[ppi] [ppiindia] Freeport in Indonesia: Filling in the holes

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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. 

(Copyright 2006 Asia Times Online Ltd. All rights reserved. Please contact us 
for information on sales, syndication and republishing .)

[Non-text portions of this message have been removed]



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