No significant progress in government-Cemex dispute

No significant progress in government-Cemex dispute

Vincent Lingga, Jakarta

The President's lack of leadership to act firm and fast in
resolving the government's four-year dispute with Cemex over the
Mexican company's investment in the state-controlled Semen Gresik
Group (SGG), could cost the government half a billion dollars and
longer delays in the return of foreign direct investment.

It is now almost three months since the government initiated
negotiations with Cemex to iron out an amicable solution to the
impasse.

But it seems that no substantial progress has been made,
despite a string of official claims that a final resolution is
imminent. Indeed, State Minister of State Enterprises Sugiharto
took everyone for a ride when he said a memorandum of
understanding would be signed on Tuesday.

The government initially appeared determined to resolve the
Cemex case, as one of four high-profile disputes with foreign
companies it expected to settle during the first 100 days of its
rule to jump-start the inflow of foreign direct investment (FDI).

However, the only achievement thus far has been Cemex's
temporary (60 days) suspension of arbitration proceedings on its
claim at the International Center for the Settlement of
Investment Disputes (ICSID) in Washington.

A costly, messy lawsuit still looms over the government, and
its failure to reach a basic agreement by February could trigger
litigation proceedings at the ICSID, a World Bank affiliate. And,
given its frustration with the capricious stance of the previous
administration, Cemex will not likely commit to anything, unless
it is absolutely sure of a smooth, clean deal.

The government has insisted that it proposed six options to
resolve the dispute, but most of them are either politically
unacceptable or commercially and fiscally unfeasible. It has
ruled out selling its 51 percent stake in the SGG and buying out
Cemex's 25.50 percent holding in the SGG.

The most commercially viable solution acceptable to both
parties seems to be the option disclosed by Coordinating Minister
for the Economy Aburizal Bakrie in November, after flying around
the world to initiate a series of initial negotiations with Cemex
management in France, Chile and Mexico.

Aburizal then said the government would sell three units of PT
Semen Gresik, one of the SGG's three subsidiaries, with a total
capacity of almost seven million metric tons to a new joint-
venture company to be controlled by Cemex.

The other two subsidiaries of the SGG are PT Semen Padang in
West Sumatra, with a capacity of five-and-a-half million tons,
and PT Semen Tonasa in South Sulawesi, with three-and-a-half
million tons.

Under this option, the government would maintain its 51
percent control of the SGG, but the holding company would retain
only the other two subsidiaries, Semen Padang and Semen Tonasa.

This transaction, besides halting the litigation process --
which could otherwise inflict US$500 million in losses on the
government -- would bring in hundreds of millions dollars in
fresh capital to the SGG, which it could immediately invest in
building a green-field cement factory to capitalize on the
steadily rising demand for building materials.

Most analysts have predicted that, based on the current annual
economic growth of 5 to 6 percent, Indonesia would see a
significant cement deficit in 2007 if the industry does not
increase its capacity.

Yet another important effect is the greatly positive signal
the settlement of the dispute would give to foreign investors.

Sadly, though, even before the government and Cemex began
serious negotiations over the basic principles of how to
implement this option, PT Semen Gresik's "trade union" has
launched a massive campaign to torpedo the plan.

The "trade union" -- fully backed by Semen Gresik's management
-- has lobbied the House of Representatives, trumpeting fear that
the government's sale of the cement unit would make the country
vulnerable to cartel-like practices in the cement trade.

But this campaign seems to be modeled on the "rebellion" of
the previous Semen Padang management, which, with the support of
vested-interest politicians and senior officials in West Sumatra,
succeeded in blocking the government's put option to sell its 51
percent stake in the SGG in October, 2001.

Rent-seekers in West Sumatra, in a desperate attempt to
maintain Semen Padang as their cash cow, also whipped up narrow
nationalistic sentiments against the government's plan to sell
its controlling stake in the SGG.

Unfortunately, though, the then Megawati government, notorious
for its lack of political leadership, simply succumbed to the
rent seekers and left behind a time bomb for the new government
of President Susilo Bambang Yudhoyono to defuse.

Even now the SGG holding company still suffers from the
damaging impact of the Semen Padang rebellion.

Even though SGG shares were still traded on the Jakarta Stock
Exchange, the SGG's consolidated financial reports for 2002 and
2003 were classified by its independent auditors with a
disclaimer. No one really knew the actual market value of the SGG
until the findings of a forensic audit, ordered by SGG
shareholders on PT Semen Padang last year, were disclosed.

But the Susilo government seems about to repeat the mistake of
its predecessor.

The ministerial team of privatization is not so ignorant as
not to know that, what is claimed to be the Semen Gresik "trade
union" is actually synonymous with Semen Gresik's management
because virtually all the union leaders consist of the company's
management and heads of divisions, departments or sections.

Blue-collar workers, who make up 90 percent of Semen Gresik
employees, seem not represented in the trade union leadership.

This clearly indicates that what the union leaders claim to be
the aspirations of Semen Gresik workers and the local people is
actually the vested interests of those in the current management
who want to do "business as usual".

Yet, the government seems unable to adequately respond to the
rent-seekers' negative campaign and xenophobia sentiments.

The government should demonstrate its political leadership to
resolve the dispute, once and for all, by making a firm decision
on what it feels to be best for national interests, rather than
bowing to political pressure from vested interests, who claim to
represent the workers and local people.

The stakes are high, both in terms of potential financial
losses and severe damage to the government's credibility.

The Susilo government, which has gained such a strong
political mandate, should be able to make a bold -- albeit
politically unpopular -- decision, as long as it is highly
accountable, and in the best interests of the people.

The writer is Senior Editor at The Jakarta Post