Human Rights, Employment and Social Development of Papuan People in Indonesia potx

ICCA Audit Report, PT Freeport Indonesia, Page - 1



Audit Report





Human Rights,
Employment and Social Development

of Papuan People in Indonesia



on the part of

Freeport-McMoRan Copper and Gold, Inc., New Orleans, LA
and
PT Freeport Indonesia, Jakarta and Papua

International Center for Corporate Accountability
Box J-1034, Zicklin School of Business, Baruch College
1 Bernard Baruch Way, New York 10010-5585
www.ICCA-corporateaccountability.org






Copyright © 2005

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CONTENTS

Page
EXECUTIVE SUMMARY 4

Chapter 1 - ANTECEDENTS TO THE AUDIT PROJECT 20
Introductions
Background
Antecedents to the current audit
Freeport’s Guiding Principles of Operations in Indonesia
Public Dissemination of Audit Findings
APPENDIX I


Chapter 2 - FRAMEWORK OF THE CURRENT AUDIT AND AUDIT PROTOCOLS 57

Scope of the Audit
Two-Phase Audit
Audit Design and Implementation Process
Sample design and worker selection for one-on-one confidential interviews
APPENDIX II


Chapter 3 - WORKER PROFILE AND OPERATING PRACTICES 65
Make-Up of the PTFI Workforce - Worker Profile
Work-Related Issues
Employee Attitude Towards Supervisors
Perception of Discrimination
Job Training, Apprenticeship and Worker Proficiency Tests
Audit Findings and Required Remedial Actions


Chapter 4 - PTFI’S SOCIAL, EMPLOYMENT, AND HUMAN RIGHTS POLICY (SEHR) 74

Employee Understanding and Belief in SEHR
PTFI’s Efforts Toward Employee Training in Human Rights Policies and Programs
Impact of SEHR Training Program
Workers’ Experience with Incidents of Human Rights Violations
APPENDIX IV


Chapter 5 - SECURITY DEPARTMENT 83

Worker Profile and Operating Conditions
Organization of Work and Overtime

Employee Perceptions
Dealing with the Local Police and Army
Recommendations for Improvement

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Chapter 6 - INDUSTRIAL RELATIONS DEPARTMENT 86

Industrial Relations Department – a Profile
ICCA’s Analysis of the IRD’s Structure and Operational Procedures
Self-Assessment by the Employees of IRD
Relationship Between Workers’ Complaints and Human Rights Violations
PTFI and Contractor-Supplied Workers’ - Experience and Attitude toward the IRD
Overall Observations and Recommendations
APPENDIX VI


Chapter 7 - SOCIAL AND ECONOMIC DEVELOPMENT OF THE PAPUAN COMMUNITY 102

Scope and Magnitude of PTFI’s Policies and Programs
Organizational Structure, Findings and Operational Procedures
ICCA’s Analysis and Assessment of SLD program


Chapter 8 - EMPLOYEES’ OVERALL PERCEPTION AND ATTITUDE TOWARD PTFI 106

PTFI as a “GOOD” Employer
PTFI a “GOOD” Company for the Papuan People
PTFI As Part Of Employees’ Future
APPENDIX VIII

Chapter 9 - LEMBAGA PENGEMBANGAN MASYARAKAT AMUNGME
DAN KAMORO (LPMAK) 119

Introduction and Background
Organizational Structure and Operational Procedures
LPMAK’s Educational Programs
Scope of Audit
Education Bureau – Organization Structure and Operating Procedures
ICCA Recommendations
Scholarship Program
ICCA Recommendations
Dormitories
ICCA Recommendations
Out-of-School and Adult Education Programs
ICCA Recommendations



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Executive Summary


Introduction


This document is a summary of the findings of an audit conducted by the
International Center for Corporate Accountability, Inc. (ICCA) with regard to the

commitments made by Freeport and PTFI in the area surrounding its mining
operations in Papua, Indonesia. The field audit was concluded at the mine site in
Papua, Indonesia during the period of November 23 – December 1, 2004. The
actual field was preceded by intensive preparatory work by ICCA lasting over six
months.

Freeport-McMoRan Copper & Gold, Inc. (Freeport) operates one of the
world’s largest copper and gold mines in the province of Papua, Indonesia. The
operating subsidiary is PT Freeport Indonesia (PTFI). The mine faces a number
of unusual challenges. It operates at more than 12,000 ft. above sea level,
where the rainfall is over 300 inches per year. The high mountainous region is
inhabited by tribal people, who until around 100+ years ago, had lived in almost
complete isolation without any meaningful contact with the modern world. The
massive mining operations have had a substantial impact on their way of life.

The Papuan region has had a history of political unrest with local tribes
seeking independence from Indonesia. This has led to strong presence by the
Indonesian army and police at the mine site and the area surrounding it. One
inevitable outcome of this state of events has been rising conflict between the
Indonesian army and local police on the one hand and the Papuan people on the
other hand. Given the mine’s strategic location, and its importance to all parties,
it is not surprising that PTFI has been accused of being entangled in these
conflicts. This situation has resulted in accusations against the company by the
local tribes, and also by international human rights groups, for cooperating with
the Indonesian security forces and thereby becoming involved in human rights
abuses. This was especially true in the period from 1994 through 1996.

Among other things, the company has been accused of discrimination
against the Papuan people in job training and employment, disregard of Papuan
people’s traditional rights, and a neglect of the Papuan peoples’ social and

economic development. In response to these challenges and criticisms the
management of FCX and PTFI undertook a number of initiatives to strengthen
the company’s relationships with the local communities through enhanced
employment opportunities, social and economic development in the communities
near PTFI’s mining operations, and policies and programs to protect human
rights in PTFI’s operations area.



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Scope of the Audit

This audit was conducted by ICCA at the behest of Freeport and PTFI,
which guaranteed that ICCA’s audit findings would not be modified by the
company. At the same time, Freeport would have the right to include its
responses, without editing by ICCA, in the final audit report. ICCA confirms that
both these conditions have been met. ICCA also confirms that in conducting its
audit, it received full support from the management at the mine site, in
interviewing workers, providing access to documents, and logistical support in
facilitating ICCA’s conduct of the audit.

