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

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 Ind

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

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

Worker Profile and Operating Conditions

Organization of Work and Overtime

Employee Perceptions

Dealing with the Local Police and Army

Recommendations for Improvement

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

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

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

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

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

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

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

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

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

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

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 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

contractor-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 table for its completion

time-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

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

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

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

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

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

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 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

out-of-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,

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

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

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

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

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

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 http://www.icca-corporateaccountability.org

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

Extractive industries, by their nature, have significant impact on the physical environment and people of the region Mining is a highly capital and technology intensive industry The remote location requires building a complex infrastructure and transportation network for moving raw materials and processed goods

A similar and somewhat less recognized but equally daunting parallel exists in terms of people Inaccessibility and remoteness of the region has fostered communities that are essentially self-contained, surviving at subsistence level and without meaningful contact with outside societies Only in the past century have these communities confronted the outside world and modern societies This isolation has given rise to highly localized and unique cultures These cultures risk serious challenges, and in some cases, harm when confronted with new people, new technologies, new modes of production and employment, new community structures, and new lifestyles and standards of living When confronted with these issues on a massive scale, and within a short timeframe, these communities may become disoriented and disenfranchised, leading to resentment and rebellion against newcomers and everything that they represent

No country, especially a poor and developing country, can afford not to harness its resources to support its growing population and improve its economic well-being It is, therefore, inevitable and unavoidable that large-scale mining operations, or for that matter any type of large infrastructure projects (e.g., building a dam), will bring about major changes in the lives of the local people and their surrounding environment Change can be a force for both good and evil When properly managed, it can minimize adverse impact on the environment and fragile local cultures, while at the same time creating enormous economic wealth and opportunities to help both the nation and the local community to gain and sustain an improved standard of living and quality of life for the current and future generations

Guiding Principles for Indonesian Operations – People and the Community

of responsibility toward its Papuan employees and the indigenous people who live around its operations area

To this end, Freeport has voluntarily devoted resources, and will continue to

do so in the future, which go beyond its legal and contractual commitments to the Government of Indonesia and the Papuan people of the region The Corporate mission for the future is to conduct its mining operations in Papua in a manner that is economically efficient, protects the environment, and nurtures the economic growth and development of the Papuan people with respect for their tribal culture and value system and their human rights

I 3 Corporate Commitment

The Guiding Principles enunciated here are intended to codify Freeport’s Social, Employment, and Human Rights Policy by enumerating practices and operational standards in Papua in the areas of social and economic development of the indigenous people of Papua, protection of human rights and respect for their culture and dignities These Principles address how Freeport’s polices and operational practices are intended to impact employment, business-government relations, protection of human rights, and economic and social development of the local tribes in the area of operations They also set forth Freeport’s commitment for the welfare of the people of Papua and their unique culture and value set

Furthermore, to ensure compliance with these Principles, Freeport has already undertaken a series of measures:

1 Created detailed, objective, quantifiable, and outcome-oriented measures

of performance in each of the five areas covered in the Principles

2 Initiated policies and procedures whose implementation and enforcement will be required of all levels of supervisors and managers

3 Undertaken an extensive training program to familiarize managers and workers with these policies This training program has also been offered to local community leaders as well as police and military units to sensitize them to these issues

4 Developed internal monitoring programs to evaluate compliance with the Principles and their Standards of Implementation.

5 Made compliance with the Principles and Standards an integral part of every manager’s performance evaluation, promotion, and compensation

6 Implemented an internal communication program whereby all employees and managers are made aware of their responsibilities under the Principles and are encouraged to participate in the implementation and enhancement

of these Principles

Part - II

II 1 People and the Community

The Guiding Principles address how Freeport’s policies and operational practices are intended to impact employment, protection of human rights, and economic and social development of the local tribes in the area of operations In particular, they pertain to the Seven Papuan Tribal Communities (7-PTC) which encompass the area of Freeport’s mining operations

These Principles are a public expression of Freeport’s commitment and how the Company intends to meet the self-imposed obligations that Freeport has voluntarily assumed The Principles further demonstrate the Company’s resolve to conduct its operations in Papua in a highly professional, economically efficient, and socially responsible manner

The Principles described here cover five areas:

