Peter Waldman, Mount Jaya – At 13,000 feet up this remote crag, Steve Drake, operations chief of Freeport-McMoRan Copper & Gold Inc.'s huge Grasberg mine, looks out uneasily across Lake Wanagon. The dazzling turquoise pool is loaded with copper leached from the mine's waste-rock dump, so much copper that Freeport intends to mine the lake water some day. Mr. Drake scans the dump, itself 1,000 feet tall, for fissures. Sensors have picked up a surge of water downstream in the Wanagon River. Seismometers indicate movement within the dump itself. Rains may have dislodged big chunks of waste rock into the lake, sending waves of copper water cascading down the river valley. He orders the dump temporarily shut – too late. At the village of Banti downstream, 11 Amungme tribesmen, out on a bow-and-arrow hunting expedition, are reported missing in the flood.
The flood's actual casualties, it turns out, are some pigs. Freeport settles the matter for about $5,000. But the fissures in its Indonesia mining operations are still widening, and won't be so easily resolved.
For years, critics have held up Freeport's operations in Irian Jaya, the Indonesian half of the island of New Guinea, as a poster child of corporate neo-colonialism. The mining has generated billions of dollars for New Orleans-based Freeport since it arrived in 1967, and billions more for the Indonesian government. But, critics say, the mining has brutalized one of the world's most pristine ecosystems and done little to lift local tribes, just decades removed from Stone Age isolation, out of poverty and primitiveness.
Freeport also has been assailed in international human-rights circles for its financial assistance to Indonesia's military, which periodically has crushed tribal unrest stemming in part from anger over the mining. Many Amungme have died in those sweeps. An Amungme chief accuses Freeport of "cultural genocide," and Amungme have sued the company in state and federal courts in the US Media
Yet the criticism hardly registered among the people who mattered most in Indonesia – the regime of former President Suharto. For one thing, the government was given about a 10% stake in the mine, the world's largest copper and gold deposit. For another, as evidence emerging in the aftermath of the May collapse of Mr. Suharto's 32-year dictatorship shows, financial and personal ties between Freeport and its chairman, James "Jim Bob" Moffett, and Mr. Suharto and his inner circle run deep. Indeed, that relationship stands as a study in how multinational companies adapted to the crony capitalism that helped bring down Suharto – and that helped push Indonesia into economic and social chaos.
Between 1991 and 1997, Freeport made at least $673 million of loan guarantees to three Indonesians with close ties to Mr. Suharto or his ministers. One of those loans helped one of the Indonesians turn a one-year profit of 500% on his $40 million investment – and helped Freeport renew a crucial mining license. Suharto allies, including at least one cabinet minister, bought assets from the company, such as housing and a hotel near the mine, in deals that Freeport not only helped finance, but in which the company also guaranteed buyers sizable annual profits. In another deal, Freeport not only guaranteed debt, but also agreed to subsidize interest payments for a Suharto-family business partner, enabling him to buy 4.7% of Freeport's Indonesian unit.
With Mr. Suharto out of power, many in Indonesia for the first time are calling for a reckoning of Freeport's role; some, including a recent parliamentary commission, call for a possible ban on the company. Freeport says it has broken no Indonesian or US laws, including the US Foreign Corrupt Practices Act, which bars US public companies from providing "anything of value" to curry favor with foreign governments. In fact, Freeport says, it has repeatedly rejected appeals for payoffs from officials in Indonesia's corruption-tainted system.
The company notes that it is the country's biggest taxpayer. In the jungles of Irian Jaya, where it is the only economic engine, it has built schools, roads, hospitals. It pledges hundreds of millions of dollars over the next several decades to mitigate the mine's environmental and social impacts. It says the tribes, long neglected by the Jakarta government, would be poorer without the mine.
"If we're not there, what do those people have?" asks Mr. Moffett, a brash former University of Texas football player noted for his Elvis imitations. Freeport's opponents "don't see what those people looked like before we got there. If they had, they wouldn't like what they saw."
