Bill Guerin, Jakarta – "It's all over for Cemex, and as far as we're concerned they can go back to Mexico," said Titi Nazif Lubuk, deputy leader of the West Sumatra legislative assembly.

She was speaking on November 1, 2001, the day the local parliament usurped Jakarta's authority by announcing its unilateral takeover of Semen Padang, the local subsidiary of publicly listed Semen Gresik.

The move, described by Titi as an example of "people power" by the coup leaders, a motley crew of provincial politicians, renegade corporate leaders and local Islamic clerics, had posed a significant challenge to the authority of President Megawati Sukarnoputri who then was less than four months into office.

Now, with only six weeks to go until the country's first-ever direct presidential elections and as Jakarta prepares for international litigation, the Padang locals have fired a warning shot across the bows of the five candidates, including Megawati, who are vying for the top spot.

Local public leaders and senior politicians, a local tribal leader and a local newspaper owner, together with the province's Indonesian Youth National Committee, staged a mass rally over the weekend, demanding that Jakarta halt the sale of all state assets, including Semen Padang, to foreign investors.

Titi was in the front line once again, as was the provincial governor, Zainal Bakar, who was widely quoted as saying at the time of the 2001 takeover that Semen Padang is West Sumatra's Taj Mahal, a symbol of local pride that must not be sold to foreigners.

Titi put forth another argument at the time. The fact that the Semen Padang industrial complex, which employs nearly 3,000 people and is the largest single employer in the province, is built on communal lands and customary law prohibits it from being handed over to foreigners, she said.

But many believe the real objective of those behind the unlawful spinoff and the renewed pressure on Jakarta is to keep Semen Padang as their cash cow ready to be milked at will.

The Semen Gresik group, which is based in Surabaya, the provincial capital of East Java, owns 99.99 percent of Semen Padang shares and also owns Semen Tonasa in South Sulawesi.

The government owns 51 percent of Semen Gresik, while the public holds a further 23.46 percent and Monterrey-based cement giant Cemex SA (Cemex) owns the remaining 25.53 percent.

The Washington-based International Center for Settlement of Investment Disputes registered a request for arbitration submitted by Cemex in December.

The long-running controversy dates back to 1995 when the Suharto government allowed Semen Gresik to acquire the Padang and Tonasa subsidiaries in a move hailed as consolidating the three state- owned cement companies into a synergic entity, providing higher efficiency and an increased credit rating, thereby lowering their borrowing costs.

After Suharto's resignation, the desperate need for cash forced the B J Habibie interim administration to sell off a 25.5 percent stake in Semen Gresik in October 1998.

Cemex won a competitive bid at US$1.38 per share and paid $290 million. This was equal to a 127 percent premium on the share price, and the deal earned the Mexicans great kudos as the only major foreign investors to take the plunge in Indonesia during the grimmest months of the regional financial crisis.

The deal made sense for both Cemex, by then the world's third- largest cement producer, and for Jakarta's privatization program and the country as a whole. The sale was the first under privatization and Cemex was given a special "put option" giving it the right to buy another 51 percent stake in the company by the end of 2001.

However, amid threats and intimidation from Padang, Jakarta broke up Gresik's three units two weeks before the three-year conditional sale-and-purchase agreement expired.

If the government caved in, it was argued, other state-owned holding companies, which own and manage airports, seaports and mining units in several provinces, might also face a similar political impasse as renegade local leaders joined the bandwagon and claimed their rights to state assets. Sure enough, by the end of 2001, local legislators in Sulawesi were demanding that the Semen Tonasa plant also be spun off.

There were also fears that other groups in West Sumatra might demand the spinoff of the Ombilin coal unit located in the province from its holding company, publicly listed, government- controlled PT Bukit Asam Coal Co, based in South Sumatra.

Any hopes that the central government would face down the local government of West Sumatra and the implicit regional threat to its authority were wide of the mark. Instead of being resolute and pushing ahead with Gresik's privatization, Jakarta allowed the assets to be taken away without legal grounds.

