Development, Power, and the Mining Industry in Papua: A Study of Freeport Indonesia

Author(s): P. A. Rifai-Hasan
Source: Journal of Business Ethics , 2009, Vol. 89, Supplement 2: International Business
Firms, Economic Development, and Ethics (2009), pp. 129-143
Published by: Springer

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Journal of Business Ethics (2009) 89:129-143 ? Springer 2010
DOI 10.1 (X)7/s 10551 -010-0371 -y

Development, Power, and the Mining

Industry in Papua: A Study of Freeport
Indonesia P. A. Rifai-Hasan

ABSTRACT. This article seeks to determine whether PT largest gold mine on Earth in West Papua, Indonesia
Freeport Indonesia, an operating subsidiary of Freeport since 1973. In the initial years of its operation, the
McMoRan Copper and Gold Inc., has acted in environ company showed little concern for environmental or
mentally and socially responsible ways in the context of its
social issues. During this time, the company was in
operations in Papua, Indonesia, and how well it has
volved in human rights violations and gross environ
responded to the legacy left by its less responsible opera
mental degradation within and around the concession
tions from 1973 until the mid-1990s. This objective is
associated with its operations. Freeport's operation of
achieved by examining the company's impact on the
resources and assets with which it comes into contact as the mine had a disturbing effect on the life of indig
part of its operations, as well as through a historical review enous people and aggravated inequalities in Papua.
of the province of Papua and its incorporation into Indo However, the mine had a special relationship with the
nesia, Freeport's entry into Papua, and the company's New Order government, to which it paid a modest
engagement with international and Indonesian politics. portion of its considerable earnings in the form of
taxes, royalties, and stipends. Since the mid-1990s,
KEY WORDS: Freeport, Papua, Irian Jaya, develop increasingly well-organized protests by international
ment, environmental responsibility, social responsibility, groups, human rights organizations, national and local
Gold and Copper mining, NGO, the Indonesian New7 NGOs have forced Freeport to direct a new course by
Order government, United Nations, tailing
undertaking a number of social investment projects.
This began with the Grasberg mine operation, where
new mining and further exploration rights were
Introduction
granted to Freeport on stricter terms, especially as
related to the mine's benefits to the local community,
Freeport-McMoRan Copper and Gold, an American and the royalties and fixed payments. Moreover, after
transnational mining company, has been operating the Indonesian democratic reforms in 1998, the company
faced increased pressure to address growing demands
P. A. Rifai-Hasan is a Ph.D. candidate in Religion at Concordia for socially and environmentally responsible business
University, Montreal, where he is working on a thesis entitled practices similar to those undertaken by Shell, BP,
"The Muslim View of Social Justice in the Context of Eco
Unilever, and The Body Shop.
nomic Development in Indonesia." From 1998 to 2002, he
This essay discusses the current social responsibil
was a lecturer at Paramadina University, Jakarta, Indonesia.
ities of Freeport by examining the company's impact
He was a member of the staff of the Institute Jbr the Study of
on the resources and assets with which it comes into
Religion and Philosophy, Jakarta (1984-1992). He has
edited several books, including A Critical View7 on Devel
contact as part of its operations. At the end of this
opment (Jakarta: Asia Foundation and Institute for the Study
essay, I will consider whether the company has acted
of Religion and Philosophy, 1985); An Islamic Perspective in environmentally and socially responsible ways in
on National Development (Yogyakarta: Institute for the the context of its operations in Papua and how well it
Study of Religion and Philosophy and PLP2M, 1986); and has responded to the legacy left by its less responsible
The Legacy of Indonesian Islamic Intellectual Tradition operations from 1973 until the mid-1990s.
(Bandung: Mizan Publishers, 1981).

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 130 P. A. Rifai-Hasan

Freeport's entry into Papua the island of New Guinea. Before it was divided into
two provinces in November 2004, Papua was the
Soon after taking power in 1966, the army-domi largest province in Indonesia. Its 420,000 square
nated regime in Indonesia sought investment in the kilometers represent 22% of the Republic's total land
mining sector. It adopted a strategy, which allowed area. It differs markedly from the rest of Indonesia,
the first investors substantial leeway in setting up and its flora, fauna, and geography resemble those of
operations. In 1967, Freeport signed a contract with Papua New Guinea, the independent state on the
the new government in Jakarta to explore and mine eastern half of the island. Ethnically and culturally,
copper in West Irian in highly favorable terms (Hill, the majority of the indigenous people of provinces of
2000, p. 179; Leith, 2003, p. 13). This must be Papua and West Irian Jaya, who describe themselves
considered in the context of the Cold War. The as Papuans, are very different from the Asian popu
army-dominated regime, with US support, had just lations of Indonesia, rather, their ethnic and cultural
crushed an Indonesian Communist Party attempt to links he with their neighbors of Papua New Guinea
eliminate the army's leadership and to suppress other (Garnaut and Manning, 1974; Saltford, 2003).
political and social groups. Subsequently, the army Some coastal areas of Papua had a long history of
seized power from the Nationalist-Leftist Sukarno contact with traders and other seafarers from the
regime." The new regime concluded agreements Malay Archipelago, even before the arrival of
with the US and other Western powers to provide European colonialists. More fundamental and
an inflow of official Western aid and private Western widespread change, however, was caused by inter
investment into the country (Dickie and Layman, actions in modern times with the complex, literate
1988, p. 91; Robison, 2001, pp. 107, 110-111). societies of Europe and Asia. In 1660, the Dutch
The favorable terms granted to Freeport also East India Company recognized the sovereignty of
reflected the economic risks the company assumed the Sultan of Tidore of Maluku islands (Moluccas)
in undertaking the expensive, risky, and difficult task over "the Papuan islands in general." In 1828, the
of extracting copper from the Ertsberg, a copper government of "Netherlands India" (Dutch East
rich mountain of the Carstensz range in West Irian.3 Indies) formally took possession of the north coast
However, about the time the Freeport project west of the 141st meridian, and a July 1848 procla
became operational in 1973, the government mation laid claim to the whole of what is now Papua
demanded that the contract be renegotiated on terms and West Irian Jaya. The Netherlands' claim was
less favorable to Freeport (Dickie and Layman, 1988, mainly because of its proximity to their East Indies
pp. 91-92). On December 30, 1991, Freeport signed possession. Since the Sultan was a "vassal" of the
a new contract under a stricter foreign investment Dutch, that portion of the island was considered to
law. In accordance with the terms of the contract, belong to the Dutch East Indies. The Netherlands
the operating subsidiary, Freeport Indonesia, was established trading posts in the area after Britain and
incorporated in Indonesia and changed its name to Germany recognized the Dutch claims in treaties of
PT Freeport Indonesia (PTFI). In 2006, with esti 1885 and 1895. The eastern half of the island, which
mated reserves of 50.9 billion pounds of copper and came to be known as Papua New Guinea, was
63.7 million pounds of gold, PTFI operates the further divided between Britain and Germany in
largest gold mine and the most profitable copper 1885: Britain claimed southeast New Guinea, later
mine on Earth, in the area surrounding the known as the "Territory of Papua," and Germany
now-depleted Ertsberg and the newly discovered claimed the northeast, later known as the "Territory
Grasberg gold and copper deposits (Leith, 2003, of New Guinea." The southeastern part, British
pp. 63-64, 67-68). New Guinea, passed to Australia as "Papua" in
1906. The northeastern part and its offshore islands,
formerly German, became an Australian-mandated
Historical review territory after World War I, and the two were
administered by Australia as the "Territory of Papua
The Indonesian provinces of Papua and Irian Jaya and New Guinea" after World War II (Garnaut and
Barat (West Irian Jaya) constitute the western half of Manning, 1974, pp. 9-10; Saltford, 2003).