The scope of the audit included: protection of human rights, hiring and
employment opportunities for the Papuan people, and social and economic
development of the Papuan community. These provisions are described in detail
in the company’s Guiding Principles of Operations in Indonesia (GPOI – 1) and
its Social, Employment and Human Rights Policy (SEHR).

Given the complexity and large size of the mining operations, Phase I of
the audit was limited to the three core operating units of PTFI, i.e., surface

mining, underground mining, and milling. Also included were critical
administrative and support services units, and Security Department. A third
element of the audit was the education-related activities of the Freeport
Partnership Fund (LPMAK). Phase I audit covers approximately 9,350 people
representing 65% of PTFI’s total workforce including contractors and privatized
companies. The technical details, policies and procedures covering the audit are
presented in the full report.

The essential components of this field audit were:

a) detailed confidential, one-on-one interviews with a randomly selected
representative group of workers;
b) examination of the company’s relevant records and documents;
c) interviews with management personnel;
d) site visits to various community-related facilities; and,
e) meetings with local area community leaders and businesses.

Phase II of the audit will cover the remaining business, administrative and
support services units of PTFI as well as its contractors and privatized
companies. The timing and other details of the Phase II audit would be
determined at a later date once all formalities connected with the Phase I audit
have been completed.




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Organization of this Report

The audit is an evaluation of PTFI’s compliance with its commitments
made in the SEHR and supported by the GPOI-1. The audit begins, however,
with a report on the occurrence of verifiable human rights violations in PTFI’s
operations area. In addition a report is being sent to the management of
Freeport-McMoRan Copper & Gold and PTFI, which contains recommendations
to PTFI about areas where PTFI is in compliance with its commitments, but
where, in the judgment of the auditors, PTFI could do a better job in meeting its
commitments. Further, the overall report is divided into an Executive Summary
of the audit and its findings followed by the full report. For many readers, the
Executive Summary will be sufficient to understand PTFI’s commitments to its
employees, the local community, stakeholders and shareholders. For others, the
more detailed report will be useful to understand better the complexities of PTFI’s
operations and the success of its operations.


FREEPORT AND PTFI COMMITMENTS IN SEHR AND GPOI-1


I. Promotion of Human Rights Policies and Prevention of Human Rights
Abuses

One of the most important issues pertaining to the audit was the
prevention of human rights abuses for which the company had been accused in
the past, and protection and respect for human rights in all aspects of the
company’s operations. To address this issue in a comprehensive manner,
Freeport and its Indonesian subsidiary, PTFI, undertook a number of initiatives:

In 1999, Freeport adopted a comprehensive Human Rights Policy, which
was subsequently modified to become the “Social, Employment, and Human
Rights Policy” (SEHR). It was adopted by the FCX Board of Directors and PTFI

Board of Commissioners in December 2004. To support this corporate policy,
Freeport and PTFI earlier created a code of conduct called “Guiding Principles
for Indonesian Operations – People and the Community” (GPOI – 1) and made it
public in April 2003.” These documents obligated all PTFI managers and
employees at the mining facility, including those of its contractors and privatized
companies, to comply with these policies.

Audit Findings


ICCA confirms that all potential human rights violations have been
reported to the appropriate authorities and dealt with in accordance with PTFI’s
human rights policy. None of the reported human rights violations involved
activities of PTFI’s Security personnel or by security personnel of the government
of Indonesia in protection of PTFI’s operations or property. The reported
incidents fell within the realm of criminal acts and were dealt with accordingly.
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For the record, it should be noted that ICCA did not investigate the ambush and
shooting of members of the staff of the international school at Tembagapura
since those shootings are being investigated by the U.S. Federal Bureau of
Investigation and by the Government of Indonesia.


Required Corrective Action


None

II. Human Rights Training Program


In 2002, PTFI launched a human rights training program to make certain
that PTFI personnel were sufficiently knowledgeable in human rights and human
rights violations. This action was directed to ensure that all PTFI personnel
would be able to avoid violating the rights of employees and members of the
local community and would be able to accurately report on human rights
violations if they saw them being committed. The annual training is required of
all Security Department (SD) and Social and Local Development (SLD)
personnel regardless of their rank, because their jobs require them to deal with
issues concerning PTFI (including Papuan) employees and the external
community. In addition, all senior supervisory personnel, and all Security and
Community Development personnel are required annually to sign a Human
Rights Assurance Letter indicating that they are familiar with PTFI’s human rights
policies and procedures, know how to handle complaints with regard to potential
human rights violations and have not been part of nor know of any human rights
violations. PTFI’s expectation was that this program would become the lynchpin
toward creating an improved understanding of human rights issues, better
management of activities where human rights abuses were likely to occur, and
effective implementation of policies and procedures to control and resolve issues
that create the potential for human rights abuses.


Audit Findings


ICCA’s assessment of the training program indicates that the program has
been carefully articulated and well suited for PTFI’s operating environment. The
program emphasizes employees’ awareness of six major provisions of the SEHR

policy, i.e., (a) everyone should be treated fairly and equally; (b) there should be
no discrimination based on race, sex, or ethnicity; (c) every individual, regardless
of ethnicity, should be equally treated with respect; (d) everyone should have the
right to join a group, or not join a group; (e) no one should be forced to work
against his/her wishes; and (f) there should be no discrimination between
Papuans and Non-Papuans in employment, promotion, and training programs.
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PTFI’s senior management is committed to the human rights portion of the
SEHR and has provided resources for training for employees in human rights. In
2004, 5,400 employees (including contractors and privatized employees)
attended this training. Among the employees interviewed by ICCA, over 78%
had received human rights training. However, among those who had
acknowledged to receiving this training, nearly 20% failed to answer any question
correctly by responding “no answer” or don’t know”. Another 20% of the
interviewed employees could answer only one or two questions correctly. A little
over 40% could answer all questions correctly. The greatest awareness and
learning from the training program appears to have occurred among the workers
who were at the lowest level of employment hierarchy and temporary workers
supplied by contractors. These workers also had the lowest level of education.
Furthermore workers expressing greater concern with possible human rights
abuses and discrimination were also the workers who demonstrated the best
understanding of the human rights training program.

