[Kabar-indonesia] 9 of 11: HRW: Indonesian Military's Economic Activities - Mismanagement

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HRW: Indonesian Military's Economic Activities 
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Box 4: Financial Mismanagement

The poor business practices of military-owned
companies have diminished their financial
contribution. Audits of the military's business
holdings have been rare, but invariably have uncovered
major irregularities. In 2000 the newly installed
chief of Kostrad, Lt. Gen. Agus Wirahadikusumah,
ordered a financial review of the accounts of its
foundation, Yayasan Dharma Putra Kostrad (YDPK). This
reportedly was the first professional audit of YDPK
since its founding nearly forty years earlier. It
found that Wirahadikusumah's immediate predecessor as
the head of Kostrad, Lt. Gen. Djaja Suparman, had
withdrawn at least Rp. 160 billion ($19.2 million), of
which a portion was later returned, from the accounts
of PT Mandala Airlines, a subsidiary of the
foundation.497 

A follow-up investigation ordered by Wirahadikusumah
revealed a wide range of anomalies in the use and
management of the foundation's funds, including
payment of inflated prices, expenditures unrelated to
the foundation's welfare mission (including
bulletproof vests), and overspending on marketing. An
audit report determined, moreover, that YDPK operated
without a budget or planned activities, that it did
not adhere to good bookkeeping practices, that it
lacked an internal oversight mechanism, and that its
financial data, including reports, was scarce and
unreliable.498 Total losses from the foundation were
reportedly in the order of between Rp. 75 billion
($8.1 million) and as much as Rp. 189 billion ($20
million), the latter being equivalent to the entire
worth of the foundation's assets at the time.499
Prompted by the revelations, the army inspector
general undertook an internal audit but, ignoring the
indications of corruption, he attributed the problems
to procedural error.500

Suparman, who went on to become the army's Inspector
General, has strongly denied the allegations of
corruption. He told Human Rights Watch that the
charges were unfounded, politically motivated, and
amounted to "character assassination."501

Wirahadikusumah was ostracized by fellow military
officers who resented his reform efforts. They
successfully arranged to have him removed from his
command in mid-2000.502

The year 2000 was also the year of the official BPK
audit of military foundations, mentioned above. The
BPK performed a "cursory" review of eight military
foundations and found a series of problems:503

- "weak or total absence of internal control and
oversight mechanisms in the management of the
foundations;

- "incoherent financial records and incompetent
financial management;

- "violation of accounting principles in their
financial management;

- "unclear connection between the foundation, the
company, and the original military organization; and

- "inappropriate use of foundation fund for items that
have nothing to do with the purpose and goals of the
foundation."504

One of the BPK auditors at the time described
additional findings, including as follows:

- "[T]he chief of staff or the commanding officer
plays a dominant role in determining the foundations'
expenses and earnings.

- "The foundation sources and the budget of the
military-owned businesses are not transparent and they
are not only used for the welfare of the soldiers.
There are indications that the funds are used to cover
its operational preparations.

- "Elements of corruption, collusion, and nepotism are
very strong. There are markup practices, no regular
accountability reports and an ineffective use of
funds. Most of the foundation's funds are channeled
into command units and used as tactical funds."505

The audit, which was not made public, reportedly
identified one military foundation as having misused
Rp. 207.437 billion ($20.7 million) and said funds in
the amount of Rp. 87.975 billion ($8.7 million), Rp.
14.023 billion ($1.4 million), and Rp. 13.98 billion
($1.4 million) were missing from three others.506 The
then assistant for general planning for the
commander-in-chief, the outspoken Lieutenant General
Wirahadikusumah, said that the absence of proper
records of expenses caused him to suspect that
military officers had embezzled the missing funds.507
As bad as these findings were, they could have been
worse. The foundations reportedly cleaned up their
books before sharing them with BPK.508 One of the
auditors charged that "in addition to incompetence in
bookkeeping, there is evidence to suggest that
information has been deliberately 'lost' or
fabricated."509 Juwono Sudarsono, then serving a first
term as defense minister, added: "Incompetence and
corrupt practices means we must take the results of
the audit as an indication only.510