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 Mining in Papua: Freeport Indonesia 131

The 1949 agreement that recognized the The Cold War situation favored Indonesia's po
Republic of Indonesia as a sovereign state also stated sition on West Papua. Contrary to initial objections,
that the colony of West New Guinea was to remain Western countries, particularly the United States,
under Dutch rule, and stipulated that within 1 year eventually adopted Indonesia's position based on
the Netherlands and Indonesia would conclude the geo-ideological, political, and economic consider
issue of West New Guinea's future (Dick, 2002, ations. Eyeing Soviet and Chinese support for
pp. 170-171; Ricklefs, 1993, p. 146). However, the Indonesia over the issue, the United States seemed to
Dutch government attempted to keep possession of maintain that Indonesian control of the territory was
West New Guinea. This was challenged by Indo the only permanent solution to avoid Jakarta being
nesia, on the basis of West New Guinea's association "driven into the arms" of the Communist bloc.
with the Netherlands East Indies. Following a Dutch Britain and Australia also finally recognized the New
refusal to cede the territory, it became a source of York Agreement after it became clear that the US
growing tension between the two countries would not intervene militarily in case of war
throughout the 1950s and early 1960s. The United between Indonesia and the Dutch (Emmerson,
Nations General Assembly's refusal of Indonesia's 2005, p. 41; Penders, 2002, pp. 354-355; Saltford,
appeal in late 1957 prompted the Indonesian gov 2003, pp. 6-7, 11-14).
ernment to nationalize Dutch firms in early 1958. The end of the West Papua dispute was seen as a
Indonesia became increasingly annoyed when the valuable opportunity for improving US-Indonesian
Dutch began to prepare the colony for self-deter relations. In early November 1965, more than a
mination, proposed for 1970 (Chauvel, 2003, month after the failure of a Communist-supported
pp. 115, 119; Garnaut and Manning, 1974, p. 12; coup, when the army was gaining power over Pres
Saltford, 2003, pp. 2, 9-10). ident Sukarno, Freeport officially opened negotia
After the Indonesian government decided to use tions with the generals in Jakarta. Five months earlier,
force to prevent West Papua's gaining indepen in fact, Freeport had already reached a "preliminary7
dence, the Netherlands under American pressure arrangement" on the mining of Ertsberg. The com
agreed to withdraw from the territory and hand it pany's decision to proceed with the risky project was
over to a temporary UN administration. The New understandable, given its then-impressive connec
York Agreement, signed by the Dutch and Indo tions to the highest echelons of power in Washington,
nesia on August 15, 1962, agreed that the UN would and the United States' expanding role in the region
subsequently transfer administration of West Papua and its interest and influence in the events unfolding
to Indonesia by May 1963. Indonesia also agreed to in Indonesia. In time, Washington directly supported
carry out an "Act of Self-determination" by May Freeport's association with the new regime by guar
1969 to determine whether the Papuans wished to anteeing $60 million worth of loans from US lending
become part of Indonesia or to choose indepen agencies, thus enabling Freeport to proceed (Leith,
dence. In 1969, the Indonesian government held the 2003, pp. 2, 58; Saltford, 2003, pp. 7, 15).4 American
promised referendum, called the "Act of Free policy in West Irian has resulted in a great many
Choice"; it chose 1024 individuals who unani unintended consequences for US economic interests,
mously voted, on behalf of approximately 1 million as US President John F. Kennedy expected in 1962.D
Papuans, to incorporate West Papua into Indonesia. In April 1967, with the support of Washington,
The new Indonesian province was named Irian Freeport signed a favorable contract with the new
Barat, and later Irian Jaya ("Victorious Irian"). Indonesian government, which covered the mining
Although many Papuans and their supporters con of copper. The deal had benefits for three sides: the
tend that genuine self-determination did not take regime gained political support from the US gov
place in 1969, the official position of Indonesia, the ernment and prospective foreign investment and aid
UN, and almost all of the international community is to promote stability, legitimacy, and development;
that the Act met the requirements of the Agreement the company got a favorable contract; and for
with regard to Papuan self-determination (Garnaut the US government, it was a way of supporting an
and Manning, 1974, pp. 13, 20-21; Kingsbury, 2005, anti-Communist regime, which badly needed
p. 152; Leith, 2003, p. 12; Saltford, 2003, pp. 2-3). money. In terms of international law7, however, the

