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Account Fully for the Resulting Revenue

The TNI law that mandates the elimination of military
businesses, as well as earlier legislation, states
that the military should be funded from the national
budget. To achieve that end and secure much-needed
financial accountability, it is essential that
revenues from military-linked companies be properly
accounted for. As these businesses are wound down,
sold off, transferred, or held in trust and operated
for profit, the question arises as to how to dispose
of the resulting proceeds. The proceeds may well be
less than anticipated, given that in many cases the
value of military businesses has been severely
compromised by a combination of poor management, high
debt exposure, and deliberate asset-stripping. Even if
the sums are modest, they must be properly managed. At
a minimum, the management of these revenues must
conform to the rules established in regard to proceeds
from the disposal of state assets and privatization of
state-owned enterprises. Funds entered into the state
coffers should be used in accordance with a
transparent and accountable budgetary process. (A
section further below provides recommendations about
improvements to the defense budgeting process.)

It has been suggested that the funds should be
designated for spending on the military. Many
observers see this as a bargain to secure the
cooperation of the military establishment. Others view
it as a means to ensure that the revenue, once
properly accounted for, is allocated to troop welfare
to address difficult conditions. Should this approach
be adopted—perhaps as an interim measure until the
transfer of businesses out of military hands is
complete—it needs to be carefully set up to prevent a
recurrence of the serious problems that have marred
military business to date. One idea would be for the
military to transfer its business interests held
through foundations and cooperatives to
civilian-managed funds that help finance military
pensions. In this way, the proceeds from selling these
businesses and the revenue from any that were retained
would go to a government account, allowing them to be
properly counted as government revenue, and be spent
on welfare needs rather than other purposes.

Commit to Full Transparency

Top government officials acknowledge that they do not
have a full grasp of the extent, nature, or value of
all of the military's economic interests. As part of
the military divestment process, the government should
make public the TNI's inventory of military
businesses, associated financial data as verified by
the government, and the results of prior financial
reviews. These steps would be a good start toward
greater openness on military financing issues that, as
argued in this report, are an essential component of
the sound financial management practices that underpin
public accountability.

Other measures are needed to improve transparency,
several of which have already been mentioned. For
example, the government should make public all
resources allocated to the defense function in the
budget, including items currently assigned to other
budget lines, and disclose actual military spending.
Current reporting on spending is incomplete and lacks
detail. The government also should continue efforts to
improve data gathering and published statistics, with
particular attention to military finance. It should
ensure that pending legislation on secrecy and on
freedom of information leads to maximum transparency,
including in relation to military matters.

Steps are also necessary to bolster the ability of the
Supreme Audit Agency (BPK) to review military finances
in full, including operational spending and off-budget
finances until the latter are phased out. Parliament
should act to amend the foundations law of 2001 to
remove any doubt about BPK's authority to audit
military foundations, or the government could
accomplish that aim through an executive order. The
government should facilitate prompt and full public
dissemination of BPK's audit findings, including past
audits on military finances, consistent with
international best practice and the principle of
maximum transparency.

Address Financing Concerns

An important finding of our research is that military
self-financing has far-reaching corrosive effects that
harm the public and also the military itself. The
difficulty, as we also have noted, is that military
fundraising activities have their origins in a
response to acute financial pressures. For reform to
be effective, the Indonesian government must work to
remove the incentives and opportunities for the
military to retain a hold on the economy. This will
entail several steps and should involve a range of
actors. Efforts to address the financial pressures
faced by the military must be well planned so that
they promote financial accountability and achieve an
appropriate balance that recognizes other spending
priorities.

