[Kabar-indonesia] 3 of 11: HRW: Indonesian Military's Economic Activities

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II. An Anatomy of Military Economic Activity

This chapter outlines the main features of the
military's economic activities and some of their
negative consequences. It offers a typology of
military economic ventures in Indonesia that places
them in four broad categories: businesses owned or
partly owned by the military, often via foundations
and cooperatives; alliances with private businesses,
many of which revolve around payments for security or
other services; involvement in organized illicit
business activity; and corruption. We explain the
defining characteristics of each category and identify
some sample ventures to show how the different kinds
of economic activity play out in practice. Several of
the examples illustrate that, in ways both large and
small, military economic engagement helps undermine
accountability, fuel conflict and criminality, and
facilitate human rights abuses. This human rights
analysis affords two key lessons: that the problem of
military involvement in the economy is a serious one
requiring immediate attention; and that any solution
must be comprehensive in nature if it is to be
effective.

Military-Owned Businesses

Companies owned in whole or in part by the Indonesian
military span the full range of the economy, from
agribusiness to manufacturing and from golf courses to
banks. In September 2005 the TNI complied with a
request from the Ministry of Defense for an inventory
of its business interests.72 (Preparation of the
inventory was a first step toward implementing the TNI
law passed a year earlier that mandated the transfer
of these businesses to government control.) The
initial inventory identified 219 military entities
(foundations, cooperatives, and foundation companies)
engaged in business activity.73 As of March 2006, the
TNI had provided information on 1,520 individual TNI
business units.74 (See Table 1, below.) By April 2006,
the Ministry of Defense had initiated a separate
review process to examine whether its three
foundations were engaged in business activity.75
Table 1: TNI Inventory of Military Businesses

Initial Inventory (September 2005)
     

Foundations 25

Companies under Foundations 89

Cooperative Units Engaged in Business 105
     
Revised Inventory (March 2006)
     
Individual Business Units 1520

    Source: Ministry of Defense letter to Human Rights
Watch, December 22, 2005; Maj. Gen. Suganda, then TNI
spokesman, "TNI commits to reform[,] upholds supremacy
of law," opinion-editorial, Jakarta Post, March 15,
2006.

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The TNI and other authorities who have access to the
inventory results have not publicly identified the
individual business interests held by the military or
provided information on their total value. Officials
involved in the review of the military's businesses
declined to share a copy of the inventory with Human
Rights Watch, to provide the names of the businesses
listed on it, or to reveal the businesses' total
declared value.76 They said the data supplied by the
TNI could not be considered final because it was "very
rough" and included many entities that, in their view,
did not constitute "real businesses."77 According to
these officials, the list incorporated many
small-scale ventures, some with assets of negligible
value, alongside other, much larger enterprises.78

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Box 1: How Much are Military-Owned Businesses Worth?

No reliable information is currently available about
the value of the military's business holdings. Most
military-owned companies are privately held, rather
than publicly listed, so their financial statements
are not available for scrutiny.79 Up to mid-2005, when
the TNI submitted an initial inventory of its
businesses, even top military officials credibly
maintained that they did not know the number, scope,
value, or profits of the military's business
investments. In May 2005, for example, the air force
chief said he lacked data about the number or profits
of air force-owned companies.80 Ongoing government
efforts to verify the financial condition of the
companies listed in the TNI inventory should provide
answers to such basic questions.

In the meantime, public statements offer some
indications. In mid-2005, unnamed officials told the
Singapore-based Straits Times newspaper that the top
twenty or so military companies in Indonesia had a
total estimated annual income of $200 million.81 For
the sake of comparison, perhaps the best available
historical figure is one used by foreign finance
officials. An "informal review" of a selection of
eighty-eight military businesses in Indonesia found
that they had a combined turnover of Rp. 2.9 trillion
($348 million) in 1998/1999.82 The Far Eastern
Economic Review, referring to the same study, further
revealed that annual revenue from the selected
military businesses amounted to approximately Rp. 500
billion ($60 million).83 Contrasting this to the $200
million figure offered in mid-2005 (which covered a
smaller number of companies), it appears that those
military businesses that survived the Asian financial
crisis of the late 1990s were able to rebound
significantly from that low point. (See below for
additional data specifically for businesses held under
military foundations.)

