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.