[Kabar-indonesia] 7 of 11: HRW: Indonesian Military's Economic Activities - Obstacles to Reform

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III. Obstacles to Reform

For the Indonesian government to end military
self-financing, it will have to overcome several
challenges. Alongside needed measures to confront
military businesses and eliminate the TNI's other
economic activities, the government also will need to
find ways to appropriately finance the armed forces
from budgetary funds. To do so will require
improvements to financial controls on the military. As
part of that effort, it will be essential to clearly
address a number of misconceptions about military
economic activity that are often cited as excuses to
scuttle reform. This chapter addresses these issues in
turn. It begins with a critique of the current system
of military finance control. Next, it addresses three
myths about military business activity. It finds that
the challenges, while difficult, are not
insurmountable. Effective reform of military financing
will necessarily be a complex process that will unfold
over years, but delaying action will only make matters
worse.
Unaccountable Military Finances

Indonesia's constitution provides that government
revenues and the annual budget must be set by law and
implemented transparently and with accountability.377
Actual practice, however, falls far from the mark.378
The World Bank, for example, has critiqued Indonesian
government financing, while stressing that the problem
is worse in the case of the security forces:

Indonesia's budgets are systematically underfunded,
with low operations and maintenance provisions, late
release of budget funds, and skimming of allocations
at different levels of government by oversight
departments. Government agencies are implicitly
expected to find other means of meeting their needs,
thus blurring the lines between public and private
expenditure and encouraging rent-seeking behavior.
These practices are particularly egregious in the case
of the military and the police. Poor financial
controls allow such practices to flourish.379

Military finances, like all public spending, should
follow good fiscal management practices.380 This
section analyzes the Indonesian government's financial
management of the military sector and levels of
transparency. It identifies a number of major
shortcomings and finds that, despite some efforts to
improve financial controls, the military remains a
weak area. As a general matter, the Indonesian
government has acknowledged the need to improve
management of government finances and taken steps in
this direction.381 The progressive implementation of
overall reforms is welcome, but there have been delays
in applying these government-wide finance reforms to
the military sector. Moreover, targeted efforts are
needed to make military finances publicly accountable.
Government Funding of the Military

>From budget formulation through to the execution and
oversight stages, the military budgeting process in
Indonesia is marked by a series of problems. The
government is gradually switching to performance-based
budgeting, but the military is not yet covered and has
not been identified as a special priority. In the
meantime, Ministry of Finance officials and members of
parliament (MPs) complain that Ministry of Defense
budget requests are deliberately inflated and not
backed by basic information to explain why requested
funds are needed. Budget amounts are set based on
previous years' allocations, they say, rather than on
an examination of actual needs and priorities or even
accurate information on prior spending. The net result
is that decisions on the allocations of funds—for
example, on spending for welfare purposes versus
weapons procurement—are made without adequate analysis
or due consideration of the trade-offs involved. The
problem, according to officials, can be partly
attributed to the dearth of information, which makes
it difficult for them to form adequate judgments, but
they also say that the government has unclear military
spending priorities.382

One result is that approved budgets tend to be skewed
toward recurring expenditures. A major portion of the
budget, approximately two-thirds, is comprised of
so-called routine spending that covers personnel
expenses, maintenance, food, and other regular costs.
Salaries alone account for about half of the official
defense budget. The remainder is used for "development
spending," on items such as military hardware and
infrastructure. In 2005 Indonesia moved to a unified
budget framework and began tracking government finance
statistics by functional and programmatic categories
that correspond to international standards, but
officials continue to refer to the distinction between
"routine" and "development" expenditures, and to argue
that not enough money is left in the budget for
military modernization.383
Budget and Spending Levels

Under Law No. 3/2002 on Defense, military spending is
to be exclusively funded from the central government
budget.384 In 2003, Juwono Sudarsono emphasized the
legal requirement: "The state should be the only
source of funding for the TNI."385 A majority of
Indonesians surveyed in 2005 agreed that the armed
forces should be funded solely by the government, and
at the same time rejected the military's involvement
in business activities.386

Yet many observers inside and outside of government
have argued that Indonesia's military budgets have not
been realistic given troop strength and current force
structure. Indonesian military officials have been
especially vocal on this point. They complain of
chronic underfunding and variously report that the
official budget covers only a third, one half, or
three-quarters of the military's minimum needs.387 The
underlying concern that Indonesia's budgets are not
realistic in light of the current size and structure
of the military has some merit, but the claims that
government budgets are a mere fraction of what is
required must be treated with caution.  The military
has defined its minimum needs without recourse to a
proper strategic planning process and has every
incentive to inflate the figure. Moreover, approved
budget levels represent only one part of official
military finance. Additional funds allocated from
other budget lines subsidize the defense budget and
make it appear artificially low. (See "Myth 1,"
below.) It also should be noted that the military
receives the second-largest allocation in the
government's budget.388