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Many of the military's business holdings are little
more than empty partnerships. The military's stake in
a company is typically a passive interest, also known
as "golden shares" or "goodwill shares," donated by
the true investors with no expectation that the
military will play an active role in the operation or
management of the company.84 For example, in 2005, the
commander of Kostrad (the army strategic reserve—see
below) acknowledged publicly that over the years
private investors had given Kostrad ownership stakes
in various companies—and had done so for free.85
According to the Ministry of Defense, almost all TNI
businesses have private-sector partners.86 Many are
run as closely held companies, making it all the more
difficult to obtain information on profits.87

Since the passage of the TNI law of 2004, the military
has begun to liquidate some of its business holdings.
The description below reflects the limited information
that is publicly available about the extent of such
restructuring. The military has argued that the TNI
should be allowed to continue limited economic
activity under its foundations and cooperatives. Thus,
while some of the military's business investments have
been dropped, the presumption here is that the overall
structure of military economic activity has not
fundamentally changed.

Inevitably, formalized military businesses have led to
a variety of independent economic ventures by military
officers. These officers also have many opportunities
to use their positions of power and influence to
establish business ventures on their own or with
private partners. High-ranking officers are in the
most advantageous position to make business
connections and form private-sector alliances. In
addition, many mid-level officers are believed to run
small businesses to earn extra income.88 In one
example, a military intelligence officer reportedly
owned an ebony business in Central Sulawesi.89
Commonly, an officer's stake is assigned to his wife
or another family member.90

It is worth noting that in many cases, though not all,
the private business holdings of retired military
personnel can be traced to the military as an
institution.91 Many military retirees launch
businesses or form relationships with private
entrepreneurs while on active duty. For example, the
former armed forces commander General (ret.) Wiranto
has stated that he intends to build a resort in
Sukabumi, on the West Java coast, on land he obtained,
along with permission to build, in the 1990s.92 Local
farmers, however, say they have farmed that land since
the late 1960s and, under an agrarian reform law,
claim to own it.93 Wiranto was a very senior official
throughout the 1990s but was suspended from the post
of security minister early in 2000 following
allegations he presided over atrocities in East
Timor.94

Foundations

Many important military business holdings have been
established under the umbrella of tax-exempt
foundations (yayasan). Military foundations were set
up beginning in the 1960s to provide social services,
such as housing and education, for the troops and
their families. They soon expanded into businesses
ventures as a way to generate revenue, ostensibly to
pay for their welfare activities. The best known
foundations have been those established by each of the
service branches and special commands, as well as by
TNI headquarters itself, but foundations also exist at
other levels.95

Despite their nominally independent status, the
military foundations were set up with funds donated by
the government.96 As acknowledged by a senior
Indonesian military official, Lt. Gen. Sjafrie
Sjamsoeddin, for thirty years under Soeharto the
military foundations benefited from monopoly control
in many areas, priority for government licenses, and
more generally the full backing and authority of an
authoritarian government.97 As a result, the
military's foundations were economically prominent
during the Soeharto years. They declined sharply in
value as a result of the Asian financial crisis and
poor management. Increased competition also was a
factor. Military businesses still enjoyed certain
privileges but after Soeharto's fall they lost their
dominance in many sectors.98 Some military-owned
businesses were forced to close, while others
underwent major changes.

Additional changes were required to comply with a 2001
law on foundations.99 That law specified that
foundations could not "host" businesses or "directly
carry out business activities," but they could do so
indirectly through related entities whose activities
were consistent with the foundation's designated
social (or religious or humanitarian) purpose.100 This
measure prompted military foundations to restructure
their business interests and place them under holding
companies. A separate provision in the law set a limit
on the profit-making of foundations by capping
investments at 25 percent of their assets.101

Foundations also continued to benefit from government
resources. At least through 2001 government funds
continued to flow to the foundations to help cover
operational expenses, according to a government
auditor who reviewed their accounts.102 Speaking that
year, the auditor added that the military foundations
"can and usually do take advantage of the resources
and mandate of the founding department or agency" and
were operated and managed by active military
personnel: "In effect, these yayasans operate as
quasi-governmental agencies."103 The Indonesian
government acknowledged this was true in a 2003
statement that referred to "military and other
foundations receiving state funds or financing state
activities."104 In 2006, Lt. Gen. (ret.) Agus Widjojo,
the former TNI chief of staff for territorial affairs
and former deputy speaker of the People's Consultative
Assembly (MPR) from the armed forces faction,
independently affirmed that, despite changes to staff
the foundations with retired (rather than active-duty)
personnel, they nevertheless retained strong ties to
the military institution: "De facto, practically
speaking, the foundations were established by the
military command and the military command feels they
own the foundation."105

Each service branch has at least one foundation, and
each foundation typically has at least one holding
company that invests in individual businesses on the
foundation's behalf. The foundations may have sole or
majority interest in the businesses but, as noted,
often hold a minority stake though shares donated by
private partners. (See "Illustrative Diagram of a
Military Business," below.)

