Semen Padang in trouble<\/p>\n
PT Semen Padang management's rebellion against shareholders
\nhas plunged the West Sumatra cement manufacturer into a severe
\nfinancial crisis, with all major banks having now shunned the
\ncompany as too risky a client to deal with.<\/p>\n
State Bank Mandiri's refusal earlier this week to disburse Rp
\n500 billion (US$55.5 billion) as a five-year loan it had agreed
\nto with Semen Padang in June, drove what had once been the pride
\nof the people of West Sumatra to the brink of default and sharply
\ndegraded its credit rating.<\/p>\n
And this tragedy should never had happened. Semen Padang, the
\nlargest cement manufacturer in Sumatra, should be growing
\nrobustly as a sound resource-based venture. It is supported by
\nrich reserves of cement materials and is located almost in the
\nmiddle of Sumatra, the second largest cement market in the
\ncountry after Java. And any of its surplus cement can be
\nconveniently exported from the deep-sea port in Padang.<\/p>\n
But its greedy management, who collaborated with vested
\ninterests among the local administration and local politicians,
\nhas treated the company as their cash cow, driving it into gross
\ninefficiency and making it the worst performer among Semen
\nGresik's three cement units.<\/p>\n
When publicly traded Semen Gresik, which owns 99.99 percent of
\nSemen Padang, decided to bring in new investors to make the unit
\nmore efficient and competitive, the management and local
\npoliticians whipped up regional sentiment to fight against its
\nspin-off from its holding company, in blatant violation of the
\nlaw.<\/p>\n
The narrow-minded provincial administration and legislature
\nshamelessly put the company under their direct supervision as of
\nlast October, claiming that the move was in the interests of the
\npeople of West Sumatra.<\/p>\n
When Semen Gresik's shareholders -- the government (51
\npercent), Cemex of Mexico (25.54 percent) and the investing
\npublic (23.46 percent) -- moved to replace the revolting
\nmanagement through an extraordinary shareholders meeting in
\nApril, the board of directors and commissioners, again with the
\nfull support of the governor and the legislative council,
\nrevolted against the shareholders.<\/p>\n
And the district court in Padang decided in mid-June to reject
\na petition from Semen Gresik for an injunction to force the Semen
\nPadang management to convene the extraordinary shareholders
\nmeeting, ruling that there was no reason to replace the
\ndirectors.<\/p>\n
This rebellion obviously scared off banks from dealing with
\nSemen Padang, leading it into a liquidity crunch and forcing it
\nin February to borrow Rp 200 billion in six-month notes from
\nJamsostek, the state-owned labor insurance company, at 21.75
\npercent a year.<\/p>\n
It is this loan (totaling Rp 244 billion plus interest) that
\nmatures on Thursday. Another Rp 270 billion in foreign-exchange
\ndebt to ABN Amro Bank, which originally was to mature only later
\nthis year and next year, falls due on Aug. 20 because Semen
\nPadang notified ABN Amro of its decision to repay the debt early.<\/p>\n
Semen Padang claims this debt restructuring was designed to
\nprotect it from foreign exchange fluctuations. But given the
\nabout 12 percent interest rate differential between the ABN Amro
\nloan and the one from Bank Mandiri, analysts see the move simply
\nas another attempt by Semen Padang to alienate itself from Semen
\nGresik, which guaranteed that loan.<\/p>\n
It was these debts that Semen Padang intended to settle with
\nthe Rp 500 billion, five-year loan it was seeking from Bank
\nMandiri. But the bank was not so misguided as to approve the loan
\nwithout collateral and without approval from Semen Padang
\nshareholders.<\/p>\n
Semen Padang might still be able to save itself from default
\nby seeking other, much costlier bridging financing, but this
\nwould only be a temporary lifesaver because the company would
\nagain face a cash crunch in the next few months.<\/p>\n
Semen Gresik may feel compelled to intervene, convincing ABN
\nAmro to reinstate the original maturity date of the loan in order
\nto prevent repercussions to its own credit rating, but extensive
\ndamage has already been done to Semen Padang.<\/p>\n
One of the most immediate impacts will be eroded confidence on
\nthe part of Semen Padang's suppliers, prompting them to demand
\ncash payments for every deal.<\/p>\n
This whole affair, we think, should serve as a good lesson for
\nother vested interests in the provinces who harbor any intention
\nof stoking regional sentiment in order to take control of state
\nenterprises.<\/p>\n
Semen Padang is an example of how vested interests, claiming
\nto fight for the interests of local people, can damage a valuable
\nasset that could have contributed a great deal to local
\ndevelopment through employment, taxes and other multiplier
\nbenefits.<\/p>\n
Regional autonomy by no means grants local administrations or
\nlocal politicians automatic property rights to local assets. Such
\nan entirely misguided perception will only make their regions
\npariahs among domestic and foreign investors, depriving local
\npeople of the opportunity to make a better living for themselves.<\/p>",
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