[Kabar-indonesia] 8 of 11: HRW: Indonesian Military's Economic Activities - Accountability

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Limited Transparency, Little Accountability

Civilian authorities in Indonesia have made strides to
increase their monitoring and reporting of military
finance practices, but serious challenges remain. The
pace of change has been unduly modest. Some needed
steps have been delayed and other areas have yet to
receive adequate attention. Transparency over military
finances has improved as compared to dismal past
levels, but a culture of secrecy still prevails in
relation to military finance topics. Accountability is
also lacking. Mismanagement, waste, and corruption
remain endemic, and even well-documented cases
resulting in significant losses to the state have not
lead to consequences for those responsible. These
issues are elaborated below.

Low Transparency

In 2006 transparency on military finances was on the
rise, though important restrictions remained. On the
positive side, by early 2006 the findings of some
official BPK reviews of government spending had been
made public, consistent with a 2004 reform.434 These
included the results of the 2005 audit of official
military spending and a special 2004 audit of the
Ministry of Defense that previously had been kept from
public scrutiny.435 This information was made
available on government websites, which also began to
post the more detailed budget documents that the
Ministry of Finance compiled starting in 2004. The
value of this information was limited by its
incomplete and unreliable nature, as discussed above
(see "Problems with Government Statistics," above). As
one finance expert commented with regard to improved
transparency, "Numbers are easy to come by but they
don't tell you much."436

At the same time that the government made some
information public, officials have declined to release
other data to which they had access. Only budget
information was released with any level of detail.
Preliminary data on spending based on cash flows also
was available, but only in an aggregated format that
did not show the breakdown of military
expenditures.437 Final, audited financial statements,
developed as part of a package of recent reforms and
available for 2005, only addressed the overall
accounts of the government as a whole. The Ministry of
Finance did not anticipate that audited spending
figures by line ministries would be public before
2007.438 It did share some disaggregated data on
military spending with Human Rights Watch, reflected
above (see Table 3), but said that it could not
provide a copy of the document on which it was based
because it contained more detailed information that
was strictly for the use of the Ministry of Finance
and Ministry of Defense.439

Officials frequently cited confidentiality
restrictions as the rational for not sharing
information on military finance, but as of this
writing no law was in place to define what constituted
a state secret. A draft law on secrecy introduced in
2005 would make all military matters secret,
presumably blocking public access to the audit
information, and contradicted a draft law on freedom
of information that would allow greater
transparency.440 The lack of legal clarity was not the
only barrier, however. In some cases, the habit of
secrecy was so ingrained that officials declined to
discuss information that was available on government
websites.441

Transparency and accountability remain sorely absent
in relation to off-budget revenue. As one official put
it, "It goes without saying that they do not report
off-budget activity."442 Few military businesses have
been subjected to any financial scrutiny. Military
foundations were audited once but only in part, and
that audit has yet to be made public. (See the
description, below, of BPK's findings.) The TNI's then
chief Sutarto said in April 2005 that he did not have
information on the number, scope, value, or profits of
the military's business investments and, in any case,
considered such matters to be an "internal TNI
matter."443 When Human Rights Watch requested such
information from various government officials in 2006,
none agreed to provide it. Some were partially
responsive to the request. While still declining to
share a copy of the inventory of military businesses,
the Ministry of Defense provided limited financial
information on one military-owned company that was
slated to be sold, and the TNI gave a partial listing
of its business-related entities. (For details, see
the section titled "Foundations" in Part II: An
Anatomy of Military Economic Activity.)

Box 3: Opaque Funding of Military Operations in Aceh

Financial control problems have been perhaps most
serious with respect to "emergency" military
operations that, even if anticipated, are not included
in the budget.444 Funds spent on the military presence
in Aceh through 2005 illustrate this problem.

