[Kabar-indonesia] 2 of 11: HRW: Indonesian Military's Economic Activities

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A Brief History of Military Economic Activity

The Indonesian military's involvement in economic
activity in Indonesia dates back to the 1945-1949
Indonesian war for independence from the Netherlands.
The nascent military was responsible for raising its
own funds. In addition to relying on popular backing
and material support, in some areas military units
turned to smuggling to finance their operations.

The pattern of self-financing continued after the
formation of the Indonesian armed forces (which became
known as Angkatan Bersenjata Republik Indonesia or
ABRI, a combined military-police structure until
1999). Official budget allocations to the military
were low. As a consequence, throughout the 1950s
military commands and units continued to raise their
own funds to a large degree. Their fundraising methods
went beyond illegal activities such as organized
smuggling and illegal levies: Increasingly, military
commanders also allied themselves with local
businesspeople to generate funds to cover military
expenditures. In some cases the military command
itself would be granted a stake in a business venture
managed by a private partner.3

Early Military Businesses

The military began to take part in large-scale
businesses by the latter part of the 1950s. In the
late 1950s, under martial law, the military took over
control of Dutch companies. Soon afterwards President
Sukarno formally placed the newly nationalized
companies under the supervision of senior military
personnel. The state takeover of British companies and
some United States ones followed in the mid-1960s.
Control of these enterprises was likewise granted to
military officers. In part, these moves responded to
severe budget shortfalls that resulted in paltry
salaries, poor housing, and insufficient clothing and
equipment for soldiers.4

The military also became heavily involved in managing
major state-owned enterprises. Oil giant Pertamina and
the logistics agency Badan Urusan Logistik (or Bulog)
were both dominated by military leadership throughout
the 1960s and into the next decade. Profits from
military-run companies were commonly directed to the
military.5 This "unconventional financing," moreover,
allowed the government and military leadership to give
the appearance of sacrificing military spending in
favor of other national priorities.6

The rapid expansion of the military's economic
engagement in the 1960s extended to the private
sector. Much of the growth was from military
partnerships with private businesspeople. It was the
private entrepreneurs who in fact operated most
military-sponsored businesses. The military's actual
contribution to its business ventures typically was
nominal: military partners provided licenses and
approvals, and helped secure concessions and state
contracts.7

A Military Business Empire Forms

Military business activity was further entrenched
during the New Order period, the period from 1967 to
1998 in which General Soeharto led a
military-dominated government. Soeharto himself was
sympathetic to commanders who engaged in
self-financing. He had done the same during the time
he commanded an army unit in Central Java in the late
1950s, and retained close ties with his private-sector
partners.8

Early on in the New Order period, senior military
posts were filled with Soeharto loyalists who also
benefited from private business ventures. This pattern
helped perpetuate military economic ties, since
uncorrupted officers were unlikely to be promoted to
senior command positions.9

The explosive growth under Soeharto of military
business activity, both legal and illegal, reflected
the military's strong position as a center of power in
Indonesian society. The military's expanding influence
was supported by the dwifungsi (dual function)
doctrine adopted in 1966.10 Dwifungsi officially
granted the military a strong socio-political role
alongside its defense role. Also key was the
military's territorial command structure, in which
military presence throughout the country paralleled
government administrative bodies down to the village
level.11 This strong local-level presence, combined
with the military's coercive power and political
leverage, made it possible for the military to
dominate economic opportunities.12

The military service branches, regional commands,
local units, and individual officers took part in
commercial enterprises of all kinds and used different
business structures, both formal and informal.
Formally owned companies were held as investments of
military foundations or cooperatives that, going
beyond their mandated welfare function, developed into
commercial arms of the TNI.13

Thanks to political backing and favoritism,
military-linked businesses became a dominant economic
force. For example, the military took over ownership
of privatized state companies, gained vast forestry
exploitation rights, and enjoyed favored access to
government contracts, licenses, and credits.14

A range of human rights abuses tied to military
economic interests emerged during the New Order
period. In the late 1960s and 1970s, the government
forcibly took over large swaths of land on which
indigenous communities depended, dispossessing them
without due process and with little or no
compensation. The military was a prime beneficiary of
state forestry policies that enabled the wholesale
seizure of land claimed by local indigenous
communities.15 (See "Military Investments in
Forestry," below.) In many cases, soldiers also acted
as enforcers to secure control over land. For example,
indigenous communities in Riau province reported that
during the Soeharto era thousands of hectares of
community land were seized under intimidation from
armed police and military, and without any
compensation.16

