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Freeport Contract Extension Hints

Freeport Contract Extension Hints
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By: Fahmy Radhi
      UGM Lecturer and Former Member of Reform of Oil
      and Gas Governance Team


Indonesian Government has signaled to meet the demands for extension of PT Freeport Indonesia (PT FI) operating license. Cue extension of it being on the agenda the meeting the ministers concerned attended by Coordinating Minister for Economic Affairs Darmin Nasution, Finance Minister Sri Mulyani Indrawati, Minister of Justice and Human Rights Yasonna Laoly, SOE Minister Rini Soemarno, Interior Minister Tjahjo Kumolo, and Minister of Energy and Mineral Resources (EMR) Ignasius Jonan on Tuesday, July 4th, 2017.

According to Deputy for Mining Business, Strategic Industries and Media of State Enterprises Ministry (SOE), Fajar Harry Sampurno who attended the meeting, agenda of meeting discussed the extension of Freeport operations, smelter development, divestment of shares, and investment stability.

Harry further stated that Freeport's operation is scheduled to be extended once a ten years, then the second ten-year extension will be decided upon evaluation.

Although Harry's statement quoted widely by the media has been denied by Special Staff of EMR, Hadi M Djuraid, but the agenda for discussing the extension of Freeport's operating license is a signal to Freeport that at the right time the government will extend the Freeport operating license.

If it is true that government has finally granted an extension of operation permit 2x10 years, the new Freeport contract will expire in 2041. If calculated from the start of the contract permit in 1967, Freeport will operate in Papua for 75 years.

However, until Freeport has been extracting the natural wealth of Bumi Papua for 50 years, the benefits gained by Indonesia are almost no progress at all.

From 1967 to 2017, government still acquired PT FI shares of only 9.36 percent, while a majority stake of 90.64 percent was still held by Freeport McMoran Copper & Golden Inc. Indonesia earns royalty also very small between 1-3 percent and collects a fixed rate tax as well as a number of dividends that are often not distributed.
 
Amid the ongoing negotiations between the Government of Indonesia and Freeport, the signing of the extension agreement clearly undermines Indonesia's bargaining position. As a result, although Indonesia has granted consent permit approval of export permits and hinted at the extension of operating licenses, but Freeport will never meet Indonesia's demands in the negotiation process. Freeport will not approve, either the contract change from Contract of Work (KK) to the Special Mining Business License (IUPK) or the IUPK requirements.

These requirements include smelterisasi within 5 years, divestment of 51 percent for 10 years, and tax prevailing regime tax (the amount of tax that changes in line with changes in tax regulations in Indonesia).

The existence of temporary permits of concentrate exports and signals of extension of operating licenses place Freeport's bargaining position on the wind in the process of negotiations with the Government of Indonesia. With a position on the wind, Freeport is expected to continue to strongly reject all demands of Indonesia.

Although permission to export concentrates is still temporary, Freeport feels strongly PD (confident) that the Government of Indonesia will always allow Freeport to export concentrates without having to bother building smelters.
 
Since the introduction of the ban on concentrate exports on January 12, 2014 under the Minerba Act 4/2009, most of EMR Minister, Jero Wacik, Sudirman Said, Arcandra Tahar, including Ignatius Jonan, still issue permits while concentrate exports. The impact is as if there is no urgency for Freeport to build a smelter, as required by the Minerba Act.

It is not surprising that Freeport has always been defiant in the construction of a smelter because Freeport always obtains a concentrate export permit from the government, whoever the ESDM Minister is.

The existence of temporary export permits of concentrate and approval of permits for the extension of operating licenses has the potential to place Indonesia as a loser in the negotiation process with Freeport. In the position of a loser, the final decision of the negotiations is expected to never change at all.
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