Indonesian government finalizes takeover of Inalum smelter

November 2013 marks a milestone in the history of Indonesia’s resources industry as the Indonesian government is finalizing the takeover of Inalum, the only aluminum smelter that exists both in Indonesia and Southeast Asia, from its long-time partner, Nippon Asahan Aluminum (NAA).

Producing hundreds of thousand tons of ready-to-use aluminum metal, Inalum could be the key for Indonesia not only to fulfill its demand for aluminum but also to become an aluminum-exporting country, as all added-value goes back to the national economy.

Although negotiations have been tough, reflecting the unwillingness of NAA to give Indonesia full access to its lucrative investment, soon Inalum will be 100 percent Indonesia’s.

However, there is still a lot of work to be done in other cases. I would say that the next priority will be another “Inalum” in the far east of Indonesia’s archipelago, gold and copper giant PT Freeport Indonesia (PTFI).

The challenges to get a larger portion (although not 100 percent) of the ownership in PTFI are far greater as its operation is under the glove of several agreements signed or regulations issued earlier (e.g. Contract of Work (CoW) signed in 1991).

Meanwhile, in the master agreement with NAA, it is clearly stated that at the end of October 2013, the remaining asset/share transfer must be conducted.

Now the opinions about what Indonesia should do with PTFI have been narrowed down to two opposite groups: To allow PTFI to operate as usual until the end of the CoW or renegotiate its contract.

According to the CoW that was signed by Indonesia and PTFI in 1991, PTFI must give 9.36 percent of its full ownership to the Indonesian government by 2001 and 2 percent every year until 51 percent of PTFI ownership is possessed by a combination of Indonesian government and Indonesian-based companies.

The Mining Law stipulates that 51 percent of mine or processing site ownership must be sold to Indonesian interests, something not dissimilar to the CoW signed in 1991. If PTFI argues that it did not fulfill its divestment responsibility because of Government Regulation No. 20/1994, it cannot claim that the Mining Law did not apply to it.

Some people, especially those who benefit from foreign direct investment, complain that changing regulations can scare away foreign investors.

About 30 years ago, history witnessed how Falconbridge accommodated the request of the Dominican Republic to pay more royalties and taxes than their initial agreement had stipulated.

In the case of PTFI, when it claimed to be the biggest taxpayer in Indonesia, we have to understand that unlike royalties, its taxes are calculated from its net profit.

Clearly, asking investors too much when business is bearish is not nice but giving the country that owns the minerals too little is bullish. Asking for a renegotiation is not taboo.

To achieve win-win solutions, renegotiations are a two-way process and require goodwill from both parties. It should be remembered that the CoW signed in 1991 is binding to both parties.

PTFI can ignore any request from the Indonesian government (such as increase in royalties) based on the CoW signed in 1991.

However, a condition that develops to a dispute that can only be settled in international arbitration must be avoided. Because if international arbitration court is chosen to determine who is right and who is wrong, day-to-day operations can be disrupted amid years of waiting and millions or even billions of dollars can be lost as a consequence. It is clear that the Indonesian government and PTFI must cooperate to avoid this.

Rozik Boedioro Soetjipto was appointed president director of PTFI in early 2012. Under him, PTFI looks more cooperative than ever before. He agreed to raise the royalties that must be paid for every unit mass of gold PTFI produced from 1 percent to 3.75 percent, obeying Government Regulation No. 45/2003.

This also applied for silver and copper and corresponds to the significant increase of non-tax revenue when taking into account the massive amount of gold, silver and copper produced by its mines. Soetjipto’s compliance with Indonesian government regulations is hardly surprising as he once served as director general of mines — a testament to his dedication to the country.

It would be much better if he was able to produce several memorandums of understanding (MoUs) between PTFI and the government on necessary amendments to the contract because no one knows how long he will be the leader of PTFI. Those involved in the PTFI renegotiation process must remember that (hungry) people cannot wait!

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