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 132 P. A. Rifai-Hasan

contract was controversial, since Indonesia did not tons of copper, gold, and silver, generating an
then have sovereignty over the area. Freeport chose average of $300 million of revenue annually for the
to go along with the situations for which the company" (Leith, 2003, p. 63-64). Second, adding
Indonesian and the United States governments were to its semi-covert operation, Freeport did not sell the
responsible. The two governments knew full well mine for $75 million, as had been offered. Instead, in
that the status of West Papua had yet to be decided 1988, Freeport announced that it had discovered the
in the UN-sponsored Free Act of Choice. However, "giant" Grasberg not far from Ertsberg.7 This
the Indonesian government, Freeport, and the US brought the company to sign new contracts with
government ignored this detail; the Freeport con Jakarta in 1991 and 1994.lS Once again, Freeport was
tract confirmed that Indonesia was open for business, not subject to environmental laws or required to
and by 1969 $1.226 billion of foreign capital and aid compensate the traditional landowners for loss of
had been poured into the country (Kingsbury, 2005, land. Because ofthat Freeport was accused of bribing
p. 156; Leith, 2003, pp. 58-61, 77; McDonald, government officials in exchange for an extension of
1981, p. 81; Saltford, 2003, pp. 108-109). its mining contract on such lenient terms. It was also
However, from the perspective of community accused of asking the Indonesian military to guard
rights, the contract was flawed. Freeport did not the main slurry pipeline, which was frequently
respect, or even consider, the dignity, political status, attacked by the Papuan rebel group OPM (Elmslie,
historical legacies, and cultural traditions of the 2002, p. 153; Leith, 2003, p. 64; Schwarz, 2000,
Papuans in whose midst its operations were located p. 414).
(Guinness, 1994, p. 292; Whittaker, 1990, pp. 72 The Grasberg mining concession and further
73). Furthermore, the traditional Papuan owners of exploration rights were granted to Freeport on
the land, the Amungme and the Kamoro peoples, stricter terms: these included higher payments to the
were excluded from the consultations (Leith, 2003, government, restrictive exploration conditions,
p. 61). incorporation in Indonesia, Indonesian equity in the
Construction of the mine facilities took 5 years company, and a commitment to build a smelter on
to complete. The company built a fantastic com Java. With the extension of the Contract of
pany town called Tembagapura (Copper Town), a Work (CoW) on December 30, 1991, went a cor
completely self-contained Western dormitory-style porate make-over. The operating subsidiary, Free
town, a port and airstrip in the Lowlands to service port Indonesia, was incorporated in Indonesia and
the mine, as well as an access road. For Bechtel, the changed its name to PTFI. This new contract was
American company building the project for Free clearly less favorable than the 1967 version, which
port, building access road through the inhospitable required Freeport to pay royalties with an effective
terrain was the most difficult project ever under tax rate of 45% (Elmslie, 2002, p. 91; FM, 2004;
taken by the company, to the extent that the budget Leith, 2003, pp. 66-67).
had been exceeded by approximately $80 million The new mining exploration demanded an
from the original amount of about $120 million. The expansion program, which would cover extending
company provided all goods, services, infrastructure, its mine and mill facilities to cope with the continual
and utilities for Tembagapura and the mine (FM, upgrading of throughput rates of the new Grasberg
2004; Leith, 2003, pp. 61-62; McDonald, 1981, mine; and extending its established mill and work
pp. 81-82; Petocz and Raspado, 1989, pp. 96-98; area from the dying Ertsberg site, a few kilometers
Whittaker, 1990, p. 72).6 away, to the new mine. This required the building
Freeport's Ertsberg mine operated semi-secretly of new access roads, tunnels, and vertical shafts to
in West Papua after its official opening in March move ore from the new mine to the existing milling
1973. There were two interesting occasions toward site near the Ertsberg hole; as well as expanding port
the late 1980s. First, Ertsberg was largely depleted, facilities and the capacity for electrical power gen
"leaving behind an open pit more than 360 m eration, and constructing a hundred helipads and
deep and 2 km wide, filled with green, copper four runways. Therefore, in 1992, Freeport began to
impregnated water." For approximately 20 years, an expansion program that would bring its total
"Etsberg had produced approximately 32 million investment in West Papua to $4.5 billion (including

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 Mining in Papua: Free port Indonesia 133

$3.5 billion invested since the discovery ot Gras without consultation or any environmental assess
berg). Freeport also built the $500 million new ment (Leith, 2003, pp. 166-167; cf. Elmslie, 2002,
town, Kuala Kencana (River of Gold) opened by pp. 148-150).
President Suharto in late 1995. It is a tremendous Massive flooding in the lowlands in June 1990
Western-style township, in contrast with other prompted Freeport to begin consolidating a levee
Indonesian towns or West Papuan villages, and a system to divert the water toward the Minajerwi to
powerful symbol of Freeport's long-term commit prevent the flooding of its access road and the town
ment to the area (Elmslie, 2002, p. 151; Leith, 2003, of Timika. However, by 1995, the company had
p. 67).y failed to fully realize a levee system and this resulted
in the destruction of at least 33 square kilometers ol
forest. The Aikwa River had broken its banks and
Degradation of the environment merged with the neighborhood Minajerwi river
system. In addition, Freeport tailings had already
Despite economic benefits to Indonesia and Papua, polluted 84,158 ha (336.6 square miles) off-shore
Freeport mining operation for more than 30 years and 35,820 ha (143.3 square miles) onshore, with
has undoubtedly caused environmental degradation. such pollution spreading to the Lorentz National
This is exactly the dilemma of development faced Park. The potential for an ecological disaster within
human being in the more environmentally conscious the marine and estuary environment is huge. Mine
world.10 Leith told us that the company's original tailings had an adverse effect on aquatic insects and
1967 contract failed to impose any environmental mercury7 levels in the river, far exceeding levels safe
restrictions whatsoever on the company's operations. for aquatic life or human consumption. Beside
His research found out that Ertsberg, at the height of toxicity, the extraordinary physical destruction of
its operations, "was discharging 25,000 tons per day the landscape has destroyed the river system, con
(tpd) of tailings into the local river system, and sumed local population gardening, fishing, and
dumping twice that amount of overburden into the hunting areas and wildlife, and separated people
alpine valleys" (Leith, 2003, p. 163). In general, the from their resources and livelihood. Many dead trees
situation resulted from various causes: the Indone could be seen from the road and the air (Elmslie,
sian government's lack of commitment to environ 2002, pp. 148-150; FM, 2005; Leith, 2003, pp. 168
mental protection, its reluctance to restrict capital 171; Petocz and Raspado, 1989, p. 58).
producers by enforcing the nation's environmental Overburden is "rock that is not processed but
regulations, the refusal of companies and the gov must be removed aside during the extraction process
ernment to make environmental assessments public, so that the mining company can reach the metal
and the difficulty of carrying out an independent bearing ore" (Leith, 2003, p. 171). Freeport pro
assessment of the Freeport operation (Elmslie, 2002, cesses a huge amount of ore each day, wasting
p. 95; Leith, 2003, pp. 135, 155-56, 163; Petocz and around 14% of the copper in the ore, which remains
Raspado, 1989, pp. 96-99). m tailings disposed of in the river, to get the most
The company's greatest environmental problem profit. For the same reason, a large amount of cop
is tailings, the residue of the finely ground ore from per-bearing rock was excavated, then dumped
which precious metals have been extracted; they are instead of processed, because the joint venture chose
toxic, and damaging to the river system. They have to pursue higher-grade ore as quickly as possible. In
been dumped into the river for decades causing the October 1995, Freeport already dumped over
river silting up. They are responsible for widespread 102,000 tpd. In 2001, the company was moving
destruction in the Lowlands, the physical destruc more than 750,000 tpd, of which approximately
tion to the land and flora and fauna of the area, and 230,000 tpd was processed into tailings and the
the decreased quality of the river water. According remainder dumped as overburden, in order to move
to Leith, at the Grasberg mill, 95-97% of the ore 5 tons of rock to extract 1.5 g of gold (Elmslie, 2002,
processed ends up as tailings. In the past, increases p. 149; Leith, 2003, p. 171; WALHI, 2006).11
in tailings had been ignored by the relevant min The frequently used highland trails have also
istries and government utilities, or were done become sources of major threats to wildlife and

