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    Southeast Asia
     Feb 22, 2006
Freeport in Indonesia: Filling in the holes
By John McBeth

JAKARTA - Burdened by a legacy of environmental destruction and what was widely seen as an unhealthy relationship with president Suharto's New Order regime, Louisiana-based Freeport McMoRan Copper & Gold has long been depicted as the poster child for all that is wrong with mining in Indonesia. But does the US mining giant still deserve that reputation, or are the company's many critics simply living in the past?

For all the ugly holes they dig, multinational resource companies have changed a lot in the past 15 years. Reined in by

environmental groups, tougher foreign-government regulations and often their own concerned shareholders, many are now being held to higher standards of corporate governance than ever before.

In Freeport's case, that's more than most. In the past 10-15 years it has tried hard to make amends for past mistakes, introducing comprehensive community development and livelihood programs, improving health services and employment opportunities and working on innovative ways to help the environment bounce back from mining activities.

Yet the same activists and media commentators who rely on copper as with everyone else for their computers, telephones and electricity never seem to tire of raking the firm over the coals - often for infractions incurred decades ago.

Take the New York Times and the two full pages it devoted recently to Freeport's hugely profitable Grasberg mine in the central highlands of Indonesia's easternmost Papua province - much of it focusing once again on long-familiar environmental issues and on the company's now well-documented, if controversial, practice of funding Indonesian military forces guarding the site.

The same newspaper has also extensively covered allegations of mercury poisoning against the US gold company Newmont in North Sulawesi - charges that have been disproved by a host of independent monitors, including the World Health Organization, Japan's National Institute for Minamata Disease, the Australian Commonwealth Scientific and Industrial Research Organization and Indonesia's own Health Department.

With that store of technical evidence stacked against it, the Indonesian government recently dropped a US$150 million civil lawsuit against the company rather than take it to court-directed international arbitration. Instead, the two parties came to a $30 million "goodwill" settlement last Thursday, whereby Newmont maintained its innocence and the two sides merely agreed to disagree on the issue in their joint announcement. The voluntary settlement is also expected to have a bearing on the ongoing criminal trial against the company and its president director in North Sulawesi.

Both cases raise the question of what critics expect of mining companies. Some of the more radical groups, such as the Mining Advocacy Network and Australia's Mining Policy Institute, deny they want to stop all mining. But everything they do points to just that, lashing out at anyone who challenges their conventional wisdom that Freeport and other mining companies haven't done enough to change their old ways. As a result, the same allegations are repeated over and over again without any effort to determine whether they remain valid.

Because much of their funding depends on attacking multinationals, the same activists have long overlooked other more dangerous pollution. Why, for example, do environmental activists and even the government continue to ignore the unfettered use of liquid mercury by thousands of illegal gold miners in North Sulawesi and Kalimantan? While they pass it off as quaint indigenous mining, it is in fact organized and run by influential regional power-holders.

Freeport isn't about to abandon what is now a $12 billion investment. Nor does a government close a mine that has already brought in revenues of $33 billion and promises billions more over the next 40 years. Last year, a quarter of a decade after going into Papua, the company's revenues hit an all-time high of $4.1 billion, and it remains Indonesia's largest taxpayer and one of its biggest employers, with more than 18,000 workers.

Freeport may be stocked with people working on its annual $60 million-plus environmental and community development program, but the latest outcry shows once again that it will probably have to resign itself to the role of everyone's favorite whipping boy. The target this time around has less to do with those issues and much more to do with its relations with the equally reviled Indonesian military.

While the 1991 Contract of Work doesn't specifically refer to the military, the company is bound under its enabling provisions to "develop special facilities and carry out special functions", including "free medical care and attention to all its employees and all government officials". For Freeport, providing facilities and monthly allowances to the troops makes perfect sense when the government itself is unable to offer adequate budgetary support.

The company learned a hard lesson back in 1994-95 that it was much better to have contented soldiers than resentful ones when it was accused of complicity in the deaths of Papuan activists on its concession - including some who had been imprisoned in company-provided containers. Freeport denies it had anything to do with the killings and the case is still unresolved. The government's civilian presence in the area then was limited to only 50 officials, leaving the company to provide most of the essential services, including the security for the mine itself.

Freeport may have relished that proconsul role in the early days of its presence, allowing it the freedom to do what it wanted. But as times changed in the global mining industry, its position became increasingly uncomfortable, finally coming to a head in March 1996 when riots broke out in the high-altitude mining camp of Tembagapura and in Timika, the clapboard coastal town that depends on Freeport for its economic livelihood.

