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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