Subject: Indonesian Army Misses Deadline to Withdraw Business Activities

also WSJ: Indonesian Army Misses Deadline to Withdraw Business Activities; Jakarta Post:End of military businesses?

The Jakarta Globe

October 14, 2009

Critics Slam Plan for Transfer of Indonesian Military Assets

by Markus Junianto Sihaloho

The government's plan to place the management of the military's cooperatives and foundations under the Ministry of Defense was criticized on Tuesday for not getting to the root of the problem.

Jaleswari Pramodhawardani, a military analyst from the Indonesian Institute of Sciences (LIPI), said that because most of the middle- and high-ranking officials at the ministry were also active members of the military, "a conflict of interest would persist."

A presidential decree expected before the end of the year plans to transfer all military businesses to the Ministry of Finance or the State Ministry for State-Owned Enterprises, but will allow the military to retain small, nonprofit cooperatives and foundations under the supervision of the Defense Ministry.

Jaleswari, however, said the government proposal would be "a backward step," because the ministry's personnel were not business-oriented and would therefore need significant outside assistance to run the assets, which were last year found to be worth a total of Rp 3.4 trillion ($360 million).

Instead, she suggested that the state-owned asset management company, PT Perusahaan Pengelolaan Aset, be entrusted with overhauling the 1,098 cooperatives and 23 foundations operated by the Armed Forces.

Separately, Batara Ibnu Reza, a senior researcher from Imparsial, a nongovernmental organization focusing on military issues, said that the Defense Ministry takeover could clash with its commitment to becoming more accountable and transparent.

He also said that taking over the management of the cooperatives and foundations could become a potential financial burden for the government, with the operational costs of the cooperatives and foundations being absorbed by the ministry's budget.

The debts of the cooperatives and foundations are the responsibility of the institutions managing them," Batara said. So it must first be stressed that it will not be the government that is responsible for paying back any debts."


Wall Street Journal


OCTOBER 16, 2009, 8:02 A.M. ET

Indonesian Army Misses Deadline to Withdraw Business Activities


JAKARTA -- Indonesia's military missed a long-anticipated deadline Friday to withdraw from its many lucrative but controversial business activities, disappointing activists who view the step as a vital reform to modernize Southeast Asia's largest economy.

Human-rights advocates and other critics have long complained that Indonesia's armed forces are allowed to participate in commercial activities ranging from forestry to mining to banks and golf courses -- a system they say fosters corruption and gives the military too much influence over the Indonesian economy. Responding to the complaints, the Indonesian Parliament in 2004 ordered the government to shut down or take over the army's network of official businesses within five years, though details were left vague and Indonesian officials only recently began to make efforts to meet the target.

Earlier this week, President Susilo Bambang Yudhoyono issued a decree ordering the armed forces to transfer their official foundations and cooperatives – valued at $240 million or more – to Indonesia's civilian-led Defense Ministry, which will run them. But his decree didn't specify a time frame, and many businesses remained in military hands as of Friday.

Critics also say the decree didn't include a myriad of much-larger informal or possibly illegal businesses, which Human Rights Watch, a New York-based advocacy group, claimed in a 2006 report could total hundreds of millions of dollars. Human Rights Watch and others have said in recent days that Indonesia should do more than force the military to transfer assets to the Defense Ministry, which they claim is still heavily influenced by uniformed military officers.

"If we want to change the attitude [of the military] we should liquidate all the business," said Erry Riyana Hardjapamekas, the head of a government taskforce set up last year to plan the takeover or liquidation of military assets. He said he was "disappointed" with the government's decision to transfer businesses to the Defense Ministry; the taskforce had recommended in October 2008 that the state sell or liquidate such assets, recouping the money from the sales and sending a stronger signal of commitment to military reform.

Attempts to reach an army spokesman were not successful. The military has not published a complete list of its businesses, although senior generals have publicly stated they are committed to transferring, selling or liquidating them.

Other government officials say the process is at least making progress. Defense Minister Juwono Sudarsono said Mr. Yudhoyono's decree paves the way for the army to eventually move out of business entirely and come more firmly under civilian control, although he also gave no time-frame.