What sparked the violence has always been a mystery, but Freeport employees and security staff claim they saw straight-haired men carrying walkie-talkie radios directing the rioters in Tembagapura and later in the destruction of Freeport's new $2 million state-of-the-art environmental laboratory, built to monitor the quality of the water in the Ajkwa River - the conduit for tailings, or waste rock, from the mine.

Human-rights groups blamed the military, accusing it of deliberately stirring up trouble so it could increase its influence in Papua. Freeport security officials, suspicious that the laboratory had been specifically targeted, have long wondered whether radical environmental activists may have been behind the disturbances that left at least three people dead and scores wounded.

In the end, at the company's request, the government stationed a battalion-sized task force at the mine, built around a strong core of well-disciplined Army Strategic Reserve (Kostrad) combat troops. Anxious to ensure they were well looked after, Freeport spent $32 million on building new barracks and other amenities in late 1996, and also set aside an annual budget of $6 million to $7 million for ongoing support.

Over the past nine years, 75-85% of that money has been for in-kind goods and services - housing, food, medical care and transportation. The soldiers use Freeport's dining facilities, with the company paying the food services contractor for an extra 850 people per sitting. The company similarly reimburses medical expenses for soldiers treated at two modern, well-equipped hospitals, something they would be unlikely to find in most other parts of the country.

What leaves Freeport open to scrutiny is the remaining cash disbursements, which are done through wire transfer to unit bank accounts where the signatories are individual officers. Much of this money is for a monthly per diem of $35 for each soldier and $50 for each officer to offset the cost of living and working in a remote area. Privates and non-commissioned officers, for example, can exhaust their entire month's salary making a five-minute phone call to check on their wife and children living in far-off Java.

One former Freeport security employee said it was decided early on not to send the funds through the military's Jakarta headquarters because "it would never have got to the guys on the ground, hence forcing them to steal and extort for the supplemental money they need". Some local unit commanders did not have bank accounts, relying instead on paymasters and couriers. In other cases where they did have one, it was only used for official military transactions.

For a long time, many refused Freeport's repeated requests for them to open accounts in their unit's name, afraid of losing control of the funds. Even the banks resisted. In fact it was only in late 2002 that the company finally persuaded the officer corps to adapt the practice. "We constantly monitored the payments to make sure the soldiers received it," recalled the former employee. "The commander would have faced a revolt if he didn't pay out because every soldier and policeman knew exactly how much he was allotted."

Additional funds have also gone to the regional command in the provincial capital Jayapura - a scheme that began under the now-retired Major-General Johnny Lumintang, still regarded among Western diplomats and other independent observers as one of Indonesia's ablest and cleanest officers. Lumintang wanted to replace combat patrol posts with civil-affairs personnel, but he lacked the funds to carry out the hearts and minds programs needed to implement it. Freeport obliged.

The company has since financed numerous projects that have run from about $90,000 to $150,000 a year. The money is paid directly to the regional commander and, in one year for example, was used to buy new equipment for a run-down military hospital in Jayapura, Papua's province capital. The company has all along required a written program and a full costing of materials and services, along with an on-site inspection in some but not all cases.

A third financing category is the reimbursement of administrative and logistics costs that are over and above normal expenses. Often this includes establishing and maintaining communications nets, paying for investigations and disciplinary actions and also for the use of the military's aviation assets. The money, which never amounts to more than $1,500 a month for each command, is wired to the regional army chief and individual unit commanders.

Although Freeport has never denied paying the Indonesian military, it only began disclosing the aggregate amounts in 2002-03 after the ambush deaths of two American schoolteachers and their Indonesian colleague on the road to the mine raised questions about the company's relationship with the military. It continued to withhold details of individual payments, however, which were later disclosed in embarrassing detail by Global Witness, a London-based investigative organization that works to expose links between natural-resource exploitation and human-rights abuses.

What wasn't reported in those findings was what the amounts were spent on, even though that information must have been available as well. Those are noted in the company's general ledger and also in much more detail in the records of the firm's security department, made available to the US Federal Bureau of Investigation (FBI) when it was called in to investigate the ambush. They are now being scrutinized by investigators from the US Securities Exchange Commission and the Justice Department, responding to renewed complaints from the New York City comptroller, representing shareholders of city pension funds.

While it might look suspect to outsiders, it is not clear how this practice contravenes the United States' Foreign Corrupt Practices Act, which invariably involves commercial contractual arrangements. The military is not involved in any of that. If the issue is bribery, then what are army commanders actually being bribed to do? After all, protecting the mine is already part of a commander's duties and would reflect badly on him if he failed.

