indonesian government, and how much control the company is willing to give the country over its operations. Indonesia’s 2009 Mining Act requires it to divest 51 percent of its Indonesian subsidiary, but so far, only 9.36 percent has been divested.

This is why the company is also playing hardball, shutting down its gold mine in February, and most recently, terminating more than 4,000 striking workers from the Grasberg mine in a move local and global labor unions called illegal.

“First we heard [the] company had terminated 2,000 strikers, not something you see very often, then it went up to 3,000, 4,000,” said Adam Lee, campaigns director at IndustriALL, a global union supporting the fired workers. “It’s very unusual to have a company take that drastic action. We want the Indonesian government to act and force the company to reinstate the workers.”

This demonstrates the complexity of these negotiations. While Freeport is Indonesia’s largest taxpayer, and has been for some time, the relationship is symbiotic. Freeport also depends on its huge Papuan operations for a large chunk of its global revenue – in 2015, 27 percent of the operating income generated from mining operations came from Indonesia. Losing the mine, or divesting such a large chunk of the subsidiary, would be a major loss for the company, which means Indonesia is in a relative position of power – even if it is not quite ready to take full control.

“I don’t think this is about taking over the Freeport mine… as this is simply unrealistic given the business management, financing, and technological challenges,” said Tadjoeddin. “The nationalist-tinged protests and rhetoric are primarily about improving the term of the relationship for Indonesia’s benefit.”

Unfortunately, this may still not be enough to fulfill Jokowi’s development dreams, as the mines are not nearly as profitable as just a few years ago, when global commodity prices were high. In 2013 Freeport reported $18.98 billion in revenue, with nearly $4 billion of that as profit. In 2014, this resulted in a $1.5 billion tax bill to the Indonesian government. Most recent figures are not public, but almost undoubtedly much, much lower.

“Despite the drop in global commodity prices, negotiations will continue, although the profit estimate of the new business adventure will be significantly impacted,” said Tadjoeddin.

Of course, the post-2000s resource boom, driven chiefly by China’s incessant demand for raw materials, didn’t aid most Indonesians. While mining helped Indonesia’s economy grow during the early years of democracy, the wealth was never spread equally. In 2002, the country’s GINI coefficient, a measure of income distribution in which lower values demonstrate greater quality, was 29.57. In 2013, the coefficient had risen to 41, indicating dramatic growth in the wealth of the rich. This was not a big surprise, as analysis of GINI data shows that countries with more natural resources tend to have greater levels of inequality. Indonesia is no exception, having been resource export dependent since its early days as a Dutch colony.

The latest timetable is for a new agreement to be reached in October, covering 20 years. Meanwhile, protests will continue at the mine itself, or, if tensions rise, across Indonesia. Freeport’s relationship with Indonesia has gone through many iterations over the past four decades, and while whatever comes next may be better for the country financially, it will likely leave the majority of Indonesians, like before, in the dust, and further antagonize West Papuans, who will once again be forced to bear the environmental, social, and human costs of national development.

“Another 20 years of Freeport means another 20 years of shootings, police brutality, environmental carnage, and destruction of Papuan livelihoods,” said Wenda.

Only one thing is certain – mining will, as it has since 1970, remain at the heart of Indonesia’s political economy – for better, or for worse.

Nithin Coca is a freelance writer and journalist who focuses on cultural, economic, and environmental issues in developing countries. Follow him on Twitter @excinit.