Mining Indonesia: Freeport, corruption and the national interest
18 Dec 2015|

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President Joko Widodo knows better than anyone that the reason he chose Sudirman Said as mines and energy minister last October wasn’t because of Said’s knowledge of mining and oil and gas but because Widodo wanted him to clean up the corruption that riddles Indonesia’s natural resources sector.

While the President’s record in fighting graft so far isn’t without blemish, he now has to stand up and be counted after House of Representatives speaker Setya Novanto was forced to resign for allegedly conspiring with oil mafia kingpin Muammad Reza Chalid to shakedown the country’s biggest mining company.

It may not all be over. While the majority of parliament’s 17-strong ethics council decided the Golkar party member had committed an ethics breach requiring a ‘medium’ sanction, rumours continued to swirl of a backroom deal in which Said will also be replaced.

That would invoke memories of the 2008 bank century scandal, where president Susilo Bambang Yudhoyono’s failure to own the controversial bailout of a minor bank eventually led to the resignation of respected finance minister Sri Mulyani Indrawati.

Attention will now turn to the Attorney-General’s office and whether criminal charges will be brought against Novanto and Reza, a shadowy businessman with connections to some of Indonesia’s most powerful political figures.

No-one is holding their breath, but Widodo and Vice-President Jusuf Kalla aren’t happy. In a conversation recorded by Freeport Indonesia CEO Maroef Syamsuddin last June, Novanto can be heard saying the two leaders wanted shares in exchange for an early contract extension for Freeport Indonesia, a subsidiary of mining giant Freeport McMoRan Copper & Gold.

Worryingly for Widodo, the 90-minute tape also implicated chief political minister, Luhut Pandjaitan, the President’s most trusted lieutenant who played a key role in his election campaign and in settling down a virulent opposition after his inauguration.

The retired general’s name crops up 66 times during the conversation in a central Jakarta hotel, but what clearly infuriated Widodo is the disparaging way Novanto refers to the President, claiming he can be dictated to by himself (Novanto) and Pandjaitan.

Novanto only agreed to be questioned behind closed doors. Reza, who for years ran an oil import business in collaboration with the state-owned Pertamina Energy Trading Ltd (Petral), declined two ‘invitations’ to appear as a witness at the hearings.

Petral has now been dissolved, and an audit of the firm Said commissioned from an Australian forensic accountancy found Reza’s two Singapore-based trading companies turned a US$1.46 billion profit between 2012 and 2014, pointing to a long-established price-fixing conspiracy.

Novanto and Reza were caught in what amounted to a sting operation conducted without the knowledge of Freeport McMoran chairman James Robert Moffett, who was furious at the firm being embroiled in a grubby political scandal. With Freeport already engaged in a US$16 billion project to convert its hugely profitable Papua mine from an open pit to an underground operation, Moffett has spent months in Jakarta trying to negotiate a contract renewal beyond 2021.

The Government has stuck to a regulation which says that those talks can only begin two years beforehand—hardly acceptable to a firm with plans to spend $8 billion between now and 2019 when new elections are expected to complicate everything.

Indonesian politicians find it easy to turn nationalist public opinion against foreign companies—and for a while Novanto and Pandjaitan sought to heap the blame on Freeport, which already has a poor image because of its past links to former president Suharto’s regime.

Even though the televised hearings showed Indonesians how their rent-seeking officials wave a nationalist flag in pursuit of their own personal agendas, a surprising number still believe that Freeport somehow has been responsible for the whole mess.

Under normal circumstances, Syamsuddin should have followed company protocols and left the first of the three meetings he attended with Novanto and Reza when he sensed something improper was going on. Although the smart phone he used to record the third meeting was in full view on the table, the subterfuge must have come as second nature for a retired air force general whose previous job was deputy head of the National Intelligence Agency (BIN).

Only Novanto could be censured by the ethics council, but Reza did two-thirds of the talking during the June conversation, which actually focused in large part on who would get an interest in a planned 300-megawatt hydro-electric plant Freeport needs to power its expanded underground mine.

Observers were baffled as to how Novanto hoped to divide up the shares; it’s understood Freeport Indonesia’s initial 10.6% divestment, under an MOU signed last October, should first be offered to the Government, which already owns 9.4%, or to other state entities.

That anomaly may be explained by the fact that during a meeting with Moffett the following month, Pandjaitan and other officials were shocked to learn that whoever got the stake would have to pay for it—perhaps up to $1 billion, depending on reserves and prevailing market prices.

The tape shows that they thought it could be acquired under a loan arrangement with Freeport, similar to that which allowed first Suharto associate Bob Hasan and then current Golkar chairman Aburizal Bakrie to hold a similar stake in the 1990s.

Pandjaitan and his presidential office staff were also unaware that Freeport’s 1991 contract contains wording that entitles it to two 10-year extensions beyond the current expiry date, unless the Government can come up with compelling reasons why not.

So why did Said wait until November to bring the case to light, given that Widodo was clearly in the loop for most of the time? The answer seems to lie in the letter the minister sent to Freeport on 7 October agreeing in principle to a contract extension.

Secretary of State John Kerry and US Ambassador to Indonesia Robert Blake had both urged Widodo to resolve the issue before his visit to Washington, pointing out that his efforts to drum up investment would fall flat if the Government insisted on holding the country’s biggest investor at arm’s length. As it was, only Blake—and no one from the State Department—was there to greet Widodo at Andrews Air Force base when he arrived on 25 October. Kerry added insult to injury by begging off as the keynote speaker at a gala business dinner the following evening.

More than that, by acknowledging the terms of the existing contract, the 7 October letter could conceivably form a major part of Freeport’s case in any court of international arbitration if it ever comes to that.

What puzzles the business community is why Indonesian governments always seem to take a confrontational approach with foreign resource companies on contract talks, instead of looking for a win-win situation.

In doing so, they’ve opened the door to the tawdry spectacle of greedy public figures gathering around a honey pot, oblivious to the national interest or to the way Western corporates are these days compelled to conduct their business.

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