Since his appointment, Indonesian Minister of Defence, Prabowo Subianto, claimed that one of his most crucial priorities was to continue the modernisation of Indonesian National Armed Forces (TNI), following a careful and efficient assessment as procurement processes are considered complicated and time-consuming. The TNI modernisation plan is also known as the Minimum Essential Forces (MEF) target; set in 2010, aimed to be achieved in 2024, and implemented within three Strategic Plans (Renstra). While the Indonesian government has less than four years to achieve its target, several concerns are hampering the modernisation program. First, the realisation of Renstra I and Renstra II as of December 2020 has only reached 62.31%. Even if enough is budget allocated to fulfil the MEF target, negotiations and manufacturing processes will take years before the equipment will be delivered to the TNI.
Another challenge is related to financial constraint. Budget refocusing due to the COVID-19 pandemic further decreased state budget and expenditure (APBN) allocated to the Ministry of Defence. In the recent draft of the state budget and expenditure (RAPBN) for 2022, the government allocated the highest budget to the Ministry of Defence, amounting to Rp133.92 trillion or equal to approximately US$9.3 billion. It should be kept in mind that not all the budget will be allocated for defence equipment procurement. Meanwhile, funding of major equipment acquisition relies heavily on foreign loans mechanisms, which should be validated and implemented with the Ministry of Finance.
Regardless, an extremely important aspect in procurement is to make sure that the modernisation program will not only benefit the TNI, but also the Indonesian Defence Technological and Industrial Base (DTIB). As a matter of fact, Indonesia has implemented several regulations to ensure that defence equipment procurement will also support the development of the DTIB, namely Law No.16/2012 on Defence Industry (UU Inhan), Government Regulation No.76/2014, and Minister of Defence Regulation (Permenhan) No.30/2015. Basically, these regulations are implementing mandatory obligations for foreign suppliers, such as Counter Trade, Offset and Transfer of Technology (CTLCO), so Indonesia could, in the future, fulfil domestic demands and decrease dependence on foreign Original Equipment Manufacturer (OEMs).
Offset and Transfer of Technology (ToT) are not new for Indonesia as such programs had been conducted since the 1960s. With M. Subianto’s commitment to modernise the TNI through a long-term policy, which overpass the framework of MEF plan, offset and ToT have become increasingly important. Experts have argued that the government must carefully assess its planification and strategy in order to maximise the offset and to ensure that it can be fully absorbed by local defence firms.
In fact, offset/ToT programs already implemented in the country are challenged by various factors and lessons could be learned. First, despite the existing regulatory framework, Indonesia does not have the necessary blueprint or strategic planning to determine what are the most valuable offset/ToT programs for Indonesia’s domestic defence industry. The evaluation of ongoing programs is also not as effective as one could expect and could hamper the implementation of offset/ToT strategy. For example, offset implementation in the past few years has mostly relied on three mechanisms, namely co-production, purchasing licenses, and co-development. Nevertheless, most offset/ToT programs within defence procurement deals were ‘agreed’ only to meet the foreign OEMs requirements, without a careful assessment on their impact on the Indonesian defence industry. It seems that for the government, intangible values – and more particularly Transfer of Knowledge - remain the easiest, quickest, and cheapest way to process offset. PT Dirgantara Indonesia (DI) engineers' experience from Grob’s G-120 TP procurement shows that less than 15% of the total offset contract was allocated for ToT through in-class training. Short course training alone brings insignificant results, if not accompanied by the aforementioned offset mechanisms. This kind of issues has also been experienced by PT Penataran Angkatan Laut (PAL) engineers during their first years of OJT (On the Job Training) for the Chang bogo-class submarine in South Korea. In some ways, the insignificant ToT result has hindered the whole process, amid Seoul’s request for quality assurance enhancement, which includes infrastructure readiness in PT PAL’s shipyard in Surabaya. Hence, such experiences tend to show that there is no real value-added if decision-makers on Indonesian side persists in requesting a puny offset mechanism.
Somehow, Indonesia may learn from India and the United Arab Emirates current offset policies, as both countries require additional multipliers to include investment as a priority for direct offsets. It should be kept in mind that investment recipients are expected to absorb advanced technology and manufacturing capabilities until they achieve an adequate level of TRL (Technology Readiness Level) and MRL (Manufacturing Readiness Level). Success stories from Brazil Embraer and Korea Aerospace Industries (KAI) during their infancy shows how an effective offset policy which combines a definite ToT, proportional investment arrangements, along with robust licensing rights have led both companies to become competitive actors on the international market while meeting domestic needs and participating to national economic performance.
The second challenge is related to the lack of a comprehensive defence industry ecosystem. Synergies and coordination between stakeholders are, at best, limited, including for research and development (R&D), which hampers the implementation of offset and ToT programs. A quadruple helix system, which includes industrial actors, government, end-users and synergies and academic world could actually boost Indonesia’s DTIB. An attempt of such scheme was carried out back in 2010, when the KF-X/IF-X development team, which consist at this time of the Ministry of Defence R&D agency (Balitbang Kemhan), Indonesian Air Force (TNI AU) pilots and engineers, PT DI engineers, and aeronautical experts from Bandung Institute of Technology (ITB) worked on the project core/critical technology elements (CTE), which are essential guidance for the first phase of the program. Unfortunately, as of today, the future of the program is unclear due to financial conditions, technology restrictions and procurement plan priorities. As a matter of fact, ongoing discussions on purchase of Dassault Rafale and/or Boeing F-15EX could affect the development of KF-X/IF-X project if offset and ToT programs agreed in the framework of these potential procurements are not benefiting to the development of the first indigenous combat aircraft project.
The third challenge of offset programs enforcement in Indonesia, and maybe the easiest to solve, is the lack of appropriate management. Weak monitoring systems could lead to the impossibility to fully and effectively implement offset and ToT programs. It could also create a vacuum of responsibilities, where each party – the OEM, the end-users and the program receiver – will blame the others for the failure. Moreover, the lack of effective monitoring system could also increase bribery and corruption issues. Transparency International Indonesia revealed that the current Indonesian offset policies rarely include anti-corruption clauses and that no audit are conducted. Random offset arrangements can be considered as a ‘bonus’ for parties involved in the procurement process. In this perspective, it will be essential to setup a strong and effective monitoring mechanism to assess the implementation process and ensure the accountability of offset programs stakeholders.
Needless to say, as offset and ToT programs will play an important role in the Indonesian Armed Forces long-term modernisation plan, they should also support Indonesia’s DTIB to improve its capacities and capabilities. It is worth noting that according to a recent report from Jane’s, offset market values in Indonesia might reach US$18.1 billion by 2030. In this perspective, defence industry stakeholders should ensure that such value could truly benefit to the development of Indonesia’s domestic defence industry.
Writers' profiles:
Anastasia Febiola S. is a Research Analyst on defence matters at Semar Sentinel PTE Ltd, while Cynthia Sipahutar is a Marketing Analyst for Aircraft Services at PT Dirgantara Indonesia (Persero). The views expressed are personal.
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