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