Friends in high places
Mr. Moffett says Freeport has no intention of leaving Indonesia. It still has friends in high places. Mr. Moffett's closest friend in the Suharto regime, say Freeport executives, was a gregarious minister named Ginandjar Kartasasmita. He turned against Mr. Suharto on his last night in office and has emerged as the powerful minister in charge of Indonesia's economy. One of his proteges, Kuntoro Mangkusubroto, now the minister of mines and energy, dismisses talk of cronyism connected to Freeport. The company, he says, has a "legal and legitimate" mining contract. The government is "not in a position to review it." It rarely has been. Freeport, the Suharto regime's first foreign investor, wrote its first mining contract, in 1973. Indonesia lacked the expertise to draft the contract, recalls Mohammad Sadli, Indonesia's foreign-investment czar at the time. Safeguards for the environment and tribes were unheard of then, he says. "Freeport got away with murder," Mr. Sadli says. Twenty-four years later, when Freeport wanted to more than double its Grasberg output last year, Mr. Moffett took the case directly to Mr. Suharto. The president scrawled his approval of the controversial expansion in the margins of Mr. Moffett's personal letter to him – many months before required environmental reviews had even begun.
Freeport's first Irian Jaya mine, called Ertsberg, was an engineering marvel, but a modest economic success. Just getting to the copper deposit required building 68 miles of road scaling 9,100 feet from the Arafura Sea, through dripping tunnels and along white-knuckle ridges. The final 2,600-foot push to both Ertsberg and Grasberg – nestled beneath rare equatorial glaciers – is covered by a mile-long aerial tramway.
In the mid-1980s, Mr. Moffett took an enormous gamble, pouring more money into exploring one of the most inaccessible mineral zones in the world. The payoff, in 1988, was Grasberg. The open-pit mine has proven ore reserves of about $60 billion and is expected to provide 10% of the world's copper in coming years. The find converted Freeport from a midsize miner of sulfur and other minerals into an industry giant; last year alone, Freeport pulled $1.5 billion of copper, gold and silver ore from Grasberg.
Hitting the motherlode
The Grasberg motherlode was struck within Freeport's 1973 contract-of-work area. But that first contract was set to expire in 2003; Freeport needed longer-term assurance to help attract the billions in financing needed to develop mighty Grasberg. Mr. Moffett turned to a rising star in the Suharto cabinet, the new minister of mines in 1988, Mr. Ginandjar.
"Oh hell yeah, we became very close friends," Mr. Moffett says of Mr. Ginandjar. "When you fight an adventure like this Grasberg adventure, and it turns out like this, you become very, very well acquainted with a guy who helps you, and he with you."
Over the years, Messrs. Moffett and Ginandjar visited each other's homes, spending days on the golf course and evenings crooning in night clubs, associates say. (Mr. Moffett doesn't drink alcohol.) Mr. Ginandjar traveled frequently on Freeport jets. The minister's brother and son pursued business deals with Freeport, with varying degrees of success. Mr. Ginandjar's son-in-law works for Freeport in New Orleans.
By the late 1980s, Indonesia's mining technocrats were happy to renegotiate Freeport's 1973 mining contract. "Nobody else cared about Irian Jaya," recalls Kosim Gandataruna, director general of mines at the time. In exchange for mining rights to an initial 6.5 million acres for up to 50 years, Freeport agreed to pay higher taxes, do more community and environmental planning and look into building Indonesia's first copper smelter (now nearly complete in East Java). But talks bogged down over Freeport's unfulfilled 1973 pledge to divest 51% of its Irian Jaya venture to Indonesian nationals, says Mr. Kosim, lead negotiator for Indonesia. Freeport demanded to be treated under current law, which by then allowed 100% foreign ownership of mining ventures. Mr. Ginandjar approved a compromise: In addition to a 10% Freeport stake already held by Indonesia's government, Freeport agreed to divest another 10% to Indonesian nationals by the year 2001. But according to Mr. Kosim and Freeport executives, Mr. Ginandjar recommended Freeport not wait – and introduced his friend and political ally, Aburizal Bakrie, to be the purchaser.