Undertake Strategic Defense Planning

The starting point for military budgeting, like all
budgeting, should be strategic planning. To determine
the appropriate level of budgetary funding for the
military, the government of Indonesia must confront a
prior question: what role should the military fill and
how? A full defense review would provide such an
assessment. Many military experts have commented that
such a review is overdue. It would also be welcomed by
some in the military. As one indication, Major-General
(ret.) Sudrajat, a former director general for defense
strategy in the Ministry of Defense, publicly called
for a new defense doctrine in September 2005.593

In 2006 an official defense review, led by the
Ministry of Defense, was underway with external
support from donors.594 For this review to serve as a
useful basis for future planning, it would need to
evaluate the security needs for which a military
response is appropriate (a threat assessment) and then
define the role of the military in responding to those
needs. A thoroughgoing review would not take for
granted existing realities, such as present levels of
staffing and the existence of the territorial defense
structure that independent experts have declared
outmoded and ill-suited for a maritime state and that
civil society groups have challenged on human rights
grounds. The results of such a review, together with
efforts to promote a national dialogue on defense
issues, would provide the basis for the government to
make decisions on defense spending that are consistent
with democratic principles, actual needs, and budget
realities.595

Establish a Proper Defense Budgeting Process

Simultaneous with efforts to develop an appropriate
and affordable military strategy, the government
should address weaknesses in its budgetary processes.
The Indonesian government should establish effective
expenditure management systems for military finance.
In doing so, it should build on existing efforts with
respect to other areas of government spending. It
should prioritize in particular efficiency and
oversight. This recommendation is in keeping with a
major theme of this report, namely the importance of
financial accountability as an element of broader
public accountability and a means to help bring an end
to military impunity.

The donor community and international financial
institutions should make themselves available to help
Indonesia improve its management of defense
expenditures, and Indonesian officials should seek out
this assistance. Indonesia's partners are well
positioned to share international experience on
defense budgeting and other matters. Donors, for
example, could support defense efficiency studies to
help identify ways on-budget resources can be used
more efficiently and effectively. They could begin
with pilot projects focused, for example, on the
budgeting process and use of funds in the Ministry of
Defense or one of the TNI service branches. Donor
governments, moreover, can provide assistance to
improve the military finance skills of the civilians
responsible for military oversight.596 Initiatives to
provide specialized coursework in defense management
can support this goal.597 Donors also can support
independent assessments to understand weaknesses in
Indonesia's military financial management system.598

A number of bilateral donor governments have already
supported defense budgeting-related efforts in
Indonesia, but there is scope to expand and better
coordinate their efforts. The Consultative Group on
Indonesia provides an important forum. It formed a
working group on security and development that could
provide a focal point for enhanced efforts to address
security sector reform issues.599 The Partnership for
Governance Reform also could facilitate the pooling of
donor resources and help promote work on military
reform, if it could engage the TNI as it has the
police. The Partnership reportedly pursued this idea
in 2003 without success, as the TNI was
uninterested.600

The Ministry of Finance could take the lead in
establishing appropriate cooperation with multilateral
and international financial institutions. For example,
the government of Indonesia and the World Bank have
agreed to conduct a series of public expenditure
reviews (PER). One PER, addressing sectoral spending,
was due to be finalized in 2006. The Ministry of
Finance should request a follow-up review that
explicitly addresses security sector financing issues.
An example is provided by Afghanistan, where a World
Bank-led review that included an in-depth study of the
security sector was carried out in 2005.601

Additional specialized reviews are available that
would help Indonesia improve its budget processes and
outcomes. The World Bank has several instruments to
analyze expenditures and build capacity to manage them
effectively, one of which is the Country Financial
Accountability Assessment.602 Likewise, the IMF is
positioned to offer technical expertise. For example,
an IMF Report on Standards and Observance of Code
(ROSC) stands as a useful tool to evaluate actual
financial practices against international standards,
identify areas in need of improvement, and set in
motion a process to address and monitor those issues.
A fiscal transparency ROSC for Indonesia was carried
out in March 2006, and the IMF anticipated completing
its report by mid-year. Human Rights Watch encouraged
the IMF to consider the question of off-budget
military financing in Indonesia in its review and
resulting report.603 The Indonesian government also
should engage actively with the Asian Development
Bank. It has expertise on governance issues, including
in connection with public financing.

Fund the Military at Appropriate Levels

Considering that budget constraints have provided the
impetus and ongoing public rationale for military
self-financing, as discussed in this report, adequate
on-budget funding must be a centerpiece of the drive
to reform the military. As part of wider budgetary
improvements addressed above, the government should
provide public funding for the military at the level
determined to be adequate and consistent with national
priorities. For this process to have legitimacy, it
should include appropriate measures for consultation
and transparency within and outside of government
structures.