Two departments at PTFI have the greatest interaction with the local
community: the SD and the SLD Department. Of the two, the Security
department has the greater responsibility to protect human rights. Therefore, the
SD has the greatest need to understand PTFI’s human rights policy and
program.

Although over 90% of SD personnel attended the human rights training,
and the average length of the training period was approximately 12.0 hours
compared to an average of 4.0 hrs. reported by the interviewed workers from the
rest of the worker population, interviews indicated that 59% of SD personnel do
not have a sufficient understanding of the Company’s human rights policies and
programs.


Required Corrective Action


PTFI must continue and enhance its training of all employees:

(1) in the knowledge of PTFI’s human rights policy;
(2) in the specific human rights requirements as outlined in the Universal
Declaration of Human Rights and the Voluntary Principles on Security
and Human Rights; and,
(3) the importance of reporting any potential human rights violations to
management in accordance with PTFI’s human rights policy.
(4) it is especially important the PTFI’s SD do a better job in these areas.
(5) PTFI should provide a report to ICCA as to the changes it plans to make
in its human rights training program in order to make it more effective
together with a time-line for the implementation of the revised program.
ICCA would like to receive this report no later than October 31, 2005.
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III. Security Department Personnel Working with Indonesian Army
Personnel

PTFI has made a public commitment to make transparent logistical and

financial support to Indonesian security forces (police and army). The audit
revealed that eight (8) PTFI SD personnel were assigned to government security
forces to drive personnel from the lowlands to the highland. The use of PTFI
vehicles by government security forces and the provision of PTFI personnel to
provide transportation for the police and army was a major issue in 1994 and
1996 when there were human rights violations in the area around the mine and a
major reason why the religious and human rights communities accused PTFI of
being complicit with security forces in human rights violations.

Audit Findings


PTFI has worked to separate its equipment and personnel from that of the
government. The use of PTFI drivers for government security forces blurs those
distinctions for the local and international communities. ICCA considers this
practice to be contrary to the spirit of the company’s human rights policies.

Required Corrective Action


PTFI’s SD should establish a policy of keeping PTFI SD personnel
separated from operations of Indonesian government security forces. With
PTFI’s logistical support for Indonesian security forces now being transparent, so
also should the activities of PTFI’s SD personnel.


IV. Enhancement in Training and Employment of the Papuans at PTFI


Over the last 8+ years, the company has made certain specific

commitments, and adopted general principles through various documents.
These commitments have been collected in its Guiding Principles (GPOI-I) with a
view to increase Papuan employment at the mine site, and also to improve their
opportunities for future employment and promotion. In 1996, PTFI committed
itself to double the employment of the Papuan people at the mine site by the year
2000, and double it again by the year 2006. The cumulative effect of these two
initiatives would call 2,580 Papuan Non-Staff and 100 Papuan Staff in the
workforce of PTFI by 2006.

In 2002, the company initiated a highly focused and technically oriented
training program that would prepare people for jobs at the mine site. The
program gives first preference to the Papuan candidates, especially those from
the seven local tribes. PTFI also undertook to create a work environment, which
would prevent discrimination against the Papuan people in all aspects of their
employment at PTFI.
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Audit Findings

The audit indicated that the company met its obligation of doubling the
Papuan employment by 2001 and that it was on track for doubling this number
again by 2006. Among the Staff, PTFI had already exceeded the target of 100
by 100% (200 Papuan Staff). ICCA’s survey data, which is based on a
statistically valid representation of PTFI’s workforce, indicated that PTFI would
indeed meet its target of doubling Papuan employment in 2006 among the
business segments covered in Phase I audit. In one sense that could be seen as
completing the audit process about employment. However, the issue about
Papuan employment cannot end with reaching an employment goal alone; it
must also deal with on-going issues of Papuan employee satisfaction, fair
treatment for Papuans in the workforce and enhanced advancement

opportunities in the future. ICCA’s report to PTFI’s management will address
many of these issues, but two crucial issues must be raised in the audit itself.

After PTFI made its Papuan employment commitment in 1996, it refined
its targets to give special preference to Papuans from the seven tribal groups that
live closest to the mine. However, no numerical target for 7-sukus employment
over employment of non-7-suku Papuans has been made. It should, however,
be noted that of the Papuans in our interview sample only 15% of the total group
indicated belonging to one of those selected tribal groups (7-sukus), although the
employment data supplied by PTFI show that 43% of Papuan employees belong
to one of these groups. The data also show that Papuan Non-Staff are being
promoted at a rate equal to those of Non-Papuans, and that Papuans from the 7-
sukus are being promoted among staff at a higher percentage than non-7-suku
Papuans and Non-Papuans. The ability of PTFI to train and employ Papuans
from the 7-sukus is crucial for both the Papuan community and PTFI. PTFI has
developed a number of training programs specially oriented toward Papuans and
focused on the people from the 7-sukus. It is important that these programs be
supported and enhanced. PTFI also must continue to enhance the employment
climate for Papuans.

The audit identified an issue with PTFI’s use of contract labor suppliers.
Indonesia, like many countries, permits employees working in certain jobs to be
employed by contract labor providers. In Indonesia workers may be so employed
for a period of up to three years. From the earliest days of the mine, laborers
have tended to work through labor providers. During mine expansion in the early
1990s, many workers were employed on that basis. The audit found that there
are currently approximately 1,500 workers who work under contract to labor
providers, 16% of the PTFI workforce. 28% of these workers have been
employed through this means for more than three years.

This is not per se a Papuan employment issue, since there is no
significant difference in the percentage of Papuans and Non-Papuans who are
employed through contract labor providers. The issue came to light when
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workers reported that they either currently are or have been working for PTFI
through contract labor providers for periods longer than is permitted under
Indonesian labor law. Of the workers sampled, 20% reported having been
employed by PTFI through contract labor providers for a period of four years or
more. Only 9% of those who reported being employed for four years or more by
contract labor providers were Papuans and 23% were Non-Papuans (although
for those reporting that they were employed through contract labor providers for
more than two years but less than four years, the opposite was true: Papuans
made up 39% of that group and Non-Papuans made up 23% of the sample), so
the issue is not one of discrimination. The issue is that some workers are being
employed through contact labor providers for lengths of time beyond what is
permitted by Indonesian labor law suppliers.

