[Kabar-indonesia] 1 of 11: HRW Report: Indonesian Military's Economic Activities

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Joyo note: Included herein is the Press Statement
followed by the text of the report

HUMAN RIGHTS WATCH
June 21, 2006

Press Statement

Indonesia: Military Business Threatens Human Rights

Government Must Reform Defense Finances

(Jakarta, June 21, 2006) – The Indonesian government's
plans to reform military-owned businesses do not
sufficiently address the human rights problems fueled
by the current system, Human Rights Watch said in a
new report released today. The Indonesian military's
independent financing undermines civilian control,
contributing to abuses of power by the armed forces
and impeding reform.

"The military's money-making creates an obvious
conflict of interest with its proper role," said Lisa
Misol, researcher with the Business and Human Rights
Program of Human Rights Watch and author of the
report. "Instead of protecting Indonesians, troops are
using violence and intimidation to further their
business interests. And because the government doesn't
control the purse-strings, it can't really control
them."  
 
The 136-page report, "Too High a Price: The Human
Rights Cost of the Indonesian Military's Economic
Activities," is the most comprehensive account to date
of the harmful effect on civilians of the armed
forces' involvement in business. Human Rights Watch
called on the Indonesian government to ban all
military businesses, reform the budget process and
hold military personnel accountable for crimes.  
 
The Indonesian military raises money outside the
government budget through a sprawling network of legal
and illegal businesses, by providing paid services,
and through acts of corruption such as mark-ups in
military purchases. Many of these businesses are not
controlled by the military's central command, but they
have been allowed to spread as a flawed response to
budget constraints.  
 
Longstanding rules against military profit-seeking
have not been enforced. The business practices of
military enterprises have helped sustain the
reputation of the Indonesian military as abusive,
corrupt and largely above the law.  
 
"The Indonesian government says it wants to
professionalize its military, but we've seen little
evidence of real change," Misol said. "Troops are
breaking the law, violating human rights and hiding
the money they make on the side. Military reform means
getting soldiers out of business and prosecuting those
who broke the law."  
 
A 2004 law requires the Indonesian military to
withdraw from business by 2009. Civilian and military
leaders have pledged to implement the law. But they
have not yet adopted regulations spelling out how the
government will take over military businesses.
Officials say their draft plan may be ready for
adoption by August.  
 
"The people of Indonesia pay the price for the
military's economic adventurism," said Misol. "It's
past time to do something serious about it."  
 
Human Rights Watch documented several examples of
military involvement in business, its negative
consequences, and the lack of accountability for
economic crimes and associated abuses:  

    * A series of military-owned businesses in East
Kalimantan secured preferred access to forest
concessions on land claimed by local indigenous
communities. Authorities later said the military
companies had engaged in over-logging, illegally
exported timber to Malaysia, and contributed to social
unrest. The behavior was so egregious that the
companies eventually lost the concessions, but did not
otherwise face any consequences.  

    * A coal-mining company in South Kalimantan
brought in a military-run cooperative to provide
security to help it deal with illegal miners in its
concession area. The military organized the miners,
used violence and intimidation to keep them in line,
and brokered sales of the illegally mined coal.
Military authorities declined to crack down on this
activity or to punish those involved.  

    * Companies that use the Indonesian military to
provide security for their installations frequently
find that these arrangements have been marked by
allegations of corruption and abuse, as seen in the
continuing controversy over the operations of U.S.
mining company Freeport McMoRan in Papua in eastern
Indonesia. Investigations have been opened in the
United States into allegations that the payments might
amount to extortion. There are no plans for an
independent investigation in Indonesia to determine
whether military officers committed a crime by
accepting cash payments from the company.  

    * Military involvement in illegal business fuels
lawlessness and violent conflict. In the most
notorious example, soldiers mounted a major attack on
a police station in a busy town center in North
Sumatra, killing several civilians, over a dispute
allegedly involving local drug-trafficking interests.
Hundreds of troops were involved, but only 19 were
discharged and sentenced to jail following the
incident.  