The donor community could be of assistance in this
regard. Bilateral or multilateral donors and
institutions can help the Indonesian government
identify resources to help make up for budget
shortfalls. For example, they could study to what
extent the elimination of military business activity,
and the dampening effects on the economy caused by
this activity, might lead to greater corporate tax
revenue. They also could analyze the fiscal impact of
the government's plans to progressively increase
defense budgets, as an input into government
decision-making. At the same time, donors might be
able to advise the government on ways to finance the
military while protecting spending on pro-poor
government activities. They might consider relieving
some of Indonesia's burdensome debt to free up
resources that the government itself can spend on
priority areas, once sufficient accountability
measures are in place.

Donors also can support civilian authorities
responsible for ensuring proper budgeting and
oversight, including of military finances. Such
support could include trainings and technical
assistance for the parliament and civilian-led
Ministry of Defense.604 The Organization for Economic
Cooperation and Development (OECD), which includes
several donors to Indonesia, allows the use of
development cooperation funds for some
security-related programs, provided they are directed
to civilian structures, not to the armed forces of
recipient countries.605 Eligible programs include
"technical cooperation and civilian support" related
to "management of security expenditures through
improved civilian oversight and democratic control of
budgeting, management, accountability and auditing of
security expenditure."606

Address the Welfare Needs of the Troops

Contrary to those who argue that military businesses
are needed to support troops, our research has found
that low-ranking soldiers derive little benefit from
military self-financing activities, since funds are
commonly diverted to other purposes (including lining
the pockets of more senior personnel). The troops
would be better served by targeted measures funded
from government revenue. The government of Indonesia
should proceed with plans to increase military
salaries (along with those of the police and civil
servants) to enhance their ability to earn a decent
living and thereby reduce the incentives for
corruption and illicit business activity. More
broadly, the government should actively explore how to
improve soldier welfare through improvements to their
conditions of work and compensation, including
pensions. It is ultimately the responsibility of the
government, not the TNI on its own, to ensure a decent
living standard for its troops.

Remove Conflicts of Interest

Efforts to divest the military of its business
holdings and improve control over military finances
must be complemented by proactive measures to
eliminate entrenched military activity of a more
informal nature. As documented in this report, the
military's engagement in the economy, particularly its
interactions with the private sector, create conflicts
of interest and incentives for extortion. Close
attention must be paid to how the deployment of
government security forces at company sites is
financed.

One company, ExxonMobil, has said it routes its
security payments to the military through an
Indonesian government institution, the oil and natural
gas authority BPMIGAS.607 Juwono Sudarsono has said
that when he first served as defense minister
(1999-2000), ExxonMobil paid for security through
state oil and gas firm Pertamina: "Usually, Pertamina
plays the role as the funding channel from these
mining [sic] companies for the country's security
officers."608 At least one company, the U.K.-U.S. oil
company BP, has pledged to publicly report any
payments it makes for security provided by public
forces.609 BP sought to develop alternative security
arrangements that do not rely as heavily on state
security forces, but these have not yet been
tested.610

Human Rights Watch maintains that security costs
associated with any deployment of public security
forces to protect company sites should ideally be
covered through appropriate taxation, on the principle
that public security forces should be paid with public
funds, to ensure that they are held accountable to the
Indonesian public and that the flow of funds does not
provide incentives for these forces to put the
interest of companies ahead of the national interest.
That is especially true in Indonesia, where company
security arrangements have often been associated with
serious allegations of human rights abuses and
corruption. Under any system of financing for public
security at company sites, certain minimum conditions
must be met. The cost of security should be paid from
government coffers, the funds directed to this purpose
should be independently audited, and they should be
publicly disclosed in detail. The Indonesian
government also should take firm steps to
appropriately train and monitor troops, and to punish
those responsible for human rights abuses, including
in connection with company security arrangements.

