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WORKING PAPER NO. 354

THE INDONESIAN MILITARY BUSINESS COMPLEX: ORIGINS, COURSE AND FUTURE

INT'L RELATIONS/PACIFIC STUDIES LIBRARY UNIVERSITY OF CALIFOR-A, SAN DIEGO LA JOLLA, CALIFORNIA

Bilveer Singh, PhD

Working paper (Australian Nations 1 University. Strategic and Defence Studies Centre) IR/PS Stacks UC San Diego Received on: 10–31–21 SDSC Working Papers Series Editor: Helen Hookey Published and distributed by: Strategic and Defence Studies Centre The Australian National University Canberra ACT 0200 Australia Tel: 02 62438555 Fax: 02 62.4808 16 ||||8 |

WORKING PAPER NO. 354

THE INDONESIAN MILITARY BUSINESS COMPLEX: ORIGINS, COURSE AND FUTURE

INT'L RELATIONS/PACIFIC STUDIES LIBRARY UNIVERSITY OF CALIFOR, A, SAN DIEGO LA JOLLA, CALIFORNIA

Canberra

Bilveer Singh, PhD February 2001

National Library of Australia Cataloguing in Publication Entry Singh, Bilveer, 1956-. The Indonesian military business complex: origins, course and future. Bibliography. ISBN 0731554035. 1. Military-owned business enterprises - . 2. Indonesia. Angkatan Bersenjata. 3. Indonesia. Tentara Nasional. 4. Indonesia - Armed Forces - Finance. 5. Indonesia - Armed Forces - Civic action. 6. Indonesia - Armed Forces - Appropriations and expenditures. I. Australian National University. Strategic and Defence

Studies Centre. II. Title. (Series: Working paper (Australian National University. Strategic and Defence Studies Centre); no. 354). 338.47355009598

\lºn | ABSTRACT

One of the unique features of the Indonesian military (referred to as Angkatan Bersenjata Republik Indonesia or ABRI in the past and Tentara Nasional Indonesia

or TNI at present) is its massive involvement in commercial activities. Even

though the military's business activities flourished under the presidency of

Suharto, its origins can be traced to the pre- era. The ostensible reasons

for the quantum expansion of the military's business activities were the need to

cater for the welfare of the soldiers and to augment the operational budget of

the armed forces that were believed to be inadequately provided for in the

annual defence budget. As such, every service of the military - namely, the

, navy, air force and the police - established their own foundations, under whose umbrella various business activities flourished, with the army emerg

ing as the biggest economic actor from the military. Initially, there was very

little opposition to the military's involvement in these activities, stemming from

three main factors. First, as the military was a powerful political force in the

country and its activities were sanctioned by President Suharto, hardly any opposition was raised. Second, the business activities did play an important

role in raising the welfare of the soldiers as well as providing the armed forces

with valuable off-budget finances to carry out its activities. Third, the military's

business activities had a spill-over and multiplier effect, benefiting various

sector business, developing, as it were, a win-win situation. However, once the Suharto regime was toppled and Indonesia embraced democracy, the calls for greater transparency and accountability eventually took their toll on

the military, and it is within these parameters that there has been growing

criticisms about the military's involvement in business activities, especially at

a time when the country's economy has been hard-hit by multiple crises. It is against this backdrop that this study examines the origins, evolution and fu

ture of the Indonesia military's 'business complex'. THE AUTHOR

Bilveer Singh, from the Department of Political Science, National Univer sity of Singapore, is currently a visiting fellow at the Strategic and Defence Studies Centre, Australian National University. He has been teaching in Singapore since graduating with Masters and PhD degrees in international relations from the Department of International Relations, Research School of Pacific and Asian Studies, Australian National University in 1987. His re search mainly covers regional security issues in the Asia-Pacific region, with a particular focus on Southeast Asia. He has published widely, with recent works including. Succession Politics in Indonesia: The 1998 Presidential Election and the (Macmillan, 2000); ASEAN, the Southeast Asian Nuclear-Weapon Free Zone and the Challenge of Denuclearlisation in Southeast Asia (SDSC, 2000); and ‘Civil-Military Relations in Democratizing Indonesia; Change Amidst Continuity', in Armed Forces & Society (Summer 2000). He is currently re searching on Australian-Indonesian defence relations.

ACKNOWLEDGEMENTS

I wish to express my heartfelt thanks and gratitude to all those who have given me invaluable advice and encouragement while I was undertaking this study. I am particularly grateful to the Strategic and Defence Studies Centre, Australian National University, for providing the necessary support and en couragement to undertake this study. Here, I would express my sincere grati tude to its Director, Professor Paul Dibb, and Professor Desmond Ball for assist ing in the completion and publication of this work. I also like to thank Alan Dupont for sharing his ideas and materials that has greatly helped me in focus ing on the key issues as far as the subject is concerned. I would also like to thank the Institute for Policy and Community Development Studies, and the Bonn International Conversion Center, Germany, for inviting me to an international conference in Jakarta in October 2000 that helped to widen my horizon on the subject. I also wish to thank General , General Bambang Yudhoyono, Rear Admiral RMSunardiand -General Bambang Sutedjo for the various inputs that have been helpful in my understanding of the Indo

nesian military involvement in business activities. However, all the views ex

pressed in this paper are solely mine and I take full responsibility for any errors that may have occurred. ACRONYMS AND ABBREVIATIONS

ABRI Angkatan Bersenjata Republik Indonesia BULOG Badan Urusan Listrik

BUMN Perusahaan-Perusahaan Negara IMBC Indonesian Military Business Complex INKOPAD Induk Koperasi Angkatan Darat INKOPAL Induk Koperasi Angkatan Laut INKOPPOL Induk Koperasi Polri INKOPAU Induk Koperasi Angkatan Udara Komando Pasukan Khusus

KOSTRAD Komando Strategis Angkatan Darat MIC Military Industrial Complex MILBUS Military Business PETA Tentara Sukarela Pembela Tanah Air

PX Post Exchange TNI Tentara Nasional Indonesia INTRODUCTION

Strictly speaking, as the legitimate manager of violence in a state, the role

of the military is rather prescribed and defined - namely, to use its anointed

means in the pursuit of the national interest as is agreed and directed by the

legally constituted and legitimate government of the day. This role is usually

defined in terms of managing external defence even though under certain cir

cumstances, internal security could also become the purview of a country's

armed forces. In reality, almost all militaries in the developed and developing

world have undertaken a role expansion that has gone beyond their narrowly defined ambit, and this role enlargement has covered various areas including

politics, economic and social-cultural arenas of the state. In turn, their role enlargement has spurred various debates about civil-military relations, both during and after the , with scholars largely indeterminate about the

actual status of the military in a modern political entity. What cannot be de

nied, however, is that the military in almost every setting has emerged as a

highly complex and sophisticated organisation with its tentacles reaching and by affecting almost every facets of society - the question really being how and

what means is this undertaken-in agreement or in opposition to the prevailing

views, norms and mores of the society.

In this regard, by itself, the military's involvement in business activities is

essentially not a problem. In fact, in some areas, it is imperative that the military

become involved as deeply and efficiently as possible to ensure that the net

effectis the enhancement of national political and security goals. That this is so

can be seen from the activities relating to defence industrialisation in various

countries, especially in the developed world. If anything, directly and indi

rectly, the military is heavily involved in defence industrialisation, leading

many to raise various issues and concerns about what this really means for

national politics and security policies. In the West, the rise of collusion be

tween various agents and agencies involved in defence industrialisation in

what has been referred to as the ‘military industrial complex' is a case in point.

It took none other than a renowned general and two-term (1953-61) American

President, Dwight Eisenhower, to ring the alarm bell in his Farewell Address

on 17 January 1961:

This conjunction of an immense military establishment and a large arms

industry is new in the American experience. The total influence – economic,

political, even spiritual- is felt in every city, every State house, every office of the Federal Government. We recognize the imperative need for this develop

ment. Yet we must not fail to comprehend its grave implications. Our toil, 6 Strategic and Defence Studies Centre

resources and livelihood are all involved; so is the very structure of our society.

In the councils of government, we must guard against the acquisition of un by warranted influence, whether sought or unsought, the military industrial

complex. The potential for the disastrous rise of misplaced power exists and

will persist. We must never let the weight of this combination endanger our

liberties or democratic processes. We should take nothing for granted. Only an

alert and knowledgeable citizenry can compel the proper meshing of the huge

industrial and military machinery of defence with our peaceful methods and

goals, so that security and liberty may prosper together.