Last-minute hitches
Freeport followed the minister's advice. But there were some last-minute hitches. Bankers for the Bakrie purchase insisted on having a letter from the Indonesian government certifying its approval of the deal.
"I wrote the letter for Ginandjar to sign," recalls Mr. Kosim, "but he said he couldn't have anything to do with it; I still don't know why. So I signed it myself."
Other objections arose over Mr. Bakrie's use of a British Virgin Islands company to buy the Freeport shares, ostensibly meant for an "Indonesian national." Mr. Ginandjar overrode their concerns and approved the deal, say people involved in it.
In an interview, Mr. Ginandjar says Freeport conferred mostly with Mr. Kosim on the deal. Mr. Ginandjar says he assured Freeport that Mr. Bakrie "was a good pribumi," or indigenous Indonesian. But the minister says he "didn't give any recommendation, formal or informal," and in no way profited from the sale.
In a separate interview, Mr. Bakrie says he approached Mr. Moffett on his own. Mr. Moffett says what mattered was that Mr. Bakrie could afford to put up equity. "He not only knew Ginandjar, he knew everybody," Mr. Moffett recalls. "I had to find a 10% partner, and we couldn't find anybody to do it. When I took people from Jakarta to that area, they didn't even know those 13,000-foot peaks existed. They'd say, 'God O'mighty, I feel like I'm in Switzerland!' "
In December 1991, one day after Freeport inked its new government mining contract, Mr. Bakrie paid $212.5 million for a 10% stake in Freeport's Indonesian unit. The purchase was financed by a $173 million bank loan guaranteed by Freeport. One year later – following Freeport's disclosures of steadily higher Grasberg reserves – Mr. Bakrie sold nearly half that stake back to Freeport for roughly what he paid for all of it the year before, giving him a 500% profit on his initial equity investment. In essence, he wound up with a 5.1% stake in Freeport's Indonesian operations for free. (The value of both deals was based on Freeport's stock price at the time.) With the new contract under his belt, Mr. Moffett turned to developing Grasberg. It needed billions of dollars to build a port and power system, housing and towns for 20,000 workers, bases and barracks for hundreds of Indonesian troops, a golf course, a hotel, and eventually an industrial complex capable of milling up to 300,000 tons of ore a day. Mr. Moffett's solution: what he calls "privatization."
"We didn't want to own nonmining assets" such as power plants, he says. "If we own the son of a b----, the natives think we ought to provide power for nothing. Where does that stop?"
Freeport sold most of its infrastructure assets to a Jakarta company controlled by Abdul Latief, another businessman introduced to Freeport by Mr. Ginandjar, according to Mr. Kosim and Freeport executives. In 1993, two months after Freeport signed its first pact with Mr. Latief's company, Mr. Suharto appointed him minister of manpower.
Over the next four years, while Mr. Latief was a minister, his company and some partners purchased roughly $370 million of Freeport assets, financed by approximately $255 million of debt guaranteed by Freeport. Freeport is the assets' sole customer; it has guaranteed Mr. Latief's company a minimum, after-tax return on equity of about 15% a year.
