Government must go all out to protect Semen Gresik deal

Vincent Lingga, Senior Editor, The Jakarta Post, Jakarta

The government should go all out to prevent the spin-off of Semen Padang from the publicly listed Semen Gresik Group (SGG), as demanded by a group with vested interests led by Semen Padang management, which claims to represent the aspirations of the West Sumatra people.

Should the spin-off take place, the credibility of the whole privatization program, which is a core component of the nation's economic rehabilitation, could be destroyed, and foreign investors would shun resource-rich West Sumatra.

The group's arguments about the dignity of the Minangkabau people with regard to their ancestral land and its concerns about the risk of foreign cement companies abusing their market power are entirely false.

The group has been using the spin-off demands as ammunition to block the government from exercising its put option (the right to sell its remaining 51 percent holding in SGG) with Mexico's Cemex, which now owns 25.5 percent of the company.

The current management of Semen Padang and other rent seekers of the vested-interest group are scared of losing their lucrative business if Cemex takes control of Semen Padang.

The issue has nothing to do with anti-foreign investor sentiment among the local people. The group's real objective is to retain Semen Padang as a cash cow that its members can milk any time they like.

That is currently the status of Semen Padang because, despite its acquisition by state-owned Semen Gresik in 1995, Semen Padang remains an independent enterprise, with its own board of directors and commissioners, having its own internal audit and its own procurement and marketing system.

No wonder that Semen Padang, which allegedly is ridden with collusion like many other state companies, is the worst performer among the three cement units owned by SGG.

The other two units are Semen Tonasa in S.Sulawesi and Semen Gresik in East Java. The three units together have a total capacity of more than 17 million metric tons.

The SGG consolidated financial report for the year 2000 shows that Semen Padang lost Rp 46 billion, booked the lowest operating profit margin and suffered the lowest export prices. All this was caused by questionable practices in its marketing and procurement systems.

The SGG annual shareholders meeting in Jakarta in June reprimanded the management of Semen Padang for its gross inefficiency, questionable pricing policies, poor marketing mix strategy and very poor communications and cooperation with the other SGG members.

Recent reports from media in Padang and Jakarta showed how leaders of the spin-off team, who included not only Semen Padang directors but some legislators and businesspeople close to the West Sumatra governor, had allegedly benefited either from supplying materials to Semen Padang, local marketing or exporting Semen Padang products.

The local people of West Sumatra, notably those in Lubuk Kilangan subdistrict where the Semen Padang industrial complex is located, do not really care who owns the company so long as it creates maximum benefits for the local community.

Statements by the Lubuk Kilangan community on various occasions, the last one in late September, demanded only that Semen Padang concentrate on recruiting locally, assist the community to establish a cement distribution company, implement environment-friendly operations and contribute more to community development.

However, since the spin-off team is much better organized and more generously funded and able to meet with House leaders, senior officials and newspaper reporters in Jakarta, the voice of the vested-interest group has apparently been much louder.

By forging ahead with its put option to sell its remaining 51 percent holding in SGG to Cemex, the government would generate multiple benefits for the three cement units and the whole economy as well.

Among the immediate benefits would be:

* The best selling price of around US$1.72 per share, or more than 275 percent of the current SGG share price on the Jakarta stock exchange, bringing in about $520 million (Rp 5.2 trillion) to the cash-starved government at negligible transaction cost.

* Facilitating full integration of the three cement units that should have taken place in 1995 when Semen Gresik acquired Semen Tonasa in South Sulawesi and Semen Padang, but failed to materialize until now due to opposition from Semen Padang management and some local leaders.

The synergy resulting from the integration would create great benefits through much lower costs in financing, information- sharing, elimination of redundancies in internal audits, management, local and export marketing and procurement.

Most important of all is that the three cement companies would be fully subject to stock market regulations, especially those regarding disclosure and audit standards, and compliance with the principles of good corporate governance.

* This landmark deal would kick start the process of regaining foreign investor confidence in Indonesia at a time when the country's risk premium is increasing due to local reaction to the U.S.-led attacks on the alleged bastions of terrorism in Afghanistan.

However, succumbing to the demands for spin-off from the vested-interest group would wipe out whatever remaining confidence foreign investors still had in the government's privatization program.

Much more devastating would be the flagrant violation of stock market regulations because the spin-off would almost certainly be rejected by the minority shareholders (Cemex and the investing public, which holds 23.50 percent).

Equally damaging would be the legal entanglements caused by SGG commitments to its domestic and foreign creditors, who obviously lent to SGG on the merits of its business plans that were based on the operational prospects of three cement units.

Semen Padang had, as of last December, outstanding debts of Rp 617 billion to ABN Amro Bank and Rp 281 billion to state Bank Mandiri, entirely guaranteed by SGG.

With a spin-off, Semen Padang would have to renegotiate its debts as a stand-alone company, obviously with a higher risk premium, meaning that it would have to pay interest rates much higher than the current ones under the SGG corporate guarantee.

An analyst concluded, after perusing the 2000 SGG annual report, that the higher interest rates alone would almost double Semen Padang's interest expenses to Rp 70 billion, or nearly 40 percent of its operating income.

No wonder that senior government officials have asserted that the Semen Gresik deal could make or break both the whole privatization program and the government's credibility, especially as the most promising candidates among state companies for privatization are resource-based enterprises that are located in the provinces.

Meanwhile, Cemex understandably does not wish to continue in uncertainty. Indonesia is not the only place for cement investment for Cemex, which owns and operates 66 cement plants and almost 500 ready-mix concrete and aggregates plants in North and South America, the Caribbean, Europe, Africa and Asia.