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 134 P. A. Rifai-Hasan

ecology. The glaciers and Cartensz Mountains are Freeport also transformed West Papua from a
now major destinations for visitors, particularly alp remote and isolated backwater to modern neigh
inists. The mining concession includes an important borhood in some areas. By early 2001, the com
segment of the park - about 20% of the actual ice pany's investment around $4.5 billion into the area
field and Mount Jaya, Indonesia's highest peak was by far the largest single American one in Indo
(4884 m). There is considerable evidence of pollu nesia. In 30 years, the company created extensive
tion and litter from the mine to the foot of the infrastructures built according to US standards. It
Meren glacier, and Freeport's mining operation has committed large amounts to social and community
been blamed for damage to the ice fields (Leith, services such as schools, scholarships, places of
2003, p. 165; Petocz and Raspado, 1989, pp. 6, 58). worship, health care, housing, hospitals, offices,
In its defense, Freeport claimed that the Indone recreational facilities, and small and medium busi
sian government confirmed that the company always nesses. The company also maintains its own water,
operated in compliance with its contract and with electricity, sanitation, and garbage utilities and, in
Indonesian environmental regulations. However, the later years, assisted the local government with
Indonesia's environmental protection system is these services in the project area. Most types of fixed
ineffectual and the government is hesitant about infrastructure will revert to the Indonesian govern
enforcing environmental law. For many developing ment at the end of contract term (Emmerson, 2005,
countries, including Indonesia, high-quality envi p. 41; FM, 2004; Leith, 2003, pp. 78-79).
ronmental amenities are seen as a luxury they cannot However, the investments that Freeport put in
afford, and the cost, including supervision, is high before 1992 were mostly disconnected from indige
(Hardjono, 1994, p. 214; Hill, 2000, pp. 256-257; nous industries and enterprises. It was a fractured
Leith, 2003, pp. 155-156). In 1989, Freeport development. The mining company has created
publicly expressed a commitment to environmen enormous wealth for itself, the government and local
tally sustainable development. It also adopted the elites, and the US and Indonesian power brokers. It
"Environmental Charter" of the International failed to promote overall economic growth, industrial
Council on Mining and Metals (FM, 2004; Leith, and technical advancement, or viable local commer
2003, pp. 161 and 163; MacAndrews, 1994, cial markets. The Amungme and the Kamoro, who
pp. 377-378). live around the mine site, have essentially remained
disadvantaged, underprivileged, and disenchanted. It
undermined the traditional culture, fracturing tribes
Economic and social development along generational lines. Cultural differences led to
misunderstandings, resentment, and inappropriate
Freeport's exploitation of copper and gold in West development programs.13 Freeport also has to deal
Papua should have benefited the province abun with difficulties in delivering development such as
dantly and generated economic and human devel the need to identify primary stakeholders, the absence
opment. In practice, however, during the Orde Baru of strong government and indigenous institutions,
period, the province benefited little from the taxes fundamental cultural differences, and the payment
Freeport paid directly to Jakarta. Actually, Freeport of compensation in ways that have divided the
dominates the economy of West Papua with its community (Guinness, 1994, p. 292; Leith, 2003,
operations and offshoots, and has a tremendous im pp. 85-87).
pact on local economy. It is the largest purchaser and Although Freeport also has paid attention to
employer in Papua and Irian Jaya Barat. Yet the community relations and social development, its ef
province of Papua is the poorest in Indonesia, and forts were viewed as ineffective, inappropriate, and
until 2003 only a fourth of all Freeport employees in paternalistic by the traditional landowners. The
Papua were ethnically Papuan (Emmerson, 2005, company's development projects only increased
p. 41; FM, 2005; Leith, 2003, pp. 77-78; Wie, 2002, tensions in the concession. Nevertheless, what Free
p. 229). 1~ This condition and the fact that there were port was doing was beyond what was legally required,
huge financial transfers of resources from West both under Indonesian law and within the Freeport
Papua led to the emergence of the separatist OPM. contract (FM, 2005; Leith, 2003, pp. 97-99).

