Semen Gresik's imbroglio

There is nothing substantially new, nor legally meaningful in State Minister for State Enterprises Laksamana Sukardi's letter of April 16 addressed to West Sumatra Governor Zainal Bakar, yet politicians in this province had prematurely rejoiced, strongly confident that Semen Padang would soon be spun off from its holding company, publicly-traded Semen Gresik.

The letter in essence only states that the government, as the 51 percent owner of Semen Gresik, understands the aspirations of the West Sumatra people, and therefore approves of their demand for Semen Padang's spin-off from Semen Gresik.

The caveat, though, is that the letter also states that any decision on the split shall be based on the provisions of the Law on Limited Liability Companies and regulations governing publicly listed companies. This means that government approval legally does not matter at all because such a total separation shall be approved by Semen Gresik's minority shareholders, who consist of the investing public with 23.5 percent and Mexico's Cemex with 25.5 percent.

In yet another harsh reprimand to the current management of Semen Padang, Laksamana's letter also instructs the board of directors of this company to conduct a reorganization and restructuring to improve its performance, which, according to Semen Gresik, has thus far been the worst among its three cement units.

The Semen Gresik group, which is based in Surabaya, consists of Semen Gresik with an annual capacity of 8.2 million metric tons, Semen Padang in West Sumatra with 5.5 million tons and Semen Tonasa in South Sulawesi with 3.48 million tons.

A number of politicians and government leaders in West Sumatra, allegedly with full support of the Semen Padang management, have been campaigning since 2000 for Semen Padang's separation from Semen Gresik, arguing that the dignity of the West Sumatra people, who had "surrendered" their ancestral land to Semen Padang was hurt when Cemex bought into Semen Gresik in late 1998. Semen Gresik wholly owns Semen Tonasa and 99.99 percent of Semen Padang.

But most analysts and Semen Gresik directors believe that the groups's real objective is to hold on to Semen Padang as a cash cow they can milk anytime they like.

Earlier reports from the mass media in Padang and Jakarta told of how leaders of the spin-off team included not only Semen Padang directors themselves but some legislators and businesspeople close to the West Sumatra governor who all had allegedly benefited either from supplying materials to Semen Padang or taking part in locally marketing or exporting Semen Padang cement.

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

Statements by the Lubuk Kilangan community on various occasions, notably in September 2001, demanded only that Semen Padang emphasize local recruitment, assist them to establish a cement distribution company, implement environmentally friendly operations and contribute more to community development.

Semen Gresik shareholders have endeavored to replace the present management of Semen Padang since 2001, citing their utterly poor performance, but the management clung to their position and rejected an extraordinary shareholders meeting. This case is now awaiting a ruling from the Supreme Court.

Certainly, Semen Gresik's minority shareholders will not agree on the spin-off, because such a move would damage the value of their investment. When they bought Semen Gresik's shares, the share price was based on the earning potential of a company with an annual capacity of 17.1 million tons.

If the government pressured these minority shareholders to agree on the split, that would amount to an act of nationalization that would not only set off a messy litigation process, but also would scare off domestic and foreign investors in all sectors for the future.

Even if the minority shareholders somehow agreed to a spin- off, they would certainly demand compensation that could amount to hundreds of million of dollars. How could the cash-strapped government afford this?

The government can do whatever it has within its power -- and is legally allowable -- according to the stock exchange regulations to meet any legitimate demands from the West Sumatra people regarding Semen Padang.

However, succumbing to the vested interest groups' demand for a spin-off in violation of the laws would wipe out whatever little confidence investors still had in the government's credibility.

Much more devastating is that a forced separation will violate stock market regulations and could set off a wave of disputes over state companies, which have been partially privatized.

Moreover, not a single investor would touch state companies or banks that are now in the final preparations for strategic sales or initial public offerings on the Jakarta Stock Exchange.