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I. Military Finance in Indonesia

Military Self-Finance and Human Rights

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

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

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

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

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

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

A Brief History of Military Economic Activity

The Indonesian military’s involvement in economic activity in Indonesia dates back to the 1945-1949 Indonesian war for independence from the Netherlands. The nascent military was responsible for raising its own funds. In addition to relying on popular backing and material support, in some areas military units turned to smuggling to finance their operations.

The pattern of self-financing continued after the formation of the Indonesian armed forces (which became known as Angkatan Bersenjata Republik Indonesia or ABRI, a combined military-police structure until 1999). Official budget allocations to the military were low. As a consequence, throughout the 1950s military commands and units continued to raise their own funds to a large degree. Their fundraising methods went beyond illegal activities such as organized smuggling and illegal levies: Increasingly, military commanders also allied themselves with local businesspeople to generate funds to cover military expenditures. In some cases the military command itself would be granted a stake in a business venture managed by a private partner.³

Early Military Businesses

The military began to take part in large-scale businesses by the latter part of the 1950s. In the late 1950s, under martial law, the military took over control of Dutch companies. Soon afterwards President Sukarno formally placed the newly nationalized companies under the supervision of senior military personnel. The state takeover of British companies and some United States ones followed in the mid-1960s. Control of these enterprises was likewise granted to military officers. In part, these moves responded to severe budget shortfalls that resulted in paltry salaries, poor housing, and insufficient clothing and equipment for soldiers.⁴

The military also became heavily involved in managing major state-owned enterprises. Oil giant Pertamina and the logistics agency Badan Urusan Logistik (or Bulog) were both dominated by military leadership throughout the 1960s and into the next decade. Profits from military-run companies were commonly directed to the military.⁵ This “unconventional financing,” moreover, allowed the government and military leadership to give the appearance of sacrificing military spending in favor of other national priorities.⁶

The rapid expansion of the military’s economic engagement in the 1960s extended to the private sector. Much of the growth was from military partnerships with private businesspeople. It was the private entrepreneurs who in fact operated most military-sponsored businesses. The military’s actual contribution to its business ventures typically was nominal: military partners provided licenses and approvals, and helped secure concessions and state contracts.⁷

A Military Business Empire Forms

Military business activity was further entrenched during the New Order period, the period from 1967 to 1998 in which General Soeharto led a military-dominated government. Soeharto himself was sympathetic to commanders who engaged in self-financing. He had done the same during the time he commanded an army unit in Central Java in the late 1950s, and retained close ties with his private-sector partners.⁸

Early on in the New Order period, senior military posts were filled with Soeharto loyalists who also benefited from private business ventures. This pattern helped perpetuate military economic ties, since uncorrupted officers were unlikely to be promoted to senior command positions.⁹

The explosive growth under Soeharto of military business activity, both legal and illegal, reflected the military’s strong position as a center of power in Indonesian society. The military’s expanding influence was supported by the dwifungsi (dual function) doctrine adopted in 1966.¹⁰ Dwifungsi officially granted the military a strong socio-political role alongside its defense role. Also key was the military’s territorial command structure, in which military presence throughout the country paralleled government administrative bodies down to the village level.¹¹ This strong local-level presence, combined with the military’s coercive power and political leverage, made it possible for the military to dominate economic opportunities.¹²

The military service branches, regional commands, local units, and individual officers took part in commercial enterprises of all kinds and used different business structures, both formal and informal. Formally owned companies were held as investments of military foundations or cooperatives that, going beyond their mandated welfare function, developed into commercial arms of the TNI.¹³

Thanks to political backing and favoritism, military-linked businesses became a dominant economic force. For example, the military took over ownership of privatized state companies, gained vast forestry exploitation rights, and enjoyed favored access to government contracts, licenses, and credits.¹⁴

A range of human rights abuses tied to military economic interests emerged during the New Order period. In the late 1960s and 1970s, the government forcibly took over large swaths of land on which indigenous communities depended, dispossessing them without due process and with little or no compensation. The military was a prime beneficiary of state forestry policies that enabled the wholesale seizure of land claimed by local indigenous communities.¹⁵ (See “Military Investments in Forestry,” below.) In many cases, soldiers also acted as enforcers to secure control over land. For example, indigenous communities in Riau province reported that during the Soeharto era thousands of hectares of community land were seized under intimidation from armed police and military, and without any compensation.¹⁶