1 Treatment of Workers employed by Freeport and its affiliated organizations

2 Special Status workers from the Seven Papuan Tribal Communities PTC) with regard to Employment, Training, and Promotion at Freeport

(7-3 Protection of Human Rights

4 Business-Government Relations

5 Economic and Social Development of the Seven Papuan Tribal Communities (7-PTC)

II 2 Treatment of Workers

1 Freeport will comply with all national and local labor laws with regard to employment practices This will also apply to all independent contractors, privatized companies, and major suppliers and service providers doing business with Freeport There can be no exception to this rule

2 Where economically feasible, Freeport will act affirmatively to create policiesand programs that go beyond the national and local labor laws andregulations to demonstrate the Company’s commitment to be a responsiblecorporate citizen

3 The treatment of workers includes such issues as: Hiring, wages, andworking hours; training and skill enhancement; protection fromdiscrimination based on religion, ethnicity, gender, and political affiliation;protection from physical abuse, sexual harassment, and unfair treatment;workplace safety; provision of adequate living space and eating facilities;workers’ health; and safety Freeport is also committed to the protection offreedom of speech, religion, and association

Freeport’s implementation of its policies with regard to worker treatment willnecessarily differ according to the extent of the Company’s control over the workers inaffiliated organizations and service providers as described below However, Freeportwill assume overall responsibility to ensure that these units comply with Indonesia’snational and local labor laws, do not practice discrimination among different classes ofworkers, and that differences as to wages and working conditions are reasonable,non-exploitative, and non-discriminatory

These policies cover four classes of workers and include both permanent andtemporary workers

1 All workers employed directly by Freeport in its mining operations andrelated facilities These are called Category 1 workers

2 All workers employed by independent entities who perform specializedservices connected with Freeport’s mining operations are called Category 2workers.1

3 All workers employed by independent companies with significant businessrelationship with Freeport, but not connected specifically with Freeportmining operations These are called Category 3 workers.2

4 All workers employed by companies that supply labor at Freeport’soperations for temporary work at Freeport’s various facilities These arecalled Category 4 workers.3

Category 1 Workers Freeport has developed detailed policies covering workers

directly employed by Freeport at the mine and its affiliated facilities Salient elements

of these polices are briefly described here

Category 2 Workers Independent entities (“privatized companies,” specifically

referring to privatization contracts developed during 1994-1995) that perform specialized services connected with Freeport’s mining operations hire these workers

A company employing Category 2 workers must meet all the conditions applicable to Category 1 workers subject to the following exception:

_

Tata Disantara (TDS), PT Mahaka Industri Perdana, PT Pangansari Utama, PT AVCO, PT Puncak Jaya Power (PJP)

Category 2 workers may receive wages and benefits that are significantly different than those paid to Category 1 workers provided that the nature of work performed by Category 2 workers is not comparable to any work performed by Category 1 workers

Category 3 workers Companies employing Category 3 workers have a significant

business relationship with Freeport, but are not directly connected with Freeport’s mining operations These companies have their own policies and programs covering wages and working conditions of their employees Freeport has no control over the employment practices of these companies Notwithstanding, these companies must abide by Freeport’s policies with regard to compliance with local and national laws, non-discrimination, and human rights policies

Category 4 workers Category 4 workers perform temporary jobs If their work is

required for a period of less than three years, their wages and benefits will gradually achieve parity with those of workers employed in similar positions at Freeport Upon the completion of three years of service, if the work is still needed, all qualified Category 4 employees will become Category 1 employees

• Where work performed by Category 4 workers is similar to the work performed by Category 1 workers, wages and benefits paid to Category 4 workers must be substantially similar to those of Category 1 workers

• Where Category 4 workers terminate employment with their employer and become Category 1 workers, the criteria for transfer must be non-arbitrary, clearly established, and made known to all Category 4 workers There can

be no discrimination among Category 4 workers seeking status of Category

1 workers with the exception noted in the case of workers belonging to the 7-PTC

II 3 Hiring Practices

1 At the time of hiring, each worker must be provided with a document that provides complete details of the terms and conditions of his or her employment, method of wage calculation, and the regularly scheduled

dates of payment of wages

2 Each worker must also receive appropriate training with regard to plantsafety, fire drills, safe handling of hazardous materials, and job-specifictraining