In our context, however, defence industrialisation perse is not the issue. Most countries have undertaken defence industrialisation for legitimate politi cal, security and economic reasons and where more often than not, with the

defence industries emerging as an important pillar of national defence and security. The reasons and incentives for defence industrialisation, especially

in the Third World, include:

• Political

avoid, preempt or overcome international embargoes

pursue self-reliance and self-sufficiency in order to reduce dependence

on foreign suppliers

seek political independence by avoiding political strings that may be

attached to arms purchases seek prestige and regional influence

• Economic

reduce defence expenditure and save foreign exchange provide impetus for domestic scientific research and technological progress

keep abreast in strategic technology and provide civilian spin-offs stimulate and support domestic industrialisation provide skilled jobs retain skilled manpower

• Military meet national defence needs

meet unique requirements tailored to local needs

ensure availability of necessary spares and supplies in time of crisis

ensure high state of operational readiness Working Paper No.354 7

• Technology easy transfer of weapons production technology from abroad growth of local trained and skilled manpower As such, the military's involvement in defence industrialisation will not be the focus of this discussion. Rather, it will examine what appears to be the growing propensity of certain militaries to engage themselves in non-tradi tional military and defence activities. In many ways, the military's involve ment in business and commercial activities is a highly dynamic process and represents part of the evolution of the military's role and adjustment in the society at large. What is legitimate and permissible in a society depends criti cally on the civic culture and public expectations, and no doubt, this varies from country to country, with some tolerating a more expansive role of the military than others. To that extent, generalisations can be illusory as certain

cultures would welcome, even insist, that the military be part of its political,

economic and social-cultural fabric, in addition, to ensuring national defence

and security. In view of this, it is important, from the very outset, to be clear by about what is meant the military being involved in business. What is meant

by the ‘military' or 'soldiers', and to whom do these specifically refer?

What is meant by ‘business', and what type of activities does it cover? Until and unless these defining parameters are clarified, the discussion

faces the danger of being ambiguous and undefined. 8 Strategic and Defence Studies Centre

1 UNDERSTANDING MILITARY BUSINESS (MILBUS)

Before analysing the businesses of the Indonesian armed forces, it is first imperative that the basic facts of the phenomenon be understood. While the security role of armed forces has been extensively examined, the same cannot be said of military businesses. While references are often made to this phenom enon, usually in the negative, the study of the theory and practice of MILBUSis highly underdeveloped. This, however, is not something restricted to the armed forces of various developing countries as many militaries in the developed and industrialised world are also direct participants, often with the pro-active sanc tion of their governments. Against this backdrop, it will be useful to examine some of the basic facts about MILBUS, including the types of businesses, the actors, the characterisation of the businesses, the reasons for involvement, its

impact and finally, its future.

First, what is involved? A survey of MILBUS worldwide highlights that

besides defence industrialisation, militaries are involved in a whole array of industrial, agricultural and commercial activities. While Post Exchange (PX)

and the like were early symbols of the military's involvement in small-scale

businesses in the West, the ascendancy of the military as an economic actor

can be seen in its roles as operators of banks, hotels, airlines, real estate or even

as a leading producer of industrial and agricultural products. In this connection, what are the businesses that concern us? The businesses can refer to:

- the traditional businesses of the military, usually state-controlled and

strategic in nature, such as arms production, etc.

- the non-traditional businesses that are usually the domain of civilians

but that serves the needs of the military.

- the businesses that are usually the domain of civilians with the military

entering the market as a competitor.

Second, who are the 'actors' that we are concerned with? Again, there is a

wide range and it is difficult to categorise. In the main, it is the corps that

is usually involved but in certain business activities, other ranks may also

participate, depending on the nature of the business. Thus, the actors may include:

- active regular soldiers holding official positions in the military estab lishment but are active in business activities

- active regular soldiers who are deployed outside the military establish

ment to undertake non-military, essentially business activities Working Paper No.354 9

- soldiers who have retired but have become active in the business arena - active regular soldiers holding official positions in the military estab lishment but whose business interests are being undertaken by proxies, who may be bonafide businessmen or family members - active soldiers who are about to retire from active duty seeking business experience Third, how can MILBUS be characterised? There are a number of ways this can be undertaken. One method is through a three-fold typology of exam ining the formal, informal and criminal business activities of the military." What distinguishes the categories is the degree of accountability, transparency and legality, with the formal being strongest of these features and thus legiti mate, and the shady and criminal business activities being the most undesired and thus illegitimate. The military can also be involved in business as an institution, a group or through individuals. At the same time, both active and ex-servicemen can be found in business activities, either by themselves or in collusion and cooperation with civilians.

Fourth, why is the military prepared to divert from its primary role of

defence and security provision to become involved in business activities? There

are a number of explanations, being pull-and-push factors for this endeavour. These include:

- the existence of historical and traditional factors for military's involve ment in various economic activities. by - financial imperatives spurred budgetary constraints and shortfalls

as well as the opportunity for institutional and personal enrichment. by - motivated the need to enhance welfare and well-being of military personnel and their family members, especially when the official budget

is insufficient or when large-scale demobilisation is being undertaken.

- the military's preparedness as a ‘path-finder' to spur national develop

ment, especially in undertaking investments and activities that are con

sidered vital for national development but often regarded as either risky by or non-profitable the private sector.

- to enhance the corporate interest of the military as an institution, re

gardless of whether there is effective political control or not, so that the

military can become immune from pressures from local politicians or

overseas agencies as well as to ensure that it remains a powerful politi

cal force in national politics, with its own autonomous sources of fund ing and support. 10 Strategic and Defence Studies Centre

Fifth, what is the impact of MILBUS? The record thus far, for both the

developed and particularly developing is a mixed one. As for its merits, MILBUS has created employment for soldiers, bridged budgetary shortfalls, provided

resources for welfare, maintenance and modernisation of various militaries as

well as provided various economic, technological and military spin-offs for the

country which would not have been possible otherwise without the MILBUS. It

has also been argued that MILBUS provides the military with a direct stake in

the stability of the political system. As for the negative impact, it has provided opportunities for large-scale corruption and profiteering; negatively affected

military readiness and professionalism; weakened the cohesiveness of the mili

tary with the ‘financial generals' being envied; the proliferation of a large inef

ficient military business complex that is usually not accountable to the public;

created some form of 'warlord complex' at the regional level as well as eco by nomic distortions brought about tax exemptions; privileged use of public

resources; gaining of state contracts through favouritism and preferences; and collusion with foreign multinationals that often disadvantaged the state and

public at large.

Finally, what is the future of MILBUS? A big debate has ensued about

whether it was advisable for the military to be involved in business activities

and there appears to be no clear roadmap as far as the future is concerned. The

key question is essentially one of opportunity cost. Does MILBUS detract and

undermine the military from its primary function of focusing on defence and

security? Also, what is the impact of globalisation on MILBUS and the extent to

which the military can continue its activities inside its national borders with

out taking cognisance of the changes that are taking place in the world at large?

The answers to these question would largely determine the future of MILBUS

even though it is likely that each country, due to its own national needs, might

reach different conclusions about the utility of MILBUS in their respective set tings.

It is important to be clear about these facts on MILBUS as the implications

and the morality stemming from the 'soldiers in business' will vary, with some

being viewed as normal and legitimate, thereby providing a positive synergy to

society as a whole and others, just the reverse. It is against this backdrop that

this study will examine the business activities of the Indonesian military and

what it has meant for the military and society at large. Working Paper No.354 11

2 THE INDONESIAN MILITARY AND BUSINESS ACTIVITIES

The Indonesian Armed Forces or the Angkatan Bersenjata Republik Indonesia (ABRI) which later reverted itself to the present day Indonesian National Army or Tentara Nasional Indonesia (TNI) was born as an army of national liberation'. Following the collapse of the Japanese occupation of Indonesia - then a Dutch colony-in mid-August 1945, elements from the Dutch colonial army, the Japa nese-established military and militia as well as various youth militias (called Pemudas) formed the basis of what was to emerge as the later day ABRI. When and Hatta declared Indonesia's independence on 17 August 1945, a national army was not immediately established. Instead on 20 August 1945, a People's Security Body was formed, which strictly speaking, was more akin to a security agency. The nationalists and freedom fighters found this insulting, marking the beginning, in many ways, of the military's challenge of the civilian political leadership. Partly in response to the unhappiness of the armed na tionalists and militias, and the realisation that territorial sovereignty could not be safeguarded without an army, the People's Security Army was established by the government on 5 October 1945. The delayed creation of a national army also sowed the seeds of the military's suspicions of civilians, their capabilities and their commitment to national security. On 10 November 1945, the newly created army was involved in a major clash with the Allied forces, with the heaviest battle taking place in Surabaya in eastern , which to this day is commemorated as Heroes Day. Following the battle, the army emerged as an

autonomous political force in the country under the leadership of its charis matic leader, .