Workers employed through contract labor providers make less than
permanent workers who do the same job while on the PTFI payroll. However,
they do not cost PTFI less because of the payments the company makes to the
contract labor providers. Workers who work for PTFI under agreements with the
labor providers are supervised by PTFI perform the same work as direct PTFI
employees, except with regard to salaries and benefits. PTFI’s employment data
show that all contract workers irrespective of their region of origin receive the
same pay. There were complaints from Papuan workers about who was
transferred from working for contract labor providers to the PTFI payroll, including
accusations of nepotism, bribes, ethnicity and other subjective consideration
affecting transfers. The data show that Papuan contractors are being transferred
to the PTFI payroll at the same rate as Non-Papuans. However, the perception

of workers about unequal treatment should be a concern to PTFI.



Required Corrective Action

It appears likely that PTFI will fulfill its commitments with regard to Papuan
employment by 2006. Therefore, no corrective action is called for with regard to
commitments made in SEHR or GPOI-1. However, there remain significant
challenges for PTFI and the Papuan community with regard to training and
employment. As the pool of educated people in the 7-sukus is depleted, effective
remedial education and training becomes essential. PTFI has established a
training institute, which shows promise of success. These efforts must be
reinforced and intensified. In the long-run, the internal development of Papuan
employees will become more important than the recruitment of new Papuan
employees. Many Papuans entered the workforce lacking the required skills and
thus are at the bottom of the employment ladder; they will stay there unless
effective programs continue for their personal and professional development and
additional incentives put in place for supervisors to enhance the development of
Papuan employees. ICCA has provided recommendations to the management
of PTFI on ways to further enhance the employment and advancement
opportunities for Papuans.

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An area that does require corrective action pertains to workers who
remain with contract labor suppliers for extended periods of time while working
under the management of PTFI and doing similar jobs as PTFI employees. ICCA
has set out the following corrective actions for PTFI’s management:

a) Discontinue using contractor-supplied workers, except within the letter
and spirit of Indonesian labor law. PTFI must also normalize wages
between PTFI employees and those workers supplied by contract labor
providers providing that skill levels are equal.
b) Modify contracts with contract labor suppliers and other vendors so that
contractor-supplied workers doing the same work as their PTFI
counterparts and having the same skill levels receive the same pay and
benefits.
c) Create a set of guidelines clearly specifying the conditions under which
contractor-supplied workers can be hired by PTFI. These guidelines
must also define the conditions of “temporariness” that would apply to
contractor-supplied workers. They must also meet the relevant provision
of the Indonesian labor laws and PTFI’s code of conduct. All contractor-
supplied workers hired under the new guidelines must be paid wages
and benefits equal to those paid to their counterparts on the PTFI
payroll. The revised guidelines must also create an objective and
transparent set of rules in case of transfers from contractor to the PTFI
payroll. Where contract labor suppliers are used by PTFI as a place for
training workers and as a probationary period, the need for such training
and the extent of the probationary period must be clearly defined and
justified. They must also be in compliance with the Indonesian labor
laws.
d) Finally, given the importance of this issue in terms of fairness and equity,
and also for the negative perception it creates among the Papuan
workers, ICCA would recommend that:
i. PTFI prepare a detailed plan of corrective action, including a time-
table for its completion.
ii. This plan should be submitted to ICCA and agreed by PTFI and
ICCA.
iii. ICCA would undertake a follow-up audit within 6-9 months of this

plan’s initiation, to ensure that it has been fully implemented.


V. Social Development of the Papuan People


In late 1960s, Papuan communities in South-Eastern Indonesia were
primarily characterized as traditional economic systems with dominant hunting
and gathering and agricultural lifestyles. Freeport’s mining development brought
along social and economic challenges and opportunities to the local tribal
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communities. To gain communities’ support and prevent violence and social
unrest and to help enhance the opportunities available to the local communities,
Freeport, in the early stage of its Indonesian operations, applied a strategy of
infrastructure development and direct monetary subsidies to the communities.


More recently, this approach has been modified through a long-term social
and business development plan to enhance relationships between PTFI and local
communities. One area of importance to the well-being of the Papuan
community was the need for developing a more diversified base of economic
activity. Freeport and PTFI recognized this challenge and its efforts have taken
two forms.

1. The company created a department of Social and Local Development
(SLD), which is entirely funded and supervised by PTFI. SLD’s mandate
is to implement programs to which PTFI has made public commitments.
2. Freeport and PTFI also created the Freeport Partnership Fund for
Community Development with a commitment to allocate annually 1% of

PTFI’s gross operating revenues to the Fund. Estimated at between US
$18-20 million per year, the contribution is to continue until the year 2006,
and after that Freeport plans to continue the program for another five
years.

By any measure, this is a substantial amount of money both in absolute
and relative terms. These contributions are a direct, voluntary commitment on
the part of PTFI. Another important feature of the fund is that it is entirely
managed by the Papuan community through its organizational entity, Lembaga
Pengembangan Masyarakat Amungme dan Kamoro (LPMAK), subject to
Freeport-established Donor Guidelines to ensure financial integrity and
performance accountability.


ICCA’s Audit Findings

I. Social and Local Development Department (SLD)


SLD is an integral part of PTFI and reflects corporate priorities in its goal
development and program priorities. However, it works closely with LPMAK in
implementing community development programs focused on education, health
and local business development. SLD’s primary focus is on three groups of
activities.

