October 4, 2022
JAKARTA – In 2017, the government announced a plan to relocate three state-owned defense companies, namely PT Pindad, PT PAL and PT Dirgantara Indonesia (PT DI), to Tanggamus regency in Lampung province. It was the first time that the Defense Ministry considered such a project since the government started to revitalize the domestic defense industry and modernize the Indonesian Military (TNI).
Their relocation was based on several considerations, specifically the limited space available for the state firms to expand their production facilities due to high population density and land use on the island of Java. Then-defense minister Ryamizard Ryacudu said approximately 10,000 hectares of land would be needed to build new factories for the three companies.
Nonetheless, the relocation plan has since been in limbo and shipbuilder PT PAL, aircraft manufacturer PT DI and arms producer Pindad continue to operate at their existing sites.
In 2021, President Joko “Jokowi” Widodo hinted at reviving the relocation plan, but with a different scenario. He instructed that Pindad and PT DI be relocated in the vicinity of Kertajati International Airport in Majalengka, West Java, and that the two companies’ headquarters in the West Java capital of Bandung be transformed for tourism or other relevant sectors.
Observers seem to support the idea, saying that relocating the SOEs might help them revive stalled projects. Furthermore, the government claims that the relocation plan is part of its effort to revitalize the defense industry to eventually achieve self-sufficiency.
The undertaking is also seen as a strategy for the government to achieve its goal of equitable development in order to strengthen national resilience. In this sense, revitalizing the defense industry, including the relocation plan, opens opportunities for not only the central government, but also the administrations of the regions where the companies operate.
The benefits from the relocation plan can take several forms, such as jobs and tax revenue. For instance, Pindad’s production facility in Malang, for example, has created more than 300 jobs and generated a multiplier effect for 300 local companies. Meanwhile, PT DI and Pindad’s production facilities in Bandung have generated tax revenue for the local administration and also attracted foreign companies to invest in the region, such as the United States’ Jabil Inc. and UTC Aerospace Systems [now Collins Aerospace –Editor], which began operating in 2017.
Another remarkable achievement was the delivery of two CASA/IPTN CN-235 military transport aircraft to the Senegalese Air Force in 2021, which reportedly employed more than 4,000 Indonesian workers. Furthermore, the construction of two Makassar-class landing platform docks (LPDs) in 2008-2011 at PT PAL’s Surabaya facility reportedly absorbed 800 workers.
In the framework of TNI modernization and defense industry revitalization, either for the short term (until 2024) or the long term, President Jokowi has asked for a return on investment (ROI) in defense spending. Especially since the government has a legal basis (Law No. 16/2012 on the defense industry) that implements an offset policy in transfer of technology (ToT), it can maximize economic opportunities through arms deals.
In terms of return value, investments can be obtained from the defense offsets/ToT of major procurement deals worth millions or billions of dollars for weapons such as fighter jets, multirole tanker transport (MRTT) and submarines.
As a matter of fact, the deal to procure six Dassault Rafale fighter aircraft signed early this year includes defense offsets/ToT in the form of maintenance, repair and overhaul (MRO) capabilities for PT DI. Nonetheless, under the MRO capabilities for PT DI, the agreement also has favorable outcomes for the local administration and creates opportunities for local businesses to be part of the supply chain.
In a wider context, the agreement can attract more investment to Bandung, create more jobs, empower local businesses, such as raw material suppliers, and benefit the local administration through tax revenue.
Furthermore, the Indonesian shipyard also stands to gain not only lithium-ion battery technology through the offsets/ToT from the Memorandum of Understanding between PT PAL Indonesia and Naval Group, but also the long-term impacts of submarine-building capacity to support PT PAL’s 4.0 Maritime Transformation.
For example, the acquisition of Scorpene-class submarines by the Brazilian Navy through the collaboration between Naval Group and Itaguaí Construções Navais (ICN) created jobs for more than 1,700 workers in the South American country. It also empowered domestic companies in the construction supply chain, such as small and medium enterprises specializing in metallurgy.
These examples show that the ROI from weapons procurement can support a country’s economy, including regional economies.
However, at least three factors must be taken into account to ensure that the economic benefits apply to all stakeholders, including local administrations and communities.
The first is the readiness of all parties involved, including local administrations and companies, in terms of communications and infrastructure, human resource capacity and capability, as well as regulations and the political climate.
The second is how the Defense Ministry, State-Owned Enterprises Ministry and the newly established defense industry holding company, DEFEND ID, can ensure inclusivity and fairness, especially in providing a level playing field so local companies can join the supply chain. It is important to note that many domestic firms, especially those in the second, third and fourth tiers, have faced difficulties in joining the defense supply chain due to red tape.
The last is the government’s general commitment to overseeing the implementation of all defense offsets/ToT programs to achieve the best results, including for local administrations and communities. While the government’s pledge is key, changes in the national leadership and Cabinet ministers often pose a major challenge to achieving the objectives of the defense industry.
All in all, amid the socioeconomic issues currently plaguing the country, such as soaring inflation, local or global supply chain disruptions as an impact of the Ukraine war, and COVID-19 recovery efforts, defense spending offers many opportunities for local administrations and communities to generate new income.
It is now up to the government to consider all the steps necessary to benefit all stakeholders, especially in its choice of defense offsets/ToT programs to sustain the national defense industry ecosystem in both the short and long terms.