The government was between a rock and a hard place. If it pressured the main minority shareholders, Cemex, to agree to the split, the screams of "nationalization" would have drowned out the noise coming from the streets of Padang, and would likely have scared off investors in all sectors for a very long time.

Conversely the cash-strapped government could not afford to pay huge amounts of compensation in the event that Cemex called Jakarta's bluff and agreed to a spinoff.

A letter sent in April 2003 by State Minister for State Enterprises Laksamana Sukardi to West Sumatra Governor Zainal Bakar added to the confusion. The letter stated that the central government, as the majority owner of Semen Gresik, understood the aspirations of the West Sumatra people, and therefore approved of their demand for Semen Padang's spinoff from Semen Gresik.

Oddly enough, the letter, described as a "meaningless political goodie" by one analyst, also warned that any decision on the split would be based on the provisions of the Law on Limited Liability Companies and regulations governing publicly listed companies. This meant in essence that government approval was not a legal requirement because Semen Gresik's minority shareholders, who consist of the investing public with 23.5 percent and Cemex with 25.5 percent, would approve any ensuing total separation.

Last September, after months of failed attempts, Semen Gresik was finally able to regain control of Semen Padang, but not before hundreds of troops and police were deployed to escort the new management into the compound. This took place despite a local court ordering the existing management to leave the company.

Their reluctance to leave was explained in part by media reports in Jakarta and Padang that claimed the 2001 coup leaders, who included Semen Padang directors and several legislators and business owners close to the West Sumatra governor, had benefited from supply contracts and other lucrative marketing arrangements with Semen Padang and exporting Semen Padang cement.

As for Semen Gresik, PricewaterhouseCoopers was asked in December to re-audit its accounts, and the Jakarta Stock Exchange has set a deadline of this Friday, May 28, for the group to file its consolidated 2002 and 2003 accounts, or face the risk of share suspension.

Cemex plans to ask the Washington-based arbitration court to rescind the original agreement and order the Indonesian government to pay all related costs and expenses, including compensatory damages

Calls for a spinoff have continued, even after Cemex registered its arbitration claim. Semen Gresik's president, Satrio, warned off the government in February, advising it to postpone the plan to sell more shares to Cemex. "The local people are not in the mood for such a plan, especially during the general election," he said.

The bitter experience in Indonesia, however, has apparently not affected Cemex's outlook on new acquisitions. "We are interested in being in any part of the world," chief executive Lorenzo Zambrano told a shareholders meeting last month. "We continue to study where we can invest."

The negative impact on investor confidence in Indonesia by more international litigation against Jakarta can hardly be overstated but there is also a wider threat implicit in the success of the Padang coup. Foreign ownership of Semen Gresik is a politically divisive issue. After Saturday's rally a petition was issued, signed by senior politicians from the West Sumatra chapters of the Crescent Star Party (PBB), the National Mandate Party (PAN), the New Indonesia Alliance Party (PIB) and the PKPI. Other signatories were the local regent, who also chairs the provincial chapter of the United Development Party (PPP), as well as the local leader of the Prosperous Justice Party (PKS), Mahyeldi Ansharullah.

Sukardi said at a news conference shortly after the Padang locals commandeered the factory in 2001: "This is about the interests of the nation. I hope that the people of Padang can understand that."

He could not have foreseen the split in parliament resulting from no single party holding enough seats to exert its authority, and this division whipping up regional sentiments by appeals to local pride and xenophobia. This state of affairs could have dire consequences for the new government, come this October.

Foreign investors will want to see evidence that central government policy, widely supported in parliament, will win the day and that such prevarication and capitulation to provincial and district governments will not be perpetuated by a new administration.

As for Cemex, it may well be in the mood to cut its losses, pursue the arbitration in Washington, and then get out of Indonesia, as Titi suggested two and a half years ago.