1. Community Business Development (CBD)
is the largest group,
responsible for about 45% of SLD’s operations. It focuses on specific
projects aimed at facilitating entrepreneurship among local communities,
agricultural development, farms and fishing. One of its major activities is

to provide consultation and training to the local communities in the areas
of social and business development.
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From ICCA’s perspective, SLD is a remarkable success story.
First, it is the notion of finding entrepreneurs and risk takers among a
people where competition new to the culture and where business activity
is not a customary means of acquiring status and power in the tribal
community. Second, the area suffers from poor opportunities of economic
growth. Apart from the mine and mine-related enterprises, the local
economy does offers few other sources of producing goods and services
that are large enough to create a more diversified base for enhanced
economic activity.

2. CBD’s Business Incubator Program
aims to take people who are inclined
to start new business and help them with a basic understanding of
business start-up process, financial plans, and elementary aspects of
sales, purchasing, customer service, inventory management,
bookkeeping, etc. If we consider success as a proportion of incubator
program start-ups which become self-sustaining profitable enterprises,
despite their small size, than we can say that this program is successful.
Between 2002 and 2004, 40 small and medium business enterprises were
supported or assisted by CBD, and of these, 77% are generating positive
cash flow. Also, PTFI assisted business have provided work opportunities
for over 1,200 local people.

3. Information Support and Liaison Office (ISLO).
The primary role of this
organization is to serve as liaison with the local communities. ICCA’s

investigations indicated that CLO was providing a needed service to the
community. CLO officers are well respected in the community, and
especially in the far flung villages, where their liaison activities and support
services among the villages are particularly helpful.

A review of CLO’s modus operandi would suggest that CLO could
be made even more effective and productive by shifting its program focus
from activities performed to results achieved. For example, if future
performance focused on eradicating a specific problem.


Required Corrective Action


PTFI has clearly fulfilled its commitments to the local community through
the programs that it has developed for and with the local community. ICCA
recognizes the many challenges that all parties face in creating effective models
for development. However, ICCA believes that PTFI can further refine its models
with regard to community development.

In this context, ICCA has made a number of recommendations with the
goal of achieving long term operating efficiencies and also orienting SLD toward
“deliverables achieved” rather than activities performed. These
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recommendations, when fully implemented should make a demonstrable
difference in the positive impact that SLD can make in the economic and social
life of the Papuan community

II. Freeport Partnership Fund and LPMAK

The Lembaga Pengembangan Masyarakat Amungme dan Kamoro
(LPMAK) was established in 2002 to manage the Freeport Partnership Fund.
The Fund and its predecessor organization were established in the early part of
1996 and has received US $132 million over the 9-year period. PTFI funds the
Freeport Partnership Fund with one-percent of the gross revenue from its
Indonesian operations. When the program began in 1996, Freeport decided that
Fund would be managed by the local community. However, the local community
lacked the experience to manage such large sums of money effectively. A
number of management structures were tried from 1998 through 2002, and while
each was an improvement over what had gone before, it was clear that further
changes were necessary. Between 2002 and 2003 a new structure evolved,
which has generally served the local community well.

As presently constituted, LPMAK has a dual governance structure. The
management of LPMAK comprises of a Board of Commissioners (Badan
Musyawarah or BM), consisting of representatives from the local government,
Papuan regional leaders, leaders from the Amungme and Kamoro, and
representatives from PTFI. The Board of Commissioners establishes annual
budgets for three main development areas: Education, Health, and Village
Development. The second board is the Board of Directors (Badan Pengurus or
BP) and is responsible for approving overall budgets for various programs,
oversight of plan implementation, and managing external financial audits. The
responsibility for daily operations and program management lies with the
Executive Secretary.

To support the LPMAK PTFI established Community Management
Services (CMS), which provides technical and professional advisory services to
LPMAK in planning, managing, and monitoring social programs sponsored by the

1% fund. CMS personnel are employed by PTFI, but work directly with the
Executive Secretary of LPMAK and the various bureaus set up by LPMAK to
administer the Freeport Partnership Fund. CMS also acts as the implementers of
PTFI’s Donor Guidance.


ICCA’s Observations and Audit Findings

The audit has found that PTFI has made the required payments to the
Freeport Partnership Fund and the Fund has made available those monies to the
LPMAK as stipulated in the Donor Guidance. LPMAK’s programs cover a wide-
variety of activities ranging from health education, public health and malaria
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control, community development, infrastructure development to education and
training. By mutual agreement between ICCA and PTFI, Phase-I of this audit
was limited to the activities of LPMAK’s Education Bureau. Other activities of
LPMAK will be covered in Phase-II of the audit.


Education Bureau

The Education Bureau oversees planning and implementation of six major
programs. These are: Scholarship Programs; Dormitories; Out of School and
Adult Education/Skills Training; Cooperation with the Government; Infrastructure;
and Cooperation with Third Parties: Bank, Foundation, and Church. Two of the
six programs, i.e., educational assistance/scholarships and dormitories have
accounted for 96% of LPMAK’s spending on educational programs. Therefore,
these programs were subjected to careful analysis by ICCA during this audit.

Educational Assistance/Scholarships.
This program has suffered from the
growing pains of a new organization with insufficient management experience,
inadequate financial controls, reporting, and accountability systems. In 1996, the
program began giving educational aid to more than 5,000 students per year at an
annual cost which ranged between $3.0 and $5.9 million. The educational aid
ranged from small amounts for school uniforms and school supplies for
elementary students to full scholarships for university students. The data show
that approximately 80% of those receiving educational subsidies were pre-school
through high school students and 20% were attending universities.

Exact expenditures for the program are not available for the period of
1996-2000. The program spending between 2001 and 2004 was approximately
US $11.9 million. Data are not available as to how many persons were granted
scholarships. There was also no system in place to monitor the progress of
scholarship recipients. For the period 1996-2001, no information is available on
the success or the failure of the program in terms of students who completed
their educational programs. LPMAK also does not have any information as to the
status of their current employment.

Two things about the academic scholarship program are worth noting.
One, the scholarship program has consumed almost 50% of the Bureau’s budget
since its inception. Two, this situation has not materially changed even after
prodigious efforts by the current management of the Education Bureau. The
Bureau states that the scholarship program, in the condition it was inherited,
suffered from problems of weak infrastructural support, weak logistics and
absence of policies and procedures. LPMAK did not have any other option but to
continue support to 4,000 students who were receiving educational assistance.

