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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 content@atimes.com
for information on our sales and syndication policies.)
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