    * Soldiers in areas of internal conflict in
Indonesia commonly engage in predatory economic
behavior, such as extortion and property seizures.
This was the case in Aceh during the longstanding
conflict there. Military demands for bribes have
lessened since the devastating tsunami in 2004 and the
signing of a peace accord, but ongoing military
corruption is driving up the cost of reconstruction
and adding to the survivors' hardship.

Indonesia's military says that its official budget is
sufficient to meet only about half of its needs, and
some estimates suggest that the military raises the
remainder independently. In March 2006, the military
declared that it owned more than 1,500 businesses.
Many of them are collapsing after years of
mismanagement.  
 
Human Rights Watch acknowledged that Indonesia's
defense budget is low compared to many of its
neighbors, but said the problem was not as severe as
is often stated because the military also draws on
additional funds from other government accounts. These
funds are not transparently reported and, Human Rights
Watch said, oversight of military finances is very
weak.  
 
"It's the government's responsibility to finance the
military," Misol said. "Moonlighting by the military
is not the answer. Indonesia's leaders need to agree
on an appropriate defense budget that is strictly
monitored and reported accurately."  
 
Human Rights Watch called on the Indonesian government
to revamp its plans to take over military business.
Government planners have said they will transform the
few profitable military enterprises into state-owned
companies, but they intend to allow the military to
keep the charitable foundations and cooperatives that
have been a front for its commercial interests.
Officials have also carved out exceptions to the ban
on military business that dramatically weaken the
potential to clean up military finances.  

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Too High a Price: The Human Rights Cost of the
Indonesian Military's Economic Activities

Contents: 

Map [not included herein]

Acronyms and Abbreviations
go to: http://hrw.org/reports/2006/indonesia0606/2.htm#_Toc138140633

Summary

I. Military Finance in Indonesia

      Military Self-Finance and Human Rights
      A Brief History of Military Economic Activity
      Military Business Activity and the Law

II. An Anatomy of Military Economic Activity

      Military-Owned Businesses
      Military Collaboration with Private Businesses
      Military Involvement in Criminal Activity
      Military Corruption

III. Obstacles to Reform

      Unaccountable Military Finances
      Three Myths about Indonesian Military
Self-Finance
      Flawed 2004 Reform Effort

IV. Recommendations

      Ensure Accountability
      Ban All Military Economic Activity and Enforce
the Ban
      Divest the Military of Existing Military
Business Interests
      Commit to Full Transparency
      Address Financing Concerns

Acknowledgments

----------------------------------------

Summary

    The [business] involvement of army officers is a
fundamental trigger for conflict, abuses of power,
crime, and human rights violations.

    —An Indonesian human rights activist, email
message to Human Rights Watch, September 26, 2005

    Up to now, benefits from military business are
still enjoyed by the upper echelon of the military
elite. 

    —Minister of Defense Juwono Sudarsono, quoted in
Tempo Interactive, February 23, 2005

    Business is autonomy… It is not good for the
command hierarchy.

    —Lt. Gen. Sjafrie Sjamsoeddin, secretary-general
of the Ministry of Defense and former spokesman for
the Indonesian military, in an interview with Human
Rights Watch, April 12, 2006.

    Civilian governments can't control the military if
they don't control the budget. It's as simple as that.

    —A foreign military reform expert, speaking to
Human Rights Watch, September 7, 2004

It matters how militaries get their money. Civilian
control over a state's armed forces is fundamental for
the development of a professional military that
respects human rights. The more a military's revenue
and spending are outside civilian government control,
and the more funds it raises itself, the harder it is
for civil authorities to engage in meaningful
oversight of the military. The result is a government
that lacks the power to demand accountability from its
armed forces and to implement needed reforms.
Particularly when a military has a record of
exercising political power and of committing human
rights abuses with impunity, financial autonomy can
lead to abuse.