For years, parliamentarians complained about
impediments to oversight on military spending. In
2003, for example, the TNI received at least Rp. 1.2
trillion ($144 million) from a government reserve
account intended to cover emergency financing, which
was the typical way the Aceh operations were
funded.445 That year parliamentarian Djoko Susilo
asserted that the approval process for budgetary
allocations to the military was little more than a
rubber stamp: "Far from controlling the budget, the
DPR (parliament's House of Representatives) is still
nearly impotent against the military on the budget
issue." 446

An Indonesian human rights activist, speaking in 2004,
summarized the continuing problem: "Civilian
authorities have no agenda for control of the
[military] budget. There is no accountability from the
center, no transparency, and no skill to audit war
operations."447

The consequences have been felt by soldiers on the
ground. Troops are poorly trained and equipped and
face difficult living conditions. An analyst who
conducted research on the topic found that "[t]he Aceh
supplementary budget doesn't go to the rank and file.
There is huge civil and military corruption. It is
institutionally systemic."448

With the tsunami in December 2004, the TNI was granted
an additional stream of money. Observers expressed
concern that the military's lack of financial
accountability could hamper efforts to ensure relief
and reconstruction funds were properly spent.449

In early January 2005, the Ministry of Defense
submitted to parliament a budget request of nearly Rp.
237 billion (approximately $25.4 million) to cover TNI
disaster assistance for a thirty-day period.450 In
mid-2005 the ministry sought an extra Rp. 530.3
billion (nearly $54.5 million) to pay for military
operations in Aceh for the remainder of the year.451
The defense minister and the then head of the TNI both
confirmed that their intention was that this sum not
be counted as part of the defense budget.452

Parliamentarians complained that the Ministry of
Defense bypassed the regular budget process, and
ordered it to draw the funds from the ministry's own
Rp. 2 trillion ($206 million) emergency fund or await
the 2006 budget. A member of the budget subcommittee
of the parliamentary commission on defense, Djoko
Susilo, declared to the Jakarta Post:

"Because Aceh has been given a normal status [the
state of emergency was lifted in May 2005], according
to the TNI law, all funds must come from the state
budget specifically allocated to the (defense)
ministry. (…) But in their latest proposal, it's not
clear which post they expect us to disburse the money
from. They don't even give complete details on what
they will do with the money."453

Another member of the budget committee, Happy Bone
Zulkarnaen, emphasized that the problem was not new.
He said the Ministry of Defense had failed to report
on its spending on military operations in Aceh for the
previous two years.454 After MPs insisted heavily on
this point, the ministry became more responsive to
their requests for information.455

In 2006, members of parliament were considering a
government request for some Rp. 400 billion ($44
million) to pay for the redeployment of troops
withdrawn from Aceh under the peace agreement, as well
as to cover some costs associated with those that
remained.456 The funds, according to MP Djoko Susilo,
were to come from the government's emergency
budget.457

The Audit Function

To date government auditors have limited themselves to
reviews of non-operational expenditures, such as
spending on salaries and other items that do not
directly relate to military deployments. Former BPK
officials said the reason was that the military had
obstructed their efforts to examine operational
spending. One complained that in 2003 the military
leadership impeded the agency's efforts to audit
operational funds using several tactics. For example,
the military—acting outside its authority—determined
on its own what information would be subject to audit,
claimed that the requested information was not yet
available, and limited access to documents by
declaring them to be confidential.458 In 2004,
operational expenses continued to be treated as "off
limits," government auditors told Human Rights
Watch.459 Over time, BPK's authority has gradually
increased as military cooperation has improved.460 BPK
officials, perhaps optimistically, said that they
anticipated being able to undertake a review of the
military's operational spending in 2007.461

Another longstanding limitation on BPK audits has been
the exclusion of the military's off-budget revenues
and expenditures. A government auditor explained in
2004 that, contrary to requirements,  the military had
obstructed his efforts to look at off-budget finances:
"They insist we audit only what is paid by the
budget." 462 One limited BPK audit of military
foundations took place in 2000, but only after
international financial institutions, especially the
International Monetary Fund (IMF), insisted on it.
Lending agreements signed between the Indonesian
government and the IMF after the Asian financial
crisis, when Indonesia took out large loans, stated
that "any future internal audits of financial
operations of all government agencies" by BPK should
"take full account of all extra-budgetary sources of
support. This will begin in 2000 and will include the
military." It added, "We recognize that quasi-fiscal
activities may also arise from the operations of
foundations and we intend to bring their activities
and accounts under government review and audit."463 
(The results of this BPK audit of military foundations
are described below, in the section titled "Financial
Mismanagement.")

