Indonesia defence commision backs Krakatau Steel IPO plan

JAKARTA, July 14 (Reuters) - An Indonesian parliamentary commission urged the government on Monday to sell a stake in the country's largest steel maker, PT Krakatau Steel, through an initial public offering in a bid to protect national interest.

Krakatau Steel, which has assets worth an estimated 11 trillion rupiah ($1.20 billion), is one of 37 Indonesian state firms slated for privatisation this year to help fund a widening budget deficit.

The government has decided to sell the firm's shares through an IPO but the plan still needs to be approved by parliament. The defence and foreign affairs commission's recommendation suggests the plan may get the green light from parliament.

The government wants to keep a majority stake in Krakatau Steel, which produced 2.25 million tonnes of steel products in 2007, or about 30 percent of Indonesia's total steel demand.

The government has said it is aiming to sell a maximum 40 percent stake in the firm.

Krakatau Steel supplies raw material for the making of military equipment such as tanks to state-owned military equipment producer PT Pindad in West Java.

Theo Sambuaga, chairman of the defence and foreign affairs commission, said selling the shares through an IPO would ensure state ownership of strategic industries that support production of security and military equipment.

"The commission agrees with the government that efforts to increase funds for Krakatau Steel should be done by an IPO and not strategic sales to retain state ownership of strategic industries," Sambuaga told legislators in a hearing.

The industry is crucial to reduce dependence on imports of security and military equipment, he said.

ArcelorMittal SA (ISPA.AS), the world's largest steelmaker, and BlueScope Steel Ltd (BSL.AX), Australia's largest steelmaker, have shown interest in acquiring a stake in the firm.

Local protests over the price tag, which was seen as too low, and the lack of competitive bids forced the government to scrap a memorandum of understanding to sell Krakatau Steel to Ispat International NV in 1998.

The firm aims to produce 2.5 million tonnes of steel products this year and to double the figure to 5 million tonnes by the year 2011. ($1 = 9,145 rupiah)

(Reporting by Telly Nathalia, writing by Fitri Wulandari; editing by Sugita Katyal)