Indonesia Update

Indonesia Update

18th September 2006

Freeport’s Façade Fails Amidst Investigations and Divestment

by Abigail Abrash Walton and David Meek

Tok Blong Pasifik, A newsletter of the Pacific Peoples' Partnership, Summer 2006

It appears that the ‘iron curtain’ of impunity that the New Orleans-based management of Freeport McMoRan Copper and Gold, Inc. (NYSE: FCX) have carefully constructed as a barricade around the company's West Papua mining operations is developing a widening crack. Since the start of mining activity in the early 1970s, Freeport has succeeded in blocking a significant degree of outside scrutiny of its impact on the communities and ecosystems within its massive project area. The Indonesian government and armed forces have cooperated in the constant effort to keep the area closed from independent investigation, turning away United Nations human rights monitors, lawyers representing local affected community members, journalists, environmental experts, and others.

Now, in an unprecedented avalanche of attention, Freeport has become the focus of numerous investigations -- by Indonesia's Ministry of Environment, the Indonesian parliament, and the U.S. Justice Department and U.S. Securities and Exchange Commission (SEC). In addition, major shareholders, such as the New York City and Norwegian governments' pension funds, have taken concrete action in response to Freeport's governance and environmental practices. The legal and economic consequences that Freeport currently faces are arguably more severe than in 1996, when indigenous Amungme traditional landowners sued Freeport in the U.S. federal and Louisiana state courts, or when the U.S. Overseas Private Investment Corporation (OPIC) cancelled the corporation’s political risk insurance in October 1995 due to OPIC's determination "that Freeport's implementation of the Project, and especially its tailings management and disposal practices, have severely degraded the rainforests surrounding the Ajkwa and Minajeri Rivers. Additionally, the Project has created and continues to pose unreasonable or major environmental, health or safety hazards with respect to the rivers that are being impacted by the tailings, the surrounding terrestrial ecosystem, and the local inhabitants. (for full text of letter, see http://www.moles.org/ProjectUnderground/motherlode/freeport/opicletter.html).

During the past year, a series of thorough investigative newspaper articles and non-governmental organization (NGO) reports have been published, exposing Freeport’s payments to the Indonesian military (TNI) as well as the environmental degradation wrought by the corporation's mining practices (see, for example, http://www.eng.walhi.or.id/kampanye/tambang/frpt-report-may-06/). What makes some of these current exposés so significant is that their data are derived from Freeport’s own documents. These company reports, which include financial audits and environmental impact assessments, were conducted either by Freeport itself or its subcontractors, and document illegal activity at a systemic level. In a lengthy front-page investigative news article on December 27, 2005, The New York Times cited company documents outlining the massive extent to which Freeport management have been allocating money to individual Indonesian military and police officials. These records document that between 1998 and 2004, the corporation paid well over U.S.$20 million to military and police generals, colonels, majors and captains, and entire military units. A Freeport spokesperson, asserting that the payments were not inappropriate, said “We don’t bribe…assisting security personnel on duty is just normal. If you give some food to your starving guard, that is normal, right.” However, The Times maintains that the company used these types of purportedly ‘necessary expenditures’ as an ostensibly legitimate means of funneling payments of up to $150,000 for individual officer’s annual food stipends (a seemingly odd allowance considering Freeport provides three meals a day to its military guards).

Though reportedly it is against Indonesian law to make payments to individual military officers, Freeport has countered that payments to the TNI were required by the Contract of Work (CoW) that the company originally negotiated with the Indonesian government in 1967 and reaffirmed in 1991. However, after reviewing each contract, The Times and other investigators have determined that there were no clauses necessitating payments to the military. Adding to the media dialogue concerning these allegations of bribery and extortion, Erry Riyana Hardjapamekas, the vice chairman of Indonesia's anticorruption commission, publicly affirmed that if Freeport financially compensated individual officers, "that's corruption." Mr. Hardjapamekas also indicated that his department would assist any investigation by a U.S. government agency into these payments.

Now the U.S. Justice Department is investigating whether Freeport’s business practices violate the U.S. Foreign Corrupt Practices Act. Indeed, U.S. Senator Joseph Biden (D- DE), the ranking Democrat on the Senate Foreign Relations Committee, stated in January 2006 that these ''large payments by Freeport officials directly to individual Indonesian Army officers are highly irregular. It is time for the Justice Department and the Congress thoroughly to investigate Freeport's business practices in Indonesia.”

In June 2006, the Norwegian government made international headlines when it announced its decision to exclude Freeport stock from its U.S. $230 billion pension fund. This decision was based on a judgment that Freeport's dumping of toxic mine waste into local river systems has caused environmental damage that is "extensive, long-term and irreversible," with "considerable negative consequences for the indigenous peoples residing in the area."

