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A warning etched in cement in
Indonesia
By Bill Guerin
A planned deal between Jakarta and
Mexico's Cemex SA, the world's third largest
cement maker, to resolve a protracted contractual
dispute has been put on hold. President Susilo
Bambang Yudhoyono, who pledged to make solving the
dispute one of his top priorities during the first
100 days of his presidency, a milestone that was
reached on Friday, reportedly rejected parts of
the proposed settlement deal on Tuesday.
The dispute, which the Mexicans have taken
to international arbitration, is over their
contractual right to control state-owned PT Semen
Gresik, Indonesia's largest cement maker, "We
failed to agree upon several points in the
settlement scheme...and cannot forecast when the
settlement deal will be signed," said State
Minister of State Enterprises, Sugiharto.
The government, in the face of concerted
management and union opposition from Semen Gresik,
and opposition within parliament, has already made
it clear that none of several options would
include giving Cemex outright control. Sugiharto's
ministry had come up with a scheme to hand over
control of Semen Gresik's main production
facilities in Tuban, East Java, to Cemex, in
exchange for the latter agreeing to allow the
government to maintain its majority stake in the
company. Cemex would also invest in building
another cement plant in the area.
This is
a complete about-face from the government's stated
position in October when Aburizal Bakrie, the new
coordinating minister for the economy, was quoted
in local media as saying that there were two basic
principles that Indonesia had already decided it
would stick to during negotiations. "The
government has no money and we have to honor the
contract."
The contract he was referring
to was the 1998 Conditional Sale and Purchase
Agreement between the government and Cemex when
the Mexican company bought a 14% stake in Semen
Gresik and the right to buy additional shares,
referred to as a put option, until it became the
majority shareholder. Cemex later bought a further
11.53% share in Semen Gresik through the stock
exchange, increasing its holding to the current
25.53%. The government still owns 51% stake and
private investors have the remaining 23.47%.
A deadline for Indonesia to implement the
put option of October 1, 2001, had been written
into the agreement but decentralization was to
have a telling impact on a deal that had been
struck with the central government. After
autonomy, power moved sharply from central to
local government in the public sector and in the
bureaucracy. The testing ground for the inevitable
battle of wills between Jakarta, the Java
heartland, and the regions was the West Sumatran
province of Padang, home to Semen Padang.
Resistance was mobilized against Cemex and
leaders of the provincial legislature (DPRD) in
Padang, the governor of West Sumatra, and top
executives of Semen Padang pre-empted the
government by taking matters into their own hands.
They passed a decree expropriating Semen Padang
until such time as it is separated from Semen
Gresik (and no longer included in any subsequent
deal with Cemex). By December 2003, Cemex had had
enough and took its case to the International
Center for the Settlement of Investment Disputes
(ICSID), demanding the government pay damages for
not upholding its contractual obligations.
Indonesia faced the possibility of having to pay
Cemex as much as $500 million in compensation and
damages (the price of a 24.5% share plus interest
plus a fine) because of the government's failure
to honor the 1998 contract.
The
administration of Megawati Sukarnoputri had worked
on a different plan, one conjured up by
parliament, that the government would buy back the
Semen Gresik shares that it has already sold to
Cemex. As Bakrie has indicated, the government
does not have the Rp4.5 trillion (US$492 million)
cash to buy back the shares. Not that it ever was
an option anyway. Cemex has already stated that it
does not want to release its shares in Semen
Gresik.
The timing of the latest hitch
could hardly have been more inopportune. A key
driver of increased cement demand will be
infrastructure investment, expected to reach $150
billion over the next five years. The government's
investment plans include projects that involve
private domestic and foreign investors'
partnerships with state-owned firms. The huge
investment planned on infrastructure, including
more new toll roads, will not only create direct
demand but also secondary demand along the roads
for housing, schools and hospitals.
Semen
Gresik's total capacity, including that of Semen
Tonasa on Sulawesi Island, and Semen Padang, is 17
million tons. Indocement, once the flagship of the
powerful Salim group, is now 65.14% owned by
Germany's Heidelberger Zement AG and is still the
country's second-largest cement maker, with an
annual capacity of 15.4 million tons.
Demand for cement is also expected to soar
once reconstruction work gets under way in
tsunami-hit Aceh. Indocement production facilities
are in West Java, limiting the spread of its
distribution network to West Java and Jakarta
market. Transport costs are a major factor in the
industry and the cost of hauling cement from the
main island of Java would involve long journeys by
road, a ferry across the Sunda Strait, and then
yet another long trek by road, all of which would
badly impact on profit margins.
Semen
Andalas, majority owned by France's Lafarge, is
the dominant cement maker in Aceh, but its plant
at Lhonga, near Banda Aceh, was badly hit by
tsunami and half of its staff are reported
missing. Prior to the disaster, it controlled
around 80-90% of the market there though its
annual capacity is only 1.6 million tons. Semen
Padang, which, although by far the nearest to the
disaster area, is unlikely to be able to keep pace
with the expected demand.
Cemex has made
no comment this week on the stalled deal, but had
earlier agreed to postpone the arbitration
hearing, pending completion of out-of-court
settlement negotiations. Before flying off to
Mexico last year to meet Cemex's top management,
Bakrie had said he wanted to settle the Cemex case
as soon as possible in order to win back the
confidence of foreign investors in Indonesia. Yet
at the end of the day, the new administration has
clearly decided to ditch a contractual agreement
with a major foreign investor, the first to bring
investment capital to Indonesia during the
desperate times that prevailed in 1998.
The company has thus stayed in Indonesia
through thick and thin and though it may accept a
compromise, the risk for the government is that
foreign investors waiting in the wings may take a
less accommodating view toward Indonesia now.
Parliament has demanded the government maintain
its majority ownership in Semen Gresik and
continue negotiations to reach an out-of-court
settlement over the dispute. The argument that the
country risks losing control over an industry
vital for national economic development has to be
respected. Yet on the other hand, if both parties
achieve a resolution based on the leaked terms of
the deal on the table, this would have several
advantages. A new Cemex cement production plant
would create more jobs and help meet future cement
shortages, predicted to be 6.9 million tons next
year alone. Cemex, controlling the proposed joint
venture, would be able to bring its undoubted
expertise and management skills into play,
Cemex has some 56 factories in 15
countries and has said it will place its regional
headquarters in Jakarta rather than Manila if the
dispute is settled, because of the country's
proximity to other Asian markets and its own
domestic market potential. Over the years, Cemex
has been unable to institute the profit-boosting
changes it had sought. The company met hurdle
after hurdle and had to stand by and watch as
global rivals, including Heidelberg and Lafarge,
clinched hassle-free deals with other Indonesian
cement makers. Under previous administrations,
privatization was aimed at meeting targets set in
the state budget rather than transforming state
enterprises into efficient business organizations
through the process. The new government has a
chance to change that, and Cemex would a good
place to start.
Bill Guerin, a
Jakarta correspondent for Asia Times Online since
2000, has worked in Indonesia for 19 years. He has
been published by the BBC on East Timor and
specializes in business/economic and political
analysis in Indonesia.
(Copyright 2005
Asia Times Online Ltd. All rights reserved. Please
contact us for information on sales, syndication and republishing.) |
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