Defense procurement and military-related debt<\/p>\n
Andi Widjajanto, Jakarta<\/p>\n
Weapons systems procurement should be driven by military
\nstrategies developed by the defense ministry to respond to
\ncurrent and potential threats. Defense procurement should also be
\nconfirmed by the finance ministry in order to make sure that
\nmilitary spending is legitimate.<\/p>\n
The main questions for strategic planners and acquisition
\nofficers to decide on weapons procurement are: What and how much
\nshould we buy? How should the ministry buy it? From whom should
\nwe buy? Should we develop more a reliable defense industry and
\nbuy our equipment from domestic sources? Even when guided by an
\nofficial strategy (e.g., the National Defense Strategy or Force
\nDevelopment Program (Probangkuat)), forecasting defense
\nprocurement is no longer a simple linear process from threat
\n(demand) to equipment (supply), but a more dynamic, interactive
\nprocess that cannot be captured by a simple method.<\/p>\n
Defense contractors take into account both the new weapons
\nsystems that recently have been made available on the
\ninternational market and the cost of obtaining those systems. The
\nacquisition officers in Asrena (Planning Assistant) or Asrenum
\n(General planning assistant) office take these signals into
\naccount in drawing up long-term plans and mid-term military
\nexpenditure framework.<\/p>\n
However, the internationalization of the defense industry as
\nwell as liberalized defense exports can easily alter the defense
\nrequirements. To complicate matters, defense acquisition is
\nclosely scrutinized because many stakeholders have a valid
\ninterest in ensuring that acquisition preferences are made
\ncorrectly. Such stakeholders include the defense contractors who
\nhope to make a handsome profit and maintain access to the
\nministry's procurement system; the armed services that engage in
\ninter-service rivalry to decide which system should be made the
\nhighest priority; and the Ministry of Finance which must find
\nsuitable foreign loans to fund the procurement.<\/p>\n
Importing military equipment that is financed via foreign
\nloans increases the economic burden on the country. By taking out
\na foreign loan, a debt is incurred, for which interest payments
\nmust be made and amortization paid. For the purpose of arms
\nimports, Indonesia uses the Credit Export Facility (CEF). The CEF
\nis a loan with medium requirements provided by industrialized
\ncountries to finance their exports.<\/p>\n
The problem with the CEF lies primarily on its interest, which
\nis relatively high, its grace period that is relatively short and
\nits premium charge. At present, the Credit Export Institution --
\nwhich provides a rating to debtor countries based on the analysis
\non its risk in trading and investment -- views Indonesia as a
\nhigh-risk country in that respect.<\/p>\n
In terms of the purchase of weapons, export loans are given to
\nthe military industry by the country from whence the weapons are
\nproduced. In 2002, the government provided the CEF for weapons
\nsystems procurement of Rp. 1.44 trillion.<\/p>\n
In 2002-2003 a 44.94 percent increased occurred in 2002-2003
\nin the credit export for defense procurement. In 2003, the
\ngovernment provided export loans amounting to Rp 3.36 trillion
\n(approximately US$353 million) to be used for defense
\nacquisitions.<\/p>\n
It is difficult to make an assessment of the size of the
\nmilitary-related debt. The official debt statistics do not
\nprovide any indication as to how much of the total debt was
\nincurred for the purpose of arms imports. However, we can make
\nestimates based on rough assumptions of the allocation of Credit
\nExport since 2000.<\/p>\n
Directorate for Bilateral Foreign Financing of National
\nPlanning Development Agency (BAPPENAS) stated that from 2000-
\n2004, the amount of foreign debts of the government in the form
\nof credit export was more that 20 percent of all the debt stock
\nof the government. Since all the approved allocations for credit
\nexport issued by the government from 2000-2004 were mostly
\nallotted to the defense and security sector, the military-related
\ndebt consumed 15 percent to 20 percent of all foreign debt in the
\nform of credit export.<\/p>\n
Arms imports can be used to estimate what percentages of
\ncapital expenditure are spent domestically and abroad. For
\nIndonesia, since we are not substituting domestically produced
\narms for imported ones, the consequences are threefold:<\/p>\n
First, we spent a higher proportion of our military
\nexpenditures on arms imports; second, we lose a relatively larger
\namount of scarce foreign exchange; and third, we give up a
\nsignificant amount of foreign exchange earned through exports for
\nthe arms imports.<\/p>\n
One policy alternative to reduce our dependency on such
\nimports is by developing an advanced and genuine military
\nindustry. The measure is to incrementally increase the percentage
\nof total defense-sector research and development (R&D)
\nexpenditure allocated for the materiel industry. The capital
\nexpenditures for such an industry are of particular interest.<\/p>\n
They signify the portion of overall defense-related spending
\nthat is invented domestically. The Ministry of Defense currently
\nspends less than 1 percent of its military spending for R&D, this
\nfigure should be gradually increased and hopefully by 2009, the
\nministry will spend at least 7 percent on R&D, and eventually by
\n2015, 15-20 percent of defense expenditure will be allocated to
\nbuild a more advanced, domestic arms-producing industry.<\/p>\n
A good portion of these invested resources is expected to stay
\nwithin the domestic economy rather than being sent abroad as
\nforeign exchange payments for arms imports. Theoretically, the
\ncapital expenditures in the military industry will interact with
\nother sectors in the economy and function as an accelerator that
\nwill have multiplier effects on other sectors. The indigenous
\narms industry can even be deliberately planned is such a way so
\nas to fulfill dual-production purposes (military and civilian) so
\nthat capacity-utilization functions in our national economy can
\nbe taken up in either direction.<\/p>\n
In order to mitigate the negative effect of arms imports, the
\nfinancial management of the ministry's procurement budget must
\nensure that the future of defense procurement is consistent and
\nwell-synchronized with the strategic plan to develop our defense
\nindustry. Since the advancement of this industry will not be
\nachieved instantly, the ministry must focus on at least a mid-
\nterm solution (5-10 years) and budgeting system that will enable
\nthe ministry to forecast their modernization trajectory as well
\nas to develop domestic arms-production facilities.<\/p>\n
The writer is a lecturer at the School of Social and Political
\nSciences at the University of Indonesia. He can be reached at
\nandi_widjajanto@yahoo.com.<\/p>",
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