Mr. Moffett denies any conflict of interest in guaranteeing loans and profits to an Indonesian minister. He says the broad outlines of the arrangement were set before Mr. Latief joined the Suharto government. He says that when Mr. Latief became a minister, Freeport insisted Mr. Latief do everything required by Indonesian law, including distancing himself from his companies. "We're clean as a hound's tooth," Mr. Moffett says. Mr. Latief didn't respond to requests for comment. Mr. Ginandjar's brother and his son, both named Agus Kartasasmita, also dabbled in Freeport's "privatization" program. His brother's company, PT Catur Yasa, took a stake in Freeport's privatized charter airline. It also tried to become the Indonesian partner in Freeport's $215 million power project, led by a joint venture of Duke Energy Corp. and Fluor Corp.'s Fluor Daniel unit, according to an executive who took part in the Catur Yasa effort. But when Catur Yasa didn't want to pay for the stake, this executive says, it was awarded a 20% share of a separate Duke-Fluor Daniel joint venture to maintain and operate the power system.
Clarence Ray, president of the Duke-Fluor Daniel joint venture, based in Charlotte, N.C., says Catur Yasa was recommended by Freeport. Today, the Indonesian partner has one employee working for the joint venture, says Agus G. Kartasasmita, Mr. Ginandjar's brother. The joint venture has a total of about 200 employees. Mr. Agus says Catur Yasa was picked for its professionalism, "without help or direction from any third party."
Mr. Ginandjar's son sought part of Freeport's waste-water and solid-waste management. The younger Agus Kartasasmita, fresh out of college, asked Mr. Moffett for the business while his father and the Freeport chairman were playing golf one day, according to a former colleague of the minister's son.
"I've watched those kids grow up," Mr. Moffett says. "I can't tell you whether Agus ever did that or not, but I can tell you they're a very, very sophisticated family."
When a Jakarta-based executive with Waste Management Inc. expressed interest in handling the Freeport job, it directed him to the younger Agus Kartasasmita's company, called Agumar, says Ian Sharp, project manager for the Waste Management unit that worked with Freeport. But the venture never took off; Freeport eventually decided to handle its own waste treatment. The younger Mr. Agus didn't respond to requests for comment.
Mr. Moffett says Freeport's business ties to the Ginandjar family "aren't even on the Richter scale," given Freeport's massive capital spending. He says the family has gotten its Freeport business fair and square. Says Mr. Ginandjar: "My family has never gotten any business without having to fight for it. ... They're on their own."
A victim of cronyism
More often than not, Freeport was a victim of Indonesia's endemic cronyism, its executives say. In 1992, when the company sought another expansion of its mining area, the ministry approved it on two conditions, Freeport executives say: that Freeport create a new company to lease the extra acreage, and that it take on another ministry-recommended equity partner named Setiawan Djody, a business partner of the Suharto family. Eventually, after Mr. Djody didn't pay his share of the venture's bills, Freeport repossessed his shares, Mr. Moffett says. Mr. Djody says the deal had never been finalized. Media
Freeport executives say the squeeze got worse in 1993, after I.B. Sudjana, a rival of Mr. Ginandjar, replaced him as minister of mines and energy. Mr. Sudjana had his own list of 16 retired generals and others whom ministry officials badgered Freeport to help, Mr. Moffett says. Ministry pressure also mounted on the company to do business with Mr. Suharto's family, particularly with second-son Bambang Trihatmodjo, Freeport executives say. Messrs. Sudjana and Bambang didn't respond to requests for comment.
For years, Freeport had avoided direct ties to the first family, in part because Freeport board member Henry Kissinger and others had warned of an eventual backlash against the Suhartos. But in the mid-1990s, Mr. Moffett, through a budding personal relationship with one of Mr. Suharto's best-known Indonesian confidants, Mohamad "Bob" Hasan, began spending much more time with the first family. He golfed with the president and became close friends with his second daughter, Siti Hedianti Prabowo, and her husband, a controversial general at the time.
The first-family friendship, coming at the twilight of the Suhartos' rule, troubled even some Freeport executives. When one warned Mr. Moffett of the growing perception that Mr. Moffett had himself become part of the Suharto inner circle, the boss told the executive to butt out – not in those words, the executive says.
"Part of the problem is that nobody wants to confront Jim Bob; he's such a forceful figure," this executive says.
