Semen Padang in trouble

PT Semen Padang management's rebellion against shareholders has plunged the West Sumatra cement manufacturer into a severe financial crisis, with all major banks having now shunned the company as too risky a client to deal with.

State Bank Mandiri's refusal earlier this week to disburse Rp 500 billion (US$55.5 billion) as a five-year loan it had agreed to with Semen Padang in June, drove what had once been the pride of the people of West Sumatra to the brink of default and sharply degraded its credit rating.

And this tragedy should never had happened. Semen Padang, the largest cement manufacturer in Sumatra, should be growing robustly as a sound resource-based venture. It is supported by rich reserves of cement materials and is located almost in the middle of Sumatra, the second largest cement market in the country after Java. And any of its surplus cement can be conveniently exported from the deep-sea port in Padang.

But its greedy management, who collaborated with vested interests among the local administration and local politicians, has treated the company as their cash cow, driving it into gross inefficiency and making it the worst performer among Semen Gresik's three cement units.

When publicly traded Semen Gresik, which owns 99.99 percent of Semen Padang, decided to bring in new investors to make the unit more efficient and competitive, the management and local politicians whipped up regional sentiment to fight against its spin-off from its holding company, in blatant violation of the law.

The narrow-minded provincial administration and legislature shamelessly put the company under their direct supervision as of last October, claiming that the move was in the interests of the people of West Sumatra.

When Semen Gresik's shareholders -- the government (51 percent), Cemex of Mexico (25.54 percent) and the investing public (23.46 percent) -- moved to replace the revolting management through an extraordinary shareholders meeting in April, the board of directors and commissioners, again with the full support of the governor and the legislative council, revolted against the shareholders.

And the district court in Padang decided in mid-June to reject a petition from Semen Gresik for an injunction to force the Semen Padang management to convene the extraordinary shareholders meeting, ruling that there was no reason to replace the directors.

This rebellion obviously scared off banks from dealing with Semen Padang, leading it into a liquidity crunch and forcing it in February to borrow Rp 200 billion in six-month notes from Jamsostek, the state-owned labor insurance company, at 21.75 percent a year.

It is this loan (totaling Rp 244 billion plus interest) that matures on Thursday. Another Rp 270 billion in foreign-exchange debt to ABN Amro Bank, which originally was to mature only later this year and next year, falls due on Aug. 20 because Semen Padang notified ABN Amro of its decision to repay the debt early.

Semen Padang claims this debt restructuring was designed to protect it from foreign exchange fluctuations. But given the about 12 percent interest rate differential between the ABN Amro loan and the one from Bank Mandiri, analysts see the move simply as another attempt by Semen Padang to alienate itself from Semen Gresik, which guaranteed that loan.

It was these debts that Semen Padang intended to settle with the Rp 500 billion, five-year loan it was seeking from Bank Mandiri. But the bank was not so misguided as to approve the loan without collateral and without approval from Semen Padang shareholders.

Semen Padang might still be able to save itself from default by seeking other, much costlier bridging financing, but this would only be a temporary lifesaver because the company would again face a cash crunch in the next few months.

Semen Gresik may feel compelled to intervene, convincing ABN Amro to reinstate the original maturity date of the loan in order to prevent repercussions to its own credit rating, but extensive damage has already been done to Semen Padang.

One of the most immediate impacts will be eroded confidence on the part of Semen Padang's suppliers, prompting them to demand cash payments for every deal.

This whole affair, we think, should serve as a good lesson for other vested interests in the provinces who harbor any intention of stoking regional sentiment in order to take control of state enterprises.

Semen Padang is an example of how vested interests, claiming to fight for the interests of local people, can damage a valuable asset that could have contributed a great deal to local development through employment, taxes and other multiplier benefits.

Regional autonomy by no means grants local administrations or local politicians automatic property rights to local assets. Such an entirely misguided perception will only make their regions pariahs among domestic and foreign investors, depriving local people of the opportunity to make a better living for themselves.