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 Mining in Papua: Freeport Indonesia 135

The change of Freeport's environment also contributed significantly to the protection of

policy and management Lorentz (both logistically and financially), and has
been instrumental in facilitating valuable scientific
As a result of NGO efforts and the participation of research. The WWF and other institutions have
the press, public awareness of environmental prob praised the assistance they have received from the
lems increased significantly. By 1994, Freeport had company. They also applaud the company's own
formulated its first waste-management and recycling conservation efforts, noting that Freeport's mining
program. It also built a $3 million environmental operations have had minimal impact on the park.
laboratory with the newly formed Environmental Its mining and ore processing operations also
Department, which by 1995 had an annual operating received ISO 14001 certification in December, 2001
budget of more than $17 million and an honest (FM, 2005; Leith, 2003, pp. 165-166).
commitment to protect the unique flora and fauna of Despite Freeport's effort to improve its environ
the area (FM, 2004; Leith, 2003, p. 164). mental records, the problem of environmental
Because of wide media coverage and international damage continues to haunt the company. After
attention, in 1995 the company reaffirmed its receiving a report by a team of independent experts
commitment to the levee plan. To this end, it in March 2006, Indonesia's government threatened
allocated $23.4 million to construct two levees legal action against Freeport unless the company
through which the lowland Ajkwa River could improved its environmental record.16 Due to Free
meander. By December 1997, the original plan had port's pervasive financial and political influence, it is
been revised to manage an increase in tailings of up uncertain that the government will really take any
to 300,000 tpd and a cumulative deposition of up to legal action against the company. The destruction of
3 billion tons. Freeport now uses a river system for Papua's natural resources is the biggest and most
transport tailings to a designated area in the Low complex problem that Freeport's mining operations
lands and coastal zone under this Modified Ajkwa has to deal with (Leith, 2003, pp. 182-185).
Deposition Area (ADA) Plan. "It calls for the con
tainment of the tailings within an expanded area of
230 square kilometers, with revised estimates Solution to local social and economic
showing the levee walls averaging 10 m, but rising as development problems
high as 25 m in some areas" (FM, 2004; Leith, 2003,
pp. 167-168). As a result of NGO criticisms and publication on
The company also traded 45% of its Ertsberg human rights violations, pressure from the central
concession in Lorentz National Park for an area government, heavy international criticisms, and the
equal in size to the west of its concession.14 Leith years of community protests, Freeport on April 13,
points out that as part of the company's environ 1996, announced its solution to the local people's
mental impact assessment requirement, in 1997 concerns. The company also conceded in 1998 that
Freeport commissioned the area's first biodiversity traditional landowners are both victims and benefi
study. A second study was completed by Conservation ciaries of the inevitable encroachment of moderni
International in 1998. These studies found numerous zation. The company issued two programs: first, a
species of flora and fauna previously unknown to "Land Rights Trust Fund" to officially recognize
science. "Like the Freeport concession, the park, lands rights and provide compensation, and second, a
which forms Freeport's eastern boundary, is an area socioeconomic development fund called variously
of immense biological significance" (Leith, 2003, the "Integrated Timika Development Plan," the
pp. 164-165). "PWT2," the "Freeport Fund for Irian Jaya
In 1996, after the US Overseas Private Investment Development (FFIJD)," the "Integrated Timika
Corporation revoked Freeport's insurance policy for Development Plan (ITD)," or, most commonly, the
environmental violations of a sort that would not "One Percent Fund." Under this program, Freeport
be allowed in the US, Freeport committed itself committed 1% of its annual gross revenue, or
to providing a $150 million fund for the eventual approximately $15 million annually for the next 10
rehabilitation of the mine site.1 n Freeport has years, with the funds being deposited quarterly, in

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 136 P. A. Rifai-Hasan

advance, into a bank account. Its partner, Rio Tinto, opportunities to many of the people living around
committed another $8.7 million. The amount in the the mine site, raises expectations about access to the
fund in 2005 was $42 million, and the total contri amenities of modern life, but also aids in the
butions to the fund from both Freeport and Rio destruction of the traditional culture. The education
Tinto since inception are approximately $194 mil system can be considered a form of indoctrination
lion. Although the One Percent Fund was, and that devalues traditional cultures, but lack of access to
remains, by far the largest such socioeconomic education and its outcomes is also criticized by tra
development program in West Papua, and one of ditional landowners. However, with the recent focus
the largest in Indonesia, it is a small fraction of the on development in the village, these problems may
profits obtained by Freeport (Council on Foreign lessen. Freeport has begun an adult-education liter
Relations, 2003, pp. 52-53; FM, 2005; Guinness, acy program using Papuan teachers and materials,
1994, p. 293; Leith, 2003, pp. 90-92, 102-104; and most Papuans see education as the key to the
cf. Emmerson, 2005, p. 41). future (Council on Foreign Relations, 2003, p. 74;
This funding was intended principally to favor the Leith, 2003, pp. 127-129).
tribes originally displaced by the company, although At the end of 2005, PTFI directly employed
it would also benefits those living in and around the approximately 8000 workers; of these, more than
concession area. So far the Partnership Fund has built 2000 were Papuans. Skilled positions are mostly
and expanded two modern hospitals and a system of taken by non-Papuan Indonesians. Another 10,700
community clinics, and sponsors comprehensive workers are employed by contractors serving PTFI,
public health programs including Public Health and for a total of approximately 18,700 workers
Malaria Control Department (PHMC). The Part employed at Freeport operations at the end of 2005.
nership Fund has built schools, community facilities, Through the Freeport Partnership Fund for Com
and housing and has provided scholarships, training, munity Development (FPFCD), it supports training
and business opportunities. Jakarta announced its and small business development initiatives, human
intention of supporting the new development pro capital development through apprentice programs,
grams by playing a greater role in the area. Further to technical training schools, and higher education
the 1% Fund and the Land Rights Trust Fund assistance. By encouraging the application of
(LRTF), Freeport announced that affirmative action appropriate technologies, providing business skills
on behalf of the traditional landowners was to education and supplying access to working capital, it
become corporate policy, with a commitment to promotes sustained local economic growth and aids
raise the number of Melanesians employed at the the viability of existing and future small and med
mine while increasing their prospects for job training ium-sized enterprises. These are expected to pro
and promotion. The LRTF eventually was replaced mote increased productivity within local economies
by a "Letter of Mutual Acknowledgment," which in ways that help foster the social and economic
requires the company to pay about $500,000 per interconnections among households and businesses
year into a trust fund for the Kamoro and the Am participating in those economies (FM, 2005).
ungme landowning villages. Freeport also announced The arrangement to use productively the One
that it had deposited $2.5 million into the trust to Percent Fund quickly fell apart, as leaders of the
cover payments dating back to 1996 (Council on indigenous foundations gave into pressure from their
Foreign Relations, 2003, p. 53; FM, 2005; Leith, constituents and handed out money for unplanned
2003, pp. 104, 111, 124-125, 136-137). projects. The money was used carelessly and was
After democratic reform in 1998, Jakarta and improperly distributed. Beside, the presence and
Papua seemed to realize more the importance of the activism of certain NGOs makes things more diffi
mining industry's revenue to economic develop cult for the company as well. Some NGOs such as
ment in the area. Unfortunately, many Papuans are Catholic Migration Commission, Catholic Relief
trapped between their traditional isolation and the Services, and World Vision Australia provide
compelling forces of modernity. Freeport's support emergency assistance, emphasizing humanitarian
for education may have negative as well as positive preparedness in the event of conflict escalation.
impacts on the indigenous peoples. Education offers Others, such as the US-based Papua Resource