For a time, companies also routinely called on troops
to respond to labor and land disputes, and soldiers
used excess force or intimidation to silence dissent.
For example, military personnel in the role of
"company security" frequently interfered in labor
disputes, using intimidation and outright violence, up
to the early 2000s.17 In some cases, the dirty work of
intimidation and violence was subcontracted to private
groups of thugs.18

In addition, illegal revenue-generating activity by
the military continued. Commanding officers, faced
with the expectation of their superiors that they
would finance the units they led, devised ways to use
their troops, facilities, and clout to raise money.
Many of the illegal ventures they established were
local schemes but others implicated higher-level
officials. In some cases, military commanders openly
tolerated illegal economic activity by their
subordinates. More generally, military leaders looked
the other way, so long as the money continued to flow.
Not surprisingly, self-enrichment took place on a
grand scale and impunity prevailed.19

Throughout the Soeharto era, the military remained
active in commercial ventures at all levels, from
headquarters to unit commands. By 1998 territorial
units throughout Indonesia were considered to be
"financially independent."20 Much of the money
generated by military businesses was allocated to
senior officers. For example, an audit of one
military-linked company, covering the years 1997 and
1998, noted large payments to senior military
personnel, mostly listed as "honoraria."21

The military's business investments were closely
linked to the economic interests of the Soeharto
family and its associates, and they often joined
together in powerful conglomerates. In the later years
of the Soeharto administration, however, private
investors began to partner directly with members of
Soeharto's family, so the military lost its place as
the favored business partner.22

The Financial Crisis and its Aftermath

The military's economic standing slipped dramatically
as a result of the Asian economic crisis that
ultimately helped bring down the Soeharto
administration and usher in the reformasi (reform)
era. A researcher has estimated that only about
one-third of the military's companies survived the
crisis.23 Overall, the military reportedly experienced
a 30 percent decline in its purchasing power from 1997
to 1998.24 Dividends from one major military
investment, a timber company, fell from U.S.$30
million in 1996 to an estimated $19 million in 1998.25

Financial reviews of military-owned businesses
confirmed their decline. An audit of the main army
foundation found that in 2000 its companies returned a
net loss of Rp. 8.21 billion ($985,000).26 Facing
major setbacks, the TNI divested itself of some
businesses, including in the formerly lucrative timber
sector. It also shut down many profit-losing
businesses, while others underwent restructuring.
Financial concerns also led to the consolidation of
some military foundations. The defense minister from
1999 to 2000, Juwono Sudarsono (who would be renamed
to that position in October 2004), expressed concern
about the state of the military foundations: "We must
act as soon as possible to stop the loss of funds to
the nation."27

Some military businesses were able to limit the
financial damage.28 Yet the overall picture was bleak.
The then TNI assistant for general planning estimated
that military foundations contributed in 2000 a total
sum equivalent to only about 1 percent of the military
budget and still less (0.7 percent) in 2001.29

New Trends: Diversification, Decentralization,
Competition

In the years following the financial crisis, military
economic activity underwent several changes. In one
important trend, the TNI increasingly turned to
alternative revenue sources to compensate for troubled
businesses. In particular, the military came to rely
more heavily on partnerships and other arrangements in
which it allied with private businesses, notably by
providing paid protection services. Contributions from
private individuals and businesses took on special
importance. The military supplemented its official
budget by tapping other government resources,
especially to pay for purchases of weapons. The TNI
also developed new strategies to find funds. Taking
advantage of a government decentralization drive, the
military tapped into growing local and regional
budgets to cover military expenditures.

At the same time, rampant illicit activities and
corruption in the military continued unhindered. As
military economic ventures became reliant on informal
partnerships and criminal activity, they became more
hidden. The military's economic activities and their
harmful side effects thus became harder to control,
even as pressure mounted for greater accountability.

In another new trend, military businesses have faced
increased competition from the police. Welcome moves
to give the police greater responsibility for internal
security have had the unintended side effect of giving
the police opportunities to take over businesses in
which the military had been dominant. This has been
particularly true for security and protection
services, but it also has extended to many other
areas. As the police have begun to displace the TNI,
struggles over turf repeatedly have broken out into
violence. Police business activities, like those of
the military, have been associated with human rights
abuses, corruption, and weak accountability.

Military Business Activity and the Law

In September 2004 a new law on the TNI was passed. The
law mandated that the Indonesian military end its
involvement in business. It also ordered the
government to take over military businesses within
five years.