Illustrative Diagram of a Military Business [To view
diagram, go to:
http://hrw.org/reports/2006/indonesia0606/5.htm#_Toc138140639

Note: This example is provided here to demonstrate the
ownership structure of military businesses and does
not purport to make a substantive claim about the
businesses listed. It is based on information provided
by TNI headquarters and supplemented by two people
familiar with the navy's businesses because they
reviewed them (in one case, as part of an internal
review by the navy and in the other independently).

(Information as of May 2006.)

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Box 2: Military Foundations and their Assets

The descriptions presented below reflect the
information available to Human Rights Watch at the
time of writing.106

Army: Yayasan Kartika Eka Paksi (YKEP). The largest
military foundation, at least by reputation, it was
established in 1972. Foundation holdings as of 2001
included eleven subsidiaries and twenty-two joint
ventures. The disparate companies at that time fell
into six broad categories: forestry/plantation,
construction, property, manufacturing, services, and
mining.107 Among its most visible holdings at one time
was its part-ownership of the Sudirman Business
District, a prime real estate development in Jakarta
run by private partners that in 1999 was estimated to
be worth $3 billion.108 Still suffering the effects of
the financial crisis, YKEP suffered a net loss from
its investments of approximately Rp. 8 billion
($880,000) per year in 2000 and 2001.109 The TNI chief
declared in 2002 that YKEP generated a profit of no
more than Rp. 50 billion ($5.5 million).110 The
negative trend apparently continued: according to a
former deputy army chief , Kiki Syahnakri, YKEP's
profits in 2005 showed a steady decline from previous
years.111 As of that time, it was believed to have
largely retained its earlier investments and to
continue to own, among others, timber companies,
hotels, property, and transport services.112 In 2006,
the Ministry of Defense announced that one of the
army's most prominent businesses, PT International
Timber Corporation Indonesia (ITCI), was in dire
financial condition, as it was experiencing large
losses and was unsure if it could pay its thirteen
thousand employees.113 

Kostrad (Army Strategic Reserve Command): Yayasan
Kesejahteraan Sosial Dharma Putra (YKSDP Kostrad).
This foundation was first set up as Yayasan Dharma
Putra Kostrad (YDPK) in 1964, under Soeharto's
command. Information provided to Human Rights Watch in
2004 showed that YKSDP was believed to have an
investment in thirteen companies, including in the
automobile, plastics, and insurance industries.114 In
April 2005, however, Kostrad commander Lt. Gen. Hadi
Waluyo declared that his forces only retained an
ownership stake in three companies: PT Mandala
Airlines (100 percent), Darma Medika General Hospital
(25 percent), and PT Darma Mandala (25 percent).115 He
said they had divested themselves of all other
business holdings because the businesses had fared
poorly.116 Waluyo, in his capacity as the Kostrad
chief, also served as a commissioner of Mandala
Airlines.117 Potential buyers were reluctant to take
over the company because of concerns that financial
information was incomplete and presented the risk of
hidden liabilities.118 In April 2006, Kostrad sold the
foundering airline.119 

Kopassus (the Army Special Forces Command): Yayasan
Kesejahteraan Korps Baret Merah (Yakobame), formed in
1995.120 As of 2004, it was thought to have
investments in the construction business.121

Air Force: Yayasan Adi Upaya (Yasau). Yasau owned ten
companies in 2000.122 Its holdings in 2004 (eight
companies) were in forestry, construction, property,
airlines and related companies, and a pharmaceutical
company.123 Several air force-owned businesses
remained active as of early 2006, including PT
Konstruksi Dirgantara (construction), PT Angkasa Pura
(property), and PT Dirgantara Husada (pharmacy).124

Navy: Yayasan Bhumyamca (Yasbhum). Established in
1964, Yasbhum had thirty-two companies in 2000.125 The
number of navy-owned companies had dwindled to six by
late 2004, according to the then navy chief of staff,
Adm. Bernard Kent Sondakh, who said these would be
sold off to the private sector.126 Information
provided by TNI headquarters, however, listed the navy
as owning one holding company and fifteen individual
businesses as of early 2006.127 (See "Illustrative
Diagram of a Military Business," above.) The TNI also
identified two other navy foundations, Yayasan Nala
and Yayasan Hangtuah, without indicating if they owned
businesses.128