For a time, companies also routinely called on troops to respond to labor and land disputes, and soldiers used excess force or intimidation to silence dissent. For example, military personnel in the role of “company security” frequently interfered in labor disputes, using intimidation and outright violence, up to the early 2000s.¹⁷ In some cases, the dirty work of intimidation and violence was subcontracted to private groups of thugs.¹⁸

In addition, illegal revenue-generating activity by the military continued. Commanding officers, faced with the expectation of their superiors that they would finance the units they led, devised ways to use their troops, facilities, and clout to raise money. Many of the illegal ventures they established were local schemes but others implicated higher-level officials. In some cases, military commanders openly tolerated illegal economic activity by their subordinates. More generally, military leaders looked the other way, so long as the money continued to flow. Not surprisingly, self-enrichment took place on a grand scale and impunity prevailed.¹⁹

Throughout the Soeharto era, the military remained active in commercial ventures at all levels, from headquarters to unit commands. By 1998 territorial units throughout Indonesia were considered to be “financially independent.”²⁰ Much of the money generated by military businesses was allocated to senior officers. For example, an audit of one military-linked company, covering the years 1997 and 1998, noted large payments to senior military personnel, mostly listed as “honoraria.”²¹

The military’s business investments were closely linked to the economic interests of the Soeharto family and its associates, and they often joined together in powerful conglomerates. In the later years of the Soeharto administration, however, private investors began to partner directly with members of Soeharto’s family, so the military lost its place as the favored business partner.²²

The Financial Crisis and its Aftermath

The military’s economic standing slipped dramatically as a result of the Asian economic crisis that ultimately helped bring down the Soeharto administration and usher in the reformasi (reform) era. A researcher has estimated that only about one-third of the military’s companies survived the crisis.²³ Overall, the military reportedly experienced a 30 percent decline in its purchasing power from 1997 to 1998.²⁴ Dividends from one major military investment, a timber company, fell from U.S.$30 million in 1996 to an estimated $19 million in 1998.²⁵

Financial reviews of military-owned businesses confirmed their decline. An audit of the main army foundation found that in 2000 its companies returned a net loss of Rp. 8.21 billion ($985,000).²⁶ Facing major setbacks, the TNI divested itself of some businesses, including in the formerly lucrative timber sector. It also shut down many profit-losing businesses, while others underwent restructuring. Financial concerns also led to the consolidation of some military foundations. The defense minister from 1999 to 2000, Juwono Sudarsono (who would be renamed to that position in October 2004), expressed concern about the state of the military foundations: “We must act as soon as possible to stop the loss of funds to the nation.”²⁷

Some military businesses were able to limit the financial damage.²⁸ Yet the overall picture was bleak. The then TNI assistant for general planning estimated that military foundations contributed in 2000 a total sum equivalent to only about 1 percent of the military budget and still less (0.7 percent) in 2001.²⁹

New Trends: Diversification, Decentralization, Competition

In the years following the financial crisis, military economic activity underwent several changes. In one important trend, the TNI increasingly turned to alternative revenue sources to compensate for troubled businesses. In particular, the military came to rely more heavily on partnerships and other arrangements in which it allied with private businesses, notably by providing paid protection services. Contributions from private individuals and businesses took on special importance. The military supplemented its official budget by tapping other government resources, especially to pay for purchases of weapons. The TNI also developed new strategies to find funds. Taking advantage of a government decentralization drive, the military tapped into growing local and regional budgets to cover military expenditures.

At the same time, rampant illicit activities and corruption in the military continued unhindered. As military economic ventures became reliant on informal partnerships and criminal activity, they became more hidden. The military’s economic activities and their harmful side effects thus became harder to control, even as pressure mounted for greater accountability.

In another new trend, military businesses have faced increased competition from the police. Welcome moves to give the police greater responsibility for internal security have had the unintended side effect of giving the police opportunities to take over businesses in which the military had been dominant. This has been particularly true for security and protection services, but it also has extended to many other areas. As the police have begun to displace the TNI, struggles over turf repeatedly have broken out into violence. Police business activities, like those of the military, have been associated with human rights abuses, corruption, and weak accountability.

Military Business Activity and the Law

In September 2004 a new law on the TNI was passed. The law mandated that the Indonesian military end its involvement in business. It also ordered the government to take over military businesses within five years.

