The haunting of Semen Gresik

The government, as the controlling shareholder at publicly traded PT Semen Gresik (SG), Indonesia's largest cement group, should be commended for its determination to remove the significant uncertainties that have dogged SG and hindered its growth since 2002.

The SG general and extraordinary shareholders meetings on Monday night replaced most of its directors and commissioners and acted firmly on the findings and recommendations of PriceWaterhouseCoopers' forensic audit of PT Semen Padang (SP), one of three SG cement subsidiaries.

Just how strategic the shareholders' decisions are can be seen from the web of problems that have beleaguered SG, mostly because of the 2002-2003 fiasco at SP.

Almost two years after its ouster, SP's "renegade" management still haunts its holding company, SG.

For the second consecutive year, the SG consolidated financial reports for 2004 received a qualified opinion from its independent auditors, Haryanto Sahari & Rekan- PriceWaterhouseCoopers, because the statements still carried auditors' disclaimers relating to the 2002 and 2003 financial statements of SP.

The qualified opinion is nevertheless an improvement from the disclaimer verdict SG received for its 2003 financial reports, also because of chronic accounting problems at SP, which led to the temporary suspension of SG shares from trading on the Jakarta Stock Exchange in mid-2004.

However, significant uncertainties remain concerning the SP accounts after a forensic audit of SP, which was completed early this year, found numerous irregularities and various forms of bad governance practices at SP under its 2002-2003 management, with hundreds of billions of rupiah in potential losses. This will certainly affect SG as well because SP accounts for 32 percent of SG's total cement manufacturing capacity of 17.2 million metric tons.

The special audit confirmed strong suspicions on the part of SG's 25.50-percent shareholder, Mexico's Cemex, as early as 2002 that SP had been "pillaged" amid the massive campaign for SG to spin off SP. SG did send a team to Padang to conduct due diligence on SP in 2002 but it was denied entrance to the SP compound by the management at that time.

Until now, SG continues to be mired in three litigation cases directly or indirectly related to the former management which, with the support of vested interest groups in W. Sumatra, wanted to separate SP from SG entirely.

The arbitration case against the Indonesian government which was filed by Cemex in late 2003 with the International Center for the Settlement of Investment Disputes in Washington was also prompted mainly by the debacle at SP.

Cemex claims the fiasco at SP and the seemingly endless succession of lawsuits against SG, which have adversely affected the performance of the hundreds of millions of dollars of investment it made in acquiring 25.50 percent of SG in October, 1998 could have been prevented if the government, as the controlling shareholder, had from the outset acted firmly to address the "separatist" movement at SP.

Certainly all the uncertainties stemming from the special audit's finding of big potential losses at SP and the lawsuits are imposing contingent liabilities on SG, heightening its risk premium and hurting its credit rating.

It is against these backdrops that the government deserves credit for leading SG shareholders, including the investing public who owns 23.50 percent, toward important measures to remove the uncertainties and make a clean break from the debacle left behind by the former SP management in 2003.

The new teams of management and commissioners will most likely be more capable of developing a strong synergy between the SG's three cement subsidiaries: Semen Gresik in Surabaya, Semen Padang in W. Sumatra and Semen Tonasa in S. Sulawesi.

Dwi Soetjipto, the new chief executive officer of SG, is the right choice to lead SG because of his remarkable success over the past two years in leading SP into a strong recovery from its weak condition under the former management. Soetjipto, who has long experiences in the cement industry, will most likely be capable of developing better coordination among the SG subsidiaries in procurement, marketing, financial, information and production systems.

Until now, SG as the holding company is not able to reap full benefit from the merger of the three state-owned cement companies because they still operate separately as independent entities.

SG badly needs a clean bill of health from its independent auditors and higher credit rating in the market, particularly as it will take a new loan for the US$350 million cement factory it plans to build next year in anticipation of a cement deficit in 2007/2008 due to the steady rise in domestic demand.

A clean break from the fiasco with SP and better synergy among its three units would also help make SG more competitive against the other two large cement companies -- Heidelberger-controlled PT Indocement and Holcim-controlled PT Semen Cibinong.