TNI headquarters: Yayasan Markas Besar ABRI (Yamabri).
Founded in 1995 with a combination of military and
civilian ownership and initial capital of only Rp. 25
million ($11,250), it quickly expanded.129 In 2004, it
was believed to have holdings in agribusiness, mining,
communications, transport, and a convention hall.130
That year, the then TNI chief Gen. Endriartono Sutarto
indicated that the total value of military businesses
under TNI headquarters was no more than Rp. 100
billion ($11 million).131

Ministry of Defense: Yayasan Kejuangan Panglima Besar
Sudirman (YKBPS). In 2006, YKBPS owned three
universities, a high school, and hospital.132 A second
foundation, Yayasan Kesejahteraan Perumahan Prajurit
(YKPP), was involved in housing, while the ministry's
third foundation, Yayasan Satya Bhakti Pertiwi (YSBP),
had numerous profit-oriented companies.133

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Cooperatives

Military cooperatives form part of the national
cooperative movement in Indonesia and, as such, are
supposed to exist for the mutual benefit of their
members and to be collectively controlled by these
members, as well as by a national law on
cooperatives.134 Like military foundations, however,
military cooperatives have strayed far from their
stated purpose. Initially established with troop
welfare in mind—to provide subsidized commodities,
such as rice, to soldiers and families—they soon
became a vehicle for business ownership. The business
activities of military cooperatives have tended to
receive less scrutiny than those of military
foundations. This has helped feed the often-false
perception that military cooperatives merely serve as
discount stores for the troops.135 Yet many
cooperatives actually raise revenue not only from
membership dues but also from wide-ranging business
activities, including investments in private
companies.136 Military cooperatives, for example, have
owned stakes in numerous hotels and a cargo
company.137 As with foundations, many are privately
held companies so financial data can be difficult to
obtain.

Table 2: Businesses Owned by Military Cooperatives

Service Branch/Number of  Businesses/Internal
Capital/External Capital/Dividend

Army 923 Rp. 169 billion ($17 million) Rp. 38 billion
($4 million) Rp. 13 billion ($1.3 million)

Air Force 147 Rp. 40 billion ($4 million) Rp. 9
billion ($900,000) Rp. 4 billion ($400,000)

Navy 124 Rp. 95 billion ($9.5 million) Rp. 8 billion
($800,000) Rp. 4 billion ($400,000)

    Source: Ridep Institute, Practices of Military
Business, citing statistics from the planning bureau
of the Ministry of Cooperatives, Small and Medium
Enterprises, 2001.138 

The cooperatives of the military exist for each
service branch and follow the territorial command
structure. In the case of the army, for example, the
Army Parent Cooperative (Induk Koperasi Angkatan Darat
or Inkopad) corresponds to army headquarters, the Army
Central Cooperative (Pusat Koperasi Angkatan Darat or
Puskopad) to the regional military command, and the
Army Primary Cooperative (Primer Koperasi Angkatan
Darat or Primkopad) to the sub-regional military
command level. District level offices and local posts
also exist. Military cooperatives for the other
services include Inkopau and Primkopau, in the case of
the air force, and Inkopal and Primkopal for the navy.

An example provided below addresses military
investments in forestry and agribusiness activity in
East Kalimantan. In that case, an army cooperative had
a minority share in a privately established company
and also had its representatives on the board of the
company, so the business ties were formalized.
Informal business ventures are addressed separately in
this chapter, in the section below on military
alliances with the private sector, which includes the
informative example of a military cooperative involved
in coal mining activities.

Example 1:  Military Investments in East Kalimantan

Military ownership in private companies is often
hidden, but with assistance from NGO colleagues in the
area Human Rights Watch was able to trace military
interests in forestry operations in an area of East
Kalimantan, near the border with Malaysia. The case of
a series of military companies that held investments
in the regency of Nunukan offers insight into military
involvement in business.139 It also sheds light on
some of the negative social and environmental
consequences of this activity. Over the years,
officials and local residents have accused
military-associated businesses in the area of
contributing to illegal logging, environmental
destruction, and social tensions.

Military Stake in Forestry Operations

In 1967, citing "national security considerations" in
the wake of a border dispute, the Indonesian
government granted a military-owned company, PT
Yamaker, concession rights on a huge tract of land
covering more than one million hectares along the
Indonesia-Malaysia border.140 With this move, it
dispossessed indigenous communities of their customary
land.141 It also set in motion a pattern that would
persist for decades: military economic interests in
the forestry sector would take precedence over the
interests of local communities.

