The haunting of Semen Gresik

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.