3 Workers may be required to undergo a reasonable probationary period.However, workers must be paid no less than the prevailing minimum wage

during the probationary period

II 4 Wages, Working Hours, Benefits

1 Freeport must comply with all national, provincial, and local laws pertaining

to payment for overtime work, mandatory deductions, holidays, vacations, medical benefits, and other provisions of the country’s labor laws Where Freeport has obtained specific dispensation from the Department of Manpower for additional overtime required for certain jobs, Freeport will comply fully with these guidelines

2 All Company provided benefits, e.g., healthcare benefits, housing, meals, and other incentive bonuses must be paid to all employees within similar job categories Where differences exist as to specific benefits between various job categories, these must be based on clearly defined criteria such

as specialized skills, job characteristics, and seniority, to name a few

3 All overtime work must be voluntary except where it is integral to the type of work performed and scheduling of work shifts at the work location The employees must have agreed to “standard overtime” as part of the employment contract The Company must also comply with all applicable laws with regard to the maximum number of overtime hours permitted during a given day, week, or month

II 5 Discrimination at the Workplace

Freeport must ensure that its human resource management policies are free of any form of discrimination against workers on the basis of age, gender,ethnicity, sexual preference, religion, or tribal affiliation The only exception to this rule applies to workers from 7-PTC areas This is discussed in a latter part

of the document Furthermore, any form of harassment based on similar considerations is prohibited

II 6 Disciplinary Actions and Grievance Handling Procedure

1 Freeport has created written procedures, rules, and regulations to maintain discipline and safe working conditions in the operations areas and other related facilities, dormitories, canteens, and recreational areas These include, among others, implementing a formal program of handling grievances and resolving disciplinary issues and awareness on the part of all workers about these rules and procedures

2 Freeport will also ensure that its grievance handling and conflict resolution procedures are free from any pro-management bias and are transparent as

to their findings and implementation This attribute is necessary if the Company is to engender trust among the workers, enhance workplace harmony, and achieve greater worker loyalty

II 7 Worker Access to Management

1 Freeport’s policies require that mine management should provide andencourage access by workers to all levels of management on issues thatimpact their wages, benefits, working, and living conditions All levels ofmanagement must also hold regular meetings with workers on issues ofconcern to them

2 Freeport will also create an effective mechanism that allows andencourages workers to communicate anonymously with the management

on issues of concern to them and also make suggestions towardimprovement of the vendor’s operations and human resource managementpractices

II 8 Dormitory and Living Space

Allocation of dormitory space in different job categories will be based on related criteria These criteria will be explained to the workers Where enoughdormitory space is not available to all eligible workers, comparable financialcompensation will be provided to workers who cannot be accommodated inthe dormitories

work-II 9 Food Services and Canteen Privileges

These services will be available to all workers under rules that are clearlydefined and applied to all workers in a fair and equitable manner

Part - III Business—Governmental Relations III.1 Compliance with Host Country Laws

Freeport will obey and support the laws of the Republic of Indonesia and willsupport the development of civil government in the area of its operations

III 2 Bribery and Corruption

1 In its dealings with the representatives of the Indonesian government,provincial and local officials, and other functionaries performinggovernment work, Freeport employees and representatives of its affiliates,contractors, and privatized corporations are prohibited from using bribes orother unethical practices toward seeking favorable treatment fromgovernment agencies in furtherance of their business

2 Under certain circumstances, where it is considered normal and customary

to make small payments (defined as “facilitating payments” under theForeign Corrupt Practices Act, 1977) to minor officials, Freeport accepts thereality of this situation, but expresses aversion to this practice In all suchcases, business practices must meet the standards specified in the U.S.Foreign Corrupt Practices Act of 1977 Any violation of this Act on the part

of Freeport employees or anyone representing Freeport will be considered aserious breach of Company policy and the offending employee orrepresentative will be subjected to severe penalties including terminationfrom employment

3 All such payments, whether in kind or cash, must also meet the reportingrequirements of the Foreign Corrupt Practices Act, 1977 and those of theU.S Securities and Exchange Commission

