Subterfuge at Semen Gresik

Subterfuge at Semen Gresik

There is only a very slim chance that Indonesia might win its
dispute with Mexican cement company Cemex SA over the foreign
firm's investment in state-controlled PT Semen Gresik (SG), which
is undergoing arbitration proceedings at the International Center
for the Settlement of Investment Disputes (ICSID) in Washington.

An out-of-court settlement is thus the best, least costly
solution, as opposed to a messy, costly and protracted litigation
process. After all, it is the government that failed to fulfill
its part of the deal in Cemex's October 1998 purchase of 25.5
percent shares, with an option to expand to a controlling stake
in SG.

However, the latest initiative by State Minister of State
Enterprises Laksamana Sukardi to set up a consortium of state
pension institutes, including workers' insurance firm PT
Jamsostek, to buy back Cemex's shares is a very dangerous game.

Laksamana will expose hundreds of millions of dollars of
money belonging to pensioners and workers to great risk if he
goes ahead with his plan to buy out Cemex's SG shares, because
SG's consolidated financial reports for 2002 and 2003 were filed
with a disclaimer by its independent auditors.

The country's largest cement producer has been mired in legal
wrangles since 2000, after its West Sumatra subsidiary, PT Semen
Padang, launched a campaign to break off from SG as its holding
company, refusing to be under foreign ownership.

It is this internal battle that forced the Mexican company to
bring the case last December to ICSID, an affiliate of the World
Bank, because the secession of Semen Padang would mean a breach
of contract. The government, unable to control its renegade
subsidiary, however, made matters worse by failing to honor
Cemex's contractual option for a controlling stake in SG.

Early this year, SG shareholders, including the government
with 51 percent and the investing public with 23.50 percent,
ordered a forensic audit on Semen Padang. The shareholders had
been left in the dark about the subsidiary's performance for the
past two years, up until its "rebellious" board of directors was
forcefully ousted from the company's premises last September.

They wanted independent auditors to verify the rumors that
Semen Padang had been "pillaged" by its old management, local
officials and local legislators.

Even though SG is still traded on the Jakarta Stock Exchange
after its temporary suspension was lifted in early July, and
although investment in cement stocks do promise good returns upon
higher demand for building materials from a recovering economy,
investing in SG now is highly risky because no one knows its real
condition.

Until the forensic audit of Semen Padang -- which accounts for
32 percent of the group's output capacity of 17.2 million metric
tons -- is completed in October as scheduled, it is better not to
touch SG shares.

It is thus mind-boggling to discern why Laksamana, after
failing miserably to resolve the imbroglio faced by SG and Semen
Padang, is attempting -- apparently in a desperate bid -- to take
the seemingly easy, but treacherous, road to settle the dispute
by buying back the Cemex shares in SG.

The failure of the government, as the majority shareholder, to
control Semen Padang management since 2000 had provided an
opportunity for vested-interest groups, including senior
officials and politicians in West Sumatra, to turn the company
into their personal cash cow. It is no wonder that Semen Padang
has always been the worst performer against SG's other
subsidiaries Semen Gresik, Surabaya, and Semen Tonasa, South
Sulawesi.

While German-controlled PT Indocement and Swiss-controlled PT
Semen Cibinong, respectively the second and third largest cement
companies, have consolidated their operations to capitalize on
the rising market demand for cement, SG has constantly been
beleaguered by its Semen Padang subsidiary. While share prices
for Indocement and Semen Cibinong increased by almost 200 percent
last year, SG's share price inched up by a mere 3 percent.

SG's dispute with Semen Padang has affected its performance on
the stock market, inflicted severe damages to its corporate image
and caused an endless stream of negative publicity. Strangely,
the central government and Laksamana seem impotent to resolve the
legal mess.

The company's predicament will certainly not end until the
government resolves, once and for all, the status of Semen Padang
and deal with the vested-interest groups that sponsored the
break-off campaign, arguably to maintain Semen Padang as their
cash cow.

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