In 2001, army headquarters asked external auditors
from Ernst & Young to conduct an audit of the main
army foundation.511 The audit reviewed YKEP's holdings
in thirty-three companies that funneled funds to YKEP
as royalties or dividends.512 The report was not made
public, but Human Rights Watch obtained a copy. Among
its key findings, the audit found that YKEP-owned
companies were marked by low profit margins, large
debt exposure, overlapping of businesses, and legal
uncertainties regarding business arrangements and
asset ownership (the latter likely a reference to
state assets used by the foundation). The majority of
YKEP's holdings showed low market share and dim future
prospects.513

The audit also pointed to several management problems.
It found that company directors, generally army
retirees, were not appointed based on performance
(suggesting a patronage system), and that third
parties operated several of the companies in murky
arrangements that presented potential conflicts of
interest.514

The audit verified that the military was not
operationally engaged in the companies it owned. It
recommended divestment from some companies because the
foundation "has little or no control and hence [has]
not been receiving any benefits."515 Military
cooperatives have received less scrutiny but past
reviews have found that, like foundations, they have
misspent state funds and caused financial losses.516

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Other Types of Military Business

Little is known about the flow of funds derived from
military economic activity where the military does not
have a formal ownership stake. According to persistent
reports, in past years such funds may have been used
to facilitate unauthorized activities, such as the
formation of militia groups.517 More recent
information strongly suggests a pattern not unlike
that which characterizes military-owned businesses:
while some funds might be directed for operational
purposes, illegal and informal business activity is
rife with corruption and individuals often benefit
more than the institution.

Payments for different types of security services
illustrate the point. With respect to illegal
protection rackets, of the money earned by enlisted
men circulates to their superior officers. A person
who has researched criminality in Medan explained that
when soldiers back illegal businesses "there's an
obligation to give money to the commander."518 In the
case of security services organized informally at the
unit level, a patronage system ensures that funds
earned at lower levels flow to more senior officers.
Arrangements to hire out soldiers for protection
services are often negotiated by their commanders, who
assign the task and keep a fee.519 The commanders also
send a portion of the proceeds to their superiors.520
For instance, the Indonesian human rights group
Kontras found that in one area of West Java, the
military battalion received monthly payments from
several businesses (as well as the local government).
These were distributed according to rank. The sums
involved were tiny compared to the payments made by
Freeport (see "Freeport's Security Arrangements" in
Part II: An Anatomy of Military Economic Activity),
but in a country where salaries are very low they
could add significantly to a soldier's take-home
pay.521

Myth 3: The Proceeds of Military Businesses are Mainly
Used to Support Troop Welfare

Military businesses in principle exist for the benefit
of the troops. Troop conditions can be dismal,
and—particularly at the low ranks—military pay has not
been enough to meet the basic needs of soldiers and
their families. Salaries for soldiers are very low, as
they are for all public servants and many others in
Indonesia's developing economy. Base monthly salaries
for the troops start at Rp. 650,000 (approximately
$70) and top out at a little more than Rp. 2 million
($220) for senior officers.522 Soldiers receive
supplementary allowances that in some cases nearly
double their take-home pay, but they struggle to get
by on that income.523 A retired military officer
informed Human Rights Watch: "It is taken for granted
that a criterion for a successful commander is the
ability to fund the unit to look after the welfare of
the soldiers."524

Just as the pressure to find resources to provide for
the troops cannot be attributed solely to official
funding levels, since poor budgetary practices, waste,
and corruption are also partly to blame, it is also
false to suggest, as many in the military have, that
independently generated funds are mainly spent on
social programs.525 Certainly there is some social
spending. Military foundations provide soldiers and
their families with added benefits, including health
care, educational support, housing, and pensions for
military widows and orphans. The foundations also
sponsor various educational institutes. In addition,
military businesses owned via foundations commonly
employ military retirees and are considered an
informal pension system.

