A look at the military's business ventures
A look at the military's business ventures
Awan Wibowo Laksono Poesoro, Jakarta
Since the fall of Soeharto in 1998, the military has gradually
pulled out of the political arena but has retained its presence
in the economy.
It argues that the official defense budget, which is now
around 4.5 percent of this year's total expenditure of Rp 542
trillion (US$ 49.2 billion), or 1 percent of the GDP, is too
small and accounts for only one-third of its expenditure.
It would be helpful to examine the military's place in the
economy. Economics textbooks tell us, the economy is usually
divided into market and non-market sectors. In the market sector,
goods and services are exchanged so that producers must cover
costs of production with sales revenue. In the non-market sector,
goods and services are given away and producers must look for
other sources to cover their costs.
Using this criteria, the military's place in the economy
becomes clear-cut, at least theoretically. Its expenditure --
including operational costs (salaries, training costs and
others), weaponry procurement, and infrastructure development --
should be used to produce given-away public goods and services;
namely, its defense function. This function should be funded with
the defense budget made up from government tax income. Thus the
military should be classified in the non-market sector.
Yet, the amount of military expenditure has been much larger
than that given to it in the defense budget, and the military
therefore finds additional funds through military businesses.
Compared to their market competitors, military businesses
have some important advantages: extra political clout, special
privileges for investment permits, the use of military assets --
including soldiers -- to utilize state assets, the abilities to
exploit limited public infrastructure, to participate in
government project bids and to attain privileged information
about government policies.
These privileges also lead to negatives.
First, privileges create market distortions via high
information and transaction costs -- the costs of searching
relevant prices and of securing agreements, like billing costs
and bad debts -- resulting in the misallocation of resources.
Second, they encourage corruption and collusion.
Third, they undermine soldiers' professionalism.
Fourth, they worsen civil-military relations by making the
military independent of the budgetary control wielded by its
civilian masters.
Indonesian military businesses can be classified into three
kinds of activities.
First, formal military businesses. Here, the military as an
institution is legally involved in commerce directly through
military-run corporations owned by foundations and cooperatives
and through the commercialization of military assets and security
functions and indirectly via some degree of ownerships in certain
private companies.
Each branch of the service has its own foundations. For
example, the army has Dharma Putra (owned by the elite unit
Army's Strategic Reserves Command, or Kostrad) and Kobame (owned
by Army Special Force, or Kopassus), while the Navy has Bhumyamca
and the Air Force has Adi Upaya. The foundations own an army of
corporations, operating in the trade, insurance, financial,
tourism, construction, property, forestry, transportation,
banking, and health sectors. All branches also have cooperatives
-- like Inkopal, Inkopau, and Inkopad -- which run plenty of
business activities.
Second, informal military businesses, where the legal
businesses are not owned by the military as an institution but by
parties related to the military, like retired top brass.
Third, illicit military businesses, meaning the businesses are
unlawful and run by some military members without headquarters'
authorization.
It turns out that the formal military businesses on average
only generate profits around 1.4 percent of the annual defense
budget (Rp 23.3 trillion)-- not much of a contribution. This fact
plus their negative impact make their existence more malign than
benign.
The government should end these formal military businesses. In
fact Article 76 of Law 34/2004 on the TNI, rules that in five
years after the signing of the law, the government must take over
all business activities owned and run directly and indirectly by
the TNI.
The purpose of this bill is to pull the military out of the
economy, improving budget accountability and transparency.
Argentina's experience shows that though the privatization of its
military the businesses only recovered one-seventh of the assets'
book value, while this privatization reduced corruption, improved
credit-worthiness, and attracted investment.
The government is expected to start dissolving military
businesses soon. As the TNI supreme commander, the President is
expected to issue a Presidential Regulation on the matter.
The next step would be the government transferring the
military business ownerships to the Minister of Finance as the
state treasurer. The minister then forms a divestiture body
responsible for conducting due diligence processes; assessing
these businesses' performance. Based on the due diligence
results, the divestiture body can close these businesses,
liquidate them, transfer them to state-owned enterprises, or sell
them off to private companies.
To get optimal results, the President should commence the
divestiture immediately. If the military manages to transfer
assets from formal activities to informal ones, the divestiture
would be futile. In new informal or illegal forms, these
businesses would be more difficult to control.
Regarding the cooperatives, the government should restrict
their business activities only to the provision of soldiers and
their dependents. For example, cooperatives can run, as in the
U.S., post exchanges, hypermarkets exclusively for soldiers and
their relatives, and sell commodities like food, clothing,
medicine, appliances, and electronics at discounted prices. The
profits earned can then be used to enhance the soldiers' welfare.
The duty of financing the military rests solely on the
government. Letting the military fund itself via off-budgetary
income will demoralize our soldiers and create jealousies among
the rank-and-file, as only a handful of servicemen will benefit.
Soldiers should be proud of their ability to wage war, keep the
peace or participate in civil defense, not about their ability to
make a profit.
The writer is a researcher at the Indonesian Institute, Center
for Public Policy Research.