Part – IV

IV 1 Protection of Human Rights

1 Freeport is one of the few multinational companies in the extractive industries with a well-defined human rights policy and implementation program This includes the appointment, at the corporate level, of a Vice President with direct responsibility for Human Rights

2 In developing this policy, Freeport is guided by the United Nations Universal Declaration of Human Rights and the Voluntary Principles on Security and Human Rights as its standard for upholding the human rights

of the employees, dependents, and those who live in the area of the Company’s operations

3 Freeport considers that each worker has the right of freedom of association, freedom of speech, and freedom of religion without fear of intimidation or punishment on the part of the employer

4 In implementing this policy, Freeport will train its management employees –and all members of its Security and Community Relations Departments – to ensure their respect of human rights of the workers and the community Freeport will also put in place a systematic program whereby all managers will be held accountable to ensure that everyone under their supervision has knowledge of Freeport’s Human Rights policies and to ensure that their conduct conforms with the standards and procedures laid out in the Company’s policy and policy manuals

5 Freeport will also conduct internal monitoring programs to assure compliance with its policies with regard to human rights by all those who are responsible for implementing these policies Where necessary, the company will take appropriate disciplinary measures against those who violate these policies and will also report all suspected human rights violations in its area of operations to appropriate governmental officials

Part - V

V 1 Special Status of Papuan Workers

The Principles recognize the special status of 7-PTC Papuans and thatFreeport will have a proactive bias to support increased employment of 7-PTCworkers in all of the Company’s operations and those of its affiliates, contractors, andprivatized corporations

Freeport has made a commitment that - at a minimum - it will quadruple thenumber of Papuan employees between the years 1996 and 2006 In addition thenumber of Papuan staff employees will double during the same period of time

To make increased employment of Papuans a reality, Freeport will initiatetraining programs that will increase the supply of skilled and qualified Papuans.Freeport will also recruit aggressively for qualified Papuans to work at Freeport

Freeport will work closely with its affiliates, contractors, and privatizedcorporations to ensure increased levels of employment and promotion of Papuanworkers in their operations commensurate with Freeport’s commitment enunciated inthis document

Freeport will develop a viable plan of action, including in-house training andaggressive recruiting, to ensure that it can meet its 2006 goals for 7-PTC workers atall levels of the organization It will also establish annual targets for evaluatingprogress toward meeting the 2006 goal This plan will be prepared in consultation with7-PTC representatives, 7-PTC members currently in the employment of Freeport andits affiliated agencies The plan will also have the approval of senior management inIndonesia and in Freeport’s headquarters in New Orleans

V 2 Economic and Social Development of the Local Tribes

Freeport is committed to the economic development and cultural protection ofthe local tribes The Company has already taken important steps to engage the local7-PTC in developing programs and policies designed to improve their economicconditions while respecting their traditions in terms of communal organization andleadership

The Company has devoted substantial financial resources to this effort.Between 1996 and 2002 the Company has allocated or spent over $100 million on thedevelopment activities in support of the 7-PTC communities These funds have beenspent on healthcare, education, infrastructure development, and small businessdevelopment From these funds two hospitals have been built and are operating,scholarships and educational aid has been provided for more than 5,000 students,houses, community buildings, roads, bridges, and drainage facilities have beenconstructed, and more than a dozen small business have been developed andnurtured in the local indigenous community

V 3 Freeport Fund for Community Development (One Percent Fund)

In an initiative that is unprecedented in the mining industry and in otherindustries with significant direct foreign investments anywhere in the world, Freeporthas agreed to devote one percent of its net revenue from the mining operations to theeconomic and social development of the 7-PTC This commitment is strictly voluntaryand is undertaken by Freeport to extend its support to the development andtransformation of the seven Papuan Tribal Communities to adapt to the exigencies ofthe modern world while protecting their unique culture and value set

Legal and governance infrastructure to assure proper usage of these funds hasalready been developed The LPMAK provides a community-based managementstructure so that the community can use these funds in accordance with the overalldonor guidance These funds will be spent under the guidance and supervision of thelocal tribes and will be primarily devoted to four areas: Education, Public Health,Housing and Infrastructure, and Economic Development