Mr. Moffett met his match in Mr. Suharto. In 1995, the Indonesian president was outraged to learn about Mr. Bakrie's 1992 windfall profits on Freeport stock, say several current and former high-ranking officials in the ministry of mines and energy who were involved. They say Mr. Suharto ordered the 5% Freeport stake Mr. Bakrie still held be liquidated. "The president insisted [his son] Bambang or Bob Hasan should get those shares," says Umar Said, the No. 2 mining ministry official at the time.
Mr. Bakrie says his investment bankers told him to sell his Freeport stake. In any case, it fell to Mr. Moffett to make the deal happen. Talks began with Mr. Bambang's representatives, but the Suharto son refused to put up any cash for the shares, asking instead to have the stake "carried" by Freeport dividends and loan guarantees, according to executives involved in the talks. Freeport balked. Eventually, Mr. Hasan agreed to invest $61 million to buy the Bakrie stake, valued then at $315 million. Freeport agreed to guarantee a $254 million bank loan to Mr. Hasan's company, and pledged, through future loans, to cover any shortfall in interest payments. The deal closed in March 1997. To date, Freeport has paid more than $8 million of interest on behalf of Mr. Hasan's company. Concerned about US anticorruption laws, Freeport's lawyers and lenders were wary of the terms extended to such a close Suharto partner, Mr. Moffett says. The company that bought the shares, called PT Nusamba Mineral Industri, was 100%-owned by PT Nusantara Ampera Bakti. The parent, known as Nusamba, is widely accepted in Indonesia as being controlled by the Suharto family. Mr. Hasan himself has said in interviews that Nusamba is 80%-owned by three Suharto-chaired foundations, 10%-owned by his eldest son, and 10%-owned by Mr. Hasan.
Yet for the Bakrie-Hasan deal, Freeport officials say, Mr. Hasan provided its banks with documents stating that Nusamba is 99%- owned by Mr. Hasan and 1%-owned by a Nusamba employee. Some Freeport officials acknowledge that is hard to buy.
"Bob Hasan is part and parcel of the Suharto family," one says. Arguing otherwise would "make us the laughing stock of Indonesia." Separating Mr. Hasan and the Suhartos "is important legally and to the international banks," the executive says. "But in Indonesia, where we have to live and work, it would look pretty silly." In Jakarta, executives warned Mr. Moffett about deepening ties with Mr. Hasan. But with Mr. Suharto steaming and his son looming as the first-family buyer of choice, Mr. Hasan "was the lesser of all evils," a Freeport executive says.
He was also a loyal friend. In 1996, when a battle erupted among the Suharto kids over who would exploit the trumpeted Busang gold deposit – later proven a fraud – Mr. Suharto asked Mr. Hasan, who asked Mr. Moffett, to take charge of Busang. At other times, senior mining-ministry officials say, Mr. Hasan berated them for questioning Freeport's plans to boost ore production, saying their concerns were hurting Freeport's share price. Mr. Suharto himself eventually OK'd the massive expansion, in the margins of the Moffett letter.
"I would hope he would be supportive," given Freeport's importance to Indonesia, Mr. Moffett says. "I went in there as a geologist with my hat in my hand and talked about a dream – and it came true!" Mr. Suharto and Mr. Hasan didn't respond to requests for comment.
Mr. Moffett says he hasn't talked to Mr. Suharto in months. He stays in closer touch with Mr. Ginandjar. In April, he attended the wedding of Mr. Ginandjar's son Agus at the minister's home in Jakarta. There, he ran into his old mining-ministry friend, Mr. Kosim, whose daughter almost went to work for Freeport years ago. "He asked about my girl and I told him she wants to work in America but needs a green card," Mr. Kosim says. "He said, 'No problem, have her contact me.' " When she did, Freeport offered her a job in New Orleans. She opted to work elsewhere, but Mr. Kosim was still touched. I was flattered by his generosity," he says. "Jim Bob is a very kind man."