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 Mining in Papua: Fivcporr Indonesia 137

Center, seek to promote social welfare and indige Grasberg brought about enormous potential political
nous culture of Papua. However, Freeport perceives and economic worth of the Freeport operation to
the action of some NGOs as making the delivering of the government. The Papuan Chapter/Branch of
development in its concession area more difficult. the Indonesian National Committee on Human
Controversially, the NGOs and indigenous land Rights reports that Freeport had made contributions
owners who have most demanded and received of US$1.2 billion in the form of tax, dividend, and
accountability have no legal claims over the company, royalty to the Indonesian government in 2005.
but the NGOs have given an international voice and According to that report, the company also paid the
power to the indigenous groups and forced the government US$3.8 billion in 1992-2004. Thus,
company to seriously address the development issues Freeport made total contributions of US$4.4 billion
within its area of operations. In response to various between 1973 and 2005. Meanwhile their total
problems being faced, Freeport engaged the Inter donations for 2005 were US$736 million, including
national Center for Corporate Accountability to audit US$64 million for development program for the
the implementation of its social, employment, and local people. Hence, the company gave indirect
human rights policy (Council on Foreign Relations, financial advantage of US$9.99 billion to the gov
2003, p. 53; FM, 2005; Leith, 2003, pp. 116, ernment between 1992 and 2005 (Antara News,
129-131). April 19, 2006; Kmgsbury, 2005, p. 156; Leith,
Freeport dealing with local economic develop 2003, pp. 76-77).
ment shows that there is nothing easy, clear, or Security is another reason for Freeport to identify
certain about the process by an international busi its interest with that of the regime. In the past,
ness. Historically, development has always occa Freeport maintained a strong relationship with the
sioned periods of social disruption and economic Indonesian military to protect the mining operation.
misery, at least in the beginning. Companies do not Besides, it is the obligation of the host country to
plan to aggravate social strife, but it is not always easy provide such protection, without which no inter
to envision alternative ways of operating so as to national company would be willing to invest capital
integrate international business operations more fully and skill. Freeport acts as a surrogate government
into a local economy. Freeport now seems more with practically no bureaucracy to interfere in its
willing to take into account not only the policies of activities. According to Conflict Prevention Institute
national development, but also local economic (CPI), Freeport had paid the military (TNI) at least
interests. In the long term, interconnected devel US$18.5 million for protection. Other estimates
opment used by Freeport can offer general pros claimed that the figure was as high as an initial
perity. US$35 million, plus US$11 million annually there
after. In 2002, Freeport stopped payment to the
Indonesian military as a result of US domestic
Freeport and the New Order regime requirements (Council on Foreign Relations, 2003,
pp. 85, 93; Guinness, 1994, p. 292; Leith, 2003,
The main reason why the New Order government p. 79; Kingsbury, 2005, p. 156).17
gave favorable treatment of Freeport, despite its Since its inception, Freeport's operation in
long-time negligence of environmental degradation Indonesia has been entangled with an authoritarian
and socio-economic problems of local people, was and corrupt regime.18 During the Suharto years,
the company's significant political and economic Freeport chose to work with Jakarta, and ignored
importance for the regime. The New Order regime human and labor lights.19 Despite this complicity,
considered Freeport to be one of the nation's most Freeport served as means, however inadequately, for
treasured assets. The mine itself was valued at more fostering economic development and increasing lo
than US$50 billion. The company is the principal cal wealth. In addition, unintentionally, it acted as a
developer and de facto administrator of the area vehicle through which international and national
around its mine in West Papua, and one of the most NGOs could pressure the regime on human and
successful and outspoken Indonesian lobby groups in labor rights as well as environment and social justice
the United States. Furthermore, the discovery of issues. On the negative side, by cooperating with the

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 138 P. A. Rifai-Hascin

regime, despite American laws, Freeport benefitted pledged to work with Jakarta to implement auton
from Indonesian corruption; moreover, the com omy. The legislation is intended to provide for wider
pany and its board lobbied to ensure that US political jurisdiction and greater authority for the province
and financial support to the regime was maintained and Papuan society to manage its own affairs,
and, by association, its own investments protected. including empowering its culture and economy
The company argued that its interests and those within a unitary Republic of Indonesia (Chauvel,
of the host nation were identical to those of 2003, pp. 123-124; Council on Foreign Relations,
Washington (Clear, 2005, pp. 148-149; Leith, 2003, 2003, pp. 22, 27-28, 84-85; Holtzappel, 2002,
pp. 33, 81). For over 30 years from 1967 to 1998, pp. 25-26; Murphy, 2005, pp. 276-277).
Freeport was able to operate securely by adjusting to, However, the controversy around Freeport and
and indeed flourishing in, a business environment other mining companies' operations in Papua con
that contradicted ethical values and norms, and even tinues. One problem is now being raised with
American anti-corruption statutes. With its close Freeport concerns royalty payment and fixed pay
relationship with the New Order, Freeport secured ments. The Supreme Audit Board (BPK) is recom
for itself a powerful political and economic guaran mending a government review^ of its contract with
tee. However, with the fall of the Orde Baru regime the company, as the current one does not maximize
in 1998 and the formation of democratic govern the revenue potential from its Papua copper and gold
ments, Freeport has had to face a new reality and to mine."0 Another issue is that many groups such as
follow new rules of doing business. the ProDemocracy network, the Papua People's
Council and Papua's tribal council - (made up of
tribal and religious leaders from all of Papua's ethnic
Democratic reform and its impacts groups) have urged the government either to reform
on Freeport operation the country's mining industry, to clamp down on
officials who issued licenses for firms that pollute the
After the fall of the New Order regime in 1998, environment; they have even demanded that the
issues around Freeport and Papua got new impetus, parliament "issue a letter calling for the closure of
asserted themselves and came to the surface. The Freeport." However, the current President, Susilo
Organization for Free Papua (Orgamsasi Papua Bambang Yudhoyono, reiterated in March 2006 that
Merdeka, or OPM) increased its armed activities PTFI's mining operations would continue while a
(Kingsbury, 2005, p. 154). A call by a parliamentary financial audit of the distribution of funds to the
commission for renegotiation of the Freeport con local community was conducted. The government
tract with a more equitable distribution to Indone may ask PTFI to renegotiate its contract as it studies
sians ended with the company's offer to double the whether the mine benefits the local community
royalties it paid to the government. However, calls (Jakarta Post, March 1,7, and 21, 2006).
from members of parliament for Freeport operations
in Papua either to be closed down for environmental
reasons, or the contract to be renegotiated, failed to Conclusion
go through. It seems that Freeport has been able to
sustain its influence within the new democratic Despite its potential to promote economic prosper
Indonesia (Leith, 2003, pp. 82-83; Murphy, 2005, ity and development, Freeport's effects, in its early
pp. 276-277). years, were largely damaging. Today the company
In 2001, the Indonesian parliament passed a law finally has acted in more environmentally and
on autonomy which many in Papua, Jakarta, and the socially responsible ways and has made a commit
international community believed would provide a ment to sustainable development. Freeport opera
new foundation for Papua's relationship with Indo tions m Papua represent one of the examples of
nesia. The legislation calls for Papua to receive 70% corporate capital and western government, in this
of its mineral wealth, and for certain key govern case the US government, working collectively: first,
mental posts to be occupied by native Papuans. Key to devise a change in political leadership, and then to
Papuan leaders formed the Papua Presidium, which direct both economic policy and the way ownership