Military self-financing is an established practice in
Indonesia. From the first days of independence,
Indonesia's armed forces have found their own means.
Successive governments have endorsed or chosen to
ignore the military's economic activities. In recent
years, Indonesian officials have contended that the
military budget is sufficient only to meet half the
military's minimum requirements. A thorough review
would be needed to determine appropriate levels of
government financing but it is true that Indonesia's
official military budget is low compared to many of
its neighbors in Southeast Asia.

The Indonesian military deals with its budget
constraints using a combination of approaches. In part
it acts by deferring or reducing its spending in some
areas, such as equipment purchases. At the same time,
it seeks funds for that purpose from other government
accounts, often acting outside approved budgeting
processes and with little transparency. In addition to
juggling government funds in this way, Indonesia's
military also independently raises money through a
complex web of commercial ventures whose profits
bypass the treasury. It is these independent revenue
sources that are the focus of this report.

The Indonesian military draws on off-budget
(extra-budgetary and unaccountable) funds derived from
military-owned enterprises, informal alliances with
private entrepreneurs to whom the military often
provides services, mafia-like criminal activity, and
corruption.

Much of the revenue from such ventures goes directly
to commanders, specific units, or individual soldiers.
Ostensibly the funds are to support troop welfare, but
often they are destined for personal enrichment
instead. Some of the funds are used for day-to-day
operating expenses of the armed forces. Irrespective
of the purpose to which they are put, off-budget funds
are not monitored or subject to financial controls.
Such are the budgetary pressures and weak controls in
Indonesia that it is common for government agencies to
raise funds independently to help meet expenditures,
which in turn helps fuel widespread corruption. Yet
the problem of self-financing and its consequences are
most serious with respect to the security forces,
especially the military. (The question of police
self-financing merits close scrutiny but is beyond the
scope of this study.)

This report provides a human rights analysis of
military self-financing in Indonesia. The first part
of the report reviews how the Indonesian military came
to be involved in business activity, and explains how
such activity has spread over time. It also examines
the failure of government authorities to enforce rules
against military commercialism.

The second part of the report offers a detailed look
at how the Indonesian military finances itself,
providing the most comprehensive account to date of
the nature and scope of the problem as viewed through
a human rights lens. It identifies the four broad
categories into which the self-financing activities
fall and details how each works.

We find that the military supplements official funds
using profits from its own businesses, payments from
private-sector allies (often for security services),
income from black market activities, and money skimmed
from corrupt dealings. Formally-established businesses
have performed poorly in recent years, leading the
military to increasingly rely on irregular and illegal
fundraising. We provide examples to illustrate the
military's different economic entanglements and some
of the human rights abuses associated with them.

The third part examines obstacles to change and reform
efforts to date. It identifies the absence of
transparency and accountability regarding military
finance issues as a serious impediment to reform.
Official data on military budgets and spending are
unreliable and incomplete. When it comes to off-budget
matters, including revenue from military businesses,
no reliable figures exist and estimates have varied
wildly. The difficulty in establishing credible
statistics is but one indication of the need to
improve financial management of military affairs. Some
changes are underway, as part of wider efforts to
improve public financial management, but additional,
targeted measures are needed to ensure adequate
oversight and reporting on military finances. The
military's revenue and spending remain one of the
least transparent and accountable elements of the
government's accounts.

This part of the report also addresses three myths
often trotted out to explain the slow pace of reform:
that funds from official government sources are
sufficient to meet only a fraction of the needs the
military; that military businesses generate
substantial revenue that goes most of the way toward
filling the gap; and that the proceeds of military
businesses largely are spent on troop welfare.

While it is true that official Indonesian government
spending on the military is relatively low, it is
higher than military budget figures suggest.
Additional government outlays are hidden in other
budget lines, there is a significant level of waste,
and government support levels have increased
substantially in recent years.