Yet the funds available for such welfare spending are
greatly depleted by the practices of military
businesses, including graft. Commanders use the money
largely at their own discretion and without proper
record keeping, running them like "slush funds."526 A
military analyst explained that the true purpose of
military companies is to siphon funds: "It's all about
rent-seeking. The formal businesses don't exist to
make a profit. The point is to facilitate
scheming."527 As senior officers milk military
businesses dry, little or no profits are left for the
troops for whose benefit these businesses were
purportedly established. Defense Minister Juwono
Sudarsono has acknowledged that the top brass are the
true beneficiaries of military business.528 As an
example, the former deputy army chief Kiki Syahnakri
confirmed that his income when he was appointed to
head a military-owned timber company was worth several
times his military salary.529 A parliamentarian,
Abdillah Toha, commented: "Those who profit are the
generals. So it's all lies to say that military
business is needed for soldier welfare."530

Rather than retain military businesses of dubious
economic and social value, there are other means to
improve soldier welfare that are less susceptible to
corruption by their superiors and do not threaten
human rights and military professionalism. Soldiers
would benefit more directly from measures that enhance
their compensation and living conditions. Military pay
was due to increase in 2006 by between 15 and 20
percent under a government plan to raise the incomes
of soldiers, police, and civil servants.531

Conclusion

The responsibility to provide for the troops lies with
the government of Indonesia. For decades, civilian
leaders have instead allowed the military to raise
funds independently on the pretense that the funds
will be used to meet budget shortfalls. The net result
has been the spread of unaccountable off-budget
military financing. A major overhaul military finance
is needed to make the system compatible with
democratic governance and human rights.

Flawed 2004 Reform Effort

In 2004, parliament passed a law that mandated an end
to military involvement in business. This initiative
has promise, but implementation has been very slow and
the few steps taken so far have been deeply flawed,
both in conception and in execution. This section
reviews flaws in the law and in the limited efforts at
implementing it. Our assessment is rooted in the
findings of our human rights analysis, which showed
that three essential elements have been missing from
the reform debate to date. First, a sense of urgency
is missing, commensurate with the serious nature of
the problem and its harmful effects. Second, financial
accountability is needed to help combat military
impunity for human rights abuses. Third, the reform
effort must consider the problem of military
self-financing in a comprehensive way to account for
the true scope of the military's economic
entanglements and associated abuses.

A Mandate for Reform: The TNI Law

In September 2004 the outgoing parliament passed a law
on the TNI, Law No. 34/2004, that included several
provisions related to military financing. It stated
that TNI troops are entitled to an adequate income
funded from the official defense budget.532
Importantly, the new law also emphasized that
"professional soldiers…do not do business" and
included an unequivocal prohibition on soldiers taking
part in business activities.533 Even more
significantly, the TNI law imposed a deadline for
concrete changes: "Within five years from the passage
of this bill, the government must take over all
business activities that are owned and operated by the
military, both directly and indirectly."534

The adoption of these provisions represented an
unexpected watershed, yet the law itself left open
many questions. By imposing a deadline the law
recognized the need to act without delay, but it did
not spell out any consequences if the government or
the military failed to comply with its provisions. In
addition, the question of the law's scope was not
clearly addressed; the law did not define which types
of military businesses were covered. This lack of
clarity made it possible for some types of
formally-established businesses to be excluded and for
implementation efforts to ignore the military's
informal and illegal economic activities. Finally, the
law offered no guidance on how the government should
divest the military of its business interests or where
it was to draw the funds to bring the military fully
on budget.

Seriousness of Purpose Lacking

Past efforts to eliminate military business activity
have invariably stalled, so true reform will require
strong leadership and a sense of purpose commensurate
with the seriousness of the problem. In April 2005,
Indonesia's then military chief, General Sutarto,
pledged that the TNI would withdraw from business
within two years.535 This commitment, later repeated
by Sutarto's successor and senior TNI staff, appeared
to indicate an important shift in attitude that would
facilitate the implementation of needed reform without
delay.536 To date, however, President Yudhoyono and
his defense minister, Juwono Sudarsono, have taken a
cautious, go-slow approach. Both have argued that
military budgets would need to be raised first before
the government could be expected to tackle the problem
of military self-financing. The defense minister told
Human Rights Watch in early 2005 that bringing the TNI
fully on budget would, in his estimation, take ten to
fifteen years.537 The TNI law imposes a much shorter
timeline, but the Yudhoyono government is seemingly in
no rush to meet it.

