JAKARTA – Coordinating Minister for Economic Affairs Darmin Nasution has stated that formal discussions regarding the divestment of PT Freeport Indonesia have not yet reached a definitive conclusion, as the government continues to navigate the complexities of the company’s contract extension. Speaking at the University of Indonesia on Monday, November 9, 2015, Nasution emphasized that the administrative and legal processes surrounding the extension of Freeport’s operations in Papua remain unfinished, which has consequently delayed secondary negotiations regarding share divestment.
The minister’s comments highlight a critical juncture in the long-standing relationship between the Indonesian government and the local subsidiary of the United States-based mining giant, Freeport-McMoRan. According to Nasution, the priority remains the finalization of the contract terms before the specifics of the divestment mechanism can be fully addressed. He noted that the method of divestment, whether through an Initial Public Offering (IPO) or a direct sale to government entities, requires deeper analysis and a comprehensive evaluation of the prevailing legal framework.
The Stalled Divestment Deadline and Regulatory Hurdles
Under the existing regulatory framework, PT Freeport Indonesia was mandated to begin offering its shares to the Indonesian government by October 14, 2015. The obligation involves the divestment of a 10.64 percent stake in the company. This move is part of a broader requirement for foreign mining companies to gradually increase domestic ownership of their Indonesian operations. However, the deadline passed without a formal offer, as the Phoenix-based company opted to wait for a proposed revision of Government Regulation (PP) Number 77 of 2014.
Government Regulation No. 77 of 2014 concerns the Implementation of Mineral and Coal Mining Business Activities. It serves as the second amendment to Government Regulation No. 23 of 2010. Freeport’s hesitation stems from the desire for greater legal certainty regarding its operational future in the Grasberg mining complex beyond 2021, when its current Contract of Work (CoW) is set to expire. The company has argued that the massive capital expenditure required for underground mining operations—estimated at over $15 billion—necessitates an early guarantee of contract extension to justify such investments to its shareholders.
Historical Context: The Evolution of the Contract of Work
To understand the current impasse, it is essential to look at the historical trajectory of Freeport’s presence in Indonesia. PT Freeport Indonesia was the first foreign investor to sign a contract with the New Order government in 1967, shortly after the enactment of the Foreign Investment Law. This initial contract granted the company rights to explore and mine the Ertsberg district in Papua.
In 1991, the contract was renewed and expanded to include the Grasberg deposit, one of the world’s largest gold and copper reserves. This second Contract of Work (CoW) provided for a 30-year term with the possibility of two 10-year extensions. As the 2021 expiration date approaches, the Indonesian government has sought to harmonize Freeport’s legal standing with the 2009 Mining Law (Law No. 4 of 2009). This law mandates a transition from the "Contract of Work" system, which treated the company as an equal partner to the state, to a "Special Mining Business License" (IUPK), which asserts state sovereignty over natural resources more firmly.
The Hierarchy of Divestment Priority
The divestment process is not merely a financial transaction but a structured legal requirement designed to ensure that the Indonesian state and its people benefit directly from the nation’s mineral wealth. According to the current regulations, the 10.64 percent stake must be offered following a specific hierarchy of priority:
- The Central Government: The Indonesian state has the right of first refusal to acquire the shares.
- State-Owned Enterprises (BUMN): If the central government declines, the offer moves to national companies like PT Indonesia Asahan Aluminium (Inalum) or other relevant mining SOEs.
- Regional Government-Owned Enterprises (BUMD): The provincial or regency governments where the mine is located are next in line.
- Private National Entities: If no government body takes up the offer, the shares can be offered to the domestic private sector, potentially through an IPO on the Indonesia Stock Exchange.
Minister Darmin Nasution’s insistence on "deeper study" reflects the government’s caution regarding the valuation of these shares. Determining the "fair market value" of a 10.64 percent stake in one of the world’s most productive mines is a point of significant contention, with the company and the government often holding diverging views on whether future reserves should be included in the valuation.
