Semen Padang in trouble

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.