In 2004, Freeport and the Trikora regional command signed an agreement on arrangements to secure what the government has designated a "vital national asset". That was followed on January 27 this year with a decree, issued by the political coordinating ministry, which provides a specific, but belated, legal basis for the corporate assistance provided to government security forces guarding both the Grasberg mine and ExxonMobil's gas fields in Aceh.

For all of the current hue and cry, the results of Freeport's largesse are now readily apparent in the almost total absence of serious behavioral problems over the past few years. "The soldiers we saw appeared much better in discipline and dress than anything I've seen in Indonesia," said one Western military officer who recently visited Timika as part of a rare inspection tour. "The officers all looked like high-caliber people."

The inability of the army and the police to support their people in the field had disastrous consequences during the bloody sectarian strife on the eastern island of Ambon in the early 2000s. Forced to depend on local communities to supply them with food and other essentials, whole units disintegrated and joined forces with either the Christian or Muslim camps. Thousands died in the fighting.

As with Freeport, the military is finding it difficult to live down a reputation for human-rights abuse. Its critics still refuse to accept that the army command had nothing to do with the killing of the schoolteachers in the August 31, 2002, ambush. Brushing aside the FBI investigation and the recent arrest of eight Papuan independence activists, media reports continue to cast suspicion on "the military" - the inference being that the institution itself was involved.

Investigators feel there may have been a degree of military involvement, but only among low-ranking soldiers in the local district command who have little to do with mine security. Three months before the surprise attack, the command conducted an internal inquiry into a Papuan non-commissioned officer who had sold 400 rounds of ammunition on the black market. It is that case that is thought to have provided the FBI with valuable leads.

It is not known what happened to the ammunition, but the hundreds of rounds expended in the 2002 shootings were starkly out of character with a rag-tag, bow-and-arrow resistance force that normally doesn't have enough bullets to fill a magazine. It is that and the military's reputation for abuse that no doubt persuaded commanders they would be blamed no matter what happened.

In a private conversation, former armed forces chief General Endiartono Sutarto said he is still incensed over a Washington Post report that wrongly implicated him in the ambush. In fact, Western officers credit Sutarto with doing a lot to clean up the army in the three years he held the post. Perhaps the best illustration of that success has been in Aceh, where a peace agreement with the separatist Free Aceh Movement (GAM) appears to be holding.

These days it is not only Freeport's mine that preoccupies military planners as they look to improve Indonesia's eastern defenses and keep the Papuan separatist movement in check. Before the plan was put on hold, Timika was to be the brigade headquarters for a third Army Strategic Reserve division, to be based in the western Papuan seaport of Sorong. The two existing Kostrad divisions are both on Java.

As for Freeport, there is no question it received special treatment from Suharto during his 32-year rule. But the president was clearly grateful that the company took such a huge gamble on his fledgling administration in the late 1960s, at a time when investing in then-impoverished Indonesia - let alone far-off Papua - was a wildly risky venture.

As the years went by, the mine became the cornerstone of Suharto's eastern development plan and Freeport's chief executive, James "Jim Bob" Moffett, enjoyed unprecedented access, flying into Jakarta in his private Boeing 757 jet on regular visits. A big, larger-than-life Texan, Moffett would leave invited Indonesian officials slack-jawed with his impromptu Elvis Presley impersonations at staff gatherings.

But his roughshod style and a culturally taboo habit of loudly banging the table when he was upset also made him a host of enemies. One rancorous meeting with Moffett turned then-environment minister Sonny Keraf into a life-long foe. Now in his new role as a member of the opposition Indonesian Democratic Party for Struggle (PDI-P), Keraf also happens to be the vice chairman of the parliamentary commission on the environment.

Another prominent critic is Amien Rais, a onetime presidential candidate and founder of the National Mandate Party (PAN). Rais's anti-Freeport rhetoric, which appeals to Indonesian nationalists in particular, goes back to the Suharto days when he accused foreign resource companies of tax evasion and other irregularities. He has now resurfaced, this time joining the chorus over Freeport's relationship with the military.

After Suharto's fall in 1998, Moffett's visits tapered off sharply, in keeping with a "no tall trees" policy he introduced to lower the company's profile. One of the few occasions he has slipped into the country was in late 2003, soon after a massive landslide in the Grasberg pit killed eight Indonesian employees and led to a severe cutback in production. The publicity was surprisingly muted, but Moffett wasn't happy.

Still, these have been halcyon years for Freeport, with copper prices at an all-time high, gold not far behind and the company's share price soaring to levels no one thought possible five years ago when political risk was seen as a major drag on value. Grasberg's current reserves will last until 2041 - but that's only based on annual replenishments. If the company began an active exploration program again, they would probably be considerably larger.

