Pitan Daslani & Ezra Sihite – The House of Representatives on Tuesday unanimously passed the Defense Industry Law, setting the stage for Indonesia to independently modernize its weaponry by empowering its strategic industries to develop military hardware after more than 20 years of dormancy.
The law stipulates that primary defense industries that produce weaponry and strategic defense equipment shall come under the auspices of the Ministry of Defense while supporting industries shall be under the Ministry of State Enterprises.
Strategic state enterprises include Pindad, PAL, Dirgantara Indonesia, Dahana, LEN, Boma Bisma Indra, Inti, Barata Indonesia, Krakatau Steel and Telkom.
Currently, Pindad produces firearms and tanks, PAL makes warships, and Dirgantara manufactures jet fighters and other airplanes. Dahana makes explosives while LEN produces defense electronics, railways, and navigation equipment.
Boma Bisma Indra is capable of building supporting equipment, such as steam boilers, power generators, and earth-moving machinery, and Barata makes heavy equipment, including port-handling machinery and condensers. Krakatau is Indonesia's main steel producer while Inti and Telkom are telecommunications companies.
With this law in place, Indonesia will no longer import military hardware unless purchases are authorized by the House of Representatives.
This includes military hardware that cannot be produced locally. In these cases, foreign manufacturers must cooperate with Indonesian defense companies by ensuring that at least 25 percent of the products are made from local supplies.
Improving standards
The aim of the overall policy is to ensure efficiency, punctuality of delivery, cohesiveness with domestic defense systems, secrecy of technological and engineering formulas, the transfer of technology and self-sufficiency.
Supporting industries are defined as enterprises where at least 60 percent of the shares are owned by the state either by capital placement or through state-fund injection.
The law stipulates that such companies are not allowed to take part in the production of weapons but can participate in producing command and telecommunications equipment, computers, intelligence, surveillance and sensing tools, logistics, and basic materials for ammunition.
The development and utilization of defense industries can also be conducted through cooperation with national private companies in areas like education and training, technology, research and development, engineering, production, marketing, and financing.
The selection of national private companies for the purpose will be done by the Committee for Defense Industry Policy (KKIP), which is chaired by the president.
The law also states that primary strategic industries can be partly privatized once they are self-sufficient, but in such cases the government shall retain 75 percent of the ownership. It must be approved by the House of Representatives.
The law defines users of defense industry output as the Indonesian Military (comprising Army, Navy and Air Force), police, ministries and non-ministerial government agencies, non-structural bureaucratic agencies, state-owned enterprises, and "parties allowed by law to do so."
In order to protect local defense industries, the government will provide fiscal incentives, guarantee financing, and exempt the companies from having to pay the value-added tax.
This applies to research, development, engineering, pre-production and production of defense hardware. The government will also provide repairs and maintenance facilities for export-oriented defense products.
The minister of finance shall provide long-term funding for this development plan based on recommendations from the KKIP. That would enable Indonesia to have predictable defense capabilities because of the long-term nature of the plan.
Besides, the government will also provide a redemption guarantee for banks and non-bank institutions that help finance defense-related projects.
The government will pay up to 30 percent of the cost of any price hikes during production in order to enable defense industries to become self-sufficient.
Defense Minister Purnomo Yusgiantoro said this law would be a milestone in Indonesia's defense development and would be in line with its rapid economic expansion and national interests that need to be "securely protected."
"It would benefit the government, the users, and the industrial sectors themselves," he said, adding that this law would make Indonesia "a lot more self-reliant in defense and military affairs."
Tubagus Hasanuddin, deputy chairman of House Commission I, which oversees foreign affairs and defense, said that "in the future we do not need to import any more defense hardware" and this would save the state up to Rp 35 trillion [$3.7 billion] each year.
"It is much better to spend such money locally because, for instance, with Rp 150 billion we can build a ship and provide jobs for up to 1,500 people for two years," the Indonesian Democratic Party of Struggle (PDI-P) lawmaker said.
International impact
Fellow Commission I member Edhie Baskoro Yudhoyono – son of President Susilo Bambang Yudhoyono – said his Democratic Party welcomed the law and hopes that there will be a constructive relationship among all stakeholders in developing the domestic defense industry.
Edhie, the secretary general of the ruling party, said the law aimed to revive patriotism. He said he was optimistic about Indonesia's ability to compete internationally in this sector, because South Korea, the Philippines, Malaysia, Singapore and East Timor have previously purchased defense products from Indonesia.
Malaysia recently bought 32 Benz-powered Anoa battle tanks made by Pindad. South Korea, meanwhile, purchased eight CN 235 propeller planes made by Dirgantara Indonesia.
Defense Ministry spokesman Brig. Gen. Hartin Asrin said that the law would prevent intermediaries in transactions that have brought huge losses to the state in the past. The ministry this year received Rp 72.5 trillion from the state budget, and in 2013 the allocation will be increased to more than Rp 77 trillion.
Military analysts have described the increase as meager given Indonesia's growing geopolitical significance. When Yudhoyono took office in 2004, the country's defense budget was Rp 21.7 trillion. It climbed to Rp 33.7 trillion in 2009.
Purnomo said the rising defense budget and adoption of the law shows that Indonesia is on track to becoming the "real Asian tiger" that former President Sukarno once spoke of – a nation that is politically sovereign, culturally dignified, and economically self-sufficient.
Given the new law focusing on sourcing defense equipment domestically, it was unclear how the status of Indonesia's ongoing negotiations with friendly countries for the purchase of various military equipment would be affected. China, Russia, and Germany are planning to supply defense hardware to Indonesia, but those plans are likely to be altered by the new law, analysts said.