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.