Companies, in turn, should minimize their interaction
with the Indonesian military. As a general matter,
they should adopt and implement policies on human
rights, consistent with the U.N. Norms on Business and
Human Rights and international best practice.611
Consistent with the 2004 decree on security for vital
national assets and related government announcements,
companies should transition public security
arrangements to the police at the earliest feasible
opportunity. They also should fully adhere to the
provisions of the Voluntary Principles on Security and
Human Rights and provide for maximum transparency,
including by disclosing publicly and fully current and
past payments to security forces and taking steps to
avoid and appropriately respond to human rights abuses
by security personnel.

Companies, whether foreign or domestic, private or
state-owned, also must do their part to respect the
ban on military business activity, as contained in the
2004 TNI law. Companies that already have a previously
established business relationship with the military
should disclose it fully, coordinate with the
authorities to arrange for the transfer or disposal of
military interests in such companies, and take steps
to remove active-duty military personnel from
corporate positions. Informal partnerships or
arrangements with the TNI likewise must end. Companies
and other economic actors should cease hiring the TNI
to provide services, recognize that payments for
"facilitation" services constitute bribes and halt
them immediately, and perform due diligence checks to
ensure that they do not perpetuate military economic
activity in their operations.

for Footnotes 588 - 611, go to: 
http://hrw.org/reports/2006/indonesia0606/7.htm#_Toc138140653

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Acknowledgments

This report is dedicated to the memory of Munir Said
Thalib (1965-2004), known as Munir. Widely recognized
as one of Indonesia's foremost human rights defenders,
Munir was an outspoken critic of abuses by Indonesia's
security forces and a strong advocate of reform. Munir
was poisoned on a September 2004 flight to the
Netherlands. There is little doubt that Munir was
murdered in retaliation for his exemplary human rights
work. His memory continues to inspire new generations
of activists, in Indonesia and beyond.

The report was researched and written by Lisa Misol,
researcher in the Business and Human Rights Program of
Human Rights Watch. It was edited by Brad Adams,
Director of the Asia Division of Human Rights Watch;
Arvind Ganesan, Director of the Business and Human
Rights Program; Charmain Mohamed, researcher in the
Asia Division; and Joseph Saunders, Deputy Program
Director. Ian Gorvin, consultant to the Program
office, conducted the program review, and James Ross,
Senior Legal Advisor, conducted the legal review.
Outside counsel Usman Hamid, Todung Mulya Lubis,
Elizabeth Wang, and others provided additional legal
review. Edmund Bon also assisted with legal matters.

Charmain Mohamed and Agus (last name withheld for
security reasons) assisted with the research for this
report. Joseph Saunders and Human Rights Watch board
member David M. Brown helped research certain portions
of the report. Additional research support was
provided by Lawrence Boyd, Ronald Lengkong, Brihannala
Morgan, and Michael Roston. Human Rights Watch
associate Carly Tubbs and former associate Manu
Krishnan also provided background research.

Human Rights Watch would like to thank the numerous
organizations and individuals that contributed to this
report, including the government officials who agreed
to be interviewed or otherwise provided information.
We regret that space and security considerations
prevent us from naming everyone who helped us. We
extend a special thanks to the organizations that
assisted with the field research reflected in the
report, namely LBH Medan, Komunitas Sumpit, PADI
Indonesia, and Walhi-South Kalimantan. We also are
grateful to the outside readers who agreed to comment
on a draft of the report. These include Nicole Ball,
Col. (ret.) Don McFetridge, Mufti Makarim al-Ahlaq,
Danang Widoyoko, and a reader who preferred to remain
anonymous. Numerous interpreters and translators also
facilitated our work. Human Rights Watch bears sole
responsibility for the contents of the report.

Layout and production of this report were coordinated
by Carly Tubbs; Veronica Matushaj, photo editor and
associate director in the Development and Outreach
division; Andrea Holley, manager of outreach and
public education; and Fitroy Hepkins, mail manager in
the Publications division. The map accompanying the
report was prepared by Apperceptive
(http://apperceptive.com).

Finally, we wish to acknowledge with appreciation the
generous financial support of David M. Brown.

END/11 of 11

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Joyo Indonesia News Service
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