The government waited until mid-2005 to form an
inter-ministerial team to plan the process of
transforming military businesses. This team, known as
the Supervisory Team for the Transformation of TNI
Businesses (Tim Supervisi Transformasi Bisnis TNI,
TSTB), includes representatives from the Ministry of
Defense, the TNI, the Ministry of Law and Human
Rights, the Ministry of Finance, and the Ministry for
State-Owned Enterprises. The TSTB is headed by Said
Didu, secretary of the Ministry of State-Owned
Enterprises, with Lt. Gen. Sjafrie Sjamsoeddin,
secretary-general of the Ministry of Defense, serving
as the deputy. Under the TSTB's official mandate,
formally issued in late November 2005, the team was
tasked with conducting a verification and valuation of
military businesses, including by reviewing legal,
business, and financial aspects of the businesses.538

The government delayed basic information gathering by
granting the military until late September 2005, a
full year after the TNI law was passed, to submit an
inventory of its businesses.539 Next, the
inter-ministerial team moved to evaluate the
identified businesses according to several
criteria.540 That process also moved very slowly and
had made little headway as of March 2006. TSTB members
said their ability to complete this task was
complicated further when the TNI submitted a revised
inventory that listed more than 1,500 military
businesses (up from 219).541 Based on the judgment of
the TSTB that many of these businesses would not be
eligible for restructuring,542 the government decided
to postpone plans to assume control of the identified
businesses until it could determine which ones it
intended to take over.543 To carry that work forward,
the TSTB proposed that a new agency, the TNI Business
Transformation and Management Body (Badan Transformasi
dan Pengelolaan Bisnis TNI or BTPB), be created. The
BTPB's task would be to review and verify information
on military enterprises (the task originally assigned
to the TSTB), to assume management control over these
enterprises, and to then restructure the businesses to
comply with prevailing laws.544

These various delays have pushed back action to
implement the TNI law. Months have been spent
collecting, reviewing, and verifying data on
individual businesses but the parameters for how the
government intends to reform these businesses have not
been set. Regulations, in the form of a presidential
decree, that the government had first been promised
for October or early November 2005, then April 2006,
never materialized, and the dates slipped without
explanation.545 By April 2006, expectations had again
been revised downward. (That month, the government
belatedly initiated a review of foundations under the
Ministry of Defense, in parallel to the TSTB process
for TNI-owned businesses.546)

TSTB members who spoke to Human Rights Watch were
keenly aware of the strong public demand for reform of
military business. They affirmed their commitment to
carrying out the task, as did the TNI, but emphasized
that it would take more time. They anticipated that
the new agency might be in place by mid-2006 on the
basis of a presidential decree, and that the actual
transformation of military businesses would follow
later.547 The TSTB head, Said Didu, told Human Rights
Watch that the agency might need until 2009—the
deadline provided by law—to take over military
businesses and that turning them into state-owned
enterprises, returning, or disposing of them could
require more time.548 The TNI continued to insist that
the target date to finalize the process was two years,
rather than the five provided by law,549 and the
Ministry of Defense expressed hope that the government
handover could be completed in 2006,550 but it was
increasingly clear that these timeframes were not
realistic. In the interim, the absence of clear rules
has delayed action, created confusion, and opened up
opportunities for mischief, as discussed below.

Plans Fail to Promote Accountability

The government's efforts to address military
self-financing have been focused almost exclusively on
the 2004 TNI law's provision requiring the government
to take control of military businesses. Government
planners have prioritized the identification of
businesses that may be eligible for takeover,
particularly the few that are profit-makers, rather
than placing top priority on ending military
involvement in business in any form. Similarly, they
have not taken the opportunity to improve civilian
control over military finances. Little attention has
been given to concerns over the lack of public
accountability in the monitoring, oversight, and
transparency of military funds.