Unfortunately, this hard-won progress was not
sustained. A separate IMF-supported initiative, to
press for adoption of legislation regulating
foundations, had the unintended consequence of halting
BPK audits of military foundations. The military
foundations used a provision of this law to argue that
they were only required to open up their books to
review by private auditors, not government
authorities.464 BPK continued to assert its right to
audit state wealth under foundation control, which was
also the position of the Indonesian government and the
IMF,465 but no such audits took place. In 2006 BPK
officials were following with interest the
government's plans to take over control of military
businesses and anticipated that they would again audit
the military foundations once the handover was
completed.466 That was not scheduled to happen until
2009.

Misuse of State Assets

After negotiation to secure the TNI's cooperation, in
2005 BPK reviewed the TNI's use of state assets the
previous year. The special BPK review confirmed what
many analysts had long argued, that the military has
received considerable financial benefits, including
access to government infrastructure (state assets),
that allow it to generate added income and to compete
on an unfair basis. The results, covering 2004,
revealed widespread military misuse of state assets as
well as a persistent failure to disclose or pay taxes
on the resulting profits.

BPK's specific findings were that the TNI misuse of
state assets resulted in some Rp. 38.8 billion ($4.27
million) in profits to its partners. These funds went
to third parties, rather than to government coffers.
In addition, no taxes were paid on proceeds from use
(presumably leasing) of 167 thousand hectares of
public land controlled by the air force, Ministry of
Defense, and TNI headquarters. The military branches
left unreported Rp. 7.7 billion ($847,000) in profits
from TNI-run hospitals. The BPK report drew particular
attention to the navy, which it said failed to
properly disclose Rp. 28 billion ($3.1 million) in
income. That figure included Rp. 1.5 billion
($165,000) in profits earned through its cooperative,
Rp. 441.9 million ($49,000) paid by a company, Rp. 255
million ($28,000) from housing on navy land, and lease
payments from a supermarket and auto center in North
Jakarta totaling Rp. 25 billion ($2.75 million).467

In spite of BPK's findings that the military caused
losses to the state, no penalties were contemplated
for those responsible. Authorities cited a lack of
clarity over reporting requirements on profits derived
from the use of state assets and attributed the
problem to technical errors.468 This was consistent
with past complaints that, despite laws making the
misuse of state assets punishable, accountability has
been lacking.469

Other Financial Improprieties

Military financial improprieties are legion in
Indonesia. Indonesian oversight officials, while
recognizing that some improvements were underway,
consistently cited the military as one of the worst,
if not the worst, in terms of government waste and
corruption.470

According to press accounts, a review by the BPK
concluded that more than $450 million was diverted
from military funds over an eight-year period ending
in 2001.471 Four years later, in 2005, Defense
Minister Sudarsono stated that 30 percent of all
government spending, including the Ministry of Defense
budget (through which allocated funds pass to the
armed forces), was wasted.472 An analyst and expert on
security sector reform, Riefqi Muna, put it in even
starker terms:

Despite the fact that the Indonesian Armed Forces has
one of the lowest budgets in the region in terms of
its total and its percentage of the national budget,
it is important to note that there is still plenty of
money in military coffers to be misappropriated and
stolen.473

The Indonesian government has declared anti-corruption
a priority but its efforts have only limited
applicability to the military sector. Indonesia's
Corruption Eradication Commission or KPK only has one
investigation open into military corruption, related
to a prominent arms procurement scandal from 2003, and
had referred another to the Attorney General's office.
KPK's ability to pursue military cases is a
"sensitive" issue, according to a commission member,
because its mandate limits its role to one of
coordination when military personnel are involved.474
Moreover, the requirement that high-level government
officials submit wealth declarations has limited
applicability for the military. Only a handful of
Ministry of Defense and TNI officials are subject to
the requirement, less than in other government
departments.475 KPK does not audit these reports in
any case. It receives the information and says it
verifies what it presented but says that it lacks the
authority to investigate further if it suspects an
official has withheld information.476