Rather than focus on the size of military budgets, it
can be more useful to consider the reported levels of
military spending because military budgets have not
been adhered to and, in theory, data on military
spending should reflect the actual use of government
funds. In Indonesia, however, spending data offer an
imperfect indication of actual levels of expenditure.
It captures only what is paid from government accounts
and officially recorded as having gone to the
military. Officials at the Ministry of Finance, which
has been making efforts to improve the quality of
government finance data, acknowledged that data on
military spending has been very unreliable and remains
a weak area.389
Problems with Government Statistics

The Indonesian government's approach to collecting and
reporting official military finance statistics in
Indonesia leaves much to be desired.390 One result has
been that these statistics have been reported
inconsistently. For example, the military budget
allocation for 2003, according to the Ministry of
Finance, was around Rp. 17.2 trillion (approximately
$2 billion), but the government variously reported
actual military spending that year as Rp. 9.7 trillion
($1.2 billion), Rp. 15 trillion ($1.8 billion), Rp.
18.3 trillion ($2.2 billion), and Rp. 27.4 trillion
($3.3 billion).391 It was unclear why the
discrepancies arose, but they were noticeably larger
than for other countries providing data on military
expenditures.392

That government officials do not trust their own
numbers on military finance was made evident when
Human Rights Watch requested final military budget and
spending figures for a ten-year time period, as an
input to this report. One Indonesian finance official
declined the request, arguing that while the
information was available it would not be responsible
to disseminate it. He said that only statistics from
the past few years were at all credible, in the time
period since the government had begun improving its
accounting: "Some data collected in the past is just
garbage… The recording system took garbage data, so it
resulted in a garbage report. There was no
accounting."393 The information the Ministry of
Finance did agree to provide is detailed in Table 3,
below, and matched with publicly available data on
approved final budgets.

Again, the official statistics contrast sharply.
Statistics on military spending by Indonesia
necessarily offer an imperfect indication of actual
levels of expenditure, given problems in data
collection (not to mention the issue of extensive
off-budget spending), but the Ministry of Finance data
show actual military spending as consistently lower
than budgeted. This is unusual given the complaints
that budget allocations are too low, and given
information from the Ministry of Finance that the
military typically overspends its budget and seeks
end-of-year supplementary allocations to cover its
deficits.394 The Ministry of Finance official who
provided the spending figures was not able to
definitively explain the discrepancies, but it
appeared likely that somewhat different categories
were used in compiling data and no attempt was made to
reconcile them.

Table 3: Official Military Budgets and Expenditures,
2002-2005

To view table, go to:
http://hrw.org/reports/2006/indonesia0606/6.htm#_Toc138140644

It is helpful to look at spending figures over a
longer timeframe in order to analyze trends. For that
purpose, the work of the Stockholm International Peace
Research Institute (SIPRI), a research institute with
expertise tracking global military expenditures, is
especially useful. SIPRI relies, as much as possible,
on official data provided by governments. It reviews
the available official statistics and selects the data
series that most closely corresponds to its definition
of military spending. SIPRI then adjusts the figures
for inflation and exchange rate fluctuations to
facilitate comparisons across countries and over time.

Table 4: Trends in Indonesia's Military Spending,
1995-2005

To view table, go to:
http://hrw.org/reports/2006/indonesia0606/6.htm#_Toc138140644

Table 4, above, shows that Indonesia's spending on the
military declined as a percentage of GDP following the
Asian financial crisis and fall of the Soeharto
government. This spending fell to 0.9 percent of GDP
in 1999, the lowest level of the decade from 1995 to
2005. (This was also the year that the police
separated from the military, and presumably their
budgets were separated at that point.) In more recent
years, by contrast, the figures have increased to
approximately 1.1 percent of GDP.