It was Sudirman, the ‘father' of the Indonesian military, more than anyone

else, who established the Indonesian military's ethos and culture as a political force above national politics”. Sudirman, through his philosophy and actions,

established the TNI as a body that belonged to all Indonesians and where it

was projected as the only national organisation in the country. Sudirman, the

Commander of the Japanese-established army or PETA (Tentara Sukarela Pembela

Tanah Air), was elected by the various commanders on 11 November 1945 as

Commander-in-Chief of the People's Security Army and this was foisted upon

the government of the day. Even though the government had its own candidate

to lead the newly created army, it was compelled to accept the commanders' decision and recognise Sudirman. This act and many others that followed

established a pattern of behaviour of the TNI that were to shape the unique

character of civil-military relations in Indonesia. The core of this was the belief 12 Strategic and Defence Studies Centre

that “the Armed Forces of the Republic of Indonesia were really an army of the Indonesian people, established by the will of the people and by the people themselves. The Indonesian Armed Forces were created from below and were by no means an institution of the Government.”

On 23 February 1946, the army was renamed as the Army of the Republic

of Indonesia and later on 3 June, changed its name to TNI. The Indonesian by Armed Forces' image and credibility as well as its acceptance society at

large, were due to its various operations in safeguarding the unity and sover

eignty of the country. Throughout the ‘war of revolution' from August 1945 to

December 1949, it battled the Dutch colonialists, especially following the two

'police actions' of the Dutch of 21 July 1947 and 19 December 1948. The fact that the 'police actions' occurred after the civilian politicians had entered into

agreements with the Dutch-first the Linggajati Agreement on 25 March 1947

and later, the Renville Agreement on 17 January 1948-merely exacerbated the

military's doubts about civilians' policies and strategies of gaining the country's by independence. On 18September 1948, the TNI also put down a rebellion the

Indonesian Communist Party. The TNI's actions throughout the ‘war of revo

lution' were regarded as being vital in signaling to the outside world that the

Dutch were not in control of Indonesia and this did play a major role in expe diting the colonial exit from the country. Even more important, once indepen

dence was gained following the Roundtable Conference at The Hague in De

cember 1949, the TNI emerged as a major political player in the country's poli

tics, something that was evident from its multitude of activities beyond defence and security, including the business arena.

The TNI's framework for involvement in business activities

The roots of Indonesian military's business activities can be found in the

self-image of the military, its experience in the 'war of revolution' as well as in

the manner the military has evolved its role in the political system since inde

pendence, especially vis-à-vis the position of the civilian politicians. The key to

this was the Indonesian military's concept of ABRI or the dual func

tion of the armed forces. Essentially dwifungsi referred to the Indonesian

military's role in the social realm, especially in the social-political sphere. Since

the days of General Sudirman, the self-image of the Indonesian armed forces

has been that it was first and foremost a political institution and only second a

military one. This led to a role expansion of the TNI into areas that were gener

ally regarded as realms of civilian politicians in other political systems, with

the interventionist political culture viewed as something normal and indeed,

an entitlement. This was particularly true as far as the protection of the country's Working Paper No.354 13

1945 Constitution, the national ideology of and the unity and unitary character of the state was concerned. In this regard, the opportunity for the Indonesian military to be involved in business activities in a big way was found in the late fifties when Dutch citizens were expelled from Indonesia on the grounds of the Irian Jaya issue, and consequently the Army was ordered to take over Dutch business enterprises. This instant was viewed by the Indone sian military as being in line with the spirit of dwifungsi on grounds that it served the interest of the state.

Even though the concept of dwifungsi ABRI was formalised in November 1958 by General Nasution in his ‘Middle Way' speech, arguing that the armed forces were not only an instrument of government but also an instrument of the

state, its practice long preceded its formal enunciation, especially during 'war

of revolution'. In Nasution's view, the military was one of the forces of the

people and, as such, had rights that were equal to other forces in the polity,

including in politics. While the military would be neutral politically, at the

same time, it would not stand idly by and see the country and its interests

undermined. In order to carry out this self-anointed role, the TNI would be

involved in both military and non-military matters, including the political, economic and social arena. Nasution argued that the Indonesian military was

not just the ‘civilian tool' like the Western countries nor a ‘military regime'

which dominated state power but rather one of the many forces in society that

was national and nationalist in outlook “.

This orientation and self-perception was the result of a number of devel opments and experiences. First was the fact that unlike many other armed

forces, the TNI was self-created from ‘below', leading it to argue that it had as

much entitlement in determining the course of society as other social-political

forces. Second, the TNI saw itself as freedom fighters and patriots first, and

only second as soldiers. Unlike the civilian politicians who were believed to

have 'sold out' and capitulated to the colonialists during the ‘war of revolu

tion', the Indonesian military believed that it was their action more than any

thing else that won the country its freedom and sovereignty. Third, the fact that

the civilian politicians had tended to be highly polarised and party-centred led

the military to believe that they were the only forces of national unity and nationalism. Fourth and finally, from the very beginning, General Sudirman

drew a line in civil-military relations and was even prepared to disobey his

political superiors to the point of insubordination. This greatly shaped the

military's thinking that it could challenge the political leadership if the latter

appeared incapable of defending the country's vital interests. 14 Strategic and Defence Studies Centre

In practice, dwifungsi ABRI provided the rationalisation for the military's expansion into the various arenas that was usually closed to other militaries. For the TNI, dwifungsi ABRI had two main aspects. Politically, it represented a

pledge of loyalty to the nation that it would look after its well-being in all

dimensions all the time. In order to actualise this, it required the military to be

involved in all arenas, military and non-military, on the grounds that the coun

try was like a macro-family, with its members having equal rights to participa

tion in decision making. Strategically, dwifungsi was part of the military's con

cept of force multiplier, which permitted the TNI to be positioned in the socio

political arena, functioning as an early warning system to detect signs of im

pending trouble. This provided the military with an opportunity to solve many

problems at its origins without resorting to force, which was particularly valu

able in a highly fragmented country with many political, economic and social problems.

It is against this backdrop that the TNI's role expansion should be under

stood and appreciated. Hence, following Sukarno and Hatta's proclamation of

independence in August 1945, the military has seen its role expand gradually

on a continuous basis right up to the period when President Suharto fell from

power in May 1998. In addition to being the ‘managers of violence', the concept

of dwifungsi ABRI permitted the military to enter into various arenas of the state,

especially in times of crisis and weak civilian leadership. If anything, the TNI

had seen its influence and power expand whenever the civilian politicians

failed, as in the period from 1948-1949 when the civilian leadership surren

dered to the Dutch; in 1957-1959 when the civilian leadership proved inca

pable of handling the regional rebellions; and since September 1965, when

Sukarno almost allowed the communists to gain power. Thus, whenever the

country was confronted with internal or external threats, the TNI's role ex panded into active political management with control over both civil and mili

tary affairs. It is in this connection that the development of the Indonesian

Military Business Complex (IMBC) should be understood. In a general sense,

the IMBCrefers to the wide array of business, commercial and economic activi in, ties that the Indonesian military has been involved be it at the centre or in the

regions, be it as the military as a whole or its various services and units

below them, undertaking essentially a role expansion and an economic

actor, with the principal object of generating financial resources for the Indonesian military. Working Paper No.354 15

3

THE INDONESIANMILITARYBUSINESSCOMPLEX(IMBC)

The Indonesian Military Business Complex (IMBC) developed gradually following the take over of Dutch enterprises by the in the late

1950s, expanding vertically and horizontally, in line with the growth of its

non-military socio-political role in society. The IMBC is essentially a function

of dwifungsi ABRI and one of the best manifestations of the role

expansion of the military in Indonesia. A survey of the IMBC will reveal that

the military is involved in a wide-range of non-military activities, including, among others, banking and finance, real estate, manufacturing, construction, recreation, shipping, air services, fisheries, forestry, mining and transporta

tion. The IMBC can be organised in a two-fold typology, formal and informal. The formal activities are undertaken through four main mechanisms: namely,

the charitable foundations or yayasams; the limited liability companies; the co operatives;and various state-owned corporations. The foundations and coop

eratives administer a whole array of businesses, including various

limited liability companies, making the military an economic actor in the

country and economy at large. The informal activities, which are much more by difficult to assess, are undertaken groups and individuals associated with

the military, including various illegal activities, that aims to enrich various

individuals and groups from the military and often undertaken in connivance with the central and regional military leaders. Equally important, the military's

business activities are organised at two main command levels: namely, at the

center and region, along the lines of the military structure, even though at times this coordination do break down. As far as the actors of the IMBC are con

cerned, one finds active and retired personnel, their families as well as various

external partners, especially from the Chinese community, involved in the en

deavour. The Indonesian military personnel, in the main, are involved in

MILBUS, non-military civilian businesses as well as various state-owned busi messes.

