Private Investment in Defense Industry
Ideally, private sector participation should support the industry’s growth so as to reduce our dependence on imports. This will have a significant impact on the efficiency of the defense budget.
Heryunanto
In his commemorative address for the 76th Anniversary of the Indonesian Military (TNI) on 5 Oct., President Joko “Jokowi” Widodo reminded the TNI to carry out defense transformation to enable them to face a wider spectrum of threats.
The President also pointed out the need to strengthen the cultural strategy of TNI soldiers and officers in the military’s solidarity with the people through a universal security and defense system that was actively defensive, with multiple layers of defense supported by leaps in military technology and well-planned investments in the defense sector.
Talking about military technology of course cannot be separated from the modernization of defense and the readiness of the national defense weaponry and systems (Alutsista), about which the President also highlighted the importance of a breakthrough to shift from defense spending to long-term defense investment that was systematically designed for consistency and sustainability.
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In his address, the President was clearly urging a breakthrough in financial management and defense investment. The defense industry has actually been wide open to investment since the enactment of the Job Creation Law No. 11/2020, which opened the door for private sector participation in the defense manufacturing industry.
This policy is specifically regulated in Article 74 of the Job Creation Law as a revision of the previous provision, namely Article 11, Paragraph 1(a) of Law No. 16/2012 on the defense industry. According to the old regulation, the Alutsista industry are to be run by state-owned enterprises (BUMNs) designated by the government to be the main integrator (lead integrator) in producing primary weaponry and/or integrating all main components and raw materials to assemble primary weaponry.
Meanwhile, the revised regulation allows the participation of privately owned enterprises (BUMS) in addition to BUMNs. The regulation revision caused the emergence of pro and con parties. Those that are opposed private sector participation in the defense industry are concerned that the private sector taking a strong role in the defense industry could potentially change the direction, business policies, and confidentiality of data as regards national defense. Moreover, the defense industry plays a key role in providing primary weaponry to the TNI.
Certain parties are also concerned about the unsatisfactory competitiveness of BUMNs engaged in the defense sector, even though they are included in the category of strategic industrial state-owned enterprises (BUMNIS) as regulated in Law No. 3/2014 on Industry.
BUMNIS are generally uncompetitive due to the lack of capital, research and development support, and the low absorption of their products in the defense market.
However, optimism about the role of the private sector has also surfaced on the argument that the involvement of private companies can reduce the government’s burden in developing the defense industry.
The old idea that the government should wholly control capital ownership of primary weapons manufacturing left the government taking a key role in both the upstream and downstream sectors. This condition led to the defense industry’s collapse, particularly when the monetary crisis hit Indonesia at the end of 1997. The allocation of state funds to defense industry BUMNs also caused inefficiencies.
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We cannot say that strengthening the role of private companies in the defense industry is a form of liberalism. On the other hand, the government, specifically the Defense Ministry, maintains a dominant role in formulating strategic national policies for the defense industry.
As regulated in Article 74, Paragraph 3 of the Job Creation Law as a revision to Article 38 of Law No. 16/2012, companies engaged in the defense industry must first obtain a business permit from the central government.
In addition, Article 74, Paragraph 4 of the law states that BUMN and/or BUMS must obtain approval from the defense minister to gain capital ownership (investment) in the Alutsista industry. This regulation is also a revision of Article 52 of Law No. 16/2012.
Defense Minister Prabowo Subianto has demonstrated his commitment to formulating a concept so that BUMN and BUMS can work together in building the domestic defense industry. According to the 2018-2019 Indonesian Defense Industry Directory, at least 41 companies are currently engaged in the defense industry. They consist of eight BUMNs and 33 private companies.
It should be acknowledged that the defense industry has different demands compared to other industrial sectors. First, technology is the backbone of the defense industry. Second, confidentiality is critical to the industry because the process of manufacturing primary weaponry involves long and in-depth research.
Defense technology is growing rapidly, mainly because of rapid and dynamic threats. Industry players often say that procuring weapons is synonymous with procuring technology.
As part of the global community, Indonesia is also experiencing rapid changes in its threats. War is no longer merely a physical threat, and has changed in its psychological trend into war via cyber networks. Attacks are no longer in the form of military aggression or invasion by a country against another country (state actor), but has turned into asymmetrical warfare with the perpetrators no longer representing a state (non-state actors).
War is no longer merely a physical threat, and has changed in its psychological trend into war via cyber networks.
The spectrum of threats includes violations of sovereignty, theft of natural resources at sea, radicalism, and biological threats, including natural disasters.
Mastery of technology has become increasingly important amid the rapid development of digital technologies. With the advent of Industry 4.0, infiltration and indoctrination can be carried out remotely and the damage it causes can be even more severe than a physical war: the destruction of a nation's defense in the psychological, financial, sociocultural, political, and even ideological aspects.
Applying the latest technologies in the TNI's weapon system is certainly nonnegotiable. This is part of the efforts to modernize defense equipment to support Indonesia’s formation of an ideal military posture. The technology issue often occurs in the weapons procurement process, as not all overseas weapons manufacturers are willing to fulfill the technology transfer Indonesia requires as the buyer.
In fact, domestic politics seem to be more dominant in weapons-producing countries than the business-to-business approach. As a result, Indonesia is finding it difficult to access technology, because technology transfer can turn into an internal political issue for weapons-producing countries.
It is at this point that the independence of our Alutsista faces a big challenge. Indonesia is not the only country that is trying to achieve independence in primary weapons manufacturing. Turkey and South Korea are among the world’s countries that have succeeded in building their own weapons industry.
For example, Turkey has been able to reduce its arms imports over the last two decade by up to 70 percent. Some Turkish weapons manufacturers have even entered the ranks of the top 100 arms producers in the world. They include Alsesan, the Turkish Aerospace Industry (TAI), and Roketsan, all of which are private companies.
The Turkish government's change in policy, which opened the doors to private sector participation in the defense industry, was not the only factor that contributed to the country’s success in building its defense industry. In fact, the most important factor was Ankara’s commitment to protecting the domestic defense industry. Another important factor that supported growth of Turkey’s defense industry was the Turkish Armed Forces (TAF) research and development programs.
Ideally, private sector participation should support the industry’s growth so as to reduce our dependence on imports.
South Korea has taken a similar strategy, namely to impose the technology transfer requirement as a clause in the offset scheme, or reciprocal investment, for weapon suppliers. This enables South Korea, which had previously imported most of its weapons, to build the domestic arms industry with the help of foreign technologies. South Korea also involves large conglomerates, such as Samsung and Daewoo, in its national defense industry.
Reflecting on the two countries’ policies, we become aware that behind the success of their defense industry is rapid growth in the research and development sector. This sector indeed requires large investments. For example, Turkish arms manufacturer TAI allocated a 2020 budget for research and development that reached US$402 million (Rp 5.63 trillion).
Ideally, private sector participation should support the industry’s growth so as to reduce our dependence on imports. This will have a significant impact on the efficiency of the defense budget.
M Herindra
Regardless of the pros and cons, the regulation that opens the defense industry to private sector participation is stipulated by law, so BUMNs engaged in arms manufacturing, which have received special treatment from the government thus far, must accept it as a challenge that encourages them to build their competitiveness.
M Herindra. Deputy Defense Minister of the Republic of Indonesia.
This article was translated by Hendarsyah Tarmizi.
