Last week, around 600 Defence-related firms from more than 50 countries exhibited a range of military platforms, systems, services and weapons at the biennial Indo Defence expo, held in Jakarta. It was the sixth arms expo of its kind held in Indonesia and the hardware on show from Defence firms around the globe reflects the continuing steady growth of military budgets in the Asia-Pacific region. Indonesian Defence spending has increased 147 percent in the last two years. Indonesia accounts for 22 percent of collective ASEAN Defence expenditure, ranking second only to Singapore in terms of ASEAN nations’ military budgets. A small team from KPMG, including myself, attended.
Indonesia is engaged in a process of modernising its armed forces, known as the Tentara Nasional Indonesia, or TNI. Apart from the vintage of many platforms and systems and the need to replace them, several other factors are driving Indonesia’s Defence procurement strategy and the transformation of TNI.
First and foremost is the rate and scale of economic growth in Indonesia. According to several studies, Indonesia’s economy is predicted to be the seventh or eighth largest in the world by 2030. And the Defence budget is growing accordingly.
Second, the changing role of TNI is a significant factor. Veteran Indonesia-watcher Don Greenlees told the KPMG team that outgoing Indonesian President Susilo Bambang Yudhoyono’s main legacy would be the resolution of almost all separatist movement claims across Indonesia, particularly in Aceh. Meanwhile, pro-independence sentiment in Papua was gradually losing steam. According to Greenlees, a former journalist turned academic with ANU, successfully addressing the grievances of separatist elements in Papua was well within reach of an experienced negotiator like incoming Vice-President Yusuf Kalla.
The principal role of TNI was therefore changing from its previous preoccupation with internal security to a more orthodox focus on national defence as its core business. And this now made it easier for TNI to engage and train on an equal footing with regional counterparts like the Australian Defence Force.
The third factor is Indonesia’s increasingly centrally-coordinated approach to the control and regulation of Defence procurement, especially since the enacting two years ago of National Law 16/2012, which created a Defence Industry Policy Committee within the Ministry of Defence. This committee was set up to link Indonesia’s Defence-related State Owned Enterprises to those foreign partners seeking to sell or manufacture military equipment in Indonesia.
Since the 2012 law, Indonesia specifically requires an element of technology transfer around any Defence-related joint ventures, such as its current project to co-produce a modern strike-fighter aircraft with South Korea. This drive for self-sufficiency in arms and equipment is partly a reaction to the decade-long arms embargo imposed on Indonesia by the United States in the mid-1990s. Importantly, the kinds of human rights issues which precipitated the severing of US-Indonesia military relations are far less likely to occur today. Such transgressions are extremely rare in contemporary TNI, which has an increasingly outward focus in doctrine and strategy, contributing troops to peacekeeping operations in Lebanon, Haiti and the Congo.
Mike Kalms, addressed the members of Indonesia’s Defence Industry Policy Committee, answering their questions as KPMG’s lead partner for Defence industry, while noting he is also a member of the Australian Government’s expert panel on the 2015 Defence White Paper and a contributor to the companion Defence Industry Policy Statement. The Indonesian group, led by former Secretary of the Ministry of Defence, Air Marshal (Ret) Eris Herryanto, were particularly interested in how private sector firms like KPMG assisted various streams of Defence business in Australia.
Likewise, Kalms received a briefing from the committee members on how Indonesian SOE and private Defence companies were organised into several tiers, with foreign enterprises being allocated to respective Indonesian firms, according to the nature and scale of their business.
KPMG partner David East’s key advice after 16 years in Jakarta working corporate finance issues for foreign firms partnering with Indonesian entities is, “early in discussions with prospective partners it is important to find the best Indonesian corporate adviser possible from the best legal firm available”. Don Greenlees echoed East’s counsel, pointing to cases where civil misdemeanours had become criminal offences almost overnight, with dire consequences for the unsuspecting foreign partner. According to Greenlees, Indonesia had experienced limited legal reform in the post-Suharto Reformasi period. And this presented a huge disincentive to potential foreign investors in Indonesia.
But opportunities indisputably exist, even across a Defence industry landscape as complex as that in Indonesia. As with all of Asia, the longevity and durability of personal relationships, along with the trust that comes with them, are fundamental to a successful partnership with Indonesian firms.
New Indonesian President Joko Wibowo, known informally as Jokowi, has put maritime issues at the centre of his vision for the next five years. In his inaugural address he interestingly quoted the Indonesian Navy’s motto Jalesveva Jayamahe (On the Sea, We are Glorious), in a clear signal of his intention to actualise Indonesia’s geopolitical self-image, known simply as the archipelagic concept. Rather than a geography of 17,000 islands stretched the distance from Christchurch to Perth and separated by waterways, the concept characterises Indonesia as a sea-land continuum, joined up from Sabang in northern Sumatra to Merauke in Papua.
Depending on how President Jokowi’s new policy emphasis unfolds, his focus on maritime development will provide new opportunities for Australian military and Defence industry engagement with Indonesia, particularly across the Northern Territory, where ports and docking facilities are developing apace with offshore oil and gas extraction operations.
But a keen grasp of both the form and substance of our large neighbour’s Defence industrial and regulatory landscape is crucial to successful business engagement with Indonesian partners. KPMG Australia’s presence at Indo Defence 2014 and the discussions held in Jakarta with our Indonesia-based experts, as well as with the influential Defence Industry Policy Committee, made valuable contributions to advancing this understanding.
Gary Hogan is KPMG Australia Director for Defence and National Security