The Formal IMBC

The Yayasans or Foundations Exempt from taxation and the 1974 presidential decree that barred

active servicemen and their wives from being involved in business activi

ties', the Yayasans, which come under the rubric of charitable organisations,

represent one of the most important formal mechanisms through which the 16 Strategic and Defence Studies Centre

Indonesian military participates in business activities. In total, there are nine main foundations of importance. As shown in Figure 1, every major service and

arm of the military has its own foundation. In turn, each of these foundations administers various economic, social and educational activities, including lim

ited liability companies that are usually managed by a holding company (see

Figure 2,3 and 4). For instance, the business activities of the army foundation are by managed PT Tri Usaha Bhakti, a holding company that oversees more than 20

subsidiaries. The foundations and their networks operate both at the central and regional levels.

Figure 1: Foundations of the Indonesian Military

Ministry of Defence Yayasan Sudirman Yayasan Satya Bhakti Pertiwi TNIHeadquarters Yayasan Manunggal ABRI Army Yayasan Kartika Eka Paksi KOSTRAD Yayasan Darma Putra Kostrad KOPASSUS Yayasan KOBAME (Korps Baret Merah) Air Force Yayasan Adi Upaya Navy Yayasan Bhumiyamca

Police Yayasan Brata Bhakti Source: Compiled by the author

Figure 2: Key Activities of the Ministry of Defence and TNI Foundations Ministry of Defence TNI Headquarters

Sudirman Foundation Satya Bhakti ABRI Foundation Pertiwi Foundation

National Development PT Yamaker University

Public Middle School PT Mina Jaya PT Undagi Wana Lestari PTYayasan Maju Kerja PT Yamatran PTKoda Jaya Source: Compiled by the author Working Paper No.354 17

2arenine

Figure 3: Key Businesses of the Indonesian Military 'rviceand

Indations A. R.M. Y. AIR FORCE 1 KARTIKA ExA PAks p f ding lim A UPA YA

any (See 'ationare PT Bank Artha Graha PT Chandradirgantara ethan 20 PT Asuransi Cigna Indonesia PTUpaya Guna Dirgantara Dirgantara itraland PT Cilegon Fabricators PTKresna Puri PT Kayan River Indah Timber Plywood PT Dirgantara Husada PT Kultujaya Tri Usaha PTPadang Golf Halim PT Lukita Wahana Sakti PT Persada Purnawira PT Meranti Sakti Indah Plywood PTSurya Dirgantara PT Meranti Sakti Indonesia PT.Purna Wira Sarana PT Mina Mulia Djaya Bhakti PT Angakasa Puri PT Panca Usaha Palopo Plywood PT Green Delta PT Angkasa Wana PT Bank Angkasa PT Pondok Indah Padang Golf PT Aerokarto Indonesia PT Private DevelopmentFinance Co PTKonstruksi Dirgantara PT Sinkona Indonesia Lestari PT Dirgantara Air Service PT Sumber Mas Indonesia PTJasa Angkasa Samesta PT Sumber Mas Timber PT Mediarona Dirgantara PT Truba Anugerah Elektronik PT Cargo Dirgantara PT Truba Gatra Perkasa PT Truba Jurong Engineering

PT Truba Sadaya Industri N. A. V Y PT Sakai Sakti B H U M 1 Y A M c A PT Kayan River Timber Product PT Sempati Air PT International Timber Co Indonesia PT Bhumyamca Sekawan PT Danayasa Arthatama PT Admiral Lines PT Bina Samaktha PT Yala Trading Brajatama PT PT Yala LadangKurnia PT Polopo Timber PT KGA Taliabu Lukna Timber PT PT Bank Bahari Universitas PT Koja Bahari PTETMI PT Halmahera Kayu PT Bhumyamca Film PT Yala Persada Angkasa PT Samudra Guna Maritim Utama

P o L I c E PT Yala Gada BRATA BAKTI PT TriSila Laut PT Yala Gitatama PT Tansa Trisna PT Bintan Beach Resort PT Bhara Induk PT Pulau Bayan Club PT Karimun Kecil PT Braja Tama PT Braja Tara PT Bhara Union Source: Dr Indria Samego, et.al., Bila ABRI Berbisnis, PT Asuransi Bhakti Bhayangkara (: Pustaka Mizan, 1998),pp.88-91;Infobank,Novem PTSapta Pirsa Mandiri ber 1992; “The Enterprising Military", Indonesian Business PT Gedung Bimantara

PT Bank Yudha Bhakti Weekly, 16 July 1992;“Bisnis Prajuritdi Hutan Rimba”, Kontan, 3, Vol. No.31, 3 May 1999. 18 Strategic and Defence Studies Centre

Figure4: Key Business Activities of KOSTRAD and KOPASSUS KOSTRAD KOPASSUS DARMA PuTRA KOSTRAD KESEJAHTERAAAN KOBAME

PT Astra Basic Industries PTKobame Propertindo PT Dharma Kencana Sakti PT KMP Tribuana PT Federal Dinamika Lestari PT HPH PT Marga Bharata PT Santi Yoga PT Hela Nusantara Cemerlang PT Pakarti Wanayoga PTTirta Mukti Indah Bottling Co. PT Aica Indonesia PT Federal Motors PT Pakarti Jaya PT Pakarti Riken Indonesia PT Yuasa Bateri Indonesia PT Tokai Dharma Indonesia PT Wira Karya Yoga PT Dharma Karya Perdana PT Pakarti Tata PT Pen Asia Expres Lines PT Asuransi Beringin Sejahtera PT Asuransi Wahana Tata PT Indosuez Indonesian Bank PT Mandala Airlines PT Karuna PTSBA Wood Industries PT Garuda Mataram Motor Automotif PT Dharma Alumnas Sakti PT Setdco Nusantara PT Dharma Bandar Mandala

Source: Dr Indria Samego, et.al., Bila ABRI Berbisnis, (Bandung Pustaka Mizan, 1998), pp.88-91; Infobank, November 1992; “Bisnis Prajurit di Hutan Rimba", Kontan, Vol. 3, No. 31,3 May 1999, “Mesin Uang Kostrad", Tempo, 13 August 2000, p. 24. Working Paper No.354 19

An excellent case study in which the Indonesian military has expanded

its business activities is the manner KOSTRAD, the army's elite corps, through

its foundation, has emerged as, in the words of Tempo magazine, “a business

empire”. Established in 1964, the foundation was intended to provide for

troops, their families and pensions, with funds coming in mainly through do

nations. However, as funds were inadequate, the foundation established prof

itable enterprises to provide more money with the prime source of

income being the control of forestry concessions in and .

The KOSTRAD foundation flourished mainly due to its close ties with Suharto,

who set up the foundation when he was its commander. From the beginning, the foundation has been managed by Suharto and his close associates,

including leading conglomerates headed by Chinese businessman such as

Liem Sioe Liong, Sofian Wanandi and Bob Hassan. It also established close

links with other business giants such as the Salim, Mantrust and Gemala groups

as well as Bank Panin. Eventually, it became a major financial institution through

the establishment of Bank Windu Kencana, a joint venture between KOSTRAD and the Salim Group. Through various partnerships and synergies, the

KOSTRAD business empire grew and it became necessary to establish a hold

ing company, PT Darma Kencana Sakti, to manage the businesses of KOSTRAD. by *, According to one study until hit the economic crisis in August 1997,

on a monthly basis, PT Darma Kencana Sakti would deposit Rp 100 million into KOSTRAD's coffers. As profit motive became the key driving force, the

mother company forged partnerships and links with any type of business as

long as it paid dividends. This saw, among others, its business links with PT

Tokai Darma Indonesia, a gas lighter company, PT Darma Putera Film, which

imports films from the West and probably its best known venture, PT Mandala

Airlines. Not all its businesses were, however, paying concerns. PTTokai, for

instance, only managed to deposit Rp 10–16 million each month and the busi

ness of PTDarma Putera Film was badly affected once Sudwikatmono, a Suharto

relative, secured the monopoly in the business. By 1997, PT Darma Putera Film

was only depositing about Rp 200 million a year into KOSTRAD coffers. As for

Mandala Airlines, it only began to provide some funding for KOSTRAD in

1979, ten years after its establishment. The KOSTRAD foundation's troubles

started when Suharto and his cronies began to “buy into the business, mainly

to cream off its profits. In the 1980s, the shares of PT Dharma Kencana Sakti

plummeted due to the recession in the country. In 1992, following the purchase by of the company Bob Hassan and Sigit Hardjojujanto, respectively Suharto's

golfing partner and son, using Rp5 billion of the interest from KOSTRAD own

investments, KOSTRAD only controlled 40 percent of the shares of the mother 20 Strategic and Defence Studies Centre

company. KOSTRAD only regain full control of its shares following Suharto's

fall in May 1998. KOSTRAD's owned Mandala Airlines was never really a

profitable venture despite its high visibility. The other businesses of KOSTRAD by included a chemical storage company (partly owned Mitsubishi), a plastic

bag factory that supplied to Pertamina, a furniture company, a luxury car

(Volkwagen and Audi) import agency and a real estate contractor. KOSTRAD

had partnered with Setiawan Djodi to develop a toll road from Pandaan to

Malang in .

