Contracts and communities

Down to Earth No. 45, May 2000

Opposition is mounting to large-scale mining in Indonesia as communities speak out about its effects on their lives and the environment, but foreign companies are warning the Wahid government not to change the contracts they signed during the Suharto regime.

Indonesia's foreign-dominated mining industry is on the defensive. Communities and NGOs are calling for a halt to all mining. Local governments want more money from companies and more control over their activities. In Jakarta ministers are arguing over whether or not they can change mining contracts signed during the corrupt rule of the Suharto period. After three decades of opportunity things have become uncertain for the mining giants and their prima donna status is under threat.

In response, companies warn of the dire consequences for investor confidence that changing contracts would bring. They know that President Wahid and his ministers are committed to a policy of attracting foreign investment to try and pull Indonesia out of economic crisis and are making full use of this scare tactic to retain the privileges they enjoyed under Suharto. The strategy appears to have worked up to a point, as far as the president and the majority of the cabinet is concerned. The official government line is to honour contracts in order to safeguard legal certainty and encourage foreign investment. But companies will be expected to make voluntary concessions to lessen social and environmental impacts and increase Indonesia's share of the profits.

In recent weeks the contracts of PT Newmont Minahasa Raya and PT Inco Indonesia in Sulawesi have been under attack (see below), but most attention has been focussed on the US-based PT Freeport Indonesia, operator of the enormous copper and gold mine in West Papua. The company, which is part-owned by Britain's Rio Tinto, includes the disgraced Indonesian timber tycoon Bob Hasan and Suharto's son Sigit among its Indonesian investors. Around 2.3 million ounces of gold were extracted last year from the Grasberg mine. The mine also produces up to 220,000 tonnes of waste material per day which is dumped on the Ajikwa River system and washed downstream toward the Arafura sea. Here it has smothered rainforests, clogged up waterways and destroyed the livelihoods of local indigenous peoples.


Changing for the better

Donna Woodward, a former diplomat at the US embassy in Jakarta, has launched an attack on foreign companies which demand that their contracts be honoured. "Fairness is the theoretical foundation of all contracts", she argues in a Jakarta Post article. But there are many contracts in Indonesia which are unfair - they "sold the country's birthrights to the biggest international gift-givers" - and can justifiably be changed. She points out that contract modification is a normal occurrence and the right to do so is usually provided for in a contract.

"Indonesian officials should not be intimidated or "conned" by well-dressed international bullies like Henry Kissinger into believing that challenging the terms of suspect contracts and seeking renegotiation will necessarily harm Indonesia's competitive standing as a location for investment."

Woodward points out that revising contracts may have less of an impact on foreign investment than does the community unrest caused by the impacts on local people of their exploitative contracts. "Indonesia should not simply appeal to foreign countries' guilt. Indonesia has every justification for asserting its right to a fair deal from investors, Mr Kissinger and friends notwithstanding."

(Jakarta Post 21/Mar/00)

The Freeport/Rio Tinto operation - the first foreign business deal signed by former President Suharto - has become a symbol to many Indonesians and West Papuans of all that is wrong with large-scale foreign-owned mining and its disregard for the rights of local communities and the environment. For West Papuans the mine epitomises Indonesia's brutal, exploitative occupation of their territory.


The Freeport contract

The main arguments over Freeport's contract are:

  • whether or not the original contract (1967) was valid and whether the current contract (signed 1991), should be revoked;
  • whether parts of the contracts should be changed in line with the post-Suharto era and regional autonomy measures introduced last year;
  • whether or not to revoke a Suharto decree of 1994 which frees Freeport of its obligation to divest 51% of its shares within 20 years.

The reasons used for revoking or amending the contract range from the devastating social environmental impact, to corruption and lack of financial benefit for Indonesia and West Papua. The legality of the original 1967 contract is under question as, at the time, West Papua was not yet internationally recognised as part of Indonesia.

Those in the government in favour of amending the 1991 contract include environment minister Sonny Keraf, who has attacked the company's environmental record, and outgoing governor of Papua, (also State Minister for Administrative Reforms) Freddy Numberi, who has called on Freeport to donate 20% of its shares to the regional administration. (Deputy governor J.R.G. Djopari later said he would ask central government to split its 8% share when regional autonomy is implemented).