As for the second myth, the evidence we have shows
that many military business ventures have been great
failures and that, on net, even the businesses in
which the military has a direct ownership stake
contribute only modest sums to help cover unbudgeted
expenses—as government officials have begun to
acknowledge. In the permissive environment engendered
by the expectation that the military will generate
income to contribute to its costs and by the absence
of monitoring of that income, the weak performance of
the "regular" businesses owned by the military has
contributed to the spread of informal and illegal
military economic activities that are more hidden and
more difficult to control.

There are also strong indications that, contrary to
those who espouse the third myth, much of the funds
the military raises independently (particularly but
not exclusively funds raised through systemic
corruption and other criminal activity) goes into
pockets of individuals, instead of to improve
conditions for the troops.

The report's assessment of reform efforts to date
focuses on the 2004 law that is the basis of current
efforts. That law mandated that the military end its
business activity within five years. To make the most
of the opportunity, civilian and military officials
alike must commit themselves to comprehensive reform.
Unfortunately, as announced to date the government's
plans would not address the full scope of the problem.
They focus exclusively on a subset of one type of
military economic interest: formally-established
businesses in which the military has a documented
ownership share.

Military leaders similarly have sought to limit the
scope of financing reform in order to retain many
business ventures that they argue—contrary to the
evidence—are independent of the institution of the
military, do not make use of government resources, or
only serve to support soldier welfare. All indications
are that they have succeeded: at this writing, the
government's draft proposal provided all these
exceptions. The result would be a superficial reform
that would leave untouched many military business
enterprises, as well as the military's stake in
irregular and illegal business activity.

The report concludes with detailed recommendations for
reform. It argues that for military finance reform to
succeed the government must define the problem
accurately, recognize the true human rights costs of
self-financing—including in terms of weakening the
government's ability to bring military personnel to
justice for crimes that violate human rights—and
commit fully to stamping it out. That will require
concrete steps to impose financial accountability on
the military, ban all forms of military commercialism,
develop and implement a comprehensive strategy to
withdraw the military from business activity, and fund
the military at appropriate levels (following a close
review of actual needs and bearing in mind other
national priorities).

*                       *                       *

It is nearly impossible to determine the total value
of the Indonesian military's various economic
activities. The military's extensive network of
economic interests is scattered across the country and
includes businesses large and small, centralized and
locally controlled, legal and illegal. No one,
including top military leaders, has a full grasp of
the sums involved. For years government officials
repeated informal estimates suggesting that funds
formally allocated to the military in the national
budget covered only 25-30 percent of actual military
expenditures and that the remainder was paid from
off-budget funds, but by 2005 they dismissed these
estimates as outdated and inaccurate. Nor is it clear
if more recent estimates placing the figure at about
50 percent are any more reliable, since officials have
not undertaken an analysis of the extent of off-budget
activity and in any case give inconsistent
information.

There is equal confusion over the number of military
businesses. An initial military inventory in 2005
first put the figure at 219, but a subsequent one in
2006 gave the number as 1,520. Some government
officials have questioned the credibility of the
revised data and suggested the actual number of
military businesses was far lower than indicated.
There is equal reason to think that the official
inventory undercounted the number of military
businesses, since it excluded informal and illegal
economic activity. The inability to quantify the
extent of the military's fundraising and the exact
number of its business, however, does not detract from
the need for change. There is general agreement that
military self-financing is a dangerous practice that
should not be allowed to continue.

   *                       *                       *

Opportunity for Reform

The Indonesian military (Tentara Nasional Indonesia or
TNI) is now required by a 2004 law to withdraw from
economic activity. Under that law, the Indonesian
government must take over military business holdings
by 2009. The law also bars the military from engaging
in business activity and receiving funds outside of
the state budget. Indonesia's military leadership has
pledged to cooperate and expressed willingness to give
up some of its business interests before that
deadline. Civilian officials have acknowledged that
pervasive military economic activity takes a heavy
toll on the armed forces and the country, and that it
should be brought to an end. These policy commitments
represent an important shift after years in which
various governments made excuses for inaction and
military officials actively resisted reform.

