Time to defuse Semen Gresik's 'time bomb'

Time to defuse Semen Gresik's 'time bomb'

Vincent Lingga, Senior Editor, The Jakarta Post, Jakarta

Publicly listed PT Semen Gresik (SG) is sitting on a "time
bomb" that could explode into messy international arbitration or
litigation proceedings before the end of the year if the
government does not act to resolve once and for all the
corporate, political and social problems that the SG West Sumatra
unit, PT Semen Padang (SP), has faced since 2000.

State Minister of State Enterprises Laksamana Sukardi did set
up a joint team in mid-August to resolve the SP issues in
response to an urgent request from Mexico's Cemex S.A. de C.V,
the owner of 25.50 percent of SG, for a mediation process to
resolve the four-year fiasco at the "renegade" subsidiary.

However, more than six weeks after its establishment, the team
has not made any progress. Neither does it have any viable
propositions for Cemex to assess.

The government owns 51 percent and the investing public the
remaining 23.50 percent of SG, the country's largest cement group
with a total capacity of 17.2 million metric tons per annum. SG
itself owns 99.99 percent of SP, which has an annual capacity of
5.5 million tons or 32 percent of the SG total capacity.

Cemex warned in a letter to Laksamana on Aug. 13 that it
might, as a last resort, have to submit the issues for
international arbitration or litigation proceedings if the
mediation process fails to produce a satisfactory solution to the
SP problems, which have been adversely affecting SG's financial
performance and growth prospect.

Analysts familiar with the SG predicament with SP say the
joint team is anything but a real task force fully authorized to
tackle the problems in a holistic manner.

That initiative was only another cosmetic offer to push the
problems aside and buy time, something the government has been
doing since 2000, when vested interest groups in West Sumatra,
backed by the SP management, launched a campaign to have SP spun
off from SG.

The SP problems center around the all-out efforts by vested
interest groups of politicians and officials in West Sumatra,
with the full support of the SP management, to maintain the
cement company as their cash cow by wrestling SP from SG's
control.

After more than 15 months of court battles against the old SP
management, SG was finally able to appoint a new board of
directors for SP in May, but then had to spend a further four
months legally fighting the old board, who stubbornly refused to
quit, before the new management could enter SP on Sept. 8.

But the attempt to install this new management is only one of
a host of serious corporate, legal, political and social problems
that have been besetting both SP and SG over the last four years.

Cemex and the investing public have been roiled by the acute
lack of political will on the part of the government to address
the SP issue right from the outset when vested-interest groups in
West Sumatra first challenged the legality and political validity
of SG's acquisition of SP in 1995 in their deceptive bid to hold
the cement unit as their cash cow.

Both companies were state-owned firms in 1995.

Laksamana and his deputy Roes Ariawidjaya have been skirting
around the issues, often flirting with the vested-interest groups
in West Sumatra simply to silence their noisy protests.

But these protracted problems have caused severe damage to
both SP and the whole SG group.

While Heidelberger-controlled PT Indocement and Holcim-
controlled PT Semen Cibinong, respectively the second and third
largest cement companies, have consolidated their operations, SG
has been beleaguered by its SP subsidiary.

Just look at some of the damage done by the renegade SP:

o Both SP and SG have been embroiled in endless, costly court
battles, thereby affecting the corporate image of SG as a
publicly traded company. The series of litigation has also
diverted a lot of resources away from their operational
consolidation to tap the expanding market demand amid the
country's economic recovery.

o SG's and SP's credit ratings have deteriorated and their
higher premium risks have sharply increased the cost of their
borrowing.

o SG could not issue an audited consolidated financial report
for 2002 and was consequently penalized by the market watchdog
(Bapepam) because SP failed to complete its audited reports.

o The refusal by the old SP management in late 2002 to accept
a due diligence team assigned by SG to investigate the company
generated an even more worrisome question as to what had taken
place at, or what further damage had been done to, SP especially
between January 2002 and September 2003.

o SG's failure to publish its audited report for 2002 has also
caused serious problems for Cemex because the Mexican company
could not complete its reports (disclosure requirement) for the
New York Stock Exchange.

The failure of the government, as the SG majority shareholder,
to control the "rebellious" management of SP since 2000 also
caused a violation in the Conditional Sale and Purchase Agreement
between the government and Cemex in October 1998, when the
Mexican company bought a portion of the government shares in SG.

Laksamana has often acknowledged that the government has
failed to honor many conditions in the contract with Cemex,
conceding that Indonesia would probably lose in an arbitration
proceeding.

Yet the acute lack of government initiative to resolve the SG-
SP debacle once and for all has been mind boggling.

Cemex executives in Jakarta won't comment on the protracted
controversy, except to reaffirm that Cemex is in Indonesia for
the long term and is therefore open to viable alternative
propositions.

However, the seemingly endless imbroglio Cemex has been facing
over the past five years after it invested hundreds of millions
of dollars in SG could be too much for the Mexican company.

The next few weeks appear quite crucial for addressing the SG-
SP debacle because next year the government, preoccupied with
general and presidential elections, will simply have no energy
left to cope with this problem.

Analysts suggest that the government revisit the proposition
it made in late November 2001, whereby the three SG cement units
(Semen Gresik in East Java, Semen Padang and Semen Tonasa in
South Sulawesi) would be split into stand-alone, state-controlled
companies.

However, this proposition should be sweetened to make it
attractive to the SG minority shareholders, notably Cemex.

Given Cemex's long-term interests in Indonesia's cement
industry and the domestic cement deficit that will likely emerge
in 2007, analysts suggest that SG expand its capacity by
establishing a new subsidiary where Cemex can be offered a
majority shareholding.

This alternative could resolve the SP problem and at the same
time bring in new capital to increase cement capacity, thereby
avoiding a national cement shortage that most analysts predict
will take place in 2007 if the present total capacity of 42
million tons is not increased.

Whatever solution is finally chosen, the government
should act decisively and shortly to resolve the SP problems and
deactivate the time bomb at SG.