Averting messy litigation

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.