The stakes are high. If implemented fully and in a
timely manner with transparency and accountability,
reform of military finance could mark a major step
toward structural reform of the TNI. Many in
Indonesia's military share the view that they should
get out of the business of private moneymaking. They
recognize that the focus on fundraising reduces
military professionalism and readiness. Senior
military officers continue to publicly defend some
types of military business activity as a way to
support the basic needs of soldiers, but they are
increasingly likely to acknowledge that many military
businesses have given way to self-serving ventures
that offer little to the troops and instead only sully
the military's reputation. A growing number of
military personnel at all levels would prefer not to
engage in self-finance and would rather the state took
responsibility to fund the military appropriately.

There are other important reasons to end military
self-financing. Military economic engagements are bad
for the economy: they introduce market distortion and
irrationalities; provide a platform for corruption and
rent-seeking behavior (defined as the extraction of
excess profits, such as through privileged access to
lucrative natural resources); add to the cost of doing
business (through the payment of protection money);
and contribute to environmental degradation that
impedes sustainable development.

The compelling human costs of the military's economic
activities also must be considered. Civil society
groups have long drawn attention to the many ways in
which military economic entanglements fuel abuses of
power, including corruption and human rights
violations. The Indonesian military has a dismal human
rights record, and it is widely recognized that
military self-financing plays a role in facilitating
such abuses. Economic incentives can motivate certain
military abuses—including extortion, property
seizures, and profiteering—and also can help fuel or
sustain violence in conflict areas where the armed
forces have access to lucrative natural resources or
money-making ventures. More generally, the military's
financial autonomy undermines civilian authority and
accountability. Effective reform of military finance
would serve to enhance accountability and help curb
military abuses in Indonesia.

The drive to end the military's economic activities
forms part of a wider agenda to move the military more
firmly under civilian control. Indonesian policymakers
and military leaders have acknowledged the public
demand for military reform and have begun to carry out
some structural changes. Notably, the withdrawal of
the military from parliament, designed to help reduce
the military's political influence, was completed in
2004. Progress to date has been limited and highly
selective, but top Indonesian officials, including
President Susilo Bambang Yudhoyono, the defense
minister, and the chief of the armed forces, have
expressed a firm commitment to advance the military
reform agenda. Reform-minded officials and military
officers have the support of the public. A 2005
opinion poll by the Indonesian Survey Institute found
that a majority of Indonesians support a variety of
reforms to reduce the military's power in society.
Consistent with that view, a majority also believe
that the armed forces should be funded solely by the
government and that the military should not engage in
business activities.

The recent recognition by Indonesian leaders of the
need to address military finance and business dealings
is welcome, but the pledges to undertake serious
reform have not been matched by concerted action.
Government moves to begin addressing the military's
economic entanglements have been slow, half-hearted,
and incomplete. Proposals to address self-finance have
failed to comprehensively deal with the problem and
its human rights aspects. To fulfill the promise of
the 2004 law, the government should radically rethink
its approach.

*                       *                       *
Note on Methodology

This report and associated advocacy efforts form part
of a wider program of work by Human Rights Watch. Our
research on business and human rights issues has
resulted in reports on many countries and a range of
issues. We have prepared reports that examine the
activities of private companies in light of
international standards on corporate behavior. We have
documented widespread violations of the human rights
of workers. We also have analyzed how mismanagement,
corruption, and the absence of transparency over
government finances can undermine human rights. We
work internationally to press for public
accountability of government funds, for corporate
accountability for human rights abuses, and against
off-budget financing mechanisms that are rife with
corruption and ultimately undermine human rights
protections.