Previously when legal controls on military economic activity were imposed they were not enforced. At times pressure has mounted to rein in rampant illegal business activity, but even then the authorities have cracked down only reluctantly and with little effect. Military economic activity in Indonesia had developed with few constraints in the permissive environment created by leaders who defend the military’s involvement in business as a legitimate and necessary response to budget shortfalls. 

Much military business activity in Indonesia had been declared improper long before the passage of the 2004 TNI law.³⁰ For decades, the main instrument governing military business activities was Regulation No. 6/1974, which dates to 1974.³¹ Under that regulation, active military (and police) personnel were barred from taking part in private business activities except under certain circumstances. Specifically, military officers (at the rank of second lieutenant or higher) were prohibited from owning shares in a private company; taking part in the management of such a company, including in an advisory capacity; or otherwise engaging in profit-driven “trade activities,” whether formally or on a freelance basis.³²

Under an important exemption, officers were permitted to work for private companies set up by non-profit institutions, either as employees or company officers (in the latter case, under the condition that they obtain permission from superiors and not receive compensation).³³ The conditions were somewhat more flexible for lower-ranking troops, as well as for the wives of military personnel.³⁴ The exception for soldiers to join companies via non-profit entities opened the door for military foundations, set up with an ostensibly charitable purpose, to develop into commercial arms of the military. In a further weakness, the regulation did not specify an enforcement mechanism.³⁵

Lack of Enforcement

For decades, government laxity and tolerance has enabled the military to openly engage in self-financing. The lack of enforcement of the 1974 regulation has been the hallmark of government inaction to rein in military businesses. At various points, officials have openly encouraged the military to engage in business as a response to budget constraints. When public pressure has been particularly acute, the government and military leaders have pledged that they would crack down on the military’s business activities. In reality, however, they have shown little interest in enforcing the rules.

So many military officers flouted the 1974 regulation that the military chief and minister of defense and security felt the need to reassert the ban on business a few years after it was adopted. Speaking in 1979, Gen. Muhammad Yusuf declared: “All serving officers are forbidden to enter the world of commerce. Forget about trade if you want to be a good soldier.”³⁶ He added: “Those who violate the rules will be dismissed or will be granted early retirement.”³⁷

As a result, some 200 to 300 people reportedly were instructed to resign.³⁸ Yet military business flourished. Military commercial activity continued to take place via “front organizations” such as foundations and cooperatives.³⁹ In addition, TNI headquarters allowed field commanders “discretion” to continue fundraising as they saw fit.⁴⁰

The failure to enforce the ban on military business also signaled a lax attitude toward other illicit economic activity by the military. For a time, some regional military commanders openly tolerated smuggling by their subordinates. When the Soeharto government imposed a short-lived crackdown on blatant military smuggling, it resulted only in a change in tactics: rather than risk being directly involved in the transport and unloading of smuggled goods, military officers provided “protection” for smuggling operations carried out by private associates. Even when such operations were exposed, military backers of sufficiently high rank and political clout could practically guarantee impunity for the smugglers.⁴¹

At the end of the Soeharto era, the military faced renewed criticism about widespread illicit business activity by soldiers. The defense minister in 1997, Edi Sudrajat, renewed the 1974 ban by declaring that military personnel could not do business, whether directly or by providing protection services.⁴² The then armed forces commander, Gen. Feisal Tanjung, reinforced the order a week later: “All officers and their wives are barred from business. If they want to get involved in business, they must get written permission from me first.”⁴³

The military clarified that retired officers and those working for military cooperatives or foundations were not subject to the rule.⁴⁴ Even so, few expected the order to be enforced. Even government officials expressed skepticism, given the pervasive nature of the military’s involvement in the economy at that point.⁴⁵ In the end, the “crackdown” reportedly resulted in thirty-four solders in Jakarta being picked up for moonlighting as nightclub security guards.⁴⁶ For the few caught in the net, General Sudrajat’s order outlined the punishments: delayed promotions or dismissal.⁴⁷ Prosecution was not contemplated.

In the face of major public pressure for political reform that began in March 1998 and ultimately led to Soeharto’s fall, Susilo Bambang Yudhoyono, then serving as the armed forces’ chief of staff for territorial affairs, defended the government against its critics. He claimed that it had “punished soldiers involved in ‘backing’ illegal operations” and was “dealing sternly with those involved in manipulation, embezzlement or corruption.”⁴⁸ There was little available information to support this contention, however, so observers remained highly skeptical.⁴⁹

When Indonesia’s first direct presidential elections in 2004 swept Yudhoyono to power and he selected Juwono Sudarsono as his defense minister, it opened up the possibility that long-stalled military reform, including reform of military financing, might gain new life. Yudyonono, known as a cautious reformer, had campaigned on an anti-corruption platform. Sudarsono was a prominent critic of military engagement in business activities.