Previously when legal controls on military economic
activity were imposed they were not enforced. At times
pressure has mounted to rein in rampant illegal
business activity, but even then the authorities have
cracked down only reluctantly and with little effect.
Military economic activity in Indonesia had developed
with few constraints in the permissive environment
created by leaders who defend the military's
involvement in business as a legitimate and necessary
response to budget shortfalls. 

Much military business activity in Indonesia had been
declared improper long before the passage of the 2004
TNI law.30 For decades, the main instrument governing
military business activities was Regulation No.
6/1974, which dates to 1974.31 Under that regulation,
active military (and police) personnel were barred
from taking part in private business activities except
under certain circumstances. Specifically, military
officers (at the rank of second lieutenant or higher)
were prohibited from owning shares in a private
company; taking part in the management of such a
company, including in an advisory capacity; or
otherwise engaging in profit-driven "trade
activities," whether formally or on a freelance
basis.32

Under an important exemption, officers were permitted
to work for private companies set up by non-profit
institutions, either as employees or company officers
(in the latter case, under the condition that they
obtain permission from superiors and not receive
compensation).33 The conditions were somewhat more
flexible for lower-ranking troops, as well as for the
wives of military personnel.34 The exception for
soldiers to join companies via non-profit entities
opened the door for military foundations, set up with
an ostensibly charitable purpose, to develop into
commercial arms of the military. In a further
weakness, the regulation did not specify an
enforcement mechanism.35

Lack of Enforcement

For decades, government laxity and tolerance has
enabled the military to openly engage in
self-financing. The lack of enforcement of the 1974
regulation has been the hallmark of government
inaction to rein in military businesses. At various
points, officials have openly encouraged the military
to engage in business as a response to budget
constraints. When public pressure has been
particularly acute, the government and military
leaders have pledged that they would crack down on the
military's business activities. In reality, however,
they have shown little interest in enforcing the
rules.

So many military officers flouted the 1974 regulation
that the military chief and minister of defense and
security felt the need to reassert the ban on business
a few years after it was adopted. Speaking in 1979,
Gen. Muhammad Yusuf declared: "All serving officers
are forbidden to enter the world of commerce. Forget
about trade if you want to be a good soldier."36 He
added: "Those who violate the rules will be dismissed
or will be granted early retirement."37

As a result, some 200 to 300 people reportedly were
instructed to resign.38 Yet military business
flourished. Military commercial activity continued to
take place via "front organizations" such as
foundations and cooperatives.39 In addition, TNI
headquarters allowed field commanders "discretion" to
continue fundraising as they saw fit.40

The failure to enforce the ban on military business
also signaled a lax attitude toward other illicit
economic activity by the military. For a time, some
regional military commanders openly tolerated
smuggling by their subordinates. When the Soeharto
government imposed a short-lived crackdown on blatant
military smuggling, it resulted only in a change in
tactics: rather than risk being directly involved in
the transport and unloading of smuggled goods,
military officers provided "protection" for smuggling
operations carried out by private associates. Even
when such operations were exposed, military backers of
sufficiently high rank and political clout could
practically guarantee impunity for the smugglers.41

At the end of the Soeharto era, the military faced
renewed criticism about widespread illicit business
activity by soldiers. The defense minister in 1997,
Edi Sudrajat, renewed the 1974 ban by declaring that
military personnel could not do business, whether
directly or by providing protection services.42 The
then armed forces commander, Gen. Feisal Tanjung,
reinforced the order a week later: "All officers and
their wives are barred from business. If they want to
get involved in business, they must get written
permission from me first."43

The military clarified that retired officers and those
working for military cooperatives or foundations were
not subject to the rule.44 Even so, few expected the
order to be enforced. Even government officials
expressed skepticism, given the pervasive nature of
the military's involvement in the economy at that
point.45 In the end, the "crackdown" reportedly
resulted in thirty-four solders in Jakarta being
picked up for moonlighting as nightclub security
guards.46 For the few caught in the net, General
Sudrajat's order outlined the punishments: delayed
promotions or dismissal.47 Prosecution was not
contemplated.

In the face of major public pressure for political
reform that began in March 1998 and ultimately led to
Soeharto's fall, Susilo Bambang Yudhoyono, then
serving as the armed forces' chief of staff for
territorial affairs, defended the government against
its critics. He claimed that it had "punished soldiers
involved in 'backing' illegal operations" and was
"dealing sternly with those involved in manipulation,
embezzlement or corruption."48 There was little
available information to support this contention,
however, so observers remained highly skeptical.49

When Indonesia's first direct presidential elections
in 2004 swept Yudhoyono to power and he selected
Juwono Sudarsono as his defense minister, it opened up
the possibility that long-stalled military reform,
including reform of military financing, might gain new
life. Yudyonono, known as a cautious reformer, had
campaigned on an anti-corruption platform. Sudarsono
was a prominent critic of military engagement in
business activities.

