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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