It does not help that the law as written overlooks
important accountability issues. It refers obliquely
to the requirement that the military be fully funded
from government accounts, as did an earlier law, but
provides no specifics about how to achieve financial
accountability. It also does not define military
business, which has opened the door for the government
to consider exempting some business activity. The law
also does not identify penalties for violations of the
prohibition of military business. While it imposes a
five-year timeline for the government takeover of
military businesses, it does not spell out the
consequences if that deadline is not met. Some of
these details might be addressed in pending
regulations, when those are finally issued. In the
interim, however, the lack of clarity in the law and
the absence of ground rules—and any anticipated
punishments—leave room for the military to act
independently to dispose of its assets without
adequate oversight.

That has already been the case. For example, the army
independently sold off its stake in Bank Artha Graha,
a private company in which it held shares via the YKEP
foundation, and allocated the Rp. 121 billion ($12.1
million) proceeds without notifying the authorities
responsible for overseeing the transfer of military
businesses.551 Numerous other deals were concluded or
were in the works.552 Parliamentarians denounced the
sales, saying they violated the TNI law, at least in
spirit.553

The military was not deterred, however, and insisted
that it was within its rights to manage the businesses
as it saw fit. For instance, Kostrad's chief announced
that Kostrad intended to sell off shares in its
money-losing Mandala Airline and did not need to await
government regulations on the restructuring of
military businesses.554 Despite concerns that advance
sales or closures of businesses by the TNI undermined
the ability of the government to manage the handover
process in a transparent and accountable manner, the
government ultimately acquiesced. It endorsed the
military's rationale and argued, contrary to the
dictates of the TNI law, that the Kostrad foundation
was free to go forward with the sale because Mandala
Airlines was a "100 percent private company."555
Proponents of military finance reform pointed out that
what was taking place was a "fire sale" of businesses
that properly should be considered state assets.556
(See discussion below.)   

With regard to legal accountability, the TNI has
rejected criticism that its forces remain largely
above the law.557 The then spokesman for the TNI
argued in March 2006 that the TNI is firmly committed
to holding military personnel accountable, including
with regard to human rights abuses and
business-related crimes:

[T]he TNI has consistently brought soldiers suspected
of violating the law to justice. So far, no TNI
personnel suspected of the violations have escaped
prosecution, including those implicated in human
rights abuses (…). The TNI will not turn a blind eye
to the fact that some of its personnel were, in the
past, involved in crooked business practices. But in
line with its internal reform, the TNI is and will be
taking legal actions against soldiers found to have
breached the law in their business activities.558

The TNI's claims that it has consistently pursued
justice for human rights abuses is met by overwhelming
evidence to the contrary.559 The TNI provided limited
data on the number of military trials and convictions
over a ten-year period,560 but Human Rights Watch was
informed separately that most of the convictions were
for infractions of military discipline, not human
rights abuses or economic crimes.561 Moreover,
military courts have a history of failing to prosecute
soldiers for crimes against civilians.562 The TNI has
strongly opposed proposals to make soldiers subject to
civilian courts for such offenses.563

Similarly, TNI representatives have pledged that they
will crack down on corruption, unauthorized business
activity, and associated abuses, but when given the
opportunity to do so—in relation to the South
Kalimantan coal brokering and abuses example included
in this report, for instance—they have declined to act
and have offered excuses instead. Elsewhere, they have
attributed misbehavior to rogue elements acting in
isolation.564 The TNI leadership has been willing to
act in selected cases, but it has not fully recognized
its responsibility for these problems or committed to
the structural reforms needed to ensure proper
accountability.565 The same must be said of their
civilian counterparts, who have failed to make
accountability a centerpiece of military reform
efforts, including in connection with military
finance.

