Defence Equipment Acquisition: The Dimming of Direct Procurement Schemes

The defence trade is a commercial sector strictly regulated by arms-producing countries, with the World Trade Organization exempting it on national security grounds. Each nation has stringent export rules for defence equipment, varying in strictness, which blend interests in maintaining technological superiority, advancing foreign policy, promoting domestic defence industries, and safeguarding economic interests. Given the complexity of these rules, selling countries may implement policies viewed by others as discriminatory or employing double standards, such as comparing US arms export policy to Israel with similar policies for Arab nations. Almost all conventional weapons systems can be sold abroad, except for certain categories excluded by the producing country. Defence equipment containing nuclear elements, whether warheads or propulsion systems, is excluded from international trade. For instance, there is an agreement among nuclear submarine manufacturers to ban the export of such vessels, with the exception that a producing country can lease a nuclear submarine to another nation under strict rules. India has leased nuclear-powered submarines from Russia several times, returning the vessel after the agreement period ends.

Indonesia is both an exporter and importer of defence equipment, though in practice it imports far more weaponry than it sells. This situation stems from the weak foundation of Indonesia’s defence industry, where a wide gap remains between noble ambitions and empirical evidence. Indonesia’s most frequently exported defence commodities are the NC212 light transport aircraft and the CN235-220 medium transport aircraft, whilst transport ships are exported only once or twice a decade. The import balance for military equipment is vastly larger than the export balance, especially when routine imports of spare parts are included.

For importing weapons systems, Indonesia’s Ministry of Defence employs two procurement schemes. The first is the Government-to-Government framework, typically mandatory for purchasing US defence products via the Foreign Military Sales scheme. The second is the Business-to-Government model, where the arms manufacturer contracts directly with the Ministry of Defence. This second model, also known as Direct Commercial Sales, limits the exporting government’s involvement to issuing export licences and overseeing the activity. Not all US-made weapons systems require the FMS framework, particularly vehicles or devices not categorised as lethal equipment, such as the C-130J transport aircraft provided it does not adopt communication and electronic equipment mandated for FMS. For imports from countries other than the United States, the DCS framework is used as these nations lack an FMS-like mechanism. Examples include the purchase of two A400M aircraft from Airbus and two PPA frigates produced by Fincantieri.

Regarding DCS, for many years the Ministry of Defence conducted direct procurement, with contracts signed between the defence equipment manufacturer as the seller and the Ministry of Defence as the buyer. Although many foreign manufacturers do not have representative offices in Indonesia and only maintain a sales channel or local agent, the latter is not the entity contracting with the Ministry of Defence. The role of the sales channel or local agent is limited to bridging communication between the Original Equipment Manufacturer and the Ministry of Defence, such as arranging security clearances and scheduling meetings. According to US and European weapons system manufacturer standards, the sales channel or local agent receives a fee based on a percentage of the contract value, ranging from 0.5 to two per cent.

However, in recent years the Ministry of Defence has reverted to a DCS procurement model using brokers, a practice considered normal during the New Order era. As the name implies, the weapons system acquisition contract does not directly involve the manufacturer but only includes the Ministry of Defence and the broker, who will later sign a purchase contract with the OEM. This occurs despite Indonesia having diplomatic relations with the supplier countries and even posting defence attachés there. Available data indicates that arms imports using brokers originate from Turkey, China, Italy (for certain products), and the former Soviet Union (due to Western sanctions). Observing the Foreign Loans used to finance defence equipment procurement through brokers, the mechanism employed is always Foreign Private Creditors.