Military Resistance to Reform

The military leadership historically has been a major obstacle to reform of military financing. On occasion, usually under outside pressure, it has said it will consider withdrawing from military businesses. But such rhetoric has rarely been matched by action. To the contrary, over the years military leaders have acted repeatedly to block reform.

The armed forces generally have argued that they cannot afford to give up their economic ventures. Experience has shown, however, that they have strongly resisted reform even when accompanied by increased funds. In the 1950s, parliament debated how the central government might go about funding the military, but the military preferred to retain its financial autonomy.⁵⁰ When high oil prices in the 1970s permitted an increase in the military budget, the Soeharto government made no serious effort to dismantle military businesses. Nor was the military leadership inclined to give them up. As summed up by political scientist Harold Crouch: “Although the need for military units and individuals to depend on “unconventional” sources [of funds] had greatly declined, old habits die hard.”⁵¹

When challenged by one or another scandal that came to public light, the military strongly defended its economic role. In 1995, for example, the chief of general staff of the armed forces, Lt. Gen. Soeyono, argued that the armed forces had as much right to participate in the economy as any other sector of society.⁵² Two years later, the spokesperson for the armed forces, Brig. Gen. Slamet Supriadi, made a similar argument, in his case referring specifically to military foundations and cooperatives through which the military was involved in private business:

These groups are part of the military structure and have a legitimate right to take part in business activities. They are looking after the welfare of armed forces personnel and society. So why bar them?⁵³

Short-Lived Scrutiny

The power of the military—including its economic power—came under greater scrutiny in the wake of Soeharto’s fall. Reformers inside the armed forces pushed to professionalize the security forces and had some limited success from 1999 to 2000. This period also was marked by increased attention to the question of military financing, and military business in particular.

Nongovernmental organizations (NGOs), think tanks, and scholars issued hard-hitting reports that documented the extent of military self-financing. Their strong critique of military business practices—including extensive illegal activities—drew considerable public attention. It made it more difficult for Indonesia’s military leaders to deflect criticism as they always had, by asserting that illicit military businesses were carried out only by rogue elements in the TNI. The issue of military self-finance also caught the attention of the international donor community, which became concerned about the effect of the military’s strong role in the economy on the country’s development prospects. In particular, bilateral donors and multilateral financial institutions saw that military business undermined civilian governance, fueled criminality, and distorted markets by raising costs and reducing competition.

Rampant military corruption and outbreaks of violence tied to military economic interests also heightened calls for reform from within government. At one point, the then defense minister openly questioned the “unclear legal status” of many military businesses established under the rubric of military foundations and cooperatives.⁵⁴ In 2000 a cabinet official announced that the government would try to halt its favored treatment of military businesses.⁵⁵ Within the TNI, some officers recognized that military self-financing was deeply problematic.

As a result of growing pressure, some official audits were initiated in 2000 and 2001 (see below), but this progress was not sustained. Reform of financing was seen as too daunting a challenge in both financial and political terms. It would entail large expenditures to bring the military on budget. By one estimate offered in 2004, this could amount to additional expenditures equivalent to 1-3 percent of gross domestic product (GDP).⁵⁶

Politically, it was difficult to overcome the powerful military lobby. The government of President Abdurrahman Wahid, the first of the reformasi era, attempted to confront the military—including regarding its economic power and dismal levels of transparency—but had to back down in the face of budget shortfalls and strong resistance from the military.⁵⁷ Conservative elements in the military soon reasserted their authority over more reform-minded officers. (A main reformer, Lt. Gen. Agus Wirahadikusumah, lost his command partly in retribution for his efforts to expose financial improprieties.⁵⁸)

The resurgent military argued that it could not give up military businesses until the government provided full funding. President Megawati Sukarnoputri, who was elevated from the vice presidency in 2001 with the support of civilian political parties and the military faction in parliament, did not push that issue or other aspects of military reform. As a result, efforts to address military financing stalled. In 2001 the TNI convinced parliament that “until such time that the Government is able to entirely fund the welfare requirements of the soldiers in a fitting manner, [its] venture in business will be tolerated.”⁵⁹