While ICCA understands the emerging management of the Education

Bureau as it seeks to improve the management of the education function of
LPMAK and understanding of the cultural sensitivities with which the Education
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Bureau must deal, it finds that the Education Bureau’s inability to manage the
program effectively are symptomatic of management which does not have the
capacity to administer such a program.

Dormitories. There is a paucity of high schools in many parts of the area
served by LPMAK and the Freeport Partnership Fund, young people often live in
dormitories while pursuing education away from their homes. The Education
Bureau of LPMAK has built, maintained, and operates a number of dormitories,
not only in the Timika area (mostly for high school students), but also in other
parts of Papua (for high school and college students) and in areas within
Indonesia where Papuan students, especially those from the 7-sukus area, are
attending a university. In terms of spending, dormitories are the second major
project of the Education Bureau after the scholarship program. From 2001
through June 2004, almost US $2.5 million had been spent on the dormitories.

The Education Bureau of LPMAK has a variety of models for how it
supports dormitories. In some cases LPMAK directly contracts the management
staff for dormitories and the dormitory section head monitors the day-to-day
operations. In other cases, LPMAK is responsible for the construction of
individual dormitories, and once completed, it turns them over either to a church
or a foundation for management. For the dorms managed by the church and
foundations, LPMAK’s support consists of providing funds for operational costs
such as food, bedding, and utilities; school uniforms; routine maintenance; and
renovations needed to keep these dorms up to standard.

The Education Bureau indicated that many dormitories suffer from poor

maintenance and insufficient supervision. ICCA visited a girls’ dormitory located
in the Timika area, within 30-minutes driving distance from the Education
Bureau’s offices. The condition of the dormitory and the conditions in which the
girls lived were unacceptable with regard to safety, hygiene, and conditions that
would be conducive to effective learning. Given below is a brief summary of the
findings of the ICCA team:

a. At the time of the ICCA audit visit, the dorm had been without
electricity for several months. There were no working lights or fans
for the students living in the dormitory.
b. The restrooms in the dormitory have no doors. Also, there are
insufficient restrooms when compared with the number of
occupants in the facility.
c. The bedrooms are small and have poor ventilation. On average six
people share a room of approximately 150 square feet.
d. The kitchen has poor ventilation and no running water.
e. There is no transportation available to the school. Girls have to
walk long distances along heavy trafficked roads to their schools.
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f. The dormitory has no security and there were reported incidents
when young men from a boys’ dormitory tried to break into the girls’
dormitory.


Out-of-School and Adult Education Programs

Approximately 1% of the total funds of LPMAK are devoted to out-of-
school and adult education programs. These fall under two categories: remedial
education and adult education. Remedial education programs are intended for

young adults who are currently enrolled in school. This program also gets
support from the local government.

The Education Bureau could not adequately explain its involvement in
remedial education programs other than indicating that public schools are failing
in their responsibility of educating the youth. Adult education programs are aimed
at young adults in order to make them more employable. These programs do not
guarantee jobs to participants. Instead, they aim to enhance skill sets and help
students with basic knowledge, which makes them better qualified to seek jobs.
LPMAK has recently agreed to fund 10 students in the PTFI Apprenticeship
program.


Partnership with the Government and Management of Infrastructure Projects


ICCA was unable to evaluate these two programs due to time constraints
during its on-site audit visit in November 2004. We expect to undertake this
evaluation during Phase II of the audit.


Audit Findings


ICCA’s overall finding with regard to LPMAK’s management of educational
program is unsatisfactory. It is distressing to note that the top leadership of
LPMAK has allowed this situation to deteriorate to an unacceptable level given
the importance of this program to the Papuan community, and the fact that it has
consumed a large part of LPMAK’s annual funding. The program must be
considered as unequivocal failure both from operational and fiscal management

perspective.

LPMAK as the local community’s administration of the Freeport
Partnership Fund is the right way forward for all parties. The local community’s
ability to set goals and develop their own programs not only allows the local
community to make certain programs fit local priorities, but it also allows the
community to gain experience in self-governance and independence. However,
giving so much control to a local community that is not yet experienced in
management has inherent challenges. One must ask what responsibility PTFI,
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ICCA Audit Report, PT Freeport Indonesia, Page - 19
as the sole donor to the local community, has when a program administered by
others proves unsuccessful.

Equally, this situation causes consternation for ICCA as an auditor.
ICCA’s advisors are aware of cultural sensitivities and what the local community
sees as outsiders “holding on to the tail” and being critical of them and their
efforts. Therefore, it is tempting to gloss-over the failures of the local community
in administering programs. It is also a temptation for PTFI to say that it has little
or no responsibility for poorly run programs in the local community because it has
given the funding that was promised and the programs are administered by the
local community. However, in an area of such importance as education, no
glossing-over is acceptable.


Required Corrective Action


The entire relationship between PTFI, the Freeport Partnership Fund, and
the LPMAK must continue to be rethought and redeveloped. Even though

cursory inspection of other programs administered by LPMAK leads ICCA to
believe that the Education Bureau is the weakest part of the LPMAK programs, it
is clear that there are financial and human resources that could be more
effectively used by the community.

As part of the rethinking and redeveloping of PTFI’s relationship with
LPMAK, PTFI must take responsibility for getting the Education Bureau to do
what needs to be done to establish an educational program for the area
surrounding PTFI’s mining operations. There is a special and immediate need
for PTFI through LPMAK to take action to correct the situation at the dormitories.
Although some might argue that the conditions in the dormitory are not that
different from the conditions found in the villages from which the students come,
the dormitories must be maintained to the standard at which they were intended.
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Chapter 1

ANTECEDENTS TO THE AUDIT PROJECT



Introduction


This report is based on an audit of PT Freeport Indonesia (PTFI), an
affiliate of Freeport McMoRan Copper and Gold, Inc. (FCX) with headquarters in
New Orleans, Louisiana, USA. The audit was conducted at the mining site
between November 23 and December 1, 2004.

