Southeast Asia

Regional renegades threaten Jakarta's cement deal
By Bill Guerin

JAKARTA - Indonesian State Minister for State Enterprises Laksamana Sukardi plans a spinoff of two renegade state enterprises, PT Semen Padang and PT Semen Tonasa, from their publicly listed parent company PT Semen Gresik.

In 1995, Semen Gresik in East Java purchased regional cement manufacturers in Padang in West Sumatra and Tonasa in South Sulawesi. The rationale was to expand capacity and achieve economies of scale, allowing the newly merged state-owned entity, the Semen Gresik Group, to face challenges from the private sector in the cement industry.

Mexico's Cemex SA de CV, the world's third-largest cement producer, saw the potential to capture a large slice of the Indonesian market in 1998 at a time when no other foreign investors were willing to take the risk of investing in the country.

A deal was struck when Tanri Abeng, Suharto's minister of state-owned enterprises, chose Semen Gresik as the first of 12 companies he intended to privatize. The government owned 65 percent then and the need, as it has been all along with privatization, was to generate cash flow for the threadbare state purse.

Abeng, through what actually proved to be one of Indonesia's rare transparent bidding processes, offered 35 percent of this 65 percent. Local securities firm Makindo, linked to the Suharto family, did a sweetheart deal with Holderbank, a Swiss investor, but lost out in a two-round bidding process to Cemex with its winning bid of US$1.38 a share. Cemex was duly declared the "preferred bidder" and was granted the right to buy 35 percent of the shares from the government and a further 16 percent from the public, which would give it the desired 51 percent majority control.

Things quickly started to go wrong, with the Padang community opposing the deal and demanding that Semen Padang should no longer be part of Semen Gresik and thus controlled by foreigners. This forced the government to renege and invite Cemex back to the negotiating table, where a new deal was carved out, with the government offering to sell only 14 percent. The sweetener was a three-year put-option agreement that would, after all, allow Cemex to become a majority shareholder in Semen Gresik. Cemex, oddly enough, agreed and subsequently bought the government's offered 14 percent for $114 million, which represented a 112 percent premium on the market price of Semen Gresik shares.

A year later, in 1999, the company bought another 11-plus percent through the market to raise its stake to 25.53 percent, where it remains stuck to this day in spite of the long-expired put-option agreement.

Under this agreement, confirmed by government regulation No 76/1998 in October 1998, Cemex was given the right to buy the government's remaining 51 percent stake but at approved prices. The government had the right to sell out to Cemex and Cemex was obliged to buy the stock at the agreed price of US$1.72 per share or for a total of $520 million, which value equated to almost three times the Semen Gresik price quotation on the Jakarta Stock Exchange at the time.

The put option, however, guaranteed a price of US$1.38 per share for the government's remaining shares.

Semen Padang management, backed up by the provincial executive and legislature, was even angrier over the put option. Leaders of the provincial legislature (DPRD) in Padang, a staunch Islamic community, the governor of West Sumatra and top management in Semen Padang took the law into their own hands.

Power in the public sector and in the bureaucracy moved sharply from central to local government with the hasty introduction of the regional-autonomy law in 2001. The explosive mix of the state's privatization program with this decentralization took a heavy toll and the West Sumatra province of Padang was the testing ground for the inevitable battle of wills between Jakarta and local government.

In November 2001 the DPRD passed a decree expropriating Semen Padang until it was separated from Semen Gresik and no longer part of any deal with Cemex. The declaration, signed by the Indonesian Council of Ulemas (MUI) and the Association of Indonesian Muslim Intellectuals (ICMI), gained unanimous support from the 13 factions present, including the PDI-P faction.

This was not only against the constitution, as Sukardi lamely pointed out, but showed that President Megawati Sukarnoputri, who heads the party with the largest number of seats in Parliament, PDI-P, was unable to rally political support from her own party. Sukardi himself is a senior figure in the party and a close aide to the president.

Similarly, in faraway South Sulawesi, local interests were able to block the planned selloff of Semen Tonasa. In the end, the 2001 privatization target of Rp6.5 trillion (about US$628 million) was not achieved, principally because of the loss of a cash injection of $528.8 million (Rp5.4 trillion), which represented more than 80 percent of the privatization target.