Opponents of changing the contract include foreign minister Alwi Shihab, and mines and energy minister Bambang Yudhoyono, who use the same arguments as the mining companies: that changing the contract would undermine legal certainty and damage investor confidence in Indonesia.


Investors delay, withdraw

At least sixteen foreign mining companies have delayed projects in Indonesia because of security concerns or financial problems, according to Simon Sembiring, the director of mining development at the Ministry of Mines and Energy. Some of the companies, had delayed work because their concessions overlapped with protected forests. (Jakarta Post 18/Apr/00)

Ten companies applying for mining contracts in Central Kalimantan have withdrawn, according to acting governor Rapiduddin Hamarung. This, he said, would have a negative impact on the province's investment climate. It still leaves 16 contracts of work in the province covering a huge area of more than 1.6 million hectares.

Central and East Kalimantan witnessed the most recent 'gold rush' of the 1990s which ended with the exposure of Bre-X's spectacular mining fraud in 1997.
(Asia Pulse 22/Feb/00)

Freeport, Inco, Newmont to stay under central control

The minister for regional autonomy, Ryaas Rasyid, has confirmed that the mining contracts of Freeport/Rio Tinto, Newmont and Inco will be controlled by central government when regional autonomy is fully implemented next year. Oil and gas projects and ports and airports will also remain under Jakarta's control.
(Media Indonesia 22/Apr/00) Several new investigations into the Freeport contract and the impact of its mining operations have been announced by government departments in response to the level of public opposition to the mine. These include a three month inter-departmental fact-finding mission organised by the minister for mines and energy, which is supposed to investigate allegations of corruption surrounding the 1991 contract renewal as well as social and environmental impacts. Bapedal, the government's environment protection agency, is carrying out its own investigations, while a parliamentary team is planning another mission to assess the effect of the mine on local people. A previous parliamentary mission in December last year recommended that the government review Freeport's contract as it had led to social and economic injustice, rampant human rights abuse and political tension.

Freeport itself has pulled out all the stops to persuade the government not to touch its contract. Henry Kissinger, former US Secretary of State and a member of Freeport's Board of Directors, was dispatched to Jakarta in February to bully the government into submission. Dr Kissinger urged the Government to honour the contract, saying it was "in the interests of Indonesia" to do so. President Wahid and his economics minister, Kwik Gian Gie, duly stated their commitment to upholding the contract. Then, in a move that astonished Freeport's critics, the president invited Kissinger to become his special political advisor. This would seem to continue the Suharto tradition of cosy relations between the Indonesian presidency and the company. Kissinger's visit was reinforced by the now well-worn warnings about investor confidence from US Ambassador Robert Gelbard and senior US state department official Thomas R. Pickering, who visited the mine in March.

WALHI, the Indonesian environmental organisation, reacted angrily to Kissinger's visit, accusing him of "intimidation". "We think his statement is unethical, bullying and ignores the democratisation process now underway in this country," said the group, which has campaigned hard to expose the environmental impacts of the mine.

Now WALHI is itself under attack: Ambassador Gelbard has called for American funders USAID to cut its funding for the organisation.

The Ambassador's intervention is another indication of the US' more aggressive policy towards Indonesia. According to the Far Eastern Economic Review, "Gelbard has few qualms about upsetting Javanese sensitivities or using development assistance for political objectives". Ominously, the Review also notes that USAID now answers to him personally in its funding of civil-society programmes in Indonesia (FEER 4/May/00).


Tom Beanal, new Freeport commissioner

Where does all this leave the West Papuans themselves? In January a deputation of Amungme people led by veteran campaigner and human rights award winner Mama Yosepha Alomang, lobbied MPs to shut down the mine. She and the Amungme Council leader, Tom Beanal, have both filed lawsuits against the company in the past, and have regularly spoken out about the negative social and environmental impacts of the mine.