PTFI operates the Grasberg mine, which is located in Papua, the

easternmost province of Indonesia. Grasberg is one of the largest copper and
gold mines in the world. The current life-span of the mine is expected to be
2040. In 2004, the mine recorded sales of 1.44 million ounces of gold and 1
billion pounds of copper and a net income of approximately US $156.8 million.
1


The mine operates on the basis of 24 hours/7 days a week throughout the
year. It is a highly challenging work environment with rainfall of 300 inches per
year. The mine is located approximately 14,000 feet above sea level at a steep
incline reaching its highest elevation approximately 80 miles from the sea coast.

Prior to the initiation of the mining operations, the area was populated by
indigenous Papuan tribes scattered across a vast region of mountains and
valleys. Until about 50 years ago, these tribes were isolated from any aspect of
industrialization or modern exchange-based economic activity. There are seven
recognized Papuan tribes with traditional claims to the land around the mine.
These are Amungme, Kamoro, Damal, Ekari, Dani, Moni, Nduga.
2
Of these
seven tribes, two – Amungme and Kamoro – have the primary traditional rights to
the land where the mine is located.

At the time of the initiation of the mining activities the population within
PTFI’s Contract of Work area was less than 1,000. However, the mining activity
attracted tribal people and others from all parts of the Papuan province and other
provinces of Indonesia. This migration has resulted in the current population in
the area to be more than 120,000. The increased population has brought
inevitable pressure for jobs and greater economic opportunities. Unfortunately,
the area’s topography, soil conditions, and limited productive skills among the

local people make it difficult to create job opportunities and economic activity
independent of the mining operations. Thus PTFI – including its partners and
subcontractors - remains the only substantial employer in the area.


1
Freeport News Release – Fourth Quarter and 12-Month 2004 Results

2
Other Papuan tribes in the area include: Ayamaru, Biak, Sentani, Jayapura, Serui, and others.
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ICCA Audit Report, PT Freeport Indonesia, Page - 21
Freeport (FCX) and its Indonesian affiliate (PTFI) have been cognizant of
their responsibility to the local people and have contributed large sums of money
and resources toward job creation and economic development. The company
has also given top preference to the Papuan people in training programs and
employment opportunities in the mining operations. It should be noted that these
efforts have been above and beyond those required by Indonesian law or PTFI
obligations under its “Contract of Work” agreement with the Indonesian
government. PTFI is also the largest taxpayer in Indonesia.


Background


The Papua region has had a volatile political history. The tribal people
have a culture and ethnicity that is distinct from the rest of Indonesia. The
province has also been mired in a struggle for independence, resisted by the
national government. The political unrest has led to increased military presence
in the area, with concomitant human rights abuses. Given the mine’s presence

and its importance to all sides, PTFI could not escape accusations of
involvement and complicity in some of the human rights abuses that occurred in
the mine’s area of operations. Also, the company has been accused of not doing
enough to prevent the use of excessive force by the military and of acquiescing
to military demands for cooperation through provision of transportation and other
support services.

PTFI has denied these charges and has pointed to many instances of
abuse from all sides against the company’s employees and facilities.
Notwithstanding, PTFI and its U.S. parent FCX undertook a series of positive
actions to ameliorate the situation and to put emphasis where it belongs, i.e., on
providing greater training and job opportunities to the Papuan people. The
company also undertook certain highly innovative and financially significant steps
toward injecting substantial funds and professional expertise into the community
with a view to building greater capacity for self-governance and economic
development among the local Papuan tribes.


Antecedents to the current audit


Freeport has consistently played a significant role in improving the welfare
of the Papuan people who live in the mine’s area of operations and who look to
Freeport for continuous support for their economic well-being and increased
future prosperity. Unfortunately, a broad gap persists between the expectations
of the local people and PTFI’s ability to satisfy these expectations, which
continues to increase with time and current gains. In this effort, Freeport has
faced a number of challenges.

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ICCA Audit Report, PT Freeport Indonesia, Page - 22
1. Indonesian national and local authorities have not devoted the resources
which were promised to the region and its people. However, PTFI’s ability
to fill the gap left by the government is severely constrained and must
remain so. Any corporation, however large, cannot substitute for the
government’s role in building the economic and social infrastructure of a
given area.
2. Any improvement in the economic and social well-being of the local
people inevitably draws people from other locations in the region seeking
similar benefits from the company. This is a vicious cycle. The more the
company does, the greater the pressure to do even more.
3. Mining, by its very nature, is capital-intensive, and its ability to generate
ever- increasing employment is limited. Nevertheless, an increase in the
local population generates increased demand for employment, which
cannot be totally satisfied by the company.
4. The ability of the land to generate additional economic activity, beyond
mining operations, is limited.
5. Government agencies have not taken the required aggressive steps to
ameliorate the situation.
Nevertheless, starting in 1996, PTFI made certain major commitments
toward the economic and social well-being of the Papuan people. For example:

1. PTFI undertook to double the employment of Papuan people at PTFI
during a five-year period, i.e., by the year 2001. This commitment was
fulfilled.
2. In 2001, PTFI again committed to double the employment of the Papuan
people by year 2006, which commitment it expects to meet.
3. PTFI made further commitments toward giving preference in training and
hiring to the Papuan people. All these commitments have been codified in
PTFI’s policy manuals and are being implemented (Appendix I).

4. PTFI has been devoting significant resources in terms of money and
professional expertise to improve the health, education, and
entrepreneurial opportunities for the Papuan people.
5. In 1996, PTFI made a commitment to devote 1% of its annual gross
revenues from the mining operations toward the economic and social
uplifting of the Papuan people. This is called the Freeport Partnership
Fund for Community Development. This is an unprecedented action on
the part of the company and the only one of its kind in the world.
a. At current levels, these funds have amounted to between $18-20
million a year, to date totaling $132 million.
b. PTFI has agreed to continue the provision of these funds through
2011. At that time PTFI and the community will re-evaluate the
program.
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c. These funds have been provided by PTFI with the full approval of
PTFI’s parent Freeport McMoRan Copper and Gold, Inc. (FCX) in New
Orleans. As such, they reflect a corporate commitment to the Papuan
people.
d. These funds are in addition to the funds PTFI is already spending as a
part of its community outreach efforts.
e. The company has instituted a plan of action whereby Papuan leaders
have assumed increased responsibility toward self-governance in the
managing and spending of these funds.


