Vested interests could win in Cemex sale

Vested interests could win in Cemex sale
22 May 2006

An acute lack of leadership on the part of President Susilo Bambang Yudhohoyono’s government to act decisively on unpopular, yet good, measures, is an apt way to describe this ongoing business saga between Cemex and Semen Gresik (reports The Jakarta Post). Finance Minister Sri Mulyani Indrawati, on behalf of the President and the chief economics minister Boediono, last Tuesday notified State Enterprises Minister Sugiharto that the government had no money to take up Cemex’s 25 percent holding at Indonesia’s largest cement group, state-controlled PT Semen Gresik (SG).

But what should have been a firm and wise stance to allow for the final closing of the Cemex-Rajawali deal could instead thrust it into legal limbo. For the finance minister also stated in the same letter that the government understood Sugiharto’s initiative to buy back the Cemex stake as long as it followed prevailing rules and regulations, including transparent and accountable mechanism.

Sugiharto, acting like a businessman flush with cash and with a yen for an acquisition, immediately notified the Cemex chief in Singapore last Wednesday that the government, through state companies and regional administration-owned companies, would purchase Cemex’s holding in SG at US$336.7 million at the same price Cemex had agreed on with Rajawali early this month.

Essentially, Sugiharto’s letter is merely a proposal and not a legally straightforward reply to Cemex’s May 5 notification to the government of its sales deal with Rajawali. Moreover, the government cannot transfer its first right of refusal to other parties, even state companies.

It is difficult to understand the real motive behind the government’s ambiguous stance. Even if the rumor was true that Bosowa cement company, linked to Vice President Jusuf Kalla, was also a "partner" in the Cemex-Rajawali deal, the government should have allowed the private transaction to proceed.

Let Rajawali get "burned" by its investment in SG, for Cemex had suffered under its frustrating eight years of investment in SG. The likely troubles lying ahead were indicated by the West Sumatra governor’s threat last week that whichever party takes over the Cemex holding, the West Sumatran people would push ahead with the long-held demand to spin off Semen Padang (SP) from SG.

The greatest benefit to the cement industry (says The Jakarta Post) which has very bright prospects in view of the accelerated development of infrastructure, notably power plants and turnpikes, would be if Sugiharto mobilized the funds through state companies to build a green-field (new) cement plant to anticipate a national cement deficit beginning in 2008.

The only plausible reason behind Sugiharto’s move could then be an inordinate fear that the Cemex-Rajawali deal would again set off protests, notably in West Sumatra, where vested interests, narrow-minded nationalists and various groups of rent seekers have tried since 2001 to spin off SP, one of three SG cement subsidiaries, from the SG group.

Leaders of the West Sumatra provincial legislature, the then governor of West Sumatra and top SP executives in mid-2001 passed a decree expropriating SP until such time as it is separated from SG. But would the campaign to spin off SP from SG to make it a stand-alone state company really benefit the West Sumatra people? Not likely, if the findings of the special audit on SP by PriceWaterhouseCoopers in 2004-2005 is any indication.

The forensic audit that was made at the order of SG shareholders and completed in May 2005 found almost all types of bad corporate governance practices rife in SP. They were notably rampant between 2001 and September 2003, when it was controlled by the then renegade management with the full support of local rent seekers within the legislature and local administration. Auditors estimated tens of millions of dollars in outright and potential losses due to bad practices or even blatant fraud in procurement, inventory and marketing management.

Neither the SG management nor Sugiharto have come clean to reveal the auditors’ stark findings to the West Sumatra people. Worse still, Sugiharto did not submit the audit to the Corruption Eradication Commission for further investigation and prosecution. Now the government, the first one directly elected by around 60 percent of voters in 2004, has caved in to the misguided regional sentiments against private interests taking over the Cemex stake in SG. What a great move to scare off potential foreign investment, as well as a resounding sullying of the pledged reform of state companies.
Published under Cement News