As a first step, the Company has agreed to make these contributions throughthe year 2006 Freeport has made a commitment to extend the program through 2011

It will be re-evaluated at that time

Part - VI Evaluation, Corrective Action and Monitoring

Freeport is determined to ensure that all of its activities under the Principleshave the full support of senior management and employees Freeport also wishes toengender public confidence and trust in the Company’s compliance with thePrinciples To achieve these twin goals:

1 Freeport and its affiliated organizations will undergo regular audits of allactivities covered under GPIO-1 The organizations’ respective internal auditdepartments will perform the audits to assess their compliance with thePrinciples The internal audit process will include performance evaluations,plans for corrective action, and a follow-up mechanism to ensure compliance in

a timely fashion

2 Freeport’s commitment to the public includes verification audits by theInternational Center for Corporate Accountability (an independent monitoringorganization) to assess the extent of compliance with the Principles by Freeportand its affiliated organizations on a regular basis and to afford these auditsmaximum transparency and public credibility Freeport will provide theindependent monitoring organization with complete access to all informationand facilities in order to make an evaluation of Freeport’s performance on thePrinciples and their implementation standards The independent monitor willhave complete discretion in issuing its reports without any censorship fromFreeport provided that Freeport is afforded a suitable opportunity to respond toany findings of fact and conclusion by the Independent Monitor

Exhibit 1.b

PT Freeport Indonesia Social, Employment, and Human Rights Policy:

Human Rights Implementation Guide and Action Plan

The Social, Employment, and Human Rights Policy of Freeport-McMoRan Copper and Gold (FCX) and PT Freeport Indonesia (PTFI) sets out the standards for corporate and employee behavior with regard to important areas of mining operations in Papua

The mission of the Human Rights provision of the Social, Employment, and Human Rights Policy is as follows:

• Be dedicated to the promotion of the rule of law and protection of human rights at all operational sites

• Adhere to the principles of the Universal Declaration of Human Rights

and other applicable International Standards of Human Rights and all laws of the Republic of Indonesia

To achieve this mission, departments within the Company will have responsibilities for implementation and internal monitoring of the policy The following document sets out the program of implementation of the Human Rights portion of the policy

General Objectives

• Educate employees about human rights

• Notify all employees that the Company requires them to treat employees and non-employees in and around areas of operation with dignity and respect

• Take appropriate action against any employees who violate the human rights

• Protect all employees who report suspected human rights violations

• Work proactively to create a constructive climate for promotion of human rights in all areas where we operate by implementing programs and policies aimed at building positive relationships and by setting a good example

• Do all in our power to make certain that no party in violation of human rights uses our property and/or equipment

Human Rights Compliance Officers (HRCO)

Each operational site will have a Human Rights Compliance Officer (HRCO) and there will be a Corporate HRCO All employees shall be made aware of who is the Corporate HRCO as well as who is the HRCO at their site The Office of Human Rights Compliance is responsible for:

• Ensuring that the Company’s Social, Employment, and Human Rights Policy

is fully understood by all employees by holding periodic socialization and communication sessions, with timing to coincide with the annual certification

• Overseeing the Company’s Human Rights Annual Certification process in which designated staff and non-staff employees and contractors complete and submit the Human Rights Letter of Assurance

• Ensuring that all designated employees who leave the Company sign the Human Rights Letter of Assurance before departing and that these are filed for easy reference during the annual certification process

• Ensuring that every individual has direct access to lodge complaints or to make suggestions about conditions that affect social, employment, and human rights

• Receiving complaints or allegations of human rights violations from people within PTFI and within the local community about activities that directly relate

to PTFI’s operations

• Investigating all such allegations and following-up by taking the appropriate action in accordance with the Company’s Human Rights Reporting Standard Operating Procedure (see below)

• Reporting to PTFI’s Board of Commissioners and FCX’s Board of Directors

on the Company’s compliance with its Human Rights Policy

• Providing a public report on the Company’s fulfillment of its Human Rights Policy for both the FCX website and the Working Towards Sustainability Report

• Formal multimedia socialization and communication sessions for all business units at least every two years to brief employees on the definition of human rights, the procedure for reporting violations, and the value the Company places on upholding human rights