So the news that Tom Beanal was to become a Freeport commissioner came as quite a surprise. His reasons for doing so - as reported by the news media at least - do little to clear things up. He says it is his "duty" and "right" as an Amungme leader and landowner to accept the post and that the community are behind him. He reveals that Freeport first offered him the job in 1997 but that the government blocked the move. "I should have assumed this post in 1967. So, it is far too late." When asked whether he wants to review the company's contract of work, Beanal answered that, if reviewed, the company, government and landowners should get equal shares of the mine's profits. "But, I'm not in a position to tell Freeport to leave Timika," he added. What is most important, he says, is that "we stand now more on an equal footing than before." It is not yet clear what being a company commissioner means.


Another tragic accident

A major waste spillage at the Freeport/ Rio Tinto mine on May 4th is thought to have killed at least four (nine, according to some reports) people, including mine workers. Four workers were swept away in the flood of acidic waste water which contained heavy metals.

(Source: WALHI 5/May/00, FT 5/May; AWSJ 6/May/00.)

It is hard to see how Tom Beanal will be able to reconcile his role as Freeport commissioner with his joint leadership of the independence movement when for so long Freeport has been seen as a symbol of Indonesian colonialism. One interpretation is that he has given up hope of closing down the mine and wants to secure some compensation for the beleaguered communities living nearby. It is also questionable whether Freeport will really start treating as their equal a man whose community they have sidelined for so long. For the company, it is more likely that the move is designed to try to head off more local opposition to the mine by co-opting one of its best known critics. Wahid's motive in lifting the ban on Beanal's appointment may be to show the independence movement how it is possible after all for Indonesia, West Papua and Freeport to work together, in line with his campaign to retain the territory as part of Indonesia.
(Source: Gamma translation, No. 5, Year II, March 22-28, 2000)


Environmental audit slammed

The glowing report of Freeport's operations produced by US-based auditor Montogomery Watson last year has been received with incredulity by environmentalists and government ministers alike. The head of Bapedal in West Papua, Ali Kastella, said the report failed to reveal the extent of ecological damage and did not explain adequately what Freeport has done to overcome the problems. The company published a full page summary of the audit in at least four national newspapers - a move that has annoyed environment minister Keraf in particular as the audit was not first verified and neither was the auditor approved by his department. Keraf has also said there are irregularities with Freeport's environmental impact analysis which need to be addressed.

Kastella's office recently published findings of an investigation into the downstream impact of the mine which found that 133,000 hectares of land in the company's concession had been seriously damaged and nearby rivers polluted. Only 124 hectares had been reclaimed and then only with short life-span plants that would not bring long term benefits to local people. Freeport rejects these findings, saying that "tailings deposition is currently impacting 13,300 hectares."

One concern is that the auditors, Montogomery Watson, were paid by Freeport and could not, therefore, be considered truly independent. The government is considering a new tax to overcome this difficulty. The idea is to tax mining companies between 10-15% of investment, or impose a tax on net profits, put the money into a trust fund and use it to pay for independent audits. No doubt the mining industry will lobby hard to stop this getting off the ground.
(Source: Indonesian Observer 2/Mar/00)


Rio Tinto quiet

It is worth noting that the other main shareholder in the mine, Rio Tinto, has kept quiet about the whole Freeport issue, preferring instead to publicise community development programmes at the two mines it operates in East Kalimantan. These are the Kaltim Prima coal mine and Kelian gold mine (visited recently by Britain's Ambassador to Indonesia) where, in fact, community relations remain problematic. The long-running dispute between the Kelian community and the company over human rights and environmental impacts remains unresolved. There is also concern about the mine's closure - due in 2003 - despite the company's assurances that it will "close the mine responsibly". (Asia Pulse 22/Mar/00; RT press release 22/Feb/00)


WALHI Freeport Action

Indonesia's leading environmental organisation, WALHI, has launched a letter-writing campaign, calling for an independent audit of the company's operations in West Papua and for the contract to be renegotiated.

For more details contact DTE: tel/fax:+ 44 (0) 20 7732 7984

or WALHI tel: 62 21 7919 3363; fax: 62 21 794 1673
email: or


Trade Unions in Australia, Europe and the US are backing a new shareholders campaign to demand that the company puts in place a workplace code of labour practice at its operations world-wide and to make the company's board more accountable to shareholders. For more information see