16 May 2012

Who is minding the Indonesian military's business ties?

Jakarta Globe - May 13, 2012

Samantha Michaels & Ulma Haryanto -- The government says it has reformed the military's once-extensive network of businesses, but it has failed to ensure that military organizations with indirect business ties are not breaking the law, top ministry officials suggested.

Military cooperatives and foundations, which can raise money by owning shares in companies, were among many profit-making entities that came under scrutiny when the government began divesting the military of its business holdings in 2004. The government was hoping to bolster civilian control over the armed forces, which have a history of corruption and rights abuses. Military-owned businesses, critics argued, allowed soldiers to earn money outside their state salaries, making them less dependent on the government and less accountable.

A series of laws and decrees between 2004 and 2009 said businesses owned by military branches should be liquidated or transferred to the state, while those owned indirectly -- by cooperatives and foundations -- should comply with laws limiting their business activities.

Ministry officials say cooperatives and foundations have been restructured and are now following the law, but nobody is monitoring them to make sure. "It's not our job," said Lt. Gen. Eris Herryanto, the Defense Ministry's secretary general.

Ministries overseeing cooperatives and foundations say their powers to monitor the military are limited. "We don't monitor foundations, per se," said Syafruddin, the director of civil law at the Justice and Human Rights Ministry. "Our authority is limited to issuing permits for foundations. Whenever there are changes, such as in their organizational structure, they have to report it to us." Indonesia does not have a separate body to monitor foundations, he added.

Syarief Hasan, the state minister of cooperatives and small and medium enterprises, said his ministry's priority was not ensuring that cooperatives complied with the law, but on monitoring "places where cooperatives do not exist, and cooperatives that are weak [financially] or need help."

He said it was the job of regional offices under provincial administrations to ensure that laws were followed. But Ratna Ningsih, the head of Jakarta's office for cooperatives and small businesses, disagreed.

"We don't have that kind of authority," she said. "A cooperative has its own governing body that should do the monitoring. Military cooperatives are not under our watch."

The latest public statistics show that, as of 2008, there were 23 military foundations and 1,098 military cooperatives with combined assets of Rp 3.2 trillion ($349 million). However, in response to a private request for information last year, the Defense Ministry said there were 13 foundations and 1,301 cooperatives.

Good reputation?

The military's foundations were created to help soldiers access social services such as housing and education. Military cooperatives boost welfare by providing subsidized goods such as rice.

Regulations allow foundations to have holding companies that invests in businesses on their behalf, while cooperatives can own shares in private companies or investment equities.

"If you go to Depok, there's banner in front of a McDonald's restaurant saying that it's partially owned by Inkopad [the Army's Parent Cooperative]," said Jaleswari Pramodhawardani, a military analyst from the Indonesian Institute of Sciences (LIPI).

But in the past, these organizations have also raised funds in other ways. For example, the Navy Primary Cooperative (Primkopal) was hired by Mintohardjo Navy Hospital in Jakarta to pave the hospital's roads and waterproof its helipad in 2009 and 2010, well after reform efforts began.

However, the Supreme Audit Agency (BPK) found in 2011 that Primkopal lacked the capacity to do this work and subcontracted it to a third party while pocketing a 2.5 percent "fee" from each job. Hospital officials told BPK auditors that by asking Primkopal to do the work, they bypassed the lengthy tendering process required for all government projects.

Syarief denied that military cooperatives had any problems with transparency or in the legality of their businesses, saying some cooperatives just needed guidance to strengthen their finances during the reform process.

From "assigned" projects in 2009 and 2010, Primkopal received Rp 124.7 million in fees alone, the BPK report said, adding that Primkopal and the hospital were given a warning but never punished.

In 2000, BPK audits found that an Army foundation, Kartika Eka Paksi, failed to account for Rp 59 billion in earnings or Rp 48 billion in spending by its chairman.

Again, the BPK could only warn the foundation and the Army, whose chief of staff at the time called for an independent audit. If misappropriations were found again, he said, the Army would "act." It is unknown if the audits were done.

Who's responsible?

Though Eris says the Defense Ministry is not responsible for cooperatives and foundations, it was once a driving force in the reform process, as required by earlier ministerial and presidential decrees.

A ministry team was created in 2009 to control the restructuring of cooperatives and foundations, evaluate the results and report to the ministry's secretary general.

In a statement in March, Rear Adm. Bambang Suwarto, director general of the ministry's defense force, said the restructuring was completed in 2010. He said all organizations had conducted meetings and were audited by the relevant inspectors.

However, Eris told the Jakarta Globe that the ministry had no information about any cooperatives or foundations.

"I don't know [how many] cooperatives there are," he said. "With foundations, each [military service branch] has one.... I cannot answer other questions because we have nothing to do with them anymore. We have no data. They [cooperatives and foundations] have separated [from the military structure]. They aren't our concern anymore."

Cooperatives and foundations were "separated" by a 2009 ministerial decree, which declared that these organizations had no structural status within the military and would be monitored internally by their own regulatory bodies.

Profit confusion

During the reform, many critics were disappointed with the decision to restructure cooperatives and foundations, rather than dismantle the businesses. In 2010, a Human Rights Watch report urged the government to "reject the fiction that the businesses under the military's foundations and cooperatives are as independent from the TNI as an institution."

The debate hinges on whether the military benefits financially from cooperatives and foundations. Various laws on the issue seem to contradict each other.

The 1992 Cooperatives Law and the 2001 Foundations Law say all members can take profits, not mentioning military personnel specifically. A 2004 TNI Law prohibits active military personnel from seeking profit, and calls for an end to businesses owned by cooperatives and foundations. Decrees from 2009 say cooperatives and foundations can hold shares in businesses if they follow
existing laws.

What do the ministries say?

"Foundations can conduct business activities by establishing a business entity," Syafruddin said, adding that the profits must not be used for personal wealth. He said active military personnel could join foundations and serve as "members, a chairman or a trustee," but could not sit on the
management board.

In cooperatives, "everything is up to what the members accede in their meetings," Syarief said. "Even if they want to choose a petty officer to sit [on the board of directors or trustees], they may."

At the Defense Ministry, the rules are not clear. Eris said active personnel could not join foundations or cooperatives. "[Before the reform], cooperatives were part of our structure. Who served on them? Active personnel. Not anymore," he said.

When asked again, he changed his answer. "Don't look at the military status," he said. "The money goes to the members for our own prosperity, because our [government] salary is not enough. We can't send our children to the best schools, but using this, we can. So it's not for the military [institution], but only for the people."

HRW disagreed. "The military has no role in business," said Lisa Misol, who wrote the 2010 report. "It's just a dangerous activity for human rights, for accountability, and for the military itself."

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