Limitations in the quality of the data make
comparisons difficult, but the available information
also shows that official military spending by
Indonesia generally has been lower, as a share of GDP,
than several other Southeast Asian countries. Whereas
Indonesia's declared military expenditures have
hovered around 1 percent of GDP for several years
before rising to 1.1 percent of GDP in 2004, reported
military spending in other Southeast Asian countries
averaged 2.26 percent of GDP in 2004 (the most recent
year for which comparative data is available).398
These figures support the conclusion that budgetary
spending in Indonesia is low in comparison to its
neighbors, as is often stressed by Indonesian
officials, but it must be remembered that total
Indonesian spending on the military also must include
off-budget expenditures.399

The Extent of Off-Budget Funding

Minister of Defense Sudarsono has declared: "We must
remain true to the budget. The defense forces must not
exceed their budgetary capabilities."400 The comment
was consistent with Indonesian law and basic precepts
of financial accountability, but not with present
realities. The World Bank, which has expressed concern
about the off-budget activity of the Indonesian
security forces, has acknowledged that "no one quite
knows how much of military and police expenditures are
met from allocations in the government budget."401
Ministry of Finance officials do not have any
estimates of the amount of off-budget revenue
generated by the military, nor have they attempted to
gather such information.402 Many published sources,
often citing statements by Indonesian officials, have
suggested that Indonesia's military budget only covers
25-30 percent of the TNI's actual needs.403 This
estimate, however, seemingly dates to the 1970s and
appears to no longer be accurate.404

More recently, it has been suggested that budgetary
spending accounts for approximately one-half of total
military spending in Indonesia. This estimate was
provided by Minister of Defense Sudarsono, who told
Human Rights Watch in February 2005 that the military
budget covered about half (46 percent) of actual
spending, with the rest raised independently.405
Again, it was not clear that this was a reliable
estimate, and he may have misspoken. Sudarsono and
other officials more commonly have stated that the
military budget is sufficient to meet only 50 percent
of the military's perceived minimum needs.406 That
does not necessarily mean, however, that the military
successfully raises the other 50 percent from its
off-budget activity. It is possible that the military
simply scales back its planned spending to better
match the amount of funds the government provides.407
The latter view is supported by evidence that the
military currently is not able to afford many items,
such as training and additional equipment, that it
argues it needs.408 As will be discussed (see Myth 1,
below), some of these costs, including many weapons
purchases, are covered by the Indonesian government
using other budget lines.

Procurement

Systematic corruption in military purchasing has
resulted in vast unneeded expenditures. (See the
section titled "Grand Corruption" in Part II: An
Anatomy of Military Economic Activity.) Civilian
authorities have worked to improve oversight with
uneven results. For example, parliamentary scrutiny of
military purchases has increased in the wake of past
scandals. A few parliamentarians have taken a very
active role and have successfully insisted that the
parliamentary subcommittee responsible for defense
budgeting issues be allowed to scrutinize and approve
at least some individual arms deals and those financed
through export credit loans.409 Other MPs serving on
the House of Representatives committees on defense and
on budgetary affairs continue to indicate that,
despite some improvements, too little information on
military procurement issues is made available, it is
shared with only a select few, and that MPs as a whole
lack the technical expertise or staff support to be
able to thoughtfully review such matters.410

The Ministry of Defense has made efforts since 2005 to
try to rationalize military procurement and increase
its level of control over military purchases. It
announced new rules requiring the parties to certain
types of weapons contracts (those financed through
export credit loans) to sign an integrity pact in
which they promise not to engage in corruption,
collusion, or nepotism.411 It also declared a
"one-door" policy for military procurement that would
centralize control in the defense ministry. Such moves
were consistent with Law No. 3/2002 on Defense, which
clearly grants the civilian-led Ministry of Defense
authority over military "budgetary policy,
procurement, recruitment, [and] management of state
resources."412

Adherence to these rules, however, was a problem from
the beginning. For example, a spokesperson for the
Indonesian air force said in late 2005 that it planned
to order spare parts from the United States directly,
rather than coordinate defense acquisitions through
the Ministry of Defense, and that other service
branches would do the same.413 The situation was such
that civilian Minister of Defense Sudarsono called a
high-level meeting with military leaders and other
officials in January 2006 to try to assert the
authority he had been granted by law.414 He stressed
in particular that the authority of the Ministry of
Defense covered all budget management matters,
including arms procurement.415 That Sudarsono felt the
need to hold such a meeting, and to make a further
pronouncement a few weeks later, demonstrated that
civilian control over military purchases was not yet
in place.