Economic Stakes and Investment Commitments
The stakes for the Indonesian economy are immense. PT Freeport Indonesia is one of the country’s largest taxpayers and a primary driver of the regional economy in Papua. In 2015, the company’s contributions through taxes, royalties, and dividends remained a vital component of the national budget. Furthermore, the government has pressured Freeport to fulfill its commitment to build a domestic copper smelter, a move intended to support the national "downstreaming" policy aimed at processing raw minerals into high-value products within Indonesia.
The estimated cost for the new smelter is approximately $2.1 billion. Freeport has linked the progress of this smelter to the certainty of its contract extension. From the company’s perspective, investing billions into a smelter and underground mining infrastructure is only feasible if they are permitted to operate the mine long enough to see a return on that investment. Conversely, the Indonesian government, under the administration of President Joko Widodo, has maintained that any extension must be accompanied by increased benefits for the state, including higher royalty rates and the fulfillment of divestment obligations.
Reactions from Stakeholders and Political Implications
The delay in the divestment process has drawn reactions from various political and social sectors. Members of the House of Representatives (DPR) have frequently called for the government to take a firm stance against Freeport, urging the state to maximize its ownership. Some lawmakers have expressed concern that allowing Freeport to delay divestment while waiting for regulatory changes sets a poor precedent for other foreign mining operators.
In Papua, local leaders and indigenous communities have also voiced their demands for a seat at the table. There is a strong push for a portion of the divested shares to be allocated to the provincial government or local tribal entities to ensure that the wealth extracted from their ancestral lands contributes to local development and poverty alleviation.
The Ministry of Energy and Mineral Resources (ESDM), then led by Minister Sudirman Said, had previously engaged in intensive negotiations with Freeport. While there were indications of a "memorandum of understanding" regarding some points of the extension, Minister Darmin Nasution’s recent statements suggest that the Coordinating Ministry for Economic Affairs is taking a broader view of the economic impact and legal consistency of the deal, ensuring that all ministries are aligned before a final agreement is signed.
Analysis: Navigating a Complex Impasse
The current situation reflects the tension between resource nationalism and the need for a stable investment climate. For Indonesia, the goal is to reclaim sovereignty over its natural resources as mandated by the 1945 Constitution. For Freeport-McMoRan, the goal is to protect its most valuable asset and ensure long-term operational stability for its investors.
The "unfinished business" mentioned by Darmin Nasution likely refers to the technicalities of the transition from a CoW to an IUPK. This transition involves not just share percentages, but also land area size, royalty structures, and environmental reclamation obligations. The government’s refusal to be rushed into a divestment agreement suggests a strategy of ensuring that the legal foundation is airtight to avoid future international arbitration.
Timeline of Key Events Leading to Late 2015
- January 2009: Indonesia passes Law No. 4 of 2009 on Mineral and Coal Mining, requiring all miners to process ores domestically and divest shares to Indonesian entities.
- October 2014: The government issues PP No. 77 of 2014, detailing the timeline and percentages for divestment based on the type of mining activity.
- July 2015: Freeport and the Indonesian government continue talks on a "Memorandum of Understanding" regarding a potential contract extension and smelter construction.
- October 14, 2015: The official deadline for Freeport to offer the 10.64 percent stake passes without a formal proposal, as the company seeks regulatory revisions.
- November 9, 2015: Minister Darmin Nasution confirms that the extension process is incomplete and divestment talks are pending further study.
Conclusion and Future Outlook
As of late 2015, the fate of PT Freeport Indonesia remains one of the most significant economic issues facing the Jokowi administration. Minister Darmin Nasution’s remarks signal that the government is not yet ready to close the chapter on the 10.64 percent divestment, as it remains tethered to the broader, more complex issue of the contract extension.
The coming months will be crucial as the government weighs the benefits of immediate share acquisition against the long-term necessity of continued investment in the Grasberg mine. The resolution of this impasse will likely set the tone for foreign investment in Indonesia’s mining sector for decades to come, balancing the principles of national interest with the realities of global commodity markets and large-scale industrial operations. For now, the "unfinished business" remains on the table, awaiting a consensus that satisfies both the legal mandates of the Indonesian state and the economic requirements of the mining operator.