In mid-2000, the KOSTRAD's business empire and its ownership of key businesses stood as follows: Under the Dharma Putra Kostrad Foundation

was PT Dharma Kencana Sakti, a holding company, with 100 per cent of the

shares under KOSTRAD's control. The controlling interest in the other compa

nies was as follows: PT Mandala Airlines (100 per cent), PT Dharma Karya Perdana (25 per cent), PT Tokai Dharma Indonesia (20 per cent), PT Karuna (18.2 per cent), PTSBA Wood Industries (10 per cent), PT Garuda Mataram Motor Automotif (23 per cent), PT Dharma Alumnas Sakti (10 per cent), PT

Setdoo Marga Nusantara (5 percent) and PTDharma Bandar Mandala (45 per cent)".

Cooperatives

Just as the different services of the armed forces have their own founda

tions, so is the case with cooperatives. The ostensible purpose of the coopera

tives is to provide for the welfare of the servicemen, with each service establish

ing a cooperative movement at the national level right up to the unit level in the

different regions of the country. Hence, at the centre, the army, navy, air force

and police have Induk Koperasi Angkatan Darat (INKOPAD) or Central Army

Cooperative, Induk Koperasi Angkatan Laut (INKOPAL) or Central Navy Coop

erative, Induk Koperasi Angkatan Udara (INKOPAU) or Central Air Force Coop

erative and Induk Koperasi Polri (INKOPPOL) or Central Police Cooperative. A

parallel primer cooperative structure is replicated at the local KODIM level for

each of the services as PRIMKOPAD, PRIMKOPAL, PRIMKOPAU and PRIMKOPPOL respectively for the army, navy, air force and police. Of these,

the most developed, extensive and expansive is the business activities of the

INKOPAD, the army cooperative, that administers businesses involved in rec reation, construction, fisheries and forestry (see Figure 5). Working PaperNo.354 21

Figure 5: Key Businesses of INKOPAD PT Duta Kartika Kencana Tours & Travel PT Kartika Plaza Hotel PT Kartika Plaza PT Kartika Aneka Usaha PT Kartika Buana Niaga PT Orchid Palace Hotel PT Duta Kartika Cargo Service PT Kartika Cipta Sarana PT Mina Kartika PT Mina Kartika Samudera PTRimba Kartika Jaya PT Mitra Kartika Sejati PT Kartika Inti Perkasa PT Kartika Summa PT Mahkota Transindo Indah PTRimba Kartika Jaya PT Mitra Kartika Sejati PT Kartika Inti Perkasa PT Duta Kartika Forwarders

Source: Dr Indria Samego, et.al., Bila ABRI Berbisnis, (Bandung: Pustaka Mizan, 1998), pp.88-91; Infobank, November 1992;“The Enterprising Military", Indone sia BusinessWeekly,6 July 1992;“Bisnis Prajurit di Hutan Rimba", Kontan, Vol. 3, No. 31,3 May 1999.

State-owned Corporations Particularly since September 1965 and coinciding with the emergence of the , the military became influential in the control of various state owned corporations (Perusahaan-Perusahaan Negara, BUMN), with the State Logistics Agency (Badan Urusan Logistik, BULOG) and PERTAMINA, the state

oil company as the two main 'cows' formilking. Since Suharto came to power, both companies have been dominated by the army and have been particularly

important in financing the various needs of the armed forces, especially the army.

In addition, many military officers, both active and retired, also sit on the

board of directors and act as commissioners of various enterprises, especially

in the private sectors. This is particularly prevalentin the banking sector and

represents anotherform of formal military involvement in the business sector. 22 Strategic and Defence Studies Centre

The Informal IMBC The informal business activities of the Indonesian military are much more difficult to ascertain even though their presence is evidently clear. According to one source, despite the difficulty in validating the claim, “the value of the military's business activities is greater in the informal than in the formal sec tor". While the informal activities tend to be unstructured and ad hoc, they are widespread, with many that can be described as shady or even criminal in nature. One widely practised activity in this regard is the regularised ‘protection' payments that are made by various companies, local and multina tionals, operating in the outlying regions, to the military in return for security of the operations. In the cities, one of the main sources of ‘protection money' for the military is believed to be the ethnic Chinese community that 'buy' security and protection for their businesses, homes and even themselves by making payments to the military on a regular basis. The military is also believed, mainly through its rogue elements at the regional level, to be involved in the illegal extraction of various resources such as timber, oil and other minerals. Some have argued that the elements of the military also participate in various illegal activities such as smuggling, piracy, running of gambling and prostitution rackets and even drug trafficking.

While providing for the welfare needs of soldiers and their families as well as off-budget financing are the key motivations for the military's involvement in business activities, in reality, the Indonesian MILBUS has been rather dy

namic as seen in its multifaceted activities. Starting with the provision of basic by needs to the military from the late 1940s until the 1960s, the 1970s the mili

tary tended to focus on activities related to the distribution of products and

services that were integral and directly related to the needs of the military. In

the 1980s, the military expanded its role into the financial sector, especially in

banking and insurance. In the 1990s, it branched into the lucrative property

sector as well as becoming involved in the running of hotels and golf clubs.

Since the fall of Suharto in May 1998, military business activities have been

somewhat circumscribed, with consolidation and rationalisation as the main

concern of its reform agenda.

An additional observation worth noting is that since the outset, dating

from 1945, of all the services, the army has been the single most important

economic actor of the armed forces. Here, institutionally, in addition to the

army, its two leading components- namely, KOSTRAD and KOPASSUS-have

their own foundations and business activities. While this is unique to the army, the other services have tried to emulate this but without much success. The Working Paper No.354 23

only exception in this regard, and that too only recently, was the marine corps, which, though operating under the ambit of the navy, had successfully ven tured into the property business. This involved the construction of Plaza Cilandak (in Jakarta) in a joint venture with PT Graha Citra Herodiza, with profits being shared on a 50-50 basis. 24 Strategic and Defence Studies Centre

4 THE EVOLUTION OF THE IMBC

In the main, there are a number of clearly discernible phases through which the Indonesian military has involved itself in business activities.

Phase 1: August 1945- December 1949 The roots of the Indonesian military business activities can be traced to the

'war of revolution' in which each unit was required to raise its own funding to

finance its operations. This led to the birth of the unstructured and ad hoc

business activities of the military, with many involved in smuggling as well as

the trafficking of opium. The proceeds from these activities were used to pur

chase weapons, especially through arms agents in Singapore. During this pe

riod, smuggling was carried out not just between the territories of

Indonesia and other countries, such as Singapore, but also between territories by that were occupied the Republican forces and the Dutch. During the 'war of

revolution', the Indonesian military also saw the business activities as part of

its economic warfare against the Dutch. According to Major-General Suhardiman: “During the war, the military launched itself into the business

world in order to undertake economic guerilla warfare against the colonialists.

The goal was to undermine the colonial economic system and to finance the Republic's war and revolution.”

Phase 2: January 1950- November 1957

This phase followed the independence of the Republic from the Dutch,

when there emerged the need to rationalise and restructure the military into a

centralised and hierarchical organisation. The Chief of Staff of the Army, Colo nel A.H. Nasution was tasked with the consolidation of the armed forces and

this led to the establishment of a territorial army. The country was

divided into seven military territories, with each military territory required to

find for its own funding. Thus, from the very beginning, the regional com

mands had been looking after their financial requirements independently of

headquarters and hence the long history of military involvement in business.

While the territorial structure of the military, the very limited funding from the

centre and the need to look after their own finances made the military territories almost autonomous from central military control, the military Working Paper No.354 25 leadership at the centre, at the same time, tried to assert some form of control over the regions. That there was a high degree of incompatibility in this ar rangement could be seen in the various central-regional conflicts and clashes that broke out in the 1950s. The regional commanders, who were rarely rotated, over time, also developed their own power base by acquiring economic power and it was only a matter of time before an ostensible change in military policy or personnel was viewed as nothing more than an attempt by the central politi cal and military leadership to usurp the economic and political power of the regional commanders. This was a major cause for the regional rebellions that were to break out later in Sumatra and . This phase lasted until the end of 1957 and to a large degree, the military's involvement in business was still largely informal and unstructured, even though, compared to the first phase, it was much more deeply involved in these activities, especially at the regional level. The Bukit Barisan and Wirabuana regional commands in north Sumatra and Sulawesi respectively were known during this period as the major centres for smuggling and bartering. When was declared following the outbreak of regional rebellions, the military's power, especially in the outlying areas, increased rapidly, including their involvement, especially informally in the business sector.

