Need for a defense industry holding fim

Badak Pindad in Action ☆

A plan from the Indonesian Air Force to procure AgustaWestland AW-101 helicopters has sparked debate as it has been regarded as against domestic products. When asked why he did not choose state aircraft maker PT Dirgantara Indonesia (DI), Air Force chief of staff Air Marshall Agus Supriatna pointed out PT DI’s lack of ability to fulfill the Air Force’s requirements and the AW-101’s technological advantages.

PT DI’s late delivery of a Super Puma helicopter procured in the 2009-2014 Strategic Plan (Renstra) was another nullifying determinant.

Nevertheless, the controversy was only the tip of the iceberg. Building a capable local defense industry remains a cause for concern. Another tricky issue is the fact that local defense companies, or their subsidiaries, have potential overlapping specialties.

Guaranteeing the fulfillment of defense needs and self-reliance in production of weaponry systems tops the list of priorities of President Joko “Jokowi” Widodo’s defense policies. The government is steadily building up the country’s strategic industry.

Fuel subsidy cuts have provided the government with extra funds to advance its defense industry through state equity invested in state arms producer PT Pindad. The government also aspires to establish a holding company to manage strategic industries.

If realized, the holding company should fall under the Defense Industry Policy Committee (KKIP), which is headed by the President. As Silmy Karim, PT Pindad president director, put it, the defense holding company would act as a policy executor.

Setting up a defense industry holding company offers a number of advantages. First, it would remove perennial obstacles such as a lack of coordination among national defense companies. The holding company could help the government supervise national strategic industry and craft a better strategy to improve the quality of companies’ products.

Second, it could serve as a coordinator for various strategic projects. The holding company could integrate four clusters of Indonesia’s strategic industry (primary platforms industry, primary components industry, components industry and rough materials industry).

Third, the holding company could mediate, or even arbitrate, disputes between its subsidiaries. Although national defense companies have their own specialties, some of them have overlapping jobs, reducing the efficacy of the national defense industry.

For example, PT DI has a subsidiary company that handles electronic spare parts, which the national electronic institute PT LEN Industry is also doing. PT Pindad and PT Dahana both produce explosives, despite the fact that the latter was initially assigned to focus on this specific business.

A defense industry holding company would, however, face impending challenges, such as resistance from particular groups within the domestic defense industry and potential abuses of power. Setting up a new system may trigger discontent among old players, who have long benefited from the status quo.

On the other hand, a defense industry holding company, while solving the problem of coordination, may spark an issue of subordination. The holding company may force its will against its subsidiaries in line with the chain of command, at the expense of their plans and programs.

Establishing clear guidelines therefore becomes a primary prerequisite to maximize the performance of this strategic industry holding company. Adopting transparency as a corporate value would prevent the holding company from slipping into scandals.

The discord on procurement platforms between the national defense industries and the Indonesian Military (TNI) as the main user would be another challenge for the holding company to tackle. Catching up on the TNI’s required technical specifications for military platforms is therefore pressing.

The inability of national defense companies to match technical specifications has so far justified the TNI’s option of overseas producers. On the other hand, the absence of encouragement to use local defense products has created a weak commitment to national products.

The defense industry holding company would be expected to bridge the producer and user to solve this long-standing issue. As a consequence, this holding company must be equipped with a sufficient legal authority that enables it to control its subsidiaries and to access TNI platform needs.

Without such authority and access, the holding company would have difficulties in performing its responsibilities. Maintaining a profitable and modern national defense industry is therefore not a daydream if Indonesia manages to develop the holding company.
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The writer is a PhD student at Ritsumeikan University, Kyoto. The views expressed are his own.

  ♜ Jakarta Post