The practice of letting the military engage in business goes back decades. During Indonesia's war of independence against the Dutch in the 1940s, the ragtag army relied on business partnerships with local entrepreneurs to fund its operations. That practice was formalized under former President Suharto, a military general who ruled with the support of the army from 1967 to 1998. Under Mr. Suharto, army businesses were granted permits to log forests and mine natural resources, while military officers also headed huge business like state-owned oil company PT Pertamina.

After Mr. Suharto's ouster amid pro-democracy protests, the army's role in domestic politics receded but it hung on to many of its businesses. Mr. Yudhoyono, also a former military general, vowed to remove the army from business on coming to power in 2004 as part of a broader program -- widely applauded by foreign investors -- to clean up corruption and inefficiency in Indonesia.

Some army businesses have already been sold, including PT Mandala Airlines, which was owned by the army's strategic reserve and facing bankruptcy. In 2006, a local company bought the airline for $34 million and later sold a 49% stake to U.S. private equity company Indigo Partners LLC.

But many of the remaining businesses, including PT International Timber Corporation Indonesia, an army-run forestry company, and PT Dirgantara Husada, a pharmaceutical company owned by the air force, are unlikely to be attractive to foreign investors, said Mr. Hardjapamekas.

Getting details on informal or illegal businesses is more difficult and was not part of the scope of Mr. Hardjapamekas' task force. The military's "territorial command" structure, a relic of the Suharto era which allows officers in the province to operate semi-autonomously, creates opportunities for the armed forces to get involved in illegal logging and mining ventures, a problem which senior military commanders have acknowledged in the past.

In 2005, Mr. Yudhoyono ordered a crackdown on illegal logging in Indonesia's remote Papua province, which led to the arrest of 186 people, some of them military and police officers. Only a handful of people were convicted, all of them low-level operators, and the suspected ringleaders – including a military police officer suspected of involvement – were acquitted.

The army has also made money from providing security services for private businesses. The best-known of these cases involve foreign companies that own mines or gas projects in Indonesia, like Phoenix-based Freeport-McMoran Copper & Gold Inc.

Freeport said in U.S. filings that it paid $8 million in 2008 to help fund the operations of an almost 2,000-strong police and army contingent that provided security for its massive gold and copper mine in Papua province. The police are in charge of coordinating security at the mine since the 2004 decree, but the military still plays a significant role, a Freeport spokesman said. The company says most of the money goes to paying for food, housing and health care for the troops, and only a small amount is transferred in cash, but it does not provide a breakdown.

Some observers say the army needs to retain some businesses to be able to fund its activities. Mr. Sudarsono, the defense minister, has in the past said official military budgets cover only about half of necessary expenditures. Military budgets will need to be raised significantly before the government completely ends military self-financing, he has argued.


Military Business in Indonesia

OCTOBER 16, 2009, 9:11 A.M. ET

Indonesia' military is officially involved in a number of businesses – a system created in part to help make up for under-funding in past decades.

Many of the businesses are run through military-controlled foundations set up with government funds in the 1960s to provide housing and education for troops. Eventually they became major enterprises, with proceeds flowing to the military and senior officers. Under former Indonesian president Suharto, himself an active military general, many of the companies benefited from monopolies in various industries.

The Indonesian government this week ordered all official business to be transfered to the Defense Ministry as part of a long-delayed attempt to move the army out of business, but it gave no time-frame. Although the military does not publicize a list of foundation-run businesses, a 2006 Human Rights Watch report listed the following: * Army Foundation: Forestry, plantations, construction, property manufacturing, services, and mining, including PT International Timber Corporation Indonesia. Also at one stage held an investment in Sudirman Business District, a real estate development in Jakarta. * Army Strategic Reserve Foundation: Transport, plastics and insurance businesses. The foundation sold its 100% stake in ailing PT Mandala Airlines in 2006. U.S.-based Indigo Partners, a private equity firm, took a 49% stake with a local partner. * Army Special Forces Foundation: Construction. * Air Force Foundation: Forestry, construction, property, airlines and pharmaceutical, including PT Dirgantara Husada, a pharmaceutical company. * Navy Foundation: shipping, property, agribusiness, chemicals, weapons and transportation. * Military Headquarters Foundation: Agribusiness, mining, communications, transport and a convention hall. * Defense Ministry Foundation: Three universities, high school and a hospital. ­Tom Wright


Jakarta Post

End of military businesses?