Phase 3: December 1957 - September 1965 As a result of the West Irian crisis with the Dutch and in the face of grow ing helplessness of Jakarta, Sukarno, as part of his policy of brinkmanship

with the Dutch, nationalised all Dutch enterprises in December 1957. Taking

the cue from the politicians, a number of radical trade unions decided to take

control of these Dutch enterprises before the government could decide their

fate. Viewing this as a challenge-because a number of these trade unions were affiliated with the Communist Party-General Nasution persuaded the govern

ment to place the enterprises under the control of the military, and this was done by early 1958. With this, began the systematic and institutional involve

ment of the Indonesian military in the business activities of the

country, a position from which it has never dismounted. What further intensi

fied the military's involvement in the country's business activities was the

weakening of the economy, on the one hand, and the increasing competition

with the CommunistParty, on the other, forcing themilitarytostrengthen its roleasan

economicactor to protectitscorporate interestas well as to use the new found wealth

to survive and manageitschallengers.This position lasted untilSeptember 1965 when

anew political paradigm emerged in the country, leading to therepositioning of the

military as far as political power was concerned. 26 Strategic and Defence Studies Centre

Phase 4: September 1965 - May 1998 This phase coincided with the ‘New Order' era under President Suharto, witnessing the blossoming of the military's role in the country all-round, in cluding in business. In many ways, this period marked the golden age of IMBC due mainly to the privileged position of the military in the country and the patronage of the political leadership, including President Suharto, his family and close friends, to this endeavour. From the very outset, Suharto, a successful regional commander with extensive business network and experience, adopted a pro-active policy of enhancing and expanding the IMBC. In addition to his experience with business as commander of the Diponegero Military Command in , Suharto also believed that the only way to uplift his country out

of its doldrums was to ensure political and social stability, on the one hand,

and economic development, on the other. As such, he adopted the approach of

ensuring political stability at all costs, mainly through the process of

depoliticisation and using the military as the vanguard for

political and economic development. Hence, the primus inter pares position of

the military in the country. This also led to the popularisation, even enforce

ment, of the developmental concept that asserted democracy could wait while economic development, mainly through foreign investments, was given

priority. In this connection, following the banning of the Indonesian Commu

nist Party, according to Indria Samego, the second major decision by the New

Order regime was “to gather and persuade the Chinese businessmen to assist

in the development of the new economic policies of the country”. Thirty years

later, the IMBC was well developed and an important player in the country's

economy. The importance of this could be seen from the fact that even though

the official budget for the Indonesian military was among the lowest in South

east Asia — accounting for probably only 25 per cent of its needs — yet in

reality, through its various business activities the military was able to bridge

the gap through its off-budget financing endeavours. It was for this reason that

on 1 August 2000, Indonesia's Defense Minister, Juwono Sudarsono

argued that the “Indonesian armed forces will continue their involvement in

commercial activities to make up for the shortfall in ‘official' funding" as the

“official budget allocation of about US$ one billion covers only about 25 per

cent of the military's “minimum operational costs”. In the same vein, earlier,

on 25 April 2000, the Indonesian military spokesman, Vice Air Marshal Graito

Usodo defended the military's business ventures arguing that “it would be

impossible (for the military) to survive on state funds alone”. Working Paper No.354 27

Phase 5: Since May 1998 Following the fall of Suharto on 21 May 1998, the Indonesian military has

been continuously criticised for its non-military activities, with the key focus

being on its political and economic role. In short, its dwifungsi doctrine and

activities related to it has come under scrutiny, with the civil society and vari

ous opponents of the military demanding that the military retreat back to the

barracks and desist from various non-military activities. In response, the mili

tary has undertaken various reforms, leading among others, to a more circum by scribed public behaviour, with attempts various reform-oriented officers to

rationalise and improve the military's image in society through greater trans

parency and accountability, including in the business sector. Despite this, the

IMBC remains intact as there appears to be no alternative to the military's

presence in the sector, among others, due to the budgetary

constraints that continue to plague the country's armed forces. 28 Strategic and Defence Studies Centre

5 THE MOTIVATIONS FOR THE IMBC

A number of factors explain the involvement of the Indonesian military in business activities. Richard Robison has argued that “the military have been involved in economic activities since the early 1950s, primarily to raise extra budgetary revenue for the operations of individual commands and units as well as for the personal and political needs of individual official and political factions”. From the theoretical perspective, an important factor explaining the military's involvement in commercial activities stemmed from the near non-existence of a middle class in the country”. Due to this vacuum, the weak civilian middle class was unable to act as a catalyst, agentor dynamiser of change and development in the country. As in most cases in the Third World, this led to the state acting as the most important agent of change with the military, being the most organised and powerful institution, acting as the in strument to bring about certain desired outcomes including in the national economy. In most societies, this had led to the rise of some variant of authoritarianism with national economic development given greater priority over other goals, such as democratisation and human rights. If anything, such regimes have argued that in order to undertake national development, especially in the economic arena, democratic values had to be sacrificed for the time being and place on hold so as to provide the basic preconditions for demo cratic growth to take place in the future. As such, what has emerged is the military involvement in business and other activities, usually in collusion with selected domestic and foreign agencies and enterprises, with the national bureaucracy and political leadership supporting and facilitating these arrangements. In the light of this general pattern, the main motives for the military's involvement in business and commercial activities, especially in the Indonesian case, stemmed from considerations of history and tradition, eco nomic constraints and ambitions, political needs as well as various military necessities.

History and Tradition Ever since the Indonesian military emerged during the ‘war of revolution', it has been involved in some kinds of business activity or another. Starting with the need to finance the war of revolution, as the Indonesian military emerged as a powerful 'social-political’ force, its involvement in business activities had expanded in commensurate terms, expanding from ad hoc Working Paper No.354 29 informal activities to ones that were increasingly more formalised especially after martial law was declared in 1957 and later, following the nationalisation of the Dutch enterprises. To that extent, the Indonesian military has a history and tradition of involvement, both at the central and regional levels.

Economic Constraints and Ambitions As an organisation that was self-created, from the very beginning, the TNI's penchant for survival has been very strong. As the state was unable and

unwilling to provide for all its financial needs even at a time when the pro

military regime of Suharto was in power, the military, in response,

developed its own system of off-budgeting funding. A powerful motivation in

this regard was the need to look for funds for the welfare of soldiers and their

families as well as funds for various operations, including the multifaceted

social-political activities of the armed forces. An equally powerful

driving force in this regard was the ambition for personal enrichment, especially during the Suharto era.

Political Needs

As a self-proclaimed social-political force with rights equal to other mem

bers of the society, the military needed funds to achieve its social-political goals

in addition to financing its military operations. This in itself was a strong

incentive for its business activities even though the funds accrued from busi

ness activities were usually insufficient to achieve its goals. Related to this was

its need to involve in all activities in the country so that political stability could

be guaranteed and one area that was regarded as vital in this connection was

economic. This was particularly so because the major portion of the private

economic wealth of the country, which some estimate at more than 75 percent,

was believed to be in the hands of the ethnic Chinese. As this was politically

explosive, the military's involvement in business activities was, in part, to 'man

age' the ‘Chinese problem' as well as to prevent all the wealth from falling into

the hands of the ethnic Chinese. In this way, the military's involvement in

business activities, especially through its privileged position, was able to place

a sizeable proportion of the wealth to be placed in the hands of the ‘locals' and

if not anything, at least, not falling into the hands of the ‘non-pribumis'. To that extent, the military's business activities performed an important political

role even though most of the partners of the military businesses tended to be ethnic Chinese. 30 Strategic and Defence Studies Centre

Military Necessities Militarily, it was deemed essential for the Indonesian military to be in volved in various commercial activities from two main perspectives. First, the lack of financial resources and the military assumption that the political lead ership would not provide the necessary resources, as it has been the case since 1950, the leadership of the armed forces, to be militarily effective, had to ensure that it had access to independent finances to carry out its various internal and external tasks, including territorial duties. Second, the Indonesian military's doctrine of total people's warfare ensured that it was involved in the country's economic activities as this arena was viewed as a major source of political contestation and conflict, and hence a key source of

threat to the political and territorial integrity of the state and its unity.

Other Motives

An important goal of the military business activities was also related to

the need to train its personnel for the private sector. Here, the military, through

its business links and networks, would place personnel, usually officers in

positions of responsibility in its companies to prepare them for a career outside

the military on retirement. To that extent, it was an invaluable training ground for military personnel for the post-military careers. Some have also argued that by the military businesses were also used senior commanders to rid themselves by of 'trouble-makers' posting them on ‘active service' to the various busi by nesses and foundations run the military. In the same vein, many were given

lucrative posts in the businesses of the military as rewards, usually on retire ment.

