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.