Usman Hamid , Jakarta | Thu, 10/15/2009 11:59 AM | Opinion

Indonesia has been able to withdraw its military from politics. It's finished now. But what is not, are the business activities of the military.

The 2004 Law on the Indonesian Military stipulates Oct. 16, 2009 as the deadline for President Susilo Bambang Yudhoyono to take over all business activities that are directly or indirectly managed by and belong to the Indonesian Military (TNI). This is a must without any exception. So what will happen next?

The handover of military businesses will be very important for democratic consolidation. Unfortunately the President has not given full power to the National Team for the TNI Business Activities Handover.

The slow takeover of TNI businesses has consequences. It undermines the TNI and its mentality, thus creating space for corruption. In the end it will weaken the strength of the TNI as a whole.

The slow promulgation of the Presidential Decree No. 7/2008 has opened up opportunities for the TNI to handover its business assets to non-state enterprises, thus making article 76 of the 2004 law less effective.

On the other hand, the new presidential decree, which is soon to be promulgated, does not specifically explain the definition of TNI businesses that need to be handed over. The Business Supervision and Transformation Team (TSTB) have had a very long debate with civil society organizations about the definition of TNI businesses, which is crucial to this matter. Without a specific definition of TNI businesses, the duties to be borne by the newly formed team will be difficult.

So far, the TSTB has completed its duties although it has repeatedly complained about the difficulties of verifying TNI businesses, rather than reporting positive results of its investigations.

Thus, the work that should be continued by the National Team for the TNI Business Activities Handover is uncertain. The duties of the new team are not much different from the duties of the previous one.

With all of this sluggishness, it seems the President has not given executorial authority to the latest team to take concrete and firm action in handing over TNI businesses. The impact of this is that the handover of TNI businesses will drag on. In reality, as explained previously, the existing timeline is limited.

The management and ownership takeover can be conducted fully by attending to the two prerequisites. First, the government through the state budget is able to meet the ideal defense budget, which is committed to increasing the welfare and capability of soldiers and does not necessarily use the budget for the short-term modernization of military equipment, while considering the urgency of other sectors.

Second, the ownership takeover also means empowering the assets of ex-TNI businesses to be managed professionally so as to make a profit, not only from the TNI, but also in other sectors. The ownership takeover can be in the form of a strategic holding company, a limited public company such as a military ownership business as well as a limited partnership.

Third, business transformation can lead to further reforms of strategic state enterprises in order to develop the Indonesian defense industry.

On this basis, the President is expected to act as quick as possible or at least to be more nimble and responsive in handling the handover of TNI businesses. The President must take real action to execute the handover of all business activities in accordance with the law. If the President leaves the recommendation of the National Team for the Handover of TNI Business in ambiguity in this very limited timeline, then his commitment to the reformation of the TNI should be questioned.

The transition process of an authoritarian regime does not always end with a democratic system. There are some prerequisites that must be met.

One is about military reform. The experience of political transition in many countries shows that military reform always has the potential to fail, especially due to strong rejections from the military. Therefore, the transfer of TNI businesses will also be a test for the President.

A very important issue here is the enforcement of civilian supremacy and the professionalism of the TNI. This clearly will assist the efforts to control the military under civilian authority.

The role of civilian elites is crucial in explaining the possible success or failure of military reforms in the democratic transition period. Effort and pressure by pro-democracy movements will be at a dead-end if at the same time civilian elites take a different direction.

The writer is coordinator of the Commission for Missing Persons and Victims of Violence (Kontras).

Back to October Menu
World Leaders Contact List
Main Postings Menu