Thus, while it is possible to identify a number of motivations, including history and tradition, economic constraints and ambitions, political needs and

military necessities, as an organisation, the Indonesian military has usually

justified its commercial activities in the name of advancing the welfare of its personnel. This was first strongly articulated by the late General Ahmad Yani,

who was murdered by Indonesian communists on 30 September 1965 after he

argued that “our enemy is suffering and poverty. We will be held responsible if

we lose in this war”. In the same vein, the then Army Chief of General Staff,

General Edisudradjat, argued, following the presentation of Rp 11.2 billion to

138 commanders for the purpose of renovating army barracks that it

was meant strictly for “improving the welfare of soldiers" and that “they can't Working Paper No.354 31 fight well when the roof of their houses leak”. The same point was made by Djukardi Odang, a former one-star general who went on to become a successful businessman, who stated that “the army's indirect involvement in busi

ness is purely for the purpose of improving its members' welfare”. While

this is the raison d'etre for the involvement of the Indonesian military in

business activities, at the same time, the other goals and motivations must

not be ignored. 32 Strategic and Defence Studies Centre

6 THE MERITS AND DEMERITS OF THE IMBC

While it is difficult to ascertain the exact benefits and costs of the Indone sian military's involvement in business activities, it is possible to examine the way that involvement has positively and negatively impacted upon the armed forces as a whole. For too long, the merits and demerits of the Indonesia military's involvement in business activities were almost a non-issue. In July 1992, a leading business weekly argued that “by virtue of their strictly compli ance with acceptable trade norms, ABRI's deals have not engendered public resentment. Also, the military's involvement in business has neither

undermined its integrity nor fighting ability". At the same time, a senior politi

cal analyst argued that “as long as the cake is large enough to satisfy most, no

one is complaining". Former Mining Minister, Mohamad Sadliconcurred, ar

guing that “as long as the economic growth rate stays at 7 per cent, which

means around 10 percent in the cities and 4 percent in the regions, everyone is

happy”. However, once, these conditions no longer obtained, especially fol

lowing the collapse of the Suharto regime in May 1998, the criticisms against

the military's involvement in commercial activities intensified, as part of the

general backlash against the military and its abuse of power in the past. In the

main, the following can be identified as the main benefits and drawbacks of the

military's involvement in commercial activities: Benefits by • Offset budget shortfalls providing finances for the operational and

routine expenditure of the military.

• Provide for the welfare of soldiers and their family members.

• Provide employment for active and non-active servicemen.

• Provide funds for the military to undertake its social-political function.

• Prevent the economy from falling totally into the hands of the Chinese

capitalist in the country.

• The military was able to benefit from the modern management tech niques that were acquired from the commercial sector.

• Funds earned from the business sector partially funded the modernisation

of the military in the 1970s and 1980s.

• The funds acquired from the military's commercial activities permitted

the military to continue its operation as an effective organisation even

though the country was enduring through a serious financial and eco nomic crisis after August 1997. Working Paper No.354 33

There is no doubt that TNI's business activities have provided the Indonesian military with additional financial resources that have benefited

the institution and its personnel. For instance, in the 1980s the Army Founda

tion was praised for making available 9 billion rupiah that was used for the

construction of 25,000 housing units for retiring personnel. When General Edi

Sudradjat was the Army's Chief of Staff, he was also reported to have used

funds from the Army Foundation to purchase vehicles for various units and

funds to undertake repairs of military barracks'. On the whole, as long as the

Indonesian Government is unable to fund the military activities, both

routine and operational, the TNI will always have a strong motive and case to

be involved in business activities". Thus, despite pressures from various seg

ments of the Indonesian society and from without, the Indonesian

Defence Minister, Professor Muhammad Mahfud argued in January 2001 that

in the short run it was unviable and inadvisable to discuss the military's exit

from business activities. To that extent, it would appear that the TNI's

involvement in business activities and hence, the IMBC, is likely to stay.

Drawbacks

• Widespread corruption.

• Pilfering and leakage of state funds.

* Widespread illegal activities including smuggling and illegal ex traction of state's resources.

• Misuse of military assets and resources for private and personal ben efits.

• Undermines military professionalism

* Negative impact on the state of military readiness.

* Negative impact on military cohesiveness, with the ‘economic and financial' generals being envied by the others.

• Emergence of income disparities within the military as a result of the economic activities.

• Rise of warlordism in the outlying regions.

While the Indonesian military has argued that it has legitimate reasons to

be involved in business activities, what has worried political and concerned

observers is the opportunity for abuse that is associated with the military's

involvement in commercial activities. The most prominent case to emerge re

cently was the alleged abuse and misappropriation of funds from the KOSTRAD

Darma Putera Foundation. On 22 June 2000, the newly appointed KOSTRAD Commander Lieutenant-General Agus Wirahadikusumah announced that 34 Strategic and Defence Studies Centre there had been major leakages' of funds from the KOSTRAD Foundation and this was directly blamed on Lieutenant-General Djadja Suparman, the former KOSTRAD Commander". Following an audit by the Public Accountancy Office in mid-2000, it was found that there had been massive misappropriation of funds, especially from Mandala Airlines. According to the report, when Djaja handed over the KOSTRAD command to Agus, he did not report the with drawal of 160 billion Rupiah from Mandala Airlines. Of this, 10 billion Ru piah was the 1998 dividend, 61 billion Rupiah was the advance on 1999 divi dend and 89 billion Rupiah was the contributions for the soldiers' well being in 2000". Following a complaint from the Director of Finance from Mandala Airlines, Djaja returned 25 billion Rupiah on 17 July 2000. This still meant that there was a “leakage' of Rp135 billion. In addition to the withdrawal of Rp 135 billion, there was also a Rp28.9 billion deposit from Mandala Airlines that could not be accounted for.

Over and above these “leakages', a report accounting for the withdrawal of Rp 135 billion prepared by two of Djadja's staff-namely, KOSTRAD's Head of Finance and KOSTRAD's Assistant for Logistics-is believed to be riddled with inaccuracies. According to the report made public’, the following were the main inaccuracies and discrepancies:

1 Purchase of 50 hectares of land in Ciseeng. The reported value was Rp 11 billion. There was a discrepancy of Rp 5.79billion. 2 Purchase of 100 KIA Cars. The reported value was Rp 9.765 billion. There was a discrepancy of Rp 765 million. 3 Purchase of 2000 bulletproof vests. The reported value was Rp 11 billion. There was a discrepancy of Rp 1.8 billion. 4 Soldiers' bonus fund Rp 16.25 billion from Mandala Airlines. Of this, Rp 3 billion went to Djaja, Rp 1 billion to KOSTRAD Chief of Staff, Major-General Sang Nyoman Suwisma and Rp 1 billion was given as assistance to the Army Wives Organisation (PERSIT), whose chairperson was Djaja's wife. 5 Renovation and improvement of KOSTRAD building in Kalideres, Jakarta. The reported cost was Rp 4.2 billion. There was a discrepancy of Rp 373.5 million. 6 KOSTRAD commander's working visit. The reported cost was Rp 1.3 billion. There was a discrepancy of Rp 525 million. 7 Renovation of PERSIT building. The reported cost was Rp 1.25 billion. The discrepancy was Rp 850 million. Working Paper No.354 35

The auditors also discovered fictitious expenses involving the following items: parachutes (Rp 3.02 billion), repair of KOSTRAD HQ water pump (Rp 25 mil lion), renovation of KOSTRAD HQ guest toilet (Rp 50 million), purchase of fire extinguishers (Rp 25.5 million) and purchase of generators (Rp 200 million).

