The Semen Gresik dilemma

By Vincent Lingga

JAKARTA (JP): The cash-starved government will raise almost Rp 5 trillion (US$520 million) if it exercises a put option to sell its 51 percent stake in the Semen Gresik cement holding company to Mexico's Cemex before Oct. 26.

Since the price to be paid by Cemex will be almost twice as high as the current Semen Gresik share quotation on the Jakarta Stock Exchange, and given the big hole in the state budget, the option should be too good a deal to let pass.

But what should be a landmark deal for its own assets is now bogged down in an imbroglio which, if not resolved, could scare the hell out of foreign and domestic investors and heighten Indonesian sovereign risks.

The government on Wednesday asked Cemex to extend the deadline to provide it more time to solve the problems with Semen Padang and Semen Tonasa.

"... we are seriously considering (the request)," Cemex Indonesia's president Francisco Noriega said on Thursday.

The roots of the problem are the demands from the people in West Sumatra and South Sulawesi that the government spin off the Padang and Tonasa plants from Semen Gresik.

Former president Abdurrahman Wahid, apparently in a bid to appease regional disillusionment, approved the demands in February 2000 without realizing the grave consequences of his decision on Semen Gresik as a publicly-listed company and on the government's credibility regarding the sanctity of contract.

Spinning off the two cement units, which account for almost 60 percent of Semen Gresik's total production capacity of 18 million metric tons, will not only hurt the interests of the investing public and Cemex which own 23.46 percent and 25.53 percent of the company, respectively.

Such a drastic corporate measure is not within the government's jurisdiction, but rests with the minority shareholders to decide. That is if the government does not want to violate the securities market rules which it has pledged to enforce to strengthen the capital market.

Both the investing public, which bought Semen Gresik shares, and Cemex, and which acquired its holding through a competitive bid in 1998, put their money in the government-controlled company primarily because of its major role (a 37 percent share) in the country's total cement production capacity of 46 million tons.

Obviously, if the two subsidiaries were spun off, Semen Gresik would become a much smaller company. Such a faulty deal would also be a bad precedent for the government's privatization program -- a core element of its economic reform program.

The demands for the spin-off appear to be based on strong nationalistic sentiment against foreign investors. In this case it is Cemex, the world's third-largest cement group with more than 65 plants, which last year produced 80 million tons of cement, in more than 30 countries throughout Asia, Africa, Europe and North and South America.

But the central issue actually boils down to what the local people see as unfair distribution of the pie.

Like many other legal entanglements encountered by companies in various provinces, Semen Gresik faces one of the time bombs left behind by the authoritarian, centralized government under former president Soeharto.

"I had warned then finance minister Mar'ie Muhammad against the grievances ... before he approved the acquisition of Semen Padang (in West Sumatra) and Semen Tonasa (in South Sulawesi) by Semen Gresik in 1995," asserted Basril Djabar, chief editor of the Singgalang daily in Padang.

All three cement companies were then wholly owned by the government. As no one dared to argue with Soeharto, the deal went ahead despite the deep dissatisfaction of the West Sumatra people, added Djabar, who says he is a member of the West Sumatra team fighting for the locals' interests in Semen Padang.

The problem, he said, is that the local people had been willing to cede their traditional property rights to 400 hectares of limestone quarries to Semen Padang out of their high sense of solidarity to support national development.

"But when Semen Padang was acquired by Semen Gresik and later privatized, that was an entirely commercially-motivated deal, which had by no means been in the minds of the Minangkabau people when surrendering their land," he said.

"What further angered the people was that the commercial transactions were then concluded without taking into consideration any sort of compensation for them. This severely bruised the dignity of the Minangkabau people," he added.

Djabar hastily added that the demands do not in any way represent negative sentiment toward Cemex, nor against other foreign investors. The local administration and people have worked hard to make West Sumatra the most hospitable place for both foreign and domestic investors, he said at a meeting with Cemex Indonesia's president Francisco Noriega and vice president Vicente Saiso.

Djabar said the West Sumatra legislature had delivered a petition to President Megawati Soekarnoputri early this month again demanding the government divest Semen Padang from Semen Gresik.

"The spin-off will return Semen Padang to a wholly government- owned company; only then can we sit down again to negotiate a win-win settlement," he said.

The South Sulawesi people imply that their demand for the spin-off could be compensated with an equity stake in Semen Gresik.

"My monitoring of the people's aspirations concludes that they see the price paid by Cemex for Semen Gresik shares as too cheap," said Bunyamin, the Jakarta correspondent of the Makassar- based Fajar daily newspaper, at the same meeting.

Noriega categorically denied that Cemex bought Semen Gresik at a fire-sale price, pointing out that it won the stake through a competitive bid and paid $1.38 a share, a 127 percent premium over Semen Gresik's share price on the Jakarta Stock Exchange.

"We were invited by the government to contribute to the country's development and we joined Semen Gresik in good faith," Norieg said, "believing that with the broad and strong base of our skills and technology, and our good track record in operating more than 60 cement plants around the world, we will be able to cultivate Semen Gresik to become a world-class cement company."

He said sound business profit is surely the primary motive, but that this was a long-term objective because when Cemex bought into Semen Gresik, Indonesia was at the height of its political and economic crisis, its cement industry suffering from a huge excess capacity due to the plunge in demand.

"In fact, based on Semen Gresik's share price now, we suffer, on paper, a loss of $80.2 million, meaning that the market value of our stake is now 38 percent less than our initial investment in 1998. But we had anticipated this because we invest with a the long-term perspective," Noriega said.

Cemex's agreement with the government in 1998 requires the Mexican company to pay $1.72 per share, almost twice as high as Semen Gresik share quotation now, if the government exercises its put option for its remaining 51 percent stake.

Noriega added that Cemex has also greatly contributed to expanding Semen Gresik's exports to new markets and even to countries where Cemex has cement operations.

"Semen Gresik's exports increased 137 percent in 1999. Semen Padang exports alone expanded by 145 percent, of which 66 percent were generated by Cemex's trading networks," he said.

Given the desperate need for foreign investment and the fact that until now not a single cent of the Rp 6.5 trillion targeted from the sale of state companies has been raised, the government should do its best to resolve the issue with locals in the two provinces.

Allowing the spin-off, even with adequate compensation for the investing public and Cemex, which could reach hundreds of millions of dollars, would amount to acknowledgement that the government had sold a company with legal problems to the public and foreign investors.

This would not only sabotage the whole deal with Cemex, but would cast great doubt over the whole privatization program as well as the government's credibility regarding the contracts it has signed. Still more damaging, the government could land itself in a messy litigation case filed by the investing public.

The writer is a senior editor of The Jakarta Post.