Skip to main content

Indonesia: Reform of Military Business

A Human Rights Watch Background Briefing

 
Mandate for Reform  
 
Indonesia's military has a longstanding practice of raising independent income outside the approved budget process. It earns funds from businesses it owns, services it provides for hire, and the protection rackets it operates. It is by now widely acknowledged that Indonesian military involvement in the economy is a harmful practice that undermines civilian control over the armed forces and fuels human rights abuses. The military's economic involvement also contributes to crime and corruption, weakens the economy, and distorts the function of the military itself.  

In September 2004, Indonesia's parliament passed Law No. 34/2004 on the Indonesian Armed Forces (Tentara Nasional Indonesia or TNI) to help reform the military. Among other changes, the law bans military commercialism and requires the Indonesian government to take over all military businesses by 2009. Article 76 of that law states: "Within five years from the passage of this bill [in September 2004], the government must take over all business activities that are owned and operated by the military, both directly and indirectly." Other provisions emphasize that "professional soldiers...do not do business" and include an unequivocal prohibition on soldiers taking part in business activities.  
 
Passage of the law marked a watershed opportunity to end military self-financing and strengthen civilian control over the armed forces. The Yudhoyono government, which took office in October 2004, pledged to implement the reforms. Military leaders signaled that they would not resist the reform effort, which had strong support from the public and parliament.  
 
Delays and Inaction  
 
Rather than take advantage of the momentum for reform, the Indonesian government has proceeded very slowly. In mid-2005 it formed an inter-agency team to implement the law, the Supervisory Team for the Transformation of TNI Businesses (Tim Supervisi Transformasi Bisnis TNI or TSTB). It has spent months reviewing and verifying data on some of the more than 1,500 business units identified in a military inventory. In July 2006, it estimated that these were worth a total of approximately Rp. 1 trillion (US$108 million), a figure so low that parliamentarians said it was not credible.  
 
The government has yet to set the parameters for how it will restructure military businesses. The absence of implementing regulations has delayed action, created confusion, and left open opportunities for the military to manage its businesses as it sees fit, including by selling some companies and disposing of assets without adequate oversight. The government has not moved to take control of any military businesses. Until regulations are adopted to implement the law, they remain in military hands.  
 
The Draft Decree  
 
In 2006 the TSTB prepared a proposal to implement the law that was submitted to the president's office in the form of a draft decree. This document was subsequently sent back for revisions, but Cabinet Secretary Sudi Silalahi declined to specify the changes sought. Although the fate of the TSTB's proposal is unclear, the draft decree nevertheless provides insights into ongoing policy deliberations. It reflects the direction endorsed by the various government agencies that were tasked to oversee military business reform and may be used as the basis to prepare a revised draft.  
 
The TSTB's draft decree, as described by Lt. Gen. Sjafrie Sjamsoeddin in the press, envisions the creation of a new government agency that would take over control of military businesses. The proposed new body, the National Team for TNI Business Transformation (Tim Nasional Transformasi Bisnis TNI), would report to the government departments that are currently represented on the inter-agency team.  
 
This proposal corresponds closely to a concept officials outlined in April 2006, albeit under a slightly different name (the TNI Business Transformation and Management Body, Badan Transformasi dan Pengelolaan Bisnis TNI or BTPB). TSTB members said at the time that the government should postpone action to assume control of military businesses until a determination could be made as to which specific businesses would be eligible for restructuring. The new agency, they said, would assist in making that determination and would only take control of businesses that were identified as candidates for takeover.  
 
Weaknesses of the Proposal  
 
Human Rights Watch analyzed the TSTB's proposal in its 2006 report, "Too High a Price." The organization concluded that waiting for the creation of an agency would only delay needed action to remove businesses from military control. Human Rights Watch also raised serious questions about the scope of the effort and various exemptions that were under consideration. Many of these concerns remain relevant today, in light of ongoing policy discussions.  
 
Already, the focus on creating a new agency has been accompanied by a reinterpretation of the mandated timeframe to end military involvement in business. Sjamsoeddin was quoted in the Indonesian press in February 2007 as saying that the new body would complete its work by December 2008: "This team [once it is in place] will act in the name of the government, therefore article 76 will be already answered. The government will have taken over TNI businesses." This statement echoed an earlier comment by the head of the TSTB. Said Didu, secretary of the Ministry for State-Owned Enterprises, told Human Rights Watch that the new agency might need until 2009 to establish formal control over selected businesses and that the actual transformation of these businesses could take more time. This means that by 2009, the government would only be starting the process of divestment by preparing to sell, liquidate, or transform the military's companies into state-owned enterprises.  
 
Moreover, the plan prepared by the TSTB falls short of the requirements of the 2004 TNI law because does not contemplate the handover of all military businesses. Sjamsoeddin and other Indonesian officials have previously told Human Rights Watch that military-run foundations and cooperatives are permitted to own businesses because these entities are nominally independent from the military. These officials also have claimed that military foundations and cooperatives are permitted to operate "social businesses" of a "noncommercial" nature for "welfare purposes." Sjamsoeddin, in his February 2007 comments, said that the TNI chief was expected to issue guidance to his troops in the coming months instructing them to comply with laws governing the operations of all foundations and cooperatives. Such instructions, however, would not halt business activities by military-linked entities, only reaffirm the status quo. These rules are already in place, yet the TNI's own inventory shows that scores of military foundations and cooperatives are deeply involved in business activities.  
 
Human Rights Watch is concerned that exempting military-run foundations and cooperatives from the planned reforms would contravene the mandate of the TNI law and also ignore the reality of how these entities operate in practice. It has documented examples of timber and coal businesses in which the military had a stake. These businesses, initially set up with "legal" military participation through foundations and cooperatives, soon became involved in criminal activity. For example, a coal company in South Kalimantan sub-contracted part of its business to a military-run cooperative in order to curtail illegal mining. But the military cooperative organized the illegal miners, oversaw their activity, exploited workers, and brokered sales of the illegally mined coal. Soldiers increased their profits by demanding protection payments from miners, whom they also subjected to beatings and intimidation.  
 
The TSTB's blueprint for reform also would exclude other categories of military businesses from their reform plans. In 2006 interviews with Human Rights Watch, officials indicated that they would exempt individual businesses owned by the military that, in their estimation, had not made use of government assets. Human Rights Watch strongly criticizes these proposed exclusions in its report on military self-financing.  
 
Human Rights Watch called on the Indonesian government to revamp its approach to reform. It said that the government should move swiftly to approve regulations that clearly ban all forms of military business (including informal arrangements), assert government control over existing business, and establish punishments for violations of the prohibition of military business.

Your tax deductible gift can help stop human rights violations and save lives around the world.

Region / Country

Topic