Although the company is portrayed in most media reports as a gold miner, sitting as it does on one of the largest gold reserves in the world, it is in fact a New York Stock Exchange-listed copper play that uses its rich gold grades to offset the production cost of copper. That enables Freeport to produce copper at 10 cents a pound, compared with the 50-60 cents for most other mines around the world.

The Grasberg mine has produced 16.1 billion pounds of copper and 23.3 million ounces of gold net since it began production in 1988, shortly after exhausting its initial discovery, which was first discovered by a Dutch explorer in the 1930s. The mine's reserves are currently estimated at more than 40 billion pounds of copper and 46 million ounces of gold.

It is no secret that Freeport ignored environmental concerns for the first 20 years. But then so did virtually every other mining company around the world. Miners, at least in those days, were not instinctively sensitive people. But little by little Freeport has had to learn not only about lessening the impact of what it does on the environment, but also on helping the Amungme and the Komoro and other local tribal communities along Papua's southern coast.

Because it has a higher profile than anyone else, Freeport has been forced to learn faster. Its executives acknowledge it has been a long and difficult road. A scheme it initiated in 1997, for example, to provide 1% of the mine's revenue to seven local tribal groups has been an unending headache since its inception. But the company perseveres. These days, it simply has no choice.

It is hoped by the time the entire Grasberg operation goes underground in 2012-14, Papuans will have become the core of the company work force, rather than the minority. The closing of the 2-kilometer-wide open pit will see daily ore output drop from 250,000 tonnes to about 160,000 tonnes. That also means fewer tailings flowing down the Ajkwa - as it has done with full government approval since the beginning.

Freeport's riverine tailings deposition area makes for an ugly sight - a gross acceleration of a process that occurs naturally with all other major rivers plummeting out of the central highlands. Hemmed in on both sides by man-made earthen levees, the gray expanse of ground-up waste rock covers 160 square kilometers and will eventually rise to 20-30 meters at its highest point.

Most of the criticism about Freeport up to now has focused on this one issue - without anyone ever mentioning that there is no other viable method of disposal. Maintaining a tailings dam in the earthquake-prone highlands, with its high rainfall, would invite disaster. Piping it down into a lowland dam would have created a 100-200-meter high unstable mound on swampy land that would have carried the risk of catastrophic release.

An alternative might be disposal at sea, the method used by Newmont in North Sulawesi and also in its Batu Hijau mine on the island of Sumbawa, east of Bali. But engineers say the Arafura Sea is so shallow, the tailings would have to be piped more than 90km before reaching deeper waters. Even then, there would be a risk of currents eventually depositing the waste across Australia's Great Barrier Reef to the south.

The Ajkwa may be a mess, but it is only one river in the vastness of a province that is three and a half times the size of Java. Lost in all the bad publicity has been Freeport's successful efforts at ridding the area of malaria and the world-class medical facilities it provides. The company has also shown that with the addition of natural and artificial nutrients, anything can grow on the tailings - from pineapples and vegetables to sago, a lowland Papuan staple, and oil palms.

In a sign of what Freeport is up against, Environment Minister Rachmat Witoelar was recently forced to acknowledge that a statement he issued on February 13 saying there were "preliminary indications" the tailings were toxic was based on December's New York Times report - and not on an investigation now being conducted by his own ministerial team. Their scientific findings are due some time next month.

While it appeared the ministry's 25-man team was responding to the latest outcry, it has had unrestricted access to the mine site since last year when Freeport elected to join a volunteer corporate monitoring program, along with a collection of other foreign resource companies. Last week the company served the team an outdoor lunch including fish and shrimp from the river and fruit and vegetables grown on the tailings.

The company insists that proper management does a lot to minimize the leaching of residual amounts of copper, which amount to about 14% of what was in the ore before it went through the mill. While higher levels of copper are found in fish and shellfish, the company insists it is within internationally recognized safe health limits. Indeed, one of the company's current concerns is the depletion of fish stocks caused by the increasing number of people now fishing in the river estuary below the deposition area.

The tailings that end up around the mouth of the estuary and settle along the seashore are now being used to grow mangroves, which in turn are creating new ecosystems. Long-term, Freeport may be proving that with careful thought and constant experimentation the environment can rebound from the impact of mining. And that's not what a lot of its blinkered critics want to hear.

John McBeth is a former correspondent with the Far Eastern Economic Review. He is currently a Jakarta-based freelance journalist.

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