Three Myths about Indonesian Military Self-Finance

The challenge of funding the Indonesian military
within the constraints of a tight budget has provided
a central justification for the TNI's independent
revenue-generating activity. From the earliest days of
Indonesia's history, official funding has been deemed
inadequate to meet the military's basic needs. While
there is truth in this claim, as already noted, the
problem is less severe than often stated and is not
insurmountable. In the form most commonly heard, the
claim rests on three myths: first, that funds from
official government sources are wholly inadequate to
meet the essential needs of the military; second, that
military businesses generate substantial revenue that
goes most of the way toward filling the gap; and,
third, that the proceeds of these businesses are
primarily used to meet the welfare needs of the
troops.

This section addresses those myths. As for the first,
while it is true that official spending on the
military has been relatively low over the course of
many years, creating incentives for military
self-financing activity, it is higher than military
budget figures suggest. One reason is that outlays are
hidden in other budget lines, so that total government
spending on the military greatly exceeds the budgeted
amount. Moreover, official budget allocations to the
military are on the rise. Any plan to address
under-funding in military budgets must also take on
the pervasive waste that the defense minister has
estimated at 30 percent. It also should account for
the considerable costs to the economy of military
self-financing activity.

The notion that the profits from military economic
activities are keeping troops housed and fed is also a
myth. The belief is strong enough, including in
military circles, that government officials say it
presents a "psychological obstacle" to reform of
military finance.477 There is considerable evidence to
support claims that regular military-owned businesses
are mismanaged, profits generally low or nonexistent,
and that they contribute only modest sums for
welfare-oriented spending. Some military officials,
even while denying widespread corruption in the
activities of these businesses, have acknowledged that
they offer little benefit to the troops. Irregular
businesses are presumed to generate more money (no
total figures are available) but these funds too tend
to be allocated for non-welfare purposes. Much of the
money that is raised through the military's various
economic activities goes into the pockets of
individuals and does little or nothing to cover
budgetary shortfalls.

Myth 1: Funds Allocated to the Military by the
Indonesian Government Cover Only a Small Fraction of
the Military's Needs

The Indonesian military faces considerable financial
pressure. While many observers attribute the problem
to low military budgets, the issue in fact is much
more complex. Importantly, official statistics only
tell part of the story. Although we cannot be sure of
the amounts of money involved due to lack of
transparency, it is clear that the TNI has benefited
from significant additional outlays made available
through other budget lines and special allocations.478
For example, the use of emergency funds for military
operations has not been counted against the military
budget. (See Box 3, above.)

Arms acquisitions financed with alternative
arrangements such as barter deals, export credit
financing, or presidential contingency funds represent
yet another form of government subsidy of military
spending.479 The sums involved can be quite large. For
example, export credit-backed loans were used to
finance weapons purchases to the tune of $160 million
in 2002, $448 million in 2003, and $449 million in
2004.480 In addition, official statistics do not
consider the substantial payments made by companies to
cover security services provided by the Indonesian
military.481 Foreign military aid, whether in the form
of grants, subsidies, or in-kind support for items the
Indonesian government would otherwise have purchased,
also supplement central government outlays for the
military.482

Military expenditures paid from funds managed by other
levels of government can be substantial. As
decentralization has made more funds available to
regional and local governments, they frequently have
been asked to help underwrite military
expenditures.483 Marcus Mietzner, an expert on
civil-military relations in Indonesia, described how
this works:

As under the New Order, the military requests a share
of regional revenue, often hidden in the budget as
"stability funds" or other items at the disposal of
the executive. Long-serving bupati [regents] report
that their administrations continue to receive bills
for all major TNI operations, ranging from security
interventions to disaster relief and development
programs.484

A government advisor who spoke to Human Rights Watch
said that he had personally reviewed financing
proposals the military submitted to authorities in one
part of Central Java province, which district
government authorities approved and paid out using
funds allocated for other purposes.485 Indonesian
finance officials told Human Rights Watch that it was
not unusual for local and regional governments to
cover certain military costs, including for some
security operations.486 Such expenditures, as well as
equipment purchases made on the military's behalf by
local or regional governments, are not counted as
military spending by the central government.487

