Holding companies may take over army's businesses

Berni K. Moestafa and Tiarma Siboro, The Jakarta Post, Jakarta

Holding companies may take over the business empires of the Indonesian army foundations as one of several steps the army has proposed to restructure its corruption-prone businesses.

However, analysts have said it should get out of running businesses altogether and hand over control of its holdings to the state.

Timber, plantation, property, insurance, steel and construction companies, a hotel, a shoe factory, a drug retailer and a bank are among the businesses owned by the army's Kartika Eka Paksi foundation (YKEP).

With Rp 102.32 billion (about US$11.5 million) in revenue last year, up from Rp 71.69 billion in 2000, the foundation spells money for an army with a limited budget. The state budget covers just 30 percent of the Indonesian Military's (TNI) total expenditure.

YKEP is just one of many owned by the TNI, which comprises the Navy, Air Force and Army. But amid calls for a professional military and suspicion of rampant corruption, pressure is mounting on YKEP to cease its commercial activities.

"Being engaged in business is not the job of the TNI," said TNI chief Gen. Endriartono Sutarto during a press briefing last week.

In an internal report from early 2002, the former Army chief outlined a plan to give up YKEP's sprawling business interests.

Accountability and transparency were also expected, he said.

The government has added to the pressure with Law 16/2001 which bans foundations from running businesses -- a practice believed to be often used to corrupt state funds.

YKEP manages 33 firms, with assets worth Rp 315 billion, as well as two academies and one university. But its main mission is to help soldiers with scholarships, health allowances and cheap loans.

YKEP cannot pursue its social mission effectively if it remains engaged with its businesses, Endriartono's report said.

The army then hired consultancy firms CSA Strategic Advisory to map out YKEP's problems. Auditor Ernst & Young was called in to gauge its business portfolio.

CSA said the foundation was inaccessible to public scrutiny, burdened by a militaristic management style and its strategic decisions were made without long-term considerations.

"The foundation's investment decisions tend to be reactive, passive and without proper investment considerations," the report said, quoting CSA findings.

Auditor Ernst & Young noted that YKEP's businesses lacked focus, had assets whose owners were often unknown, and relied too much on outsourcing practices. The firm added that several of the businesses were running on thin profit margins, while others were heavily indebted.

Key points under the restructuring plan called for a holding company to control YKEP's stakes in the timber and plantation sectors and another for stakes in the industrial and trade sectors.

Army officials may also no longer hold positions at companies, where a promotion once meant winning a seat on a board of commissioners or directors.

Political and military observer Kusnanto Anggoro of the Center for Strategic and International Studies (CSIS) however said the restructuring plan was inadequate to foster professionalism.

He said the plan stopped at improving the management of the army's businesses rather than banning them from owning companies.

"It's not right to have a military that has independent (financial) resources," Kusnanto said over the weekend.

The army, he said, may raise money to improve the welfare of its members, but not to purchase arms and finance its military operations independently.

Analysts said a financially independent military contributed to TNI's pervasive influence in politics and weak public control over this state institution.

Although the foundations' mission was to improve soldiers' welfare, they said the military's top brass benefited the most. Not subject to financial audits, the foundations were believed to have become money machines for high-ranking officials.

In 2000, reports surfaced that the Dharma Putra Kostrad foundation owned by the Army Strategic Reserve Command (Kostrad) lost Rp 173 billion to corruption.

Of that amount, Rp 135 billion had come from PT Mandala Airlines' coffers, where Kostrad chief Lt. Gen. Djadja Suparman was a commissioner.

At that time the government promised to investigate this and other corruption reports but has yet to announce the results.

"A holding company should aim to make military businesses more healthy ... more accountable," said economist Umar Juoro of the Center for Information and Development Studies (CIDES).

Eventually, the TNI must surrender these companies to the state, he said. "The military might continue to receive dividends for a certain period of time until the state budget can cover their costs."

Kusnanto said it was unlikely the military would surrender its businesses without pressure from the government.

But with the state budget covering just 30 percent of the TNI's needs, the government will find itself hard pressed to ban the military from raising money on their own.

Analysts said the government should take over the TNI's businesses and turn them into state companies. Part of the proceeds may be used to improve soldiers' welfare, Kusnanto added.

Aside from budget constraints though, the political will to reign in the military's businesses was too weak, he said.

Analysts have long noted President Megawati Soekarnoputri's cozy relationship with the TNI while legislators have done little to move the state institution further under civil control.

With the 2004 general election nearing, politicians are also unlikely to risk losing the TNI's political support by pressing for reforms.

"I think we won't be seeing any breakthroughs until past 2004," Kusnanto said.