Stop the spin-off lobby

Stop the spin-off lobby

It is mind-boggling to observe how weak and slow has been the
government in dealing with the vested-interest group, which has
been campaigning for the spin off Semen Padang from the publicly
listed Semen Gresik Group.

Even more flabbergasting is why the government allowed Semen
Padang management to spend so much of their highly-paid time and
the company's money for the lobbying campaign that could kill the
whole privatization program and destroy both the government's
credibility and foreign investor confidence in West Sumatra.

The vested-interest group, which consists of highly educated
people, must be fully aware that it is impossible for the
government to spin off Semen Padang from SGG. Even though the
government owns 51 percent of SGG, this company is already listed
on the Jakarta stock exchange and it therefore must refer all
major corporate decisions such as a spin-off to all the
shareholders, who include Mexico's Cemex, with 25.5 percent and
the investing public, with 23.5 percent.

True, the local people have often complained about what they
saw as Semen Padang's ignorance of local community interests and
the unfair treatment they received from the company in relation
to compensation for their land used for limestone quarrying.
These complaints, similar to grievances raised by people in many
other provinces, were a carryover of the disillusionment with
former president Soeharto's authoritarian rule.

But neither the West Sumatra provincial legislature nor the
second-level legislature in Padang mayoralty, under whose
jurisdiction Semen Padang operates, has ever outrightly demanded
a spin-off. Nor have locals ever expressed outright opposition to
foreign investor control of the company.

But the vested-interest group, afraid of losing a cash cow if
the government exercised its put option (the right to sell its
remaining 51 percent holding in SGG), has used the locals'
grievances as ammunition to push through its own agenda. This is
to maintain Semen Padang at least in its present status as an
independent unit of SGG. The best would it be for their rent-
seeking operation if Semen Padang could be converted into a
wholly owned state company through the spin-off.

The group's arguments about the damaging impact of foreign
control of the cement industry, an unfair price to be paid by
Cemex and other excesses that might harm the national interest
are groundless and are mere fallacies to advance its hidden
agenda of maintaining the rent-seeking activities of its members.

As another opinion article on this page shows, Semen Padang
has been the worst performer among SGG's three cement units due
to poor management and questionable deals in procurement and
marketing. Last year, for example, Semen Padang got the lowest
export price of the group, as it stubbornly refused to use SGG-
Cemex marketing networks, instead using traders (rent-seekers)
who certainly charged a commission for services that were not
actually necessary.

There are now only three days before the Oct.26 deadline for
the government to exercise its put option, signed in October 1998
when Cemex bought a stake in SGG through a competitive bid. After
that date, Cemex will no longer be legally bound to take up the
government equity.

Cemex understandably does not wish to be held in uncertainty,
as its commitment to the put option agreement is not without
cost. The Mexican company has to tie up at least US$500 million
of its reserves in banks ready for use any time the transaction
occurs.

Obviously, the government should do whatever is possible
within its power and legally possible within stock market
regulations to address the local people's grievances, but should
nonetheless go all out to prevent a spin-off.

The put option must surely be the best, and the only, deal the
government could get in its privatization program this year. Who
else would be willing to invest so much in Indonesia now at a
time when the country's risk is rising and the cement industry is
suffering a huge overcapacity due to the depressed state of the
market?