Thu, 11 Dec 2003

Averting messy litigation

Minister for State Enterprises Laksamana Sukardi has often acknowledged that the government has failed to honor the terms of the conditional sale and purchase agreement on the acquisition of 25.50 percent of PT Semen Gresik (SG) in 1998 by Mexico's Cemex S.A., the world's third largest cement group.

Laksamana has also implied that the government, as the 51 percent owner of publicly-listed SG, would lose if Cemex brought the problems it has faced since its investment in the country's largest cement group to an international arbitration tribunal.

Yet Laksamana has failed to come up with any new initiative to resolve the problem once and for all even though it is now only a matter of days before Cemex will file the case with the Washington-based International Center for the Settlement of Investment Dispute, an affiliate of the World Bank, for arbitration proceedings in Singapore.

The imbroglio faced by Cemex in its dealings with SG over the past five years again surfaced at an international investment seminar in Bali over the weekend and both analysts and the government agreed that the way in which the SG debacle was resolved would influence foreign investor sentiment as regards Indonesia.

The problem itself arose almost four years ago after PT Semen Padang in West Sumatra and PT Semen Tonasa in South Sulawesi, with the full support of local vested interests, demanded that they be totally spun off from their holding company, SG. Semen Padang was especially aggressive with its all-out fight for a total split from SG, even embroiling SG in a series of messy lawsuits.

Laksamana and his deputy Roes Aryawijaya did set up a joint team in August to mediate the dispute with Cemex but again that initiative was only a cosmetic response to a strong warning from Cemex, which threatened to bring the issue to international arbitration.

The mediation negotiations stopped in September after only three meetings because the government failed to respond to the three alternative solutions proposed by Cemex: Cemex buys out the government's 51 percent stake in SG, the government buys out Cemex's 25.50 percent holding, Cemex increases equity investment in SG, thereby diluting the government's ownership of SG to a minority stake.

Laksamana and Roes instead kept playing around with the issues, often making conflicting statements to the media in a deceptive attempt to buy time, without realizing, or perhaps caring, that the protracted problems, especially with Semen Padang, have been causing severe damages to the whole SG group.

It would be completely understandable if Cemex, after five years of fruitless waiting, finally decided to go, as a last recourse, to international arbitration given that SG's problems, especially with Semen Padang, have not only damaged the value of Cemex's investment in SG but also adversely affected SG's credit rating, increased the cost of its borrowing and severely damaged the whole SG group.

Since the rebellious Semen Padang failed to complete its audited financial report for 2002, SG could not publish its consolidated financial report. This in turn caused a lot of trouble for Cemex, which is listed on the New York stock exchange. Until a forensic audit on Semen Padang has been completed, nobody will know what damage was done to that company between 2000 and September, when the old, "rebellious" management was finally ousted.

At a time when most foreign investors did not want to touch Indonesia at the height of its multi-dimensional crisis in 1998 following the fall of authoritarian president Soeharto, Cemex entered the country in good faith in response to a public tender for a portion of the government's shares in SG.

However, the endless imbroglio Cemex has been facing over the past five years seems to be finally becoming too much for the Mexican company. In fact, based on the latest SG share price on the Jakarta stock market, the value of the Cemex investment is now only around $150 million, a far cry from Cemex's original capital outlay of about $290 million in 1998.

While there is always the risk of the value of an investment going up or down, what makes the Cemex experience particularly worrisome for would-be new investors in Indonesia is the blunt fact that the SG debacle has been caused largely by the government's failure to enforce its own laws.

It is imperative now for Laksamana to seriously discuss with the House of Representatives one of the three options proposed by Cemex that is considered the most feasible politically.

If the House can be made to understand the devastating impact of an arbitration or litigation process on the country's investment climate, the legislators should be sensible enough to cooperate with the government to work out a win-win solution to the SG fiasco.