Even following these meetings, the TNI refused to
recognize the Ministry of Defense as the lead agency
in making defense purchases. The TNI chief, Air
Marshall Djoko Suyanto, gave a press interview in
which he said that the service branches "routinely"
arrange weapons imports independently and that the TNI
would only involve the defense ministry in the case of
major weapons contracts "in the hundreds of millions
of dollars" or those using export credit
facilities.416 This statement directly contradicted a
March 2006 comment by the then TNI spokesman, Maj.
Gen. Kohirin Suganda, who said weapons imports were
arranged through government-to-government deals, with
tenders and payments handled by civilian ministries
instead of the TNI itself. The spokesman cited this
claim as evidence that military purchases in Indonesia
were subject to "very strict control" and to dismiss
as "unreasonable" concerns that Indonesian weapons
purchases from the United States might be associated
with corruption.417

The concerns proved to have been well founded. In
April 2006 U.S. authorities arrested arms brokers on
charges of attempting to illegally export a variety of
weapons to Indonesia, in a deal negotiated before the
U.S. administration waived congressionally-mandated
restrictions on U.S.-Indonesia military ties in
November 2005.418 The arrested arms brokers were an
Indonesian national and a Singaporean who represented
PT Ataru Indonesia, an arms-supplying company active
in Indonesia, but they did not have the proper
licenses to order weapons from the U.S.419 The accused
brokers sought to purchase 245 air-to-air Sidewinder
missiles, 882 light machine guns, some eight hundred
handguns, sixteen sniper rifles, five thousand rounds
of strafing ammunition, and components for a radar
system.420

According to the indictment against them, the brokers
began arranging the deal with a U.S. company in March
2005, submitted a written purchase order for the radar
parts in September 2005 (when the U.S. weapons embargo
remained in effect), and ordered additional items in
March 2006.421 In their defense, the brokers said they
were acting on behalf of the Indonesian air force,
which sent two officers to accompany them.422 The air
force confirmed that it ordered radar equipment from
the arms-supplying company PT Ataru Indonesia, a
longtime partner, and sent the two officers to inspect
the equipment, but it said this deal was legal and
denied involvement in the alleged attempt to buy other
weapons. The U.S. trial against the arms brokers was
set to begin in May 2006.423

Weak Financial Management

A major shortcoming in military finance has been poor
management procedures and implementation. Minister of
Defense Sudarsono has acknowledged that the military
must improve its financial management systems and be
more accountable for its use of budgeted funds.424
Several problem areas have been identified and have
been addressed only in part. One concern is that
military requests for funds and the flow of the money
itself have been subject to highly bureaucratic
processes that greatly delay the release of funds and
also increase the risk that money will disappear at
each level.425 The delays in the delivery of budgeted
funds to the field, together with skimming of the
funds, has encouraged self-financing and also creative
accounting to cover up the practice, as officials have
acknowledged.426 The expenditure reports are made to
match the budgeted funds, while the spending that
actually took place with funds from other sources is
not recorded.427 Under a memorandum of agreement
between the Ministry of Finance and Ministry of
Defense, salary payments have been disbursed under a
more streamlined procedure since 2005; delays in the
release of other funds have decreased from previous
levels but still stand at about four months.428

Additional problems identified by government officials
include failures to adhere to procedures,
inefficiency, and ineffectiveness in the use of
funds.429 Government auditors from the Supreme Audit
Agency (Badan Pemeriksa Keuangan or BPK) said their
review of 2004 military accounts uncovered significant
misstatements and the use of inaccurate accounting.430
The Indonesian military uses a different accounting
system than the rest of the government, and as of
April 2006 no plans were in place to correct this
situation.431 Officials also report that the military
maintains incomplete records and provides only a
general list, without details or documentation of
expenditures, to those responsible for monitoring
military spending.432 One Ministry of Finance official
said of the military, "They are not reporting
properly, and they are not audited fully."433 (See
below for an analysis of gaps in audits of military
accounts.)

Conclusion [of Chapter III]

Government planners and the TNI have continued to
emphasize that they are firmly committed to ending
military business activity,584 but the plans they have
prepared are not designed to meet that goal. From the
beginning, it was clear they had no intention to act
against the military's informal and illegal business
practices, which they viewed as outside the scope of
the TNI law.585 Over time, they have further narrowed
their approach to also exclude from consideration
precisely those businesses that the military itself
wanted to keep. The result was that the TNI law's ban
on military business was being gutted before
regulations to implement it were even adopted.

As a further indication of this trend, TNI
headquarters prepared a "general" list of nearly fifty
entities—foundations, cooperatives, and individual
commands engaged in business as umbrella entities, as
well as twenty individual businesses—that it claimed
served welfare purposes.586 According to TNI
representatives, they secured the commitment of the
Ministry of Defense that the government would leave
these entities untouched.587 Such moves, together with
the failure to address the essential issue of
accountability, seriously threatened the government's
ability to put an end to military economic
adventurism. Considering how much is at stake and how
little progress has been made, there is a very real
risk that the TNI law will represent a squandered
opportunity for reform unless the government alters
its approach.

For footnotes 377 - 587, go to:
http://hrw.org/reports/2006/indonesia0606/6.htm#_Toc138140644

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