Wrong investment decision
Editorial, The Jakarta Post

What a new twist in the saga of Mexican cement company Cemex's eight years of frustrating investment operations in Indonesia.

In late 1998, when the world's third largest cement group brought in hundreds of millions of dollars to acquire 25 percent of publicly listed PT Semen Gresik (SG), a majority government-owned company, its entry stirred controversy among narrow-minded nationalists and set off allegations of corruption against then Minister of State Enterprises Tanri Abeng.

Now when Cemex, which operates in more than 50 countries, has decided to quit Indonesia, its exit is being obstructed by an indecisiveness on the part of the government and noisy demands from the West Sumatra administration, which wants to acquire the Cemex stake.

The government did meet the 10-day deadline within which to reply to Cemex's notification of May 5 to the ministers of finance and state companies on its provisional agreement to sell its 25 percent stake in SG to a private Indonesian group, Rajawali.

However, Finance Minister Sri Mulyani Indrawati's letter of May 16, instead of giving a straight, firm reply to Cemex, as required by the Government-Cemex Conditional Sale and Purchase Agreement in 1998, tossed the "hot ball" into the lap of State Enterprises Minister Sugiharto. But Sugiharto's May 17 letter to Cemex, instead of resolving once and for all the five-year dispute with Cemex, could lead the government into another messy, costly litigation process, in addition to the arbitration case it is now facing at the Washington-based International Center for Settlement of Investment Disputes (ICSID).

What a chaotic decision-making system President Susilo Bambang Yudhoyono has shown in the way the government has dealt with Cemex's divestment of SG.

What is even more difficult to comprehend is how Sugiharto could have been so misled by the claims of the W. Sumatra administration and vested interests that the W. Sumatra administration-owned company, PT Andalas Tuan Sakato (ATS), is financially capable of acquiring the Cemex stake.

ATS claims to have received a loan commitment of $400 to $600 million from the Singapore-based Pan-Asia Presidio Capital Advisors Pte. Ltd. to fund the share acquisition and the loan will be repaid in installments derived from future dividend payments from SG.

What an absurd claim. Even though SG could maintain or even increase its net earnings, which last year were estimated at $100 million, or double its 2004 net income, ATS, if it did own 25 percent of SG, would probably get at the most $7.5 million a year in dividend payments.

Not a single company with growth prospects -- the cement industry indeed is quite promising in view of the accelerated development of power plants and turnpikes worth tens of billions of dollars -- will pay out more than 30 percent of its annual net income. Such a conservative dividend payment is especially relevant for SG which is preparing to build a new cement mill. Sugiharto, who was a businessman before joining Susilo's Cabinet, must know how companies should retain most of their profits for reinvestment.

The question then is what is the real motive behind investment company Presidio Capital's willingness to lend to ATS with a repayment period that could take more than 30 years. Moreover, doesn't Presidio Capital know that a regional administration or an entity owned by local administrations has to obtain approval from the central government before borrowing from overseas?

It is such regional companies like ATS and other state companies with huge piles of cash such as the Workers Social Protection Scheme (Jamsostek) that Sugiharto seemed to have in mind when he notified Cemex last week that the government would appoint a consortium of state enterprises and companies owned by regional administrations to take over the Cemex stake.

President Susilo cited the disputes with Cemex, Karaha Bodas and MobilExxon among the high-profile foreign investment cases he wanted to resolve during the first 100 days of his administration in a concerted bid to regain foreign investor confidence.

But when Cemex offered a peaceful way to exit by offering to sell its stake to a private national company, not to foreign investors -- which is actually much better for national interests -- the government risked another messy, costly lawsuit by scuttling the Cemex-Rajawali transaction.

The government decided to allow state companies to squander $337 million of our foreign reserves to buy the Cemex stake. But SG will have to use high-interest loans to build a new cement plant in C. Java which is badly needed in anticipation of a cement shortage beginning in 2008.
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