Jakarta, The enactment of the Law on the Defense Industry
(LoDI) is seen as a significant breakthrough since it mandates the government
to prioritize the domestic industry in arms procurement. The law implies that
the government is willing to take advantage of defense procurement as a tool of
industrial policy, that is to create, maintain and protect necessary industrial
capability at a certain cost premium (costs incurred due to local content
requirements).
A cautious approach is crucial in translating this
spirit into practical guidelines, however. The Indonesian Military's (TNI)
Minimum Essential Forces (MEF), under which the procurement program is listed,
is set to conclude within 15 years (2010-2024). The first-three years have
passed, and yet the value of local procurement remains small: 13 percent of
total arms in 2011. The figure is expected to rise significantly from Rp 1.3
trillion (USS134 million) in 2012 to Rp 11 trillion in 2013.
Optimization of local procurement necessitates
adjustments in procurement procedures. Arms procurement has been regulated
separately from other public procurement, but is not sufficiently tailored to
the unique characteristics of defense such as higher technology standards,
longer life cycles and security considerations. Debate remains as to whether
arms procurement should be spared from the competition that is the basis of any
public procurement under good goy,ernance principles. Here, confidentiality
seems to take precedence over value for money. Thus, only two mechanisms are
used: limited bid and direct appointment (in the case of urgent requirement).
Defense Ministry Regulation No. 34/2011 on
procurement ofweapons systems divides the procurement into five sequential
stages as shown in the diagram.
This procedure contains several weaknesses. First,
it does not regulate procurement of developmental items, which entail longer
life cycles and R&D spending. Second, the prepreparation stage is crammed
with activities that determine the succeeding stages. Most importantly, the
technology assessment procedure required to translate operational cequirements
(OR) into technical specifications (TS) is often criticized as the gateway for
the intervention of brokers. Since defense technology is highly specialized, it
is difficult to expect competition once the tech specs are hard wired to the
benefit of a certain provider. This explains why the preference for off the shelf
(OTS), especially foreign OTS, is still prevalent.
At the same time, the procedure also creates
obstacles to national industrial participation. First, it expects industrial
participation to begin only after the requirement planningis hardwired, which
means the defense industry is not involved in technology assessment and pricing
(therefore economic scales for industry are not considered). Second, procurement
contracts must be concluded within the same budget year, which risks penalties
for late delivery. Third, in many cases the bulk of procurement is not
synchronized with industrial capacity. Industry is either choked with too many
orders in a short period of time, or starved of them.
The most problematic issues with local procurement
are under performance, overpricing and late delivery. As much as it is the
defense industry's fault, the administrative complexity of multiple sources of
funding (there are three different sources of funding for national industry)
and slow procurement (sometimes it takes eight months just to issue a contract)
must also bear partial blame. A High Level Committee is to be created at the
Defense Ministry/TNI, Finance Ministry and the House of Representatives to
speed up the procurement process from 31 months to eight months.
The absence of R&D support and economies of
scale in procurement ordering means industry struggles to run production
competitively. This implies higher cost premiums for the state, higher unit
production prices for the user and greater barriers for the defense industry to
enter the international market. To support defense industry development, the
government created a defense technology and industry development fund iast
year. Its impact, however, remains to be seen.
It is amid the scattered efforts to accommodate
local procurement that LoDI's significance stands out:
It (indirectly) mandates substantial changes in the
procurement procedure to ensure that optimization of local procurement is
feasible. Paragraph 21, 25, and 27 of the law commands synchronization of arms
requirement planning with domestic industry's production master plans.
Central to ensuring the implementation of LoDI is
the Committee for Defense Industrial Policy (KKIP), whose role falls somewhere
between coordinator and enabler. The law envisions a new structure with
permanent support staff, without which it would be impossible for the KKIP to
undertake a huge expansion of roles.
A limited form of life cycle approach is adopted in
Paragraph 61 and 62 that stipulates the application of multi year contracts
across various activities like R&D, engineering, technology transfer,
financing, purchasing, production capacity improvement and marketing.
Paragraph 43 creates a safety net in the case of
foreign procurement, by regulating domestic industry participation through the
mechanism of offset or collaboration. It is expected that kickbacks and the
like will be transformed into industrial participation benefits.
In a nutshell, LoDI wants to address problems that
have hampered previous attempts at optimizing local procurement in a
comprehen-sive way.
There are two. recommendations to foster arms
procurement improvements. First, more atten-tion should be given to the
pre-preparation stage. If necessary, technological assessment should be put into
a separate stage in which experts from various backgrounds will be involved in
calculating the most cost efficient solution that is "effective" for
the military and "economic" for the defense industry.
Second, partnership with industry is imperative and
this means involvement at an earlier stage, in-tensive communication, as well
as a shared understanding of the risks, costs and difficulties in weapon systems
production compared to the commercial market.
For a small defense economy like Indonesia, the
existence of a defense industrial base rests on the willingness of the national
government to buy locally. Industry is expected to meet up with TNI's requirements,
but the TNI/Defense Ministry is also required to adjust its procurement
procedures to accommodate industrial sustainability. It takes two to tango. (Yusuf Setiaji and Curie Maharani), Sumber
Koran: The Jakarta Post (25 Maret 2013/Senin, Hal. 07)