Awan Wibowo Laksono Poesoro, Jakarta
Since the fall of Soeharto in 1998, the military has gradually
pulled out of the political arena but has retained its presence
in the economy.
It argues that the official defense budget, which is now
around 4.5 percent of this year's total expenditure of Rp 542
trillion (US$ 49.2 billion), or 1 percent of the GDP, is too
small and accounts for only one-third of its expenditure.
It would be helpful to examine the military's place in the
economy. Economics textbooks tell us, the economy is usually
divided into market and non-market sectors. In the market sector,
goods and services are exchanged so that producers must cover
costs of production with sales revenue. In the non-market sector,
goods and services are given away and producers must look for
other sources to cover their costs.
Using this criteria, the military's place in the economy
becomes clear-cut, at least theoretically. Its expenditure --
including operational costs (salaries, training costs and
others), weaponry procurement, and infrastructure development --
should be used to produce given-away public goods and services;
namely, its defense function. This function should be funded with
the defense budget made up from government tax income. Thus the
military should be classified in the non-market sector.
Yet, the amount of military expenditure has been much larger
than that given to it in the defense budget, and the military
therefore finds additional funds through military businesses.
Compared to their market competitors, military businesses
have some important advantages: extra political clout, special
privileges for investment permits, the use of military assets --
including soldiers -- to utilize state assets, the abilities to
exploit limited public infrastructure, to participate in
government project bids and to attain privileged information
about government policies.
These privileges also lead to negatives.
First, privileges create market distortions via high
information and transaction costs -- the costs of searching
relevant prices and of securing agreements, like billing costs
and bad debts -- resulting in the misallocation of resources.
Second, they encourage corruption and collusion.
Third, they undermine soldiers' professionalism.
Fourth, they worsen civil-military relations by making the
military independent of the budgetary control wielded by its
civilian masters.
Indonesian military businesses can be classified into three
kinds of activities.
First, formal military businesses. Here, the military as an
institution is legally involved in commerce directly through
military-run corporations owned by foundations and cooperatives
and through the commercialization of military assets and security
functions and indirectly via some degree of ownerships in certain
private companies.
Each branch of the service has its own foundations. For
example, the army has Dharma Putra (owned by the elite unit
Army's Strategic Reserves Command, or Kostrad) and Kobame (owned
by Army Special Force, or Kopassus), while the Navy has Bhumyamca
and the Air Force has Adi Upaya. The foundations own an army of
corporations, operating in the trade, insurance, financial,
tourism, construction, property, forestry, transportation,
banking, and health sectors. All branches also have cooperatives
-- like Inkopal, Inkopau, and Inkopad -- which run plenty of
business activities.
Second, informal military businesses, where the legal
businesses are not owned by the military as an institution but by
parties related to the military, like retired top brass.
Third, illicit military businesses, meaning the businesses are
unlawful and run by some military members without headquarters'
authorization.
It turns out that the formal military businesses on average
only generate profits around 1.4 percent of the annual defense
budget (Rp 23.3 trillion)-- not much of a contribution. This fact
plus their negative impact make their existence more malign than
benign.
The government should end these formal military businesses. In
fact Article 76 of Law 34/2004 on the TNI, rules that in five
years after the signing of the law, the government must take over
all business activities owned and run directly and indirectly by
the TNI.
The purpose of this bill is to pull the military out of the
economy, improving budget accountability and transparency.
Argentina's experience shows that though the privatization of its
military the businesses only recovered one-seventh of the assets'
book value, while this privatization reduced corruption, improved
credit-worthiness, and attracted investment.
The government is expected to start dissolving military
businesses soon. As the TNI supreme commander, the President is
expected to issue a Presidential Regulation on the matter.
The next step would be the government transferring the
military business ownerships to the Minister of Finance as the
state treasurer. The minister then forms a divestiture body
responsible for conducting due diligence processes; assessing
these businesses' performance. Based on the due diligence
results, the divestiture body can close these businesses,
liquidate them, transfer them to state-owned enterprises, or sell
them off to private companies.
To get optimal results, the President should commence the
divestiture immediately. If the military manages to transfer
assets from formal activities to informal ones, the divestiture
would be futile. In new informal or illegal forms, these
businesses would be more difficult to control.
Regarding the cooperatives, the government should restrict
their business activities only to the provision of soldiers and
their dependents. For example, cooperatives can run, as in the
U.S., post exchanges, hypermarkets exclusively for soldiers and
their relatives, and sell commodities like food, clothing,
medicine, appliances, and electronics at discounted prices. The
profits earned can then be used to enhance the soldiers' welfare.
The duty of financing the military rests solely on the
government. Letting the military fund itself via off-budgetary
income will demoralize our soldiers and create jealousies among
the rank-and-file, as only a handful of servicemen will benefit.
Soldiers should be proud of their ability to wage war, keep the
peace or participate in civil defense, not about their ability to
make a profit.
The writer is a researcher at the Indonesian Institute, Center
for Public Policy Research.