As the result of the investigation, the culprits involved in the misappro

priations of KOSTRAD's funds-namely its former commander, Djaja and his

two key assistants, the KOSTRAD Head of Finance and KOSTRAD Assistant

of Logistics- had thus far returned (over and above the 25 billion Rupiah that

Djaja returned on 17 July 2000), a total of 14.129 billion Rupiah. This meant

there was still a “leakage' of 95.871 billion Rupiah, something the

Indonesian Army and the country as a whole could ill-afford, especially at a

time of grave economic crisis. The KOSTRAD'saga' strengthened the voices

calling for greater 'policing of the TNI's business activities; their demands are

more about what happens to the funds under its control than about whether it

should be in business. Critics are concerned that these funds, if unmonitored,

"provides plenty of opportunities for military officers to divert substantial re

sources to finance political activities”. In other words, the issue is more about

transparency and accountability of the TNI's business activities than simply

about forcing it out of the commercial arena. 36 Strategic and Defence Studies Centre

CONCLUSION: The Future of the IMBC

A debate has ensued about the advisability of the military's involvement in business activities and to date there is no definitive answer on the issue. In

the main, MILBUS in the Indonesia, due mainly to its longstanding nature, has

come to be seen as an acceptable part of Indonesian life. Many, especially in the

military, perceive it as a legitimate necessity. It is only since the fall of the

Suharto regime that many have questioned its existence, because of

various abuses and assumed detrimental effect it was having on the military

and society at large. It is in this connection that calls have been made for greater

transparency and accountability of these enterprises to ensure that the funds

are appropriately used and, more important, to reduce 'leakages' that are be

lieved to be endemic. At a more generic level, questions have been raised about

the continued advisability of the military's involvement in business activities,

especially when the country is undergoing a process of democratisation with

emphasis on transparency and accountability as well as efforts aimed at en

hancing the professionalism of the military. Many have argued that the contin

ued existence of the IMBC contradicts these trends and developments. Also, the

impact of globalisation is unlikely to leave the Indonesian military immune

from pressures to desist from further involvement in this arena. Domestically,

the Indonesian military's collusion with the ethnic Chinese in business activi

ties has also proved to be unpopular and costly. While these arguments and

observations cannot be denied and are valid, what will eventually determine

the military's propensity for involvement in the business arena will be the

ability of the government to provide adequate financial resources to carry out

its activities. As long as the government fails to do this, the Indonesian military

is unlikely to give up its business activities because to do so would be politi

cally and militarily suicidal. To that extent, the key question of how long the by military will be involved in business activities will be determined the extent

to which the government is prepared to compensate the military for abandon

ing its involvement in the arena so that it can focus its attention on conven

tional military activities, especially in enhancing its professionalism in an era of democratisation. Working Paper No.354 37

NOTES Introduction

1. See http://www.cwrl.utexas.edu/~mcnicholas/E309–Spring.98/assign2/ military/mic.html

Section 1

1. This typology has been extensively utilized by the Bonn International Center for Conversion. See for instance the presentation by Mr Jorn Brommelhorster in his “Introduction: Expectation", at The International Conference on Soldiers in Business: Military as an Economic Actor, Jakarta, Indonesia, 17-19 October 2000.

Section 2

1. For details, see author's Dwifungsi ABRI: The Dual Function of the Indonesian Armed Forces, (Singapore: Singapore Institute of International Affairs, 1995), pp. 21-37. Also see Ian MacFarling, The Dual Function of the Indonesian Armed Forces: Military Politics in Indonesia, (Sydney: Australian Defence Studies Cen tre, The University of New South Wales, 1996).

2.For an excellent study on this subject, see Salim Said, Genesis of Power: General Sudirman and the Indonesian Military in Politics (Singapore: Institute of Southeast Asian Studies, 1991). 3.See The Military in Indonesia, (Jakarta: Department of Information, Republic of Indonesia, 1970), p.4.

4. See A.H. Nasution, Kekaryaan ABRI, (Jakarta: Seruling Massa, 1971), p. 103.

Section 3

1. Due to the intensification of conflict in the early 1974 between the ‘financial' and ‘professional' generals and due to the growing opposition of the public, especially students to the growing military involvement in business activities, President Suharto passed a governmental decree Number 7 (1974) banning active military officers from being involved in business activities. Yet, the mili tary has found many ways of circumscribing this ban, as can be seen in the rapid expansion of their business activities since then, ironically, often with Suharto's blessings. This ‘violation' of the government decree banning the military's involvement in commercial activities is justified according to some on grounds that as a ‘patriot' and ‘citizen' every field is opened to the armed forces, including the economic one, all the more so since this is an important 38 Strategic and Defence Studies Centre area of conflict and contention. For details, see Dr Indria Samego et al., Bila ABRI Berbismis, (Bandung: Pustaka Mizan,1998), p.25. 2. See “Mesin Uang Kostrad", Tempo, 13 August 2000, p.24. 3. For details, see Ibid. 4. Ibid.

5. Cited in Lesley McCulloch, “Trifungsi: The Role of the Indonesian Military in Business”. Paper presented at The International Conference on Soldiers in Business: Military as an Economic Actor, Jakarta, Indonesia, 17-19 October 2000.

6. See "Obsesi Bisnis Korps Baret Merah", Info Bismis, Vol. 3, Edition 47, May 1997, p.9.

Section 4 1. Cited in Dr Indria Samego, et al., Bila ABRI Berbismis, (Bandung: Mizan, 1998), p.48.

2. It was Suharto more than any one else who improved and improvised the

different mechanisms for the military to undertake its business activities. Hence,

as the Diponegero Commander, in January 1957, he established the Yayasan Pembangunan Territorium Empat (Fourth Territorium Development Foundation)

as the basis of his regional command's business activities. The business activi

ties were justified on grounds of providing welfare for the command's troops

under the ambit of 'Operation Karya'. Later, as the KOSTRAD Commander, in 1964, Suharto established the Yayasan Dharma Putra Kostrad for the same pur

pose. During his tenure as Diponegero and KOSTRAD Commander, Suharto's business activities were undertaken through close collaboration with Chinese

businessmen, in particular, Liem Sioe Liong and Bob Hassan, both of whom

emerged as the leading businessmen of Indonesia in the more than three de

cades of the New Order rule. In 1958, when General Nasution decided to rid

the military of corrupt officers, Suharto was removed as the Diponegero Com

mander and sent to the Army Staff College for training. See Ibid, pp. 53–59.

3. Ibid, p.57.

4. Cited in Jane's Intelligence Review, August 2000. See http://www.bicc.de/ milex/homepg/tracker.php3

5. Cited in Daily News, 26 April 2000 in http://www.lanka.net/lakehouse/ 2000/04/26/forſ)2.html Section 5 Working PaperNo.354 39

1. See Richard Robison, The Rise of Capital, (Sydney: Allen and Unwin, 1988), p.250.

2. For more details on this aspect, see Indria Samego, TNI Di Era Perubahan, (Jakarta: Penerbit Erlangga, 1999), pp. 33-45.

3. Cited in Dr Indria Samego, et.al, Bila ABRI Berbisnis, p.26.

4. Cited in “The Enterprising Military", Indonesian BusinessWeekly,6July 1992, p.4. 5. Ibid.

Section 6

1. See “The Enterprising Military", Indonesia BusinessWeekly,6July 1992, p.4. 2. Ibid.

3. See Suara Pembaruan, 24 June 2000.

4. Interview with General (Retired) Wiranto in Jakarta on 29January 2001. 5. “SeeDana Yayasan Kostrad Diselewengkan”, Media Indonesia, 23 June 2000. 6. See “Lubang Kebocoran di “Kapal Keruk" KOSTRAD”, Tempo, 13 August 2000, p.22. 7. SeeIbid.

8. See Indonesia: Keeping the Military Under Control, (Jakarta/Brussels: Interna tional Crisis Group, 2000), Report Number 9,5 September 2000, p.17. 40 Strategic and Defence Studies Centre

SELECT BIBLIOGRAPHY

Crouch, H.: The Army and Politics in Indonesia (Cornell University Press, Ithaca, 1978)

Crouch, H.: ‘Generals and Business in Indonesia', Pacific Affairs, Vol.48, No. 3, Winter 1975/76

Indonesia: Keeping the Military Under Control (International Crisis Group, Jakarta/ Brussels, 2000)

Iswandi: Bismis Militer Orde Baru (PT Remaja Rosdakarya, Bandung, 1998)

Jenkins, D.: Suharto and His Generals: Indonesian Military Politics, 1975-1983 (Cornell Modern Indonesian Project, Ithaca, 1987)

Johnson, J.J. (ed): The Role of the Military in underdeveloping Countries (Princeton University Press, Princeton, New Jersey, 1967)

Lowry, R.: The Armed Forces of Indonesia (Allen and Unwin, Sydney, 1996),

MacFarling, I.: The Dual Function of the Indonesian Armed Forces: Military

Politics in Indonesia (Australian Defence Studies Centre, Sydney, 1996)

McCulloch, L.: “Trifungsi: The Role of the Indonesian Military in Business".

Paper presented at the International Conference on Soldiers in Business:

Military as an Economic Actor, 17-19 October 2000, Jakarta, Indonesia

Muhaimin, Y.A.: Bismis dan Politik: Kebijaksanaan Ekonomi Indonesia, 1950-1980 (LP3ES, Jakarta, 1990)

Robison, R.: Indonesia:The Rise of Capital (Allen and Unwin, Sydney, 1987)

Samego, I.: TNI Di Era Perubahan (Penerbit Erlangga, Jakarta, 1999)

Samego, I. etal.: Bila ABRI Berbismis (Mizan Pustaka, Bandung, 1998)

Vatikiotis, M.R.J.: Indonesian Politics under Suharto (Routledge, London, 1993) Working Paper No.354 41

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