For decades, Yamaker grossly mismanaged the land.
Local indigenous communities charged that overlogging
by Yamaker disrupted their livelihoods and traditions
and left "only forests with no trees."142 The
communities experienced additional hardship when
Yamaker blocked access to the land, which it did
routinely on the pretext of security.143 After the
downfall of the Soeharto government in 1998 that
ushered in the reformasi era, the new government
investigated and exposed massive timber smuggling by
Yamaker.144 The then minister of forestry and
plantations, Muslimin Nasution, denounced the company
for conducting its business in an illegal manner,
failing to promote the welfare of area residents, and
having "plundered [the forests] on a vast scale."145
Acting on those findings, in 1999 the government
revoked the entire Yamaker concession.146

The military nonetheless retained strong ties to that
land. The new concession holder, the state-owned
timber company Perhutani, partnered with the Inkopad
army cooperative that had logging operations within
the ex-Yamaker site.147 The military also provided
security to Perhutani.148 Rather than directly engage
in logging operations in the area themselves, the
military instead partnered with foreign investors from
Malaysia for that purpose.149

Military-Private Partnership

In 2000, Inkopad's economic stake in the ex-Yamaker
land deepened further. That year it partnered with a
Malaysian company, Beta Omega Technologies (BOT), that
planned to develop an oil palm plantation and
processing factory on land in and near Nunukan
regency. Inkopad became part-owner of the BOT
subsidiary set up in Indonesia, Agrosilva Beta Kartika
(ABK), and had several representatives on its
board.150

These military connections helped the new company
secure permissions and negotiate further deals.151 ABK
gained the local government's approval to cut timber
on the land to prepare it for palm oil planting.152
Local officials said they expected the company to
clear some 150 thousand hectares of land in the
regency.153 From an early stage, it was clear ABK
planned to log the area and sell the resulting timber.
To assist ABK, the Nunukan government agreed to
facilitate a minimum production target of fifty
thousand cubic meters of lumber per year.154 (The then
Nunukan regent also signed a contract to gain a
partial ownership stake in ABK, though it remained
unclear if he did so in his individual or official
capacity.)155

These plans upset local indigenous communities living
in the Simenggaris area, a forested zone in the
interior of Nunukan regency along the border with
Malaysia. A letter signed by some twenty community
leaders outlined their concerns. They objected to the
palm oil project on the grounds that it threatened to
destroy the forest on which they depended for food,
wood, and traditional medicinal plants.156 In
addition, the collection of non-timber forest products
such as rattan by local communities was an economic
lifeline, second in importance only to agriculture,
and they derived additional income from occasional
logging activities in the forests.157 Nunukan
residents already had the experience of severe forest
depletion from logging operations in the area.158 The
leaders of the area also urged that the project not
move forward without proper consultation and the
consent of the community.159 The leaders expressly
opposed the involvement of the military in logging
activities, stating "We are no longer willing to
endure the same experience as [we had] with PT
Yamaker."160

Fears about the potential for overlogging were also
informed by suspicion that the oil palm project might
be nothing more than a cover to clear-cut forested
areas for a quick profit, with no plantation ever
being built. The practice has been prevalent enough in
Indonesia to have earned a nickname, the "plantation
hoax."161 NGOs have estimated that only 10 percent of
the three million hectares of East Kalimantan forest
allocated to oil palm concessions has actually been
converted into working plantations.162 Specialists who
examined Nunukan's soil as part of an independent
environmental study determined that it was generally
not suitable for oil palm.163 In addition, the
conversion of forest to other uses, including oil palm
plantations, contributed to the degradation of
Nunukan's forests. A related study found that about
one-quarter of the primary forest in Nunukan's
formerly lush river basin had been lost over a
seven-year period.164

Nunukan officials declared in 2001 that ABK's
Malaysian parent company BOT would invest at least
$4.3 million to build an oil palm plantation and
factory in the area, and that the project would employ
as many as thirty-five thousand workers locally.165
Ignoring community concerns and requests for
consultation, in mid-2001 the then regent gave the
Inkopad army cooperative and ABK permission to proceed
with the project.166 Community members issued protest
letters to no avail.167 Later that year ABK contracted
a Malaysian firm to clear land in the vicinity of
Nunukan regency and market the timber on its
behalf.168

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