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Defense industries: ‘Outsmart’ limitations Diandra Megaputri and Al Araf, Jakarta | Fri, 10/14/2011 8:08 AM The government’s will to modernize Indonesia’s weapons system was again highlighted by President Susilo Bambang Yudhoyono at the 66th anniversary of the Indonesian Military (TNI) last week. However, limited defense budgets have always hampered the realization of such an agenda. Indonesia enjoyed 6.5 percent economic growth during the second quarter, reflected in a whopping 35 percent increase in the defense budget for 2012 to Rp 64.4 trillion (US$7.23 billion). Along with supporting economic conditions, a wider space has been created to improve the government’s commitment to modernizing weapons systems. To maximize utilization of the defense budget, the government should integrate its acquisition strategy and manage its measures carefully. As a country, Indonesia has two options to boost its defense. The first is to purchase of off-the-shelf military equipment; the second is to develop an indigenous defense industry. Taking the 1998-2005 weapons embargo as a lesson learned, the second option seems more pressing to avoid another dramatic degradation of the nation’s military capability, which is dependent on foreign suppliers. However, Indonesia’s state-owned defense companies are still facing both financial problems and a lack commitment from their stakeholders, which are the government, the TNI and the National Police. The worst conditions have been experienced by shipbuilder PT PAL and aircraft maker PT DI. Both require direct cash injections from the government to remain operational. Meanwhile, arms producer PT PINDAD has not received approval to produce its BT-250 bomb — a breakthrough for the industry. To make matters worse, regulations on defense industries have been interpreted in multiple ways, as evident in the controversy surrounding the initial public offering of PT Krakatau Steel. It is obvious that financial support of the nation’s defense industries is needed. Nevertheless, the challenge lies in how to allocate a “limited” budget. Without an integrated strategy, consistency and formal regulation, the funds might be spent in vain. The purpose of strategies and regulations are not to protect national defense industries from competition in the international arms marketplace, but to boost their capabilities. For instance, the cash injection given to PT PAL in 2009 saved the company, but was not sufficient to rebuild it. To meet the operational needs of state-owned defense industries, the government should adopt the concept of minimum essential force (MEF). For state defense industries, a minimum essential procurement (MEP) would be made to guarantee an industry’s continuity and to avoid additional direct cash injections that might increase its dependency on the government. The two concepts support each other, given that supporting state-defense industries would reduce the risk of international political tensions, such as embargoes. In line with a MEF, a MEP would also solve the budgetary constraints dilemma. In response, the Indonesian government could adopt a marketing strategy for state defense industry products, either through international cooperation or offset agreements. Although many products made by the Indonesian defense industry are still not of the best quality, surprisingly there are several products that have captured international market attention. For instance, Malaysia has planned to purchase Indonesian-made Panser armored personnel vehicles and US has already purchased sport ammunition made by PT PINDAD. The strategy would allow state defense industries to reduce their dependency on local security institutions, which currently buy about 80 percent of their output. In order to achieve the MEP, development requirements should be fulfilled. One alternative is for the government to allocate financial assistance to improve the quality of arms producers with a large market potential. For example, PT PINDAD has already received a great demand for its bullets, domestically and overseas. Nevertheless, this industry has been unable to meet market demands due to its limited capacity or obsolete machinery. This is the point where government support is needed. Besides increasing production capacity, this strategy would also add value to the product. As Josse and Pier note, the governments of semi-industrial countries tend to support high-tech weapons at significant cost, although the products are not a military necessity. Therefore, the government should be cautious about its ambitious agenda. Further, financial assistance is also needed for research and development activities (R&D), especially for high-demand weapons that state defense industries have not been able to produce. Considering the vast budget needed for R&D, the government could solve its problems by improving access to international cooperation. By its nature, international cooperation will increase the production capacity of state defense industries, improve human resources, access to technology and curb dependency on government assistance. International cooperation is more effective than the transfer of technology, which relies heavily on the absorption capability of human resources and infrastructure — and often failing due to the unreadiness of both. On the other hand, international cooperation provides more advantages through the involvement of foreign partners in the process of enhancing industrial capacity. However, it should be noted that the challenge of international cooperation lies on the level of state sovereignty, which cannot be compromised. Therefore, clear regulations are needed to determine how far international cooperation can be applied to state defense industries. A similar strategy has been implemented and worked well in Russia. “Strategy before structure” is the mantra of success for state defense industries. It is obvious that the industries cannot survive without government financial support. Nevertheless, it will take a further government commitment to prepare state defense industries for self-reliance. With 21 to 27 percent of the budget allocated to defense, the government should be careful about maintaining its defense industry policies. Otherwise, this golden momentum will be gone with the wind. Diandra Megaputri studies defense management at the Indonesian Defense University and Al Araf is the program director of the human rights group Imparsial. 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