Unwillingness to Tackle the Full Scope of Military
Economic Activity

Military fundraising, as shown in this report, spans
four different categories of economic activity. In
contemplating reform of military finance, civil and
military officials have only been willing to consider
steps to deal with one category—the established
enterprises in which the military has a documented
ownership share. Moreover, they have focused their
attention on a sub-set of those businesses, the six or
so most valuable companies, and suggested that they
might leave the remainder in military hands.566 Upon
first hearing such proposals, parliamentarians
protested that the government's intended approach fell
short of the requirements of the law they had
passed.567 That law, as noted, mandated that the
military be divested of all its business interests
within five years and prohibited military personnel
from taking part in any business activities.

The inter-ministerial team formed to supervise the
restructuring of military businesses for the
government, the TSTB, has taken a very selective
approach. It has largely focused on the goal of
nationalizing the most lucrative military enterprises
rather than prioritizing the task of ending TNI
business activity.568 The limited focus on major
military enterprises and openness to permitting the
military to remain in business seemingly has been
influenced by the lobbying efforts of senior military
leaders. The TNI leadership has said it will comply
with requirements, but from an early stage it has
stressed how it thought the law should be applied.
General Sutarto made clear that the TNI would readily
relinquish companies that were unprofitable or served
only to benefit its private partners and sully the
TNI's image, but he argued that the TNI should be
permitted to retain those businesses, notably those
established under cooperatives and foundations, that
purportedly bring tangible benefits to the
soldiers.569 The new TNI chief appointed in early 2006
to replace General Sutarto upon his retirement, Air
Marshal Djoko Suyanto, also took up this cause. He
acknowledged that involvement in business is
antithetical to military professionalism,570 but he
nevertheless argued:

We must carefully separate individual businesses from
institutional businesses.…I believe that the
[inter-ministerial TSTB] team will be very wise in
correcting and selecting the military businesses. I
mean that businesses that serve the interests of TNI
members and their families must be retained."571

True to the TNI chief's wish, government planners
developed a blueprint for the transformation of
military businesses that would allow the military to
retain significant investments through purportedly
independent entities.572 Under this plan, the
government was due to create a new agency (BTPB, as
mentioned above) that would evaluate and "clean up"
selected military businesses and prepare them to be
transformed into state-owned enterprises, sold off, or
liquidated, depending on their business prospects.573
The plan, however, would not cover military
foundations, military cooperatives, and those
individual businesses that, in its estimation, did not
make use of government assets.574

The logic for exempting these entities was deeply
flawed. Foundations and cooperatives were to be left
in place on the understanding that they would limit
themselves to engagement in "social business" of a
"noncommercial" nature and that they would comply with
prevailing regulations.575 In essence, that plan
affirmed the status quo, since foundations and
cooperatives have long been subject to (and
successfully flouted) those dictates. TSTB members,
however, defended their choice by arguing that TNI
personnel, in their capacity as individuals, were
entitled to form foundations and cooperatives.576 By
their logic, the TNI law's ban on military business
did not apply if the foundations and cooperatives run
by and for military personnel were nominally
independent of the military hierarchy.577

The TSTB's decision to disregard certain individual
military businesses also was based on a dubious
rationale. Operating on the principle—nowhere
reflected in the TNI law—that the government should
not lay claim to businesses that military personnel
and their private partners built "with their own
effort, without government infrastructure,"578 the
TSTB said it planned to exclude all military
businesses that purportedly did not use state
assets.579 In offering this exclusion, the TSTB
declined to weigh the many ways in which military
businesses materially benefited from the authority of
the government and its considerable resources.580 As a
result, the TSTB did not object when the Kostrad
foundation sold Mandala Airlines because it said there
was no evidence that the airline had used state
assets.581 This conclusion not only relied on a very
limited view of the government resources utilized by
military companies and on the misguided notion that
the businesses of the TNI (a government entity) could
be considered independent of the government; it also
contradicted publicly available information, including
reports that Mandala benefited years earlier from the
transfer free-of-charge of six aircraft owned by a
subsidiary of Pertamina, the state oil company.582
Consistent with the TSTB's overall plan, however, the
Kostrad foundation was allowed to independently sell
the airline and keep its share of the proceeds rather
than enter them into state coffers.583

-end/9 of 11... continues...

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