By 2001 army leaders had for several years promised to address the military’s business activities, but their words were not backed by action.⁶⁰ TNI leaders had come to recognize that the military’s business interests sullied its reputation, but the institution nevertheless clung to them out of a sense of self-preservation: the military had become dependent on the outside funds and did not trust that the government would look after its needs. Analysts observed that it would be years until the Indonesian government would be able to fully fund government operations from tax revenue and that, until that was achieved, “the TNI will not give up one rupiah of its off-budget sources that it does not have to surrender.”⁶¹

Failed “Crackdowns” on Illegal Businesses

Illicit military economic activity remained in the spotlight following the brief period in which military businesses were under some official scrutiny. Attention to such activity, however, did not result in effective measures to halt it. Pronouncements related to military involvement in illegal logging usefully illustrate the failure to crack down on military economic activities that have clearly violated prevailing laws.

In 2001, a presidential decree (Presidential Instruction No. 5/2001) addressed in part the role of the military in illegal forestry operations. As later restated by former TNI chief Gen. Endriartono Sutarto, the order mandated him to “take serious action,” including administrative and criminal sanction, against “any TNI personnel who are proven involved in illegal logging activities, transportation/distribution of illegal forest byproducts or timber smuggling.” It also ordered “serious action against foundations, cooperatives under TNI’s umbrella, and their personnel that are involved in carrying out illegal logging activities and distribution of illegal forest byproducts.” It highlighted in particular the need for the navy to “take stern action” against timber smuggling.⁶²

Nearly two years elapsed before he issued a directive to his troops related to any of those specific provisions. In early 2003, according to his own description, he issued a letter to all TNI personnel “to prohibit and take decisive action against any TNI personnel who are proven to be involved, directly or indirectly, in illegal logging activities as well as in illegal transportation/distribution/smuggling of timber.”⁶³

He did not indicate what measures, if any, were put in place to ensure compliance with that letter. His letter apparently did not address other elements of the presidential decree. Nor did he clarify whether anyone was in fact ever investigated and punished. Human Rights Watch is unaware of any crackdown on military involvement in illegal logging, prior to 2005, consistent with the language in the 2001 presidential decree.⁶⁴ To the contrary, as of early 2005 the TNI had failed to act against a captain in the military police whom NGOs had accused two years earlier of deep involvement in illegal logging activities in Papua.⁶⁵

A further military crackdown was announced in mid-2003, following a scandal over a murder-for-hire in which two people were killed (the case is described in more detail below). Sutarto vowed to make an example of the four active-duty marines accused in the case.⁶⁶ Ultimately, two of the marines were court-martialed and convicted of the double murder.⁶⁷ Sutarto also responded by issuing an order banning criminal activity by soldiers, including the protection of criminals:

I have instructed all units to ensure that none of their soldiers are involved in (criminal) business. We will not tolerate that… The TNI has dismissed many soldiers for this sort of thing and will continue to do so.⁶⁸

Publicly available reporting indicates that some soldiers have been rounded up for their involvement in illegal economic activity, but they have almost invariably been low-ranking troops and have faced dismissal rather than legal action. For example, two soldiers and a staff official were dishonorably discharged for drug trafficking but were not reported to the police; a news report commented that it remained unclear if another seventy soldiers similarly dismissed for drug trafficking had ever been charged with a crime.⁶⁹ Prosecutions of military personnel remain uncommon, particularly as compared to the frequency of crimes.⁷⁰ Those prosecuted under the military court system are almost always low-ranking soldiers who face dismissal or light sentences if found guilty.⁷¹ (For a further discussion, see the section titled “Plans Fail to Promote Accountability” in Part III: Obstacles to Reform.)

The Situation Today

The September 2004 law mandating that the Indonesian military end its involvement in business was a watershed initiative, but one that left many questions unanswered. The language of the law is subject to multiple interpretations, and the provisions have not yet been enforced. Some preliminary steps have been taken but these have been slow and insufficient: the promise of the law remains untested. A more detailed critique is given below in the chapter on “Obstacles to Reform.” It finds that those in a position to make change happen have not shown a commitment to addressing the full costs of military self-finance, including in human rights terms. To the contrary, they have defined military business narrowly, focusing only on select elements of what is a much deeper structural problem, they have provided a number of exemptions that would leave vast parts of the military’s commercial structure in place, and they have not pursued real accountability.