Aburizal's subterfuge

Aburizal's subterfuge

The tactics used by Coordinating Minister of the Economy
Aburizal Bakrie in his attempt to reach an amicable, out-of-court
settlement in the government's dispute with Mexican cement firm,
Cemex, over its investment in state-owned PT Semen Gresik is
utterly ill-advised and could even kill the negotiations before
they start.

It was initially a good decision on the part of the Susilo
government to treat the four-year dispute with Cemex as a high-
profile case -- one that needs to be resolved quickly to restore
investor confidence. Aburizal, who was assigned by President
Susilo Bambang Yudhoyono, to handle it, spent last week traveling
around the world meeting with Cemex directors in France, Chile
and Mexico.

The President's decision to make the case a priority
demonstrates that the government does not want to repeat the
gross mistakes made by the Megawati government in handling its
disputes, particularly with Karaha Bodas Company (KBC). The
American-controlled power firm ended up with an international
arbitration court's ruling -- and subsequent court rulings --
requiring the government to pay almost US$300 million in damages
to the American company.

Even though the government has stubbornly refused to pay KBC,
and has even hit back at the American power company by jailing on
Tuesday one of its executives in Jakarta on charges of tax
evasion, Indonesia's reputation among international investors has
again been severely damaged. In yet a more devastating
consequence, American banks, on orders from a U.S. court, have
frozen around $650 million in Pertamina and government accounts.

But now a blunder by Aburizal of an otherwise good decision by
the government, could kill the new government's initiative even
before the government-Cemex negotiations advance to a point where
they are discussing actual resolutions. The government should
realize that a loss in this Cemex case could cost Indonesian
taxpayers at least $500 million.

Some of the information that has been leaked out about the
series of preliminary talks Aburizal engaged in over the last
week, could lead the Susilo government into the same big mistakes
as those repeatedly made by then Minister of State Enterprises
Laksamana Sukardi under the Megawati government.

Koran Tempo newspaper, quoting sources close to Aburizal,
reported on Tuesday that the government would propose to Cemex
that it take over the Gresik unit of PT Semen Gresik in Surabaya,
East Java and in return, the Mexican company would withdraw its
arbitration case at the Washington-based International Center for
the Settlement of Investment Disputes (ICSID), an arm of the
World Bank.

Such a premature disclosure of the proposal, without first
notifying the people in East Java, including the local
legislators, about the plan, could unnecessarily set off a new
wave of excessive nationalistic emotions directed against Cemex
if the foreign company were to take over one of the largest
companies in that province. Semen Gresik is one of the three
cement units owned by the Semen Gresik group. Semen Padang in
West Sumatra and Semen Tonasa in South Sulawesi are the other two
units.

In fact, it was just such a nationalistic uproar that was
exploited by vested interest groups in West Sumatra, thus
precipitating a plan to split Semen Padang from the Gresik Group
after Cemex bought 25.5 percent of Gresik's shares in 1998.

It is worth reminding that Semen Gresik, the country's largest
cement group, has been embroiled in an endless dispute and
litigation with its Semen Padang subsidiary, which demanded a
total spin off from Semen Gresik as its holding company.

The failure of the government, as the 51 percent owner of
Semen Gresik, to resolve the dispute and control the "rebellious"
management of Semen Padang between 2000 and 2003 caused the
violation of the 1998 Conditional Sale and Purchase Agreement
between the government and Cemex and forced the Mexican company
to take its case to the ICSID.

Yet even more devastating was the hundreds of billions of
rupiah in losses found through a recent investigative audit of
Semen Padang by PricewaterhouseCoopers.

The Megawati government had previously offered Cemex two
options, but the options were so commercially and politically
infeasible that it appeared to be a smoke screen to buy time. The
Megawati government last August tried again to delay the
arbitration proceedings at the ICSID by offering to buy Cemex's
25.5 percent stake. But again, this offer turned out to be
another simplistic deception to buy time.

Unfortunately, the Susilo government risks committing similar
mistakes. The premature disclosure of the government-Cemex
negotiations while the talks are still at a very preliminary
stage, could again be seen by the Mexican company as another form
of subterfuge by the government to buy time.

This will not help build mutual trust between the disputing
parties, but trust is what is needed most, as it is the basic
foundation for successful negotiations that could lead to a win-
win settlement.