Military Resistance to Reform

The military leadership historically has been a major
obstacle to reform of military financing. On occasion,
usually under outside pressure, it has said it will
consider withdrawing from military businesses. But
such rhetoric has rarely been matched by action. To
the contrary, over the years military leaders have
acted repeatedly to block reform.

The armed forces generally have argued that they
cannot afford to give up their economic ventures.
Experience has shown, however, that they have strongly
resisted reform even when accompanied by increased
funds. In the 1950s, parliament debated how the
central government might go about funding the
military, but the military preferred to retain its
financial autonomy.50 When high oil prices in the
1970s permitted an increase in the military budget,
the Soeharto government made no serious effort to
dismantle military businesses. Nor was the military
leadership inclined to give them up. As summed up by
political scientist Harold Crouch: "Although the need
for military units and individuals to depend on
"unconventional" sources [of funds] had greatly
declined, old habits die hard."51

When challenged by one or another scandal that came to
public light, the military strongly defended its
economic role. In 1995, for example, the chief of
general staff of the armed forces, Lt. Gen. Soeyono,
argued that the armed forces had as much right to
participate in the economy as any other sector of
society.52 Two years later, the spokesperson for the
armed forces, Brig. Gen. Slamet Supriadi, made a
similar argument, in his case referring specifically
to military foundations and cooperatives through which
the military was involved in private business:

These groups are part of the military structure and
have a legitimate right to take part in business
activities. They are looking after the welfare of
armed forces personnel and society. So why bar them?53

Short-Lived Scrutiny

The power of the military—including its economic
power—came under greater scrutiny in the wake of
Soeharto's fall. Reformers inside the armed forces
pushed to professionalize the security forces and had
some limited success from 1999 to 2000. This period
also was marked by increased attention to the question
of military financing, and military business in
particular.

Nongovernmental organizations (NGOs), think tanks, and
scholars issued hard-hitting reports that documented
the extent of military self-financing. Their strong
critique of military business practices—including
extensive illegal activities—drew considerable public
attention. It made it more difficult for Indonesia's
military leaders to deflect criticism as they always
had, by asserting that illicit military businesses
were carried out only by rogue elements in the TNI.
The issue of military self-finance also caught the
attention of the international donor community, which
became concerned about the effect of the military's
strong role in the economy on the country's
development prospects. In particular, bilateral donors
and multilateral financial institutions saw that
military business undermined civilian governance,
fueled criminality, and distorted markets by raising
costs and reducing competition.

Rampant military corruption and outbreaks of violence
tied to military economic interests also heightened
calls for reform from within government. At one point,
the then defense minister openly questioned the
"unclear legal status" of many military businesses
established under the rubric of military foundations
and cooperatives.54 In 2000 a cabinet official
announced that the government would try to halt its
favored treatment of military businesses.55 Within the
TNI, some officers recognized that military
self-financing was deeply problematic.

As a result of growing pressure, some official audits
were initiated in 2000 and 2001 (see below), but this
progress was not sustained. Reform of financing was
seen as too daunting a challenge in both financial and
political terms. It would entail large expenditures to
bring the military on budget. By one estimate offered
in 2004, this could amount to additional expenditures
equivalent to 1-3 percent of gross domestic product
(GDP).56

Politically, it was difficult to overcome the powerful
military lobby. The government of President
Abdurrahman Wahid, the first of the reformasi era,
attempted to confront the military—including regarding
its economic power and dismal levels of
transparency—but had to back down in the face of
budget shortfalls and strong resistance from the
military.57 Conservative elements in the military soon
reasserted their authority over more reform-minded
officers. (A main reformer, Lt. Gen. Agus
Wirahadikusumah, lost his command partly in
retribution for his efforts to expose financial
improprieties.58)

The resurgent military argued that it could not give
up military businesses until the government provided
full funding. President Megawati Sukarnoputri, who was
elevated from the vice presidency in 2001 with the
support of civilian political parties and the military
faction in parliament, did not push that issue or
other aspects of military reform. As a result, efforts
to address military financing stalled. In 2001 the TNI
convinced parliament that "until such time that the
Government is able to entirely fund the welfare
requirements of the soldiers in a fitting manner,
[its] venture in business will be tolerated."59