Sharing similar concerns about risks to shareholders resulting from Freeport management's practices, the New York City Comptroller's Office, which manages the city's five pension funds and with a roughly U.S.$37 million investment in Freeport, has taken a variety of actions aimed at making Freeport's operations more transparent. The New York City Employees Retirement System has filed shareholder resolutions annually during the past three years calling on Freeport management to report to shareholders about the company's relationship with the TNI. Earlier this year, the Comptroller requested the SEC to investigate Freeport for providing false proxy statements to shareholders in violation of the Security Exchange Act, and an SEC investigation is now underway.

As investor and public pressure builds, the Indonesian parliament declared in May that within two months it would begin renegotiating Freeport’s 1991 CoW. The impetus to reevaluate the CoW is related to the contention that the company should be paying significantly higher taxes to the government. In 2005, the company reportedly paid the country U.S.$1 billion in tax revenues. However, Indonesian Vice President Jusuf Kalla has alleged that the “country should have received revenues three times what the company actually paid” because gold prices recently have hit a 25-year high, at more than $550 an ounce, and Freeport’s profits have doubled within the last quarter, with a share price valued at U.S.$54.50 (July 14, 2006). The Indonesian House of Representatives has established a Working Committee on Freeport and wants to increase the central government's ownership of Freeport shares from the present 10 percent to 50 percent. However, the administration of President Susilo Bambang Yudhoyono itself reportedly is only looking for a 10-20 percent increase. Indonesian Energy and Mineral Resource Minister Purnomo Yusgiantoro told The Jakarta Post in June 2006 that "The renegotiation will begin once the government completes its evaluation of the corporation’s community development programs, and assesses the current mining practices and level of production."

At the start of 2006, the Indonesian Ministry of Environment launched an unprecedented investigation into Freeport's mining practices, The government’s investigation, which was carried out by 24 independent experts, confirmed that that the Ajkwa River Estuary used by Freeport to dispose of thousands of tons of mining waste a day has been severely damaged, that Freeport was violating Indonesia's 2001 Water Quality Regulations, and that the company had been asked to provide an alternative method for waste transport. Although for decades the company has been using the river as a repository for its toxic tailings, the Environment Minister Rachmat Witoelar said that Indonesian law banned the riverine disposal of waste in 1990, and that the corporation has no special legal dispensation to do so.

In late March 2006, Mr. Witoelar indicated that he expected Freeport to receive the worst environmental rating possible, and that the company must clean up its practices or face court action. The minister stated that "We want Freeport to start following the rules here. Freeport shouldn't be its own country within a country. There are 500 other companies like Freeport here that follow the rules." Despite the tough rhetoric, the ministry’s position is not totally clear. Approximately six weeks after publicly castigating the company, Witoelar stated that the government’s investigation had found that there was only minor damage done to the river and that Freeport was “abiding by the law, following all directions.” Those watchdogs who have been monitoring Freeport for years aren't buying Mr. Witoelar's apparent change of heart in holding Freeport accountable. As Farah Sofa, the deputy director of the Indonesian Forum for the Environment (WALHI), said in reference to the government’s investigation "We think it is a waste of time. Freeport has long been on the wrong side of the law. There needs to be direct consequences for the company's actions."

Up to its usual tactics, Freeport seems to be trying to use "quiet diplomacy" with some critics while attempting to divide and conquer others. When 15 local Papuan legislative councilors serving on the Special Committee for Freeport announced their intention to travel to company headquarters in New Orleans to highlight Papuans' concerns about Freeport's practices, local community leaders held a press conference in Jakarta to oppose speaking to Freeport on management's home turf. Amungme community leader and 2001 Goldman Environmental Prize winner Yosepha “Mama” Alomang stated, "I urge the councilors not to go abroad to lobby or negotiate with Freeport bosses. I stress to everybody that every dialog should be held in Papua and involve locals who are suffering from the company's operations. Or else, the likelihood of the company's operations being shut down will only become greater." Kamoro community leader Peter Yanwarin and Timika church leader Father John Djonga said such a visit would be undignified. Djonga stated that "they (Freeport) are the guests and we are the hosts. They are the one who should respect us by coming here and having an equal and honorable dialog."

Quite right. And if the massive pressure on Freeport continues, perhaps we'll next be reporting on the genuine dialogue that affected communities have been calling for for more than a decade.

Abigail Abrash Walton is on faculty in Antioch University New England’s Department of Environmental Studies. She served as coordinator of a joint Indonesian/International Independent Assessment Team, convened at the request of U.S.-based institutional investors in Freeport McMoRan Copper & Gold, Inc., to examine human rights conditions in the Freeport project area. She is the author of Development Aggression: Observations on Human Rights Conditions in the PT Freeport Indonesia Contract of Work Areas and Incidents of Military Violence Against Indigenous Women in Irian Jaya (West Papua), Indonesia, published by the Robert F. Kennedy Memorial Center for Human Rights (Washington, D.C.) as well as numerous articles about the Amungme, Kamoro, Freeport, West Papua and U,S. foreign policy.

David Meek is a master's degree candidate in conservation biology and advocacy at Antioch University New England. His research interests focus on traditional people, in the context of how their economic needs influence their interactions with the environment, and how these practices affect efforts at environmental conservation.