Freeport’s Guiding Principles of Operations in Indonesia


In 1999 Freeport McMoRan Copper and Gold, Inc. (FCX) released a

board-approved Social, Employment and Human Rights Policy and PTFI’s Board
of Governors gave their assent to that policy for the Papuan operations. This
document sets out the standards for corporate and employee behavior with
regard to important areas of mining operations in Papua and elsewhere. In
December 2003, Freeport made public its “Guiding Principles for Indonesian
Operations – People and the Community” (GPIO-1), which codified Freeport’s
commitments to the Papuan people in the area of its mining operations. More
than one year in the making, the Guiding Principles document explicitly states
Freeport’s commitments in dealing with workers and the community (Appendix I).
In particular:

1. It creates detailed, objective, quantifiable, and outcome-oriented
measures of performance in each of the five areas covered by the
principles. These include: People and Community, including workers
employed by PTFI and its affiliated companies, contractors, and suppliers;
Business-Government Relations including proscription of bribery and
corruption; Protection of Human Rights; Special Status of Papuan
Workers; and Economic and Social Development of the local tribes.
2. It made a commitment to the effect that Freeport and its affiliated
organizations will undergo regular audits of all activities covered under the
Guiding Principles. The organization’s respective internal audit
departments will perform the audits to assess their compliance with the
Guiding Principles. The internal audit process will include performance
evaluations, plans for corrective action, and a follow-up mechanism to
ensure compliance in a timely fashion.
3. Freeport also agreed to undergo an external audit by an independent
monitoring agency to assess the extent of compliance with the Guiding
Principles by PTFI and its affiliated organizations on a regular basis and to
give these audits maximum transparency and thus engender greater
public credibility. Current plans envisage PTFI to undergo independent

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ICCA Audit Report, PT Freeport Indonesia, Page - 24
external audits on the basis of a two-year cycle. However, once enough
experience has been gained with these audits, and depending on the
extent of remediation required as a consequence of audit findings, the gap
between audit cycles may be expanded.
4. As part of its commitment to independent external monitoring, Freeport
agreed to provide the independent monitoring organization with complete
access to all information and facilities in order to make an evaluation of
Freeport’s performance on the Guiding Principles and their
implementation standards. The independent monitor will have complete
discretion in issuing its reports without any censorship from Freeport
provided that Freeport is afforded a suitable opportunity to respond to any
findings of fact and conclusion by the independent monitor. International
Center for Corporate Accountability (ICCA) has acted as the independent
external auditor under an agreement with Freeport McMoRan. Findings of
the audit are the subject of this report.

ICCA is a not-for-profit research-education organization founded to
monitor corporate ethics worldwide. It counsels large national and multinational
corporations in creating, implementing, and monitoring their codes of conduct,
with a focus on workers' wages, working and living conditions, and employee
access to management, human rights, and sustainable development. It has
been created in response to a global need for codes of conduct that will hold
major corporations accountable for human rights and environmental behaviors.
3


These elements put the Freeport’s Guiding Principles at the forefront of
the entire mining industry. When combined with the elements of transparency,

accountability, and full public disclosure, both the instruments and the
implementation process make these Guiding Principles the first of their kind in
the global mining and extractive industries.


Public Dissemination of Audit Findings


Freeport and ICCA have also agreed on a process by which the findings
of these audits would be made public. This is a two-step process:

1. Draft Report.
The company has the first right to review ICCA’s preliminary
findings. This review process would normally take no more than 30 days.
When both Freeport and ICCA are in agreement as to the existence of any
factual errors, ICCA will correct the report prior to its publication.

2. Consultative Process.
Where the Draft Report includes any findings of
non-compliance with the Guiding Principles by Freeport or any
participating contractor, and Freeport agrees with such findings, PTFI and

3
Additional Information on ICCA is available on
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ICCA Audit Report, PT Freeport Indonesia, Page - 25
ICCA shall discuss a proposed plan of corrective action to remedy such
non-compliance. Where both PTFI and ICCA reach an agreement on a
plan of corrective action, ICCA will include both the original findings of
non-compliance and the agreed-upon plan of corrective action in the

Public Report.

Where the Draft Report includes any findings of non-compliance
with the Guiding Principles by Freeport or any participating contractor, and
Freeport does not agree with such findings, ICCA will have the right to
include such findings of non-compliance in the Public Report. ICCA must
also include PTFI’s response stating its reasons for disagreeing with the
findings. This response will not be edited or otherwise modified by ICCA.

Both sides will endeavor to complete the entire process in an
expeditious manner. It is expected that the final report be made public
within 90 days from the time of ICCA’s initial submission of the draft report
to Freeport.

3. Public Report.
Upon completion of the consultative process, ICCA will
prepare a public report. The contents of this report will be at the sole
discretion of ICCA, except that the Public Report shall not include any
information, which was not included in the Draft Report. After the Public
Report is finalized, ICCA will provide the Company with a copy of the
Public Report for review. If the Public Report conforms to the
requirements specified above, ICCA will have the right to release the
Public Report for public dissemination. ICCA will also post the Public
Report on its Web site, www.ICCA-corporateaccountability.org
.

Freeport will have the right to reproduce and distribute the Public
Report in electronic form over its Web site or in any other form over the
medium provided that Freeport does not make any changes to the public
report. PTFI may also provide the Public Report to any news sources or

other third parties that it desires.

4. Corrective Action
. It is the company’s responsibility to make corrections in
any area in which the audit finds non-compliance with (1) the laws of
Indonesia, (2) accepted international standards of corporate behavior, and
(3) Freeport’s policies and commitments. ICCA will have the option to
make subsequent visits to the mine site to verify the success of the
company’s implementation efforts. The terms of such visits shall be
mutually agreed between Freeport and ICCA. The public release of the
follow-up audit reports shall conform to the procedures listed in the
previous section.

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