By 2001 army leaders had for several years promised to
address the military's business activities, but their
words were not backed by action.60 TNI leaders had
come to recognize that the military's business
interests sullied its reputation, but the institution
nevertheless clung to them out of a sense of
self-preservation: the military had become dependent
on the outside funds and did not trust that the
government would look after its needs. Analysts
observed that it would be years until the Indonesian
government would be able to fully fund government
operations from tax revenue and that, until that was
achieved, "the TNI will not give up one rupiah of its
off-budget sources that it does not have to
surrender."61

Failed "Crackdowns" on Illegal Businesses

Illicit military economic activity remained in the
spotlight following the brief period in which military
businesses were under some official scrutiny.
Attention to such activity, however, did not result in
effective measures to halt it. Pronouncements related
to military involvement in illegal logging usefully
illustrate the failure to crack down on military
economic activities that have clearly violated
prevailing laws.

In 2001, a presidential decree (Presidential
Instruction No. 5/2001) addressed in part the role of
the military in illegal forestry operations. As later
restated by former TNI chief Gen. Endriartono Sutarto,
the order mandated him to "take serious action,"
including administrative and criminal sanction,
against "any TNI personnel who are proven involved in
illegal logging activities,
transportation/distribution of illegal forest
byproducts or timber smuggling." It also ordered
"serious action against foundations, cooperatives
under TNI's umbrella, and their personnel that are
involved in carrying out illegal logging activities
and distribution of illegal forest byproducts." It
highlighted in particular the need for the navy to
"take stern action" against timber smuggling.62

Nearly two years elapsed before he issued a directive
to his troops related to any of those specific
provisions. In early 2003, according to his own
description, he issued a letter to all TNI personnel
"to prohibit and take decisive action against any TNI
personnel who are proven to be involved, directly or
indirectly, in illegal logging activities as well as
in illegal transportation/distribution/smuggling of
timber."63

He did not indicate what measures, if any, were put in
place to ensure compliance with that letter. His
letter apparently did not address other elements of
the presidential decree. Nor did he clarify whether
anyone was in fact ever investigated and punished.
Human Rights Watch is unaware of any crackdown on
military involvement in illegal logging, prior to
2005, consistent with the language in the 2001
presidential decree.64 To the contrary, as of early
2005 the TNI had failed to act against a captain in
the military police whom NGOs had accused two years
earlier of deep involvement in illegal logging
activities in Papua.65

A further military crackdown was announced in
mid-2003, following a scandal over a murder-for-hire
in which two people were killed (the case is described
in more detail below). Sutarto vowed to make an
example of the four active-duty marines accused in the
case.66 Ultimately, two of the marines were
court-martialed and convicted of the double murder.67
Sutarto also responded by issuing an order banning
criminal activity by soldiers, including the
protection of criminals:

I have instructed all units to ensure that none of
their soldiers are involved in (criminal) business. We
will not tolerate that… The TNI has dismissed many
soldiers for this sort of thing and will continue to
do so.68

Publicly available reporting indicates that some
soldiers have been rounded up for their involvement in
illegal economic activity, but they have almost
invariably been low-ranking troops and have faced
dismissal rather than legal action. For example, two
soldiers and a staff official were dishonorably
discharged for drug trafficking but were not reported
to the police; a news report commented that it
remained unclear if another seventy soldiers similarly
dismissed for drug trafficking had ever been charged
with a crime.69 Prosecutions of military personnel
remain uncommon, particularly as compared to the
frequency of crimes.70 Those prosecuted under the
military court system are almost always low-ranking
soldiers who face dismissal or light sentences if
found guilty.71 (For a further discussion, see the
section titled "Plans Fail to Promote Accountability"
in Part III: Obstacles to Reform.)

The Situation Today

The September 2004 law mandating that the Indonesian
military end its involvement in business was a
watershed initiative, but one that left many questions
unanswered. The language of the law is subject to
multiple interpretations, and the provisions have not
yet been enforced. Some preliminary steps have been
taken but these have been slow and insufficient: the
promise of the law remains untested. A more detailed
critique is given below in the chapter on "Obstacles
to Reform." It finds that those in a position to make
change happen have not shown a commitment to
addressing the full costs of military self-finance,
including in human rights terms. To the contrary, they
have defined military business narrowly, focusing only
on select elements of what is a much deeper structural
problem, they have provided a number of exemptions
that would leave vast parts of the military's
commercial structure in place, and they have not
pursued real accountability.

for Footnotes 1 - 71, go to:
http://hrw.org/reports/2006/indonesia0606/4.htm#_Toc138140635

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