In the final year of the deadline, Sukardi next unveiled a plan, fundamentally different from the put option under the 1998 agreement, by which the government would sell its remaining 51 percent stake in Semen Gresik and use the proceeds to buy back a majority stake in Semen Padang and Semen Tonasa, leaving the two under national control. Cemex would still own 76 percent of Semen Gresik and a minority stake in Semen Padang and Tonasa.

This variation-on-a-theme put-option agreement valued Semen Gresik's shares at $1.65 apiece, compared with the shares' market value at the time of Rp4,500 (about 45 US cents), which meant Cemex would have ended up paying four times what the value of Semen Gresik was then.

West Sumatra leaders, legislators and community leaders called the new plan an insult to the province's pride, repeating demands that Semen Padang be spun off from Semen Gresik entirely. The response from Cemex Indonesia president Francisco Noriega was to insist that his company would not buy Semen Gresik's shares at the agreed price without its two units, PT Semen Padang and PT Semen Tonasa, being included.

The Semen Gresik under the put option referred to three cement units with a combined capacity of 17.25 million tons, while Sukardi's proposal offered only the Gresik unit with 8.2 million ton capacity as the Tonasa unit with 3.48 million tons and the Padang unit with a 5.57 million ton capacity would become government-controlled stand-alone companies.

Noriega summed it up, "If you separate the companies, there is no put option because you bought the three companies together."

Gresik was trading this week at about Rp7,750 (89 cents), making any such deal scarcely more plausible.

If realized, the deal would have earned the government $525 million while acting as a catalyst for the return of badly need foreign investors, but letting the deal expire, even after Cemex had agreed to extend it by three months, indicates that the government was already throwing in the towel.

Jakarta's stance appears to be that it would still honor part of its commitment to Cemex by allowing it to increase its shareholding in Semen Gresik to 76.50 percent. Not only does this raise serious doubt about the government's ability to honor its contract but highlights its inability to overcome the difficulties thrown up by the process of selling state-owned assets to the private sector, especially where foreign strategic investors are involved.

Though Sukardi has said his new variation on a theme is conditional on the spinoff not "violating the law", most political analysts see the proposal as proof that three years of resistance and manipulation by politicians and corrupt officials has finally forced Jakarta to acquiesce to pressure from provincial legislators.

The long-running saga of Semen Gresik's progress toward still-elusive privatization also highlights the entrenched power of those who treat Semen Gresik and its subsidiaries as their cash cows. This bodes ill for any prospects of resolution of this debacle in the run-up to the 2004 elections. Valuable assets that could contribute substantially to local development through employment, taxes and other benefits remain in limbo.

Vested interests in the provinces will be able to stoke up similar regional sentiment to take control of state enterprises. Spurious claims of fighting for the interests of local people belie the reality that employees were allowed to revolt against the decisions of the owners of the companies that employed them.

The cement industry is in decline, at least recently. Domestic cement sales are a key economic indicator and last month Semen Gresik said its own February sales, including exports, fell 16.3 percent year-on-year to 809,081 tons as local and export sales declined.

Its domestic sales last month dipped 1.2 percent year-on-year to 735,195 tons and exports plunged 66.7 percent to 73,886 tons in the same period.

The Mexicans could be forgiven for seeking redress in the courts for breach of contract by a government that, at least in this case, has singularly failed to maintain its authority, although it may still hold the trump card, based on the law.

The shareholder structure remains unchanged after three years of strife and shame - the government holding 51 percent, the public with 23.46 percent and Cemex with 25.53 percent. Sukardi's new plan, which he claims is the "best option", may not fly anyway, as it has yet to receive Cemex's consent and will need to be approved by Semen Gresik's independent shareholders, the investing public, as well as Cemex itself.

The Law on Limited Liability Companies and other regulations mean that any such spinoff or drastic change to the structure of a publicly listed company can only be approved by minority shareholders.

(©2003 Asia Times Online Co, Ltd. All rights reserved. Please contact for information on our sales and syndication policies.)
Apr 25, 2003

Privatization blues in Indonesia 
(Apr 19, '03)

Investors ask, who's the boss? - and stay away 
(Oct 1, '02)


Click here to be one)


No material from Asia Times Online may be republished in any form without written permission.
Copyright Asia Times Online, 6306 The Center, Queen’s Road, Central, Hong Kong.