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 Mining in Papua: Freeport Indonesia 139

and control of a nation state's natural resources environmentally responsible, humane employer and
would be allowed to develop. Despite mistakes and globally good citizen.
missed opportunities, it appears that Freeport is
committed to correct and refine its policy of its
business operation. Notes
In balance, it is fair to say that Freeport, especially
after 1996, has contributed in investment to generate
1 The Freeport group consists of Freeport
development and reduce poverty in Papua. So far,
McMoRan (originally Freeport Sulfur), which is
the investments have not yet generated higher incorporated in the United States and was the parent
incomes and prosperity in all sections of society. company eclipsed by its subsidiary; Freeport-McMoRan
However, Freeport's direct and indirect contribu Copper and Gold Inc., which is currently the main
tions have produced a "multiplier effect" in the company in the group and the parent company of
Papuan economy, spurring additional employment, PTFI, the group's operating subsidiary in West Papua.
wages, purchases, and economic activity. These Except where required in context, the company will be
are expected to reduce structural impediments that referred to as "Freeport" in this essay (Dickie and
restricted the economic opportunities of impover Layman, 1988, p. 22; Leith, 2003, p. xxiv).
ished households. The overthrow of the authoritarian Sukarno
The Earth's natural resources are limited and regime was welcomed by Muslim and Christian parties
and organizations as well as by intellectuals and secular
therefore Freeport should use Papua's natural
groups. Unfortunately the New Order regime perpetu
resources as efficiently as possible. It has to maintain ated similar authoritarian rule for the next years and
its commitment to sustainable development, in more. Sukarno's overthrow provided opportunity for
which economic, social, and environmental issues TNCs to operate (Fisher and Lovell, 2006, p. 474).
are balanced to meet the needs of the present The official name of the province since 1999 is
without impairing the ability of future generations to Papua, in response to mounting pressure for indepen
meet their own needs. In addition, Freeport must dence and m an attempt to appease dissent from people
take a stand against corruption. The cost of cor of the very east end island of Indonesia (Papua). It was
ruption is high. It depletes public revenues and previously known by various names, including West
undermines social capital by eroding public trust, New Guinea or Netherlands/Dutch New Guinea (until
1962), Irian Barat (West Irian) since 1962 after Indone
diverting attention from the pursuit and protection
sia's take over from the Dutch. During the opening of
of common civic goods, and breeding widespread
the Freeport mine in 1973, President Soeharto renamed
resentment in Papua and Indonesia alike. In the long
the province as Irian Jaya (Victorious Irian); and the
term, corruption is detrimental to the international name remained until 1999 (Dickie and Layman, 1988,
businesses that allow themselves willingly or inad p. 22; Elmslie, 2002, p. 91; Leith, 2003, p. xxv).
vertently to engage in it. Initiatives by Freeport or 4 Freeport Sulfur, the predecessor of today's giant
other international businesses operating in Indonesia Freeport-McMoRan Copper and Gold, first became
to reduce corruption should be joined by the gov interested in Ertsberg in 1959. A Freeport geologist,
ernment, mass media, and civil society; they must Forbes Wilson, predicted correctly that Ertsberg would
cooperate to curb bribery and extortion in business prove to be the largest above-ground copper deposit
practices. hitherto discovered, and Freeport analysts confirmed the
Freeport must protect the rights of the people geologist's forecast, estimating that the company would
recover its costs within 3 years (Leith, 2003, p. 2).
involved in its operations. It has to strengthen the
On August 15, 1962, the day the Agreement was
rule of law and politically neutral judicial systems.
signed, Robert Komer of the National Security Council
The government has to provide a minimally reliable
staff advised President Kennedy to capitalize on the
independent tribunal to make legitimate claims West New Guinea (Irian Barat) settlement. Komer
about human rights. Civil society organizations can reminded him of "future fruitful cooperation" of which
help by exposing human rights violations. The Kennedy spoke to Sukarno before the agreement was
democratic reforms m 1998 provided great oppor signed. President Kennedy immediately called for
tunities to the Indonesian government and Papuan "a plan of action to be ready within a month to assess
leadership to make Freeport a profitable, socially and what further measures could be taken to capitalize on

