US Mining Giant’s Extension a Victory for Indonesia’s President

A decision by Indonesian authorities to assure US mining giant Freeport McMoRan that its Grassberg copper and gold mine contract would be extended is being taken as the most important sign yet that President Joko Widodo is continuing to gain the upper hand over economic nationalists.

Freeport said Thursday that it had been assured by government officials that the contract for the mine, in Papua, would be extended. Freeport has been stymied for several years by refusal of the government to give assurances on extending the contract, which ends in 2021. Current rules governing contract talks must start within two years of the lapse of the contract.

The Phoenix, Arizona-based Freeport McMoRan, which has operated the mine since 1973, plans to invest US$18 billion to transition the Grasberg complex from an open pit to underground mining in late 2017 according to a Reuters report. It is the world’s largest gold mine and the third largest copper one, with 19,500 employees. Freeport owns 90.64 percent of PT Freeport Indonesia, its principal operating subsidiary. The government owns the remaining 9.36 percent.

“We welcome the continuation of Freeport's investments in Papua which will provide increasing benefits to the national and local economies,” said Sudirman Said, Indonesia’s Minister of Energy and Mineral Resources in a prepared release.

“Freeport is the test of whether Jokowi really wants change,” said a western businessman. “I think this is enormously important. It has been a huge internal battle.”

As an example of that internal battle, Coordinating Maritime Affairs Minister Rizal Ramli, yesterday – on the day the government announced its decision on Freeport – gave a lecture at a local university in Jakarta in which he was quoted by local media as lambasting the mentality of the country’s state officials in the mineral sector and called Freeport McMoRan greedy. All of Indonesia’s resources except coal, he said, are controlled by foreign powers through work contracts.

“There is now a chance for our country to be able to repeat our previous history, during which our mineral resources gave much benefit to all Indonesian people and the nation,” Rizal told the Post, accusing the mining company of massive environmental damage as well. A few hours later, Bambang Gatot released the government’s decision granting Freeport the extension.

The extension decision comes within days of Jokowi’s Oct. 20 trip to the United States to meet with government leaders in Washington, DC and investors and businessmen to assure them that Indonesia is serious about attracting foreign investment after a long series of nationalistic policy implementations by both his administration and the preceding one. The decision to grant the Freeport extension, which has been hanging fire for months as contenders battled it out behind the scenes, gives Jokowi an enormous victory to show to the Americans.

For the better part of a year, since he assumed the presidency last October, Jokowi has been under sustained fire from environmentalists, reformers, members of the business community and others for his seeming diffidence against economic nationalists and others. He was widely assumed to be taking a back seat on many issues to Megawati Sukarnoputri, who used the organizational power of her Indonesian Democratic Party of Struggle (PDI-P) to help engineer his election.

However, his August cabinet reshuffle, in which he put longtime technocrats into key economic management posts and moved aside some of Megawati’s handpicked supporters, was the first signal of change. Since that time, the courts – which in Indonesia are considered to take their cues from the government – exonerated two Jakarta Intercultural School teachers from child molestation charges that reportedly were designed to shut down the school so that its grounds could be taken over by unnamed developers.

He also moved aside a top police official who was leading a campaign against the Corruption Eradication Commission, forced the Home Ministry to publicly rescind harsh new regulations that would have restricted the activities of visiting foreign journalists in the country, ordered his cabinet to clean up conflicting and restrictive regulations hampering investment and overseen government action against rogue oil palm operators burning virgin forest for plantations – although smoke from fires this year has given Singapore and Malaysia some of the worst haze in decades.

The country has also finally begun to untangle the red tape that has strangled infrastructure investment, which has been held up by slow fund disbursement. An ADB report, published in September, said the Indonesian government “has taken measures to improve budget execution, which include efforts to simplify land acquisition procedures, and advancing to 2015 the tendering process for procurement of most public projects under the 2016 budget to expedite implementation.”

Other reforms include a new one-stop service for investment licensing and encouraging private investment in selected infrastructure projects through public-private partnership.

“Earlier this month, the government unveiled a package to revive investment that further simplifies or removes regulations that hinder business, expand tax incentives, accelerates strategic projects, and allows foreign ownership of high-end properties, the ADB said.

The administration has pushed through a pay rise for civil servants and tax breaks for low-income earners, which should contribute to growing consumer spending.

The psychological effect of Jokowi’s painful decision at the start of his administration to cut fuel subsidies drastically and divert the money to public spending will foster consumer spending. Inflation, partly as a result of the plummeting currency is expected to start easing towards the end of the year, the ADB report states.

Against that optimistic ADB assessment, however, is the chance that opponents of liberalization and continued foreign direct investment will do their best to sabotage Jokowi’s plans. There is a prevailing feeling among many Indonesians, particularly many in the government, that too much of the country’s assets are in foreign hands and that Indonesia is being shortchanged.

“People in Papua are very poor because Freeport pays only 1 percent in royalties for the gold it exploits. Across the world, gold royalties are around 6-7 percent,” said Rizal, the coordinating maritime affairs minister. “There is now a chance for our country to be able to repeat our previous history, during which our mineral resources gave much benefit to all Indonesian people and the nation.”