Govt says Semen Padang spin off plan unviable

Govt says Semen Padang spin off plan unviable BERNI K. MUSTAFA The Jakarta Post Jakarta

Spinning off PT Semen Padang from the Semen Gresik Group was an unviable option, the government said on Tuesday, citing it as costly and detrimental to privatization plans.

The Ministry of State Enterprises' director of state enterprises restructuring and privatization, Parkesit Soeprapto, urged legislators and regions backing the spin off plan to reconsider their stance.

"Because of the dilemma the government would face from the consequences of a spin off, there must be careful consideration to the (spin off) demands from the regions," Parkesit told legislators in a hearing with the House of Representatives' state budget commission.

Semen Gresik Group comprises Semen Padang and PT Semen Tonasa, which the government merged into PT Semen Gresik in 1997.

Demands to spin off Semen Padang from the publicly listed Semen Gresik followed plans to privatize a 51 percent share in Semen Gresik to a foreign cement company.

Mexican-based Cemex SA de CV is set to purchase the share, after already owning 25.53 percent.

But Cemex's plan to increase its ownership is facing resistance, with a surfacing of antiforeign sentiment in the province of Padang, as well as in Tonasa.

The local people of Padang said Semen Padang was built on their ancestral land and have demanded it remain under Indonesian control.

They warned that separatism movements in the province would surge should the government ignore the province's demand.

In response, the government considered a spin off of Semen Padang from Semen Gresik before selling the latter to Cemex.

But Parkesit said a spin off could prove costly, as the government must pay compensation to Cemex for the lost of Semen Padang and Tonasa's shares.

He said the government would have to buy back Cemex shares in Semen Padang and Tonasa, at a value of between Rp 2.5 trillion (about US$263.15 million) and Rp 3 trillion.

"It is impossible we'd use state funds considering our budget is running at a deficit," he said.

Another option, he said, was to swap the government's shares in Semen Gresik with those in Semen Padang and Tonasa.

But the value of the state shares in Semen Gresik would not be enough to cover Cemex's lost shares in Semen Padang and Tonasa, he said.

Parkesit also argued that the spin off plan would hurt Indonesia's credibility before foreign and local investors.

"The government would be viewed as not being consistent in its policy at a time it is promoting the privatization of state enterprises," he explained.

He further warned that pushing ahead with the spin off plan would cancel a put option agreement between the government and Cemex.

Under that deal, the government owns the right to sell its 51 percent share in Semen Gresik for $520 million to Cemex.

Cemex must buy the shares at the agreed price, should the government decide to exercise its put option right.

The put option agreement is valid until Oct. 26.

Selling Cemex on time could rescue the government from an embarrassing shortfall in this year's privatization proceeds.

With only three months remaining to the year's end, privatization proceeds still stands at zero from a targeted Rp 6.5 trillion.

The proceeds pose a vital revenue source to help plug the state budget's gaping deficit.

Securing the privatization target is also part of the government's reforms targets agreed with the International Monetary Fund (IMF).

But the Cemex put option deal could meet opposition from legislators warning against foreign domination of the national cement industry.

Backers of the spin off plan argue Indonesia would have no control over local cement prices if cement production falls into foreign hands.

Debt-restructuring deals are forcing publicly listed PT Indocement Tunggal Prakarsa and PT Semen Cibinong to secure the entrance of foreign cement companies.

They are Swiss-based cement group Holcim Ltd, and German-based cement firm Heidelberger Zement AG.

Together with Cemex, the three are among the world's largest cement producers.(bkm)