It is difficult to establish how much these other
outlays add up to, but it is wrong to start from the
premise, as so many do, that the military only
receives government funds that are explicitly
designated to defense in the annual budget. Claims
about major budgetary shortfalls, moreover, typically
fail to take into account the pervasive waste
acknowledged even by high-ranking officials. Finally,
it is important to consider that the Indonesian
government has increased its military budgets and
spending in recent years, as seen in Tables 3, 4, and
5. The approved 2006 budget ceiling for the military
was Rp. 28.2 trillion ($3 billion), a 28 percent
increase from the final 2005 budget allocation.488 The
Yudhoyono government also has made clear that it
intends to progressively raise government spending on
defense.489

Myth 2: The Businesses of the Indonesian Military
Significantly Help the Military Cover Its Funding Gap

The rationale for military business activity in
Indonesia rests in part on the assumption that such
businesses are successful. This section reviews what
we know about the operations and profits of military
economic activity, both legal and illegal. It finds
that military businesses, despite receiving
preferential treatment that has boosted their
money-making potential, in recent years have not
contributed significantly to covering unbudgeted
military expenses. Part of the reason is that funds
have been siphoned off. Military collaborations with
business, such as payments for security services, have
generated large sums and have helped supplement
official spending but also have been marked by
corruption. Illegal economic activities are presumed
to generate large sums, but not surprisingly no
reliable estimates are available. In the case of
unlawful businesses, it is especially easy for funds
to be routed to the self-enrichment of the individuals
involved rather than be used for military purposes.

Military-Owned Businesses

There is little verified information regarding the
profits generated by military-owned businesses and how
these are allocated, but some patterns can be
discerned. While some business earnings finance
military expenditures, including welfare activities
and even operational expenses, the amounts involved
are far lower than one might expect. The economic
value of military businesses has declined since
Soeharto's fall and has continued to trend downwards.
(See Box 1 and the section titled "Foundations" in
Part II: An Anatomy of Military Economic Activity.)
Unsustainable business practices, including the use of
businesses as "cash cows" from which to draw funds
without reinvesting for the future, are partly to
blame. Indonesian leaders have acknowledged that the
low level of profit from military businesses and the
fact that many were saddled with debts helped explain
why, after years of staunchly defending such
businesses, in 2005 the TNI leadership committed to
giving them up.490

Lt. Gen. (ret.) Agus Widjojo, in an interview with
Human Rights Watch, offered his explanation for the
downturn in the fortunes of military business
ventures:

First, they are losing the preferential treatment they
got in the past under Soeharto. Second, there's far
more competition now. Third, military business is
under observation and that was not the case before….
The capital and investment [of the foundations] is not
all that great. It's not true that they play a major
economic role or that the funds are used as part of
the military budget.491

Others largely agreed but added that the foundations
and other off-budget funds were used to finance some
operational costs and at least limited procurement. A
retired military officer who spoke on condition of
anonymity told Human Rights Watch that the military
foundation he helped run while on active duty had
occasionally purchased items, such as transport
vehicles, on behalf of the military. Such purchases
were most commonly made during military operations,
such as in Aceh and Papua. The officer said the
foundation had purchased the items on the
understanding that its expenses would later be
reimbursed from the government budget, but the "loans"
were never repaid.492

Minister of Defense Sudarsono has confirmed that
"[t]he income earned by the business undertakings was
partly used to finance operational activities."493 He
acknowledged that this was true of proceeds from both
legal and illegal military businesses.494 Similarly,
an auditor involved in a 2000 review of a military
foundation told Human Rights Watch he was surprised to
discover that, rather than serving strictly welfare
purposes, foundation funds were used for "certain
operations [that] were more related to the operations
of the army command and units.495 For example,
Kostrad, the Army Strategic Reserve Command, has used
foundation funds to finance military training, and
also solicited private donations for that purpose.496

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