The government has planned to grant contract extension for PT Freeport Indonesia when the current contract expires in 2041. The extension of the contract is granted earlier than scheduled because the government considers the economic feasibility of Freeport underground mining Grasberg project. The government has also planned to provide export tax reduction to the mining company.
A source in the government told Indonesia Business Post that there had been a cabinet meeting in mid September 2022 to discuss the possibility of granting contract extension for Freeport earlier than scheduled.
“It is well known that the government still views the United States as a strategic partner, who does not intend to withdraw [from Freeport]. Whether Indonesia likes it or not, it must accommodate the US intention. However, underground mining continues to be a concern,” the source said.
As the compensation for the contract extension, the source said that Indonesia requested additional shares, a more significant share of the company than the current share. In addition to being a minority shareholder, Freeport will also act as an operator.
“To obtain funds for the acquisition of the shares, Indonesia will turn to China,” the source added.
Arifin Tasrif, Minister of Energy and Mineral Resources, refused to confirm on the planned extension of the Freeport contract after 2041.
“We will discuss later on Freeport,” he said during the 2022 IPA (Indonesian Petroleum Association) Convex in Jakarta.
Controversy on contract extension
However, the energy ministry’s Secretary of the Geological Agency Sugeng Mujianto said that the extension of Freeport contract after 2041 was acceptable from a technical and economic perspective.
“This does not imply that we will be able to extend the contract soon. We must conduct a study,” he said.
Freeport Indonesia CEO Tony Wenas said that currently the company had a business plan that extended until 2041. However, he said the development of the underground mining was still possible because the resources would remain economically viable after 2041.
Wenas said the extension of the contract would be beneficial to Indonesia. “Despite this, we need to conduct more exploration. We do not know the estimated amount of resources,” he added.
Executive Director of Indonesian Resource Studies, Marwan Batubara, said it was too early for the government to grant contract extension for Freeport. As a majority shareholder of the company, the government should be consistent with article 33 of the Constitution. The article stipulates that the land, waters and natural resources within shall be under the powers of the state and shall be used to the greatest benefit of the people.
“It means there is no need to extend the contract. Indonesia has been mastering in the [mining] technology. There is no need for us to partner with the US company. We can be a partner of other countries’ companies if we think that technology is important,” he said, adding that when Freeport contract expires, the mining will be 100% under the control of the state.
Batubara alleged that the discussion on the Freeport contract extension was initiated by some political elite, who “betray” the nation.
Export tax reduction
Despite the fact that the construction of Freeport’s smelter in Gresik, East Java, has reached more than 30% of progress, the company has not been in a haste to secure reduction of export tax as regulated by finance ministry.
Wenas said that the physical progress of the company’s smelter has reached 36.2% as of July 2022.
From the total investment of US$ 3 billion, the company has spent US$ 1.2 billion. Around 12,000 of the 16,000 pilings planned have been erected. In other words, it accounts for almost 70% of the total pilling. In the case of concrete work, it has reached 10%. By the end of 2022, physical progress is expected to reach 50%, with a total investment of US$ 1.5 billion. The mechanical completion of this project should be completed by the end of 2023. The production will commence in May 2024 following pre-commissioning and commissioning procedures.
Wenas said an independent evaluator has verified the progress and has reported the verification review to the energy ministry.
“The energy ministry needs to review it first. We have made the progress report. In the near future, we hope the energy ministry will confirm or approve our progress,” Wenas told the Post on September 27, 2022.
Once the energy ministry reviews the verification report, the company will receive export tax reduction. “Later, one by one, after completing the progress report, we will talk about other things,” he added.
The Finance Ministry’s Head of Fiscal Policy Agency, Pande Putu Oka Kusumawardani, said based on laws and regulations in the Customs and Excise (Finance Ministry Regulation (PMK) No. 39/PMK/010/2022, which is an amendment to PMK No. 98/PMK.010/2022), exported mineral products are imposed on export duty concerning physical progress of the smelter construction:
- Imposition on the Export Duties of mineral products related to the physical progress of the smelter construction are as follows:
- First phase: an export duty tariff of 5% for physical construction progress of less than 30% of the total construction.
- Second phase: an export duty tariff of 2.5% for physical construction progress of less than 50% of the total construction.
- Third phase: an export duty tariff of 0% for physical construction progress of more than 50% of the total construction.
- The level of physical construction progress is included in the export recommendation issued by the Ministry of Energy and Mineral Resources.
- The export approval issued by the Trade Ministry should include the physical progress of the construction included in the export recommendation and become the basis for imposing export duty fines.
Tasrif said that the review of the Freeport smelter verification report is ongoing. After the review, he said that based on the regulation, Freeport was entitled to export tax reduction.
“During my visit in July 2022 , the progress of the smelter was 34.6%,” he said.
Possible postponement of tax reduction
The Indonesian Mining Association (IMA) Deputy Executive Director Djoko Widajatno said that based on the energy ministry information, they were still discussing the export tax reduction for Freeport. “Currently, Freeport is subject to 5% export tax,” he added.
Widajatno said there was a possibility that the government would delay granting export tax reduction for Freeport due to to the current financial distress. “Consequently, if the government delayed Freeport tax reduction, it must be to save the state budget,” he added.
However, if the government decided to delay the fiscal incentive as regulated by the finance ministry’s regulation, Freeport has the right to bring the case into international arbitration tribunal.
“The government has violated the regulation, but it was part of the deal. Maybe, there are other non fiscal incentive or compensation for Freeport,” Widajatno said.
