Cemex threatens to take dispute to arbitration

Cemex threatens to take dispute to arbitration

Dow Jones, Jakarta

Mexico's Cemex SA is threatening to take a dispute with Indonesia over control of the nation's largest cement maker to overseas arbitration - a move that could create further bad publicity for a country trying to lure back foreign investors.

Indonesia's government has asked Cemex to reconsider the plan for arbitration, and recently set up a team of experts to help solve the row, Roes Aryawijaya, a deputy at the Office of State Minister of State Enterprises, said on Monday.

Cemex claims the government has failed to keep to a 1998 agreement to allow the Mexican company to take a 51 percent stake in state-owned PT Semen Gresik.

After two years of wrangling with the government, Cemex said last month it would take the issue to arbitration in Singapore by the end of this year, which is allowed under the terms of the agreement. The company has not yet filed any petition in Singapore, Wimar Witoelar, a spokesman for Cemex, said on Monday.

The Mexican company's problems highlight the difficulties of doing business in Indonesia where business accords are often not implemented. Most agreements have clauses that allow for foreign arbitration in the event of disputes, but these are also often not enforced by local courts.

Foreign investment has remained in the doldrums since the 1997-98 Asian financial crisis in part due to weaknesses in the legal system.

Cemex bought a 25.5 percent stake in Semen Gresik in 1998 for $290 million, and signed an agreement which would allow it to increase that to a majority holding by the end of 2001. The government expected to raise US$520 million for the total 51 percent stake.

Protests from management and workers of one of Semen Gresik's units over a foreign company taking control, however, meant the deal was unable to go forward.

The unit, PT Semen Padang, which is based in West Sumatra province, has demanded to be spun-off from the rest of Semen Gresik. Local management last year barricaded their offices, and refused to hand over 2002 financial statements to Semen Gresik executives.

The government was able in September to remove Semen Padang's management, and soon after announce a Rp 269 billion ($31 million) net profit for 2002, down 15 percent on the previous year.

Still, Jakarta has failed to reach any settlement with Cemex, fearing that selling the majority stake could inflame separatist passions in West Sumatra. Many of Indonesia's provinces have been the target of separatist protests since the fall of former president Soeharto in 1998, and the government is waging a battle in Aceh against rebels.

Indonesia last year appeared to give support to the plan to spin-off Semen Padang and another unit in Sulawesi, PT Semen Tonasa, leaving Cemex to control only Semen Gresik, which has two factories in East Java.

But Cemex reportedly rejected the deal as the rump of the company would be only a much smaller cement producer, and taking it over would not help plans to increase output from Southeast Asia. Semen Padang and Semen Tonasa accounts for about two-thirds of Semen Gresik's consolidated annual output of 14 million tons.