The research for this report was conducted over the
course of two years and entailed four research trips
to Indonesia. We investigated military financing
issues and researched several examples that showcase
some of the human rights abuses associated with
military economic activity. We also sought to
understand the financial pressures experienced by the
military and the difficult choices faced.

The report is based on more than two hundred
interviews and extensive additional research carried
out in Indonesia and from abroad. We spoke to a wide
range of people to gather information. We met with
government officials from the Ministry of Defense, TNI
headquarters, and numerous other government ministries
or agencies. We also exchanged correspondence with
some of these officials. Additional sources included
scholars, professional analysts and researchers,
military experts, community activists, retired
military officers, and journalists. We also spoke to
businesspeople, diplomats, and international finance
experts. We traveled to Aceh, North Sumatra, and South
Kalimantan provinces to carry out detailed field
research with the assistance of Indonesian colleagues.
We also have relied on public disclosures, other
published research, and unpublished materials to
supplement our original research. We have benefited
especially from the work of the many independent
experts, human rights campaigners, and other civil
society activists whose efforts to raise awareness of
the phenomenon of military business in Indonesia and
to advocate for its abolition helped generate the
political will to begin to tackle this serious
problem.

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I. Military Finance in Indonesia

Military Self-Finance and Human Rights

It is widely accepted in Indonesia that military
self-finance can lead to human rights abuses. The
reason is that there are often inherent and direct
conflicts of interest between the military's security
function and its profit-seeking. Human rights too
often become a victim of those conflicts. This harmful
dynamic colors military operations in conflict zones
and also affects more mundane military activities in
other parts of the country. Human rights reports on
Indonesia are replete with examples of violence,
intimidation, extortion, land and property seizures,
and other abuses linked to military economic
interests.

Indonesia's military has a record of exercising
considerable political power, particularly under the
authoritarian government of General Soeharto, and
still holds sway in society. The fact that the
Indonesian military continues to be deployed on a
territorial basis, in parallel to civilian government
administrations down to the local level, leads to
frequent interactions between the armed forces and the
public. It provides military units and individual
soldiers with added opportunities to exploit their
position at the expense of civilians. The military can
use its coercive authority to advance or protect its
economic interests, or those of its partners.

The situation is further complicated by the fact that
the Indonesian military is often called on to assist
in preserving or restoring public order. The
military's involvement in internal security matters
can create a conflict of interest that pits its
official function against the strong drive for profits
and funds. Some military self-financing activities,
including protection rackets, directly undermine
security and fuel lawlessness.

The police, which are taking over greater
responsibility for internal security, face the same
conflicts of interest. Like the military, the police
in Indonesia have a reputation for corruption and are
deeply involved in a range of economic activities. The
two forces were only separated in 1999 and share many
of the same poor financial practices. Self-financing
by the police merits attention but is beyond the scope
of this study.

There is a second dimension to the link between
military self-financing and human rights. Even if
self-financing activity is entirely clean, follows
good business practices, and the money is properly
accounted for, money that comes directly to the
military outside of proper government budgetary
channels still can be expected to undermine
accountability. If civil authorities do not control
the flow of money, they lose important leverage over
the military. For example, if the civil authorities
withhold funds to try to limit certain military
activities, the military can always turn to other
sources. In that way, self-financing activity tilts
the balance of power away from the government and in
favor of the military and its business allies. In
turn, this impedes the ability of civil authorities to
assert control over the armed forces and end impunity
for military abuses. These problems are aggravated,
and the position of the civil government further
weakened, when military self-financing activity does
not adhere to proper business practices, generates
revenues that are not transparently reported and
publicly accountable, and includes economic activity
that violates the law.

The TNI, through its then spokesperson Maj. Gen.
Kohirin Suganda, has argued that there is "no reason
or opportunity for the TNI to deny civilian
supremacy."1 It also stated that "the TNI supports the
principle of public accountability and transparency"
and insisted that the military is subject to strict
internal and external controls on its finances.2 In
reality, however, the TNI largely operates
independently with regard to its finances.

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