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Indonesia gives up privatizing another
asset
By Bill Guerin
JAKARTA
- Defeated by an array of provincial legislatures, local
interest groups and plant management, Indonesia's
government appears to have thrown in the towel after a
five-year battle to sell the country's largest cement
group, government-controlled and publicly traded PT
Semen Gresik, to Mexico's Cemex SA, the world's third
biggest cement producer.
The failure shows how
bullying, intimidation and the brute power of vested
interests claiming to fight for a better deal for local
people have been allowed to badly damage a valuable
state asset that should be contributing to local
development through employment, taxes and other obvious
benefits. It also highlights yet again the even bigger
problem facing the government in selling state-owned
assets to foreign strategic investors.
The story
began in 1995 when the government merged its three
state-owned cement companies into one. Gresik in East
Java bought regional cement manufacturers Semen Padang
in West Sumatra and Semen Tonnasa in South Sulawesi. The
idea was to prevent private cement producers from
dominating the local market and to give economies of
scale and synergy in marketing, procurement, information
technology, accounting and management.
A new
management team of the Semen Padang subsidiary, which
had to be guarded by hundreds of police and soldiers
when they virtually took over the management on
September 8, last week promised faithfully to spin off
the unit from the parent company and thus leave it in
local hands. Though in April the government had hinted
it might accede to such a move, the governor of Padang
and the provincial legislature have won a resounding
victory over Mexico, Jakarta and State Enterprises
Minister Laksamana Sukardi.
In 1998 the
government kicked off its privatization program by
offering Gresik to qualified strategic investors. Cemex
bought 14 percent of the company for US$114 million and
secured a put-option agreement to allow it to become a
majority shareholder. Under this option, the government
had the right to sell, and Cemex was given the right to
buy the remaining 51 percent. Semen Padang's shares are
99.99 percent owned by Gresik, which is still 51 percent
owned by the government. Public shareholdings in Semen
Gresik total 23.46 percent and the Mexicans, through
their Cemex Asia Holdings Ltd, have 25.53 percent.
The rationale was that if the government needed
money, then it could exercise the option. The deal would
have earned the government $525 million, helped plug a
gaping hole in the state budget, and acted as a catalyst
to rekindle the interest of foreign investors.
By the end of 1998, Cemex had increased Gresik's
exports to 1.8 million tonnes annually from 563,000
tonnes in 1997 and in 1999 bought another 11 percent of
Gresik through the market to raise its stake to the
current 25 percent plus.
But the privatization
plan quickly ran into resistance from provincial
legislatures, local interest groups and the managements
of the group's plants in West Sumatra and South
Sulawesi.
Semen Padang is the largest cement
manufacturer in Sumatra, the second-largest cement
market in the country after Java. There are abundant
reserves of cement raw materials in the province and it
operates near Padang's deepsea port, where any surplus
production is easily shipped abroad.
Despite the
impact of 1997-98 financial crisis, the company had been
profitable and competitive and supplied more than 40
percent of the domestic cement market. But its previous
management, abetted by vested interests in the local
administration, and by local politicians, drove it
almost into the ground and turned it in to the worst
performer among Semen Gresik's three cement units. In
2000 the company recorded losses of Rp46 billion.
The problems started for real when the
government then wanted to exercise the sell option
quickly and for Cemex to honor it. In October 2001
leaders of the provincial legislature in Padang, the
governor of West Sumatra and top executives of Semen
Padang took matters into their own hands by passing a
decree expropriating Semen Padang and putting it under
the control of the general public. Commandeering the
company, they claimed, was in the interests of the
people of West Sumatra.
Semen Padang, they said,
would be supervised by the provincial legislature until
such time as it would be spun off from Gresik, and its
status returned once again to that of a state-owned
enterprise (SOE) in its own right.
Street
demonstrations and labor strikes followed, staged by
employees who opposed Semen Gresik's privatization and
were fired up by a group of vested interests that wanted
to maintain the company as their cash cow. Jakarta was
to get the message, by hook or by crook - hands off
Semen Padang.
Despite the large-scale protests,
most local community leaders still wanted the deal with
Cemex to go ahead, as long as unresolved local issues
were resolved. Semen Padang's land was "acquired" in
1998 in circumstances that created a dispute over the
status of 412 hectares of traditional land. The issue
was never resolved, either at the time of the original
merger or when problems started to arise after the
announcement in March 1998 that Semen Gresik would
become the first state-owned company to be privatized.
In October 2001, a delegation of villagers from
Lubuk Kilangan, where Semen Padang is based, visited the
parliament in Jakarta to lobby delegates and demand a
resolution of the land dispute, together with Rp5 in
local community support for every kilogram of cement
produced. Based on production levels and the rupiah
exchange rate at the time, this would have cost the
company about $2.5 million a year, a shade over 1.0
percent of its annual turnover.
However, amid
the intimidation and threats coming from Padang, Jakarta
broke up Gresik's three units two weeks before the
three-year conditional sale-and-purchase agreement with
Cemex expired in December 2001. Sukardi said the
government would restore the status of Semen Padang to
stand-alone state company by acquiring the majority of
its shares from Gresik.
From that point on
serious doubts were raised about the government's
ability to honor its contracts with Cemex. Compromise
had been expected but not capitulation. Semen Padang was
a chance for the government to demonstrate and maintain
its authority but instead of being resolute and pushing
ahead with Gresik's privatization, Jakarta waffled and
allowed the assets to be taken away without legal
grounds.
Eventually an extraordinary
shareholders meeting of the company in February 2002
voted to oust president Urip Timuryono and chief
commissioner Setiadi Dirgo before their tenures ended.
The shareholders held them responsible for the employee
revolt which disrupted production in December 2001 and
January 2002 and caused an estimated Rp100 billion ($9.5
million) loss from production disruptions and export
cancellations. They were deemed to have sponsored, or at
least given tacit support to the employees who
demonstrated and went on strike and thus failed to
defend shareholder interests.
Though improved
security has been the vital and missing precursor to any
sustained recovery in the economy Jakarta has now, quite
simply, lost control of its own assets with State
Enterprises Minister Sukardi's reported approval of the
latest Padang spinoff program. Hardly surprisingly, the
sister company Semen Tonneasa is now also demanding a
spinoff.
The new president and chairman will
face an uphill battle re-establishing any sort of
working climate. They will need to work with one eye on
the window for signs of any further protests if they are
seen to be kicking their heels. There is no sign the
threats and intimidation will let up.
(Copyright
2003 Asia Times Online Co, Ltd. All rights reserved.
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