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 140 P. A. Rifai-Hasan

the US role in the settlement. Specifically he suggested under a promising Indonesian insurance policy. All
the possibility of expanded civic action, military aid and this seemed to guarantee a lucrative and stable future
economic stabilization and development programs, as (Elmslie, 2002, p. 93; Leith, 2003, pp. 67-71, 76).
well as diplomatic initiatives" (Saltford, 2003, pp. 15, 10 One dilemma of development is the rapid depletion
68). President Richard Nixon would later declare: of the natural environment. Humans exploit the natural
"With its 100 million people, and its 300-mile arc of environment to elevate their living standards. Even the
islands containing the region's richest hoard of natural minimal use of renewable resources like trees and farm
resources, Indonesia is the greatest prize in southeast animals alters the ecology. It is impossible to not change
Asia" (Fisher and Lovell, 2006, p. 473). the environment, because human beings need to meet
6 According to Bechtel, the American company their needs and improve their level of material comfort.
building the project for Freeport, building access road In pre-industrial times, before the age of modern tech
through the inhospitable terrain was the most difficult nology, the exploitation of natural resources did not
project ever undertaken by the company, to the extent normally pose a significant problem. It seems inevitable,
that the budget had been exceeded by approximately however, that the extensive use of modern technology
$80 million from the original amount of about $120 and the expansion of human civilization will destroy
million (FM, 2004; Leith, 2003, pp. 61-62; McDonald, natural habitats and the species that depend upon them.
1981, pp. 81-82; Petocz and Raspado, 1989, pp. 96 This rapid depletion of natural resources and loss of
98; Whittaker, 1990, p. 72). biodiversity during the twentieth century has been the
7 By 1999, Grasberg produced more than doubled locus of a great deal of attention for many peoples and
the production of ore recovered from Ertsberg during governments both in developed and developing coun
its life. In addition, to being the world's largest known tries. Among the causes of environmental destruction
gold reserve (91.4 tons, in comparison to the second in are the obsessive pursuit of growth in both production
running, Freegold in South Africa, at 60.44 tons), the and consumption, or emphasis on economic growth,
Grasberg complex also holds the world's largest copper globalization, which is bringing the less-developed
reserves (32 million tons) and 37 million ounces of sil nations into the capitalist market place, and the explo
ver. Current figures show that expected earnings of sion of technology (Berger, 1986, pp. 23-24; Isbister,
Freeport range from $40 billion to $80 billion from 2001, p. 216; Rubinoff, 2000, p. 156).
Grasberg over its projected life of more than 45 years 11 WALHI predicted that over 3 billion tons of tail
(Leith, 2003, pp. 63-65, 67-68; cf. Elmslie, 2002, ings and up to 3 or 4 billion tons of waste rock will be
pp. 91-93). generated throughout the period of PTFI operations,
s With these contracts, the company received explo until closure around 2040. In total, Freeport-Rio Tinto
ration rights for approximately 9 million acres, and the wastes 53,000 tons of copper are released annually into
right to mine any discoveries for a period of 50 years. the river as Acid Rock Drainage (ARD), leachate and
In 1994, the PTFI subsidiary, PT IRJA Eastern Miner tailings. This rate of heavy metal pollution is more than
als Corporation, signed a second contract for another a million times worse than what is produced with stan
2.6 million acres. Freeport was thus given exploration dard mining industry pollution prevention practices.
leases for a guaranteed operating period of 30 years, The wasted copper costs the Papuan provincial govern
with an option of two 10-year extensions (Guinness, ment substantial income from lost royalties and creates
1994, p. 292; Leith, 2003, pp. 63-64; cf. Elmslie, 2002, serious environmental damage m groundwater and in
the rivers and estuary downstream (WALHI, 2006).
p. 61)._
After signing the contract, Freeport went into 12 Since October 2001, the province of Papua has en
worsening financial problems. It was forced to sign on joyed special autonomy, which confers greater authority
Rio Tinto as a minor partner and to outsource or pri to empower the culture and economy of Papuan society
vatize many of its non-mining activities. In May 1995, (Chauvel, 2003, p. 123).
Freeport-McMoRan signed contracts with RTZ Cor L' Today the disintegration of social life of the Papu
poration PLC (Rio Tinto), which endowed Rio Tinto ans around the mine - unemployment, AIDS, lawless
with an interest of around 14% in PTFI. The Initial ness, spiritual, and economic dislocation - is evidence
payment was worth approximately $1.7 billion. The of the negative effects of the development activities of
arrangement also stated that Rio Tinto would receive Freeport in the surrounding areas. In 1996, Freeport
40% of any increase in the mine's production and 40%) still steadfastly refused to take responsibility for the
of any future mines discovered under the exploration plight of those displaced by the mine (Council on For
program. By the end of the year, Freeport had secured eign Relations, 2003, pp. 76-77; FM, 2005; Guinness,
a cash flow. It acquired influential partners, and was safe 1994, p. 293; Leith, 2003, pp. 90-92).

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 Milling in Papua: Freeport Indonesia 141

14 The Lorentz reserve stretches from equatorial gla of being involved in human rights abuses, including
ciers of the highest mountains in Southeast Asia through murder (Leith, 2003, pp. 79, 196-198; Robison and
a complete spectrum of Alpine, sub-alpine, montane, Hadiz, 2004, p. 30).
lowland, and swamp forests to the coastal of mangroves ~() The Government owns 9% of the company's
of the Arafura Sea (Petocz and Raspado, 1989, p. 58). shares, Freeport-McMoRan Copper and Gold Inc.
13 However, based on the experience of other mines (NYSE:FCX) owns 81.28%, and PT Indocopper Inves
where mine closure costs and ongoing monitoring are tama owns 9.36%. A BPK study covering 2004 and the
predicted to run into billions of dollars, it is believed first half of 2005 found that Freeport paid its royalty
that the $150 million would have little impact in 2041, based on quarterly average prices, contrary to account
Freeport's estimate of the end of the current mine's life ing principles, which require the use of prices per trans
(FM, 2004; Leith, 2003, pp. 165-166, 175; MacAn action. This cost the state US$2.23 million and a
drews, 1994, p. 89). further US$369,490 in unpaid royalties for 2003 and
16 Environment Minister Rachmat Witoelar said the 2004. BPK also found that Freeport's contract does not
mine had committed various violations, of which the include sulfur as a by-product, causing a potential reve
tailing issues were the most pressing. The mine was nue loss of US$14.4 million. In addition, the audit
required to improve its management of tailings to mini agency found that Freeport has sold its copper concen
mize the effect on the environment. Witoelar empha trate to Glencore AG at below-market prices. This
sized there were fears the tailings could pile up and led to a potential tax revenue loss of US$5.9 million
trigger landslides or flooding, and stated that Freeport (Forbes, 2006).
would be given 2 and 3 years to resolve the problem;
otherwise his ministry would sue the mine (Jakarta Post,
March 24, 2006; WALHI, 2006).
17 Responding in December 2005 to allegations that
Freeport gave the Indonesian Military (TNI) millions of References
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