• Communication with supervisors and management via forums such as Monthly Senior Staff meetings to promote employee awareness of the policy and cooperation with socialization process

Annual Certification

In accordance with the Guiding Principles for Indonesian Operations—People and the Community (FM-2003.05) and the Social, Employment, and Human Rights Policy (No.), the Company requires selected personnel to fill out and submit

to the Corporate HRCO the Human Rights Letter of Assurance stating that they understand the Company’s Human Rights Policy and that they have neither taken part in any activities that would violate human rights nor have they witnessed any such activities [See Letter of Assurance] This procedure applies to employees of PTFI and subsidiary and affiliated companies

The following PTFI employees are required to fulfill the annual certification:

• All Senior Staff (Grade 4 and above, including employees whose job or individual grade is level 4)

• All Staff in the following departments:

o Human Resources/Industrial Relations

o Government Relations

• All Staff and Non-Staff in the following departments:

o Security

o Community Management Services (CMS)

o Executive Floor (5th Floor) Jakarta

o Executive Floor (3rd Floor Admin) Tembagapura

o Executive Floor (2nd Floor OB1) Kuala Kencana

• Jobsite Heads of the following entities (based on 100 or more people working on site as of July 2004 – to be amended periodically if necessary):

• Selection of employees at PTFI

• Treatment and work conditions of those employees

• Effectiveness of the Social, Employment, and Human Rights Policy

• Freeport Partnership Fund’s impact on community development

All major business units, privatized companies, and major contractors are asked to fill out Management Compliance Reports developed by the audit team Their responses are then evaluated against on-site examinations, independent verification of records, and field interviews The findings and suggestions will be published by September 2005 The Company will respond with a plan to implement suggested improvements Both ICCA's report and the Company's response will be made public

Human Rights Reporting Standard Operating Procedure (SOP)

a Initiating a Complaint

Any member of the PTFI community may choose to seek advice or assistance from a department supervisor, Industrial Relations staff, union representative, a staff association representative (such as Tongoi of Papuanese or the Papuan Ring), or directly from an HRCO regarding any act which they witness

or experience as a human rights abuse committed by any other member or entity under PTFI’s purview All information provided to the HRCOs will remain

confidential An employee’s department will be contacted only with the employee’s express consent If the individual decides not to make a formal complaint, the HRCO (or the individual contacted in this matter) can help them solve the problem

on their own or through consultation with others Accommodation of special needs (e.g., documents in alternate formats, interpreters, off-hour meetings) will be provided as required to ensure that complainants can fully participate in the resolution process

b Anonymous Complaints

Each operational site shall possess a drop-box where complaints can be left anonymously The box shall be checked frequently by the HRCO assigned to that site The local HRCO shall report and discuss all complaints with the Corporate HRCO, at which time further action shall be decided All complaints shall be documented by the Corporate HRCO If the matter can be resolved internally without the issuance of a formal complaint, the Corporate and local HRCO will see

to it that the appropriate action is taken However, if the matter cannot be handled internally or the HRCOs deem the situation to be serious, steps towards a formal complaint should be taken If the individual who filed the complaint refuses to come forward and no other employees who may be affected wish to file a similar complaint, the complaint may be filed by the HRCO of that operational site (at which time the HRCO from another site shall step in and help with the investigation) However, this should be a last resort

c Formal Complaints

If informal means of resolving a situation are not effective or appropriate, a formal complaint may be necessary Formal complaints must be in writing and signed by the complainant (See Formal Complaint Form.) An HRCO can assist in drafting the formal complaint All formal complaints will be referred to the Corporate HRCO for mediation and/or investigation No employee shall be singled out by an investigation unless there is a formal complaint filed against him or her

d Investigation

Investigations will be conducted by the HRCO of the relevant operational site, unless circumstances, such as those described in Section c or Section m of this document, prevent this individual from doing so The investigation shall include

a comprehensive and impartial review of all relevant information, including the position of the respondent(s) and witness interviews The investigator has the authority to speak with anyone, examine any documents, and enter any work locations that are relevant to the complaint

e Refusal to Investigate

The Human Rights Office may also refuse to investigate or may discontinue

an investigation where: an adequate remedy already exists; the complaint is