Defense spending can bring new hope to local economies
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 the Ministry of Defense had considered such a project since the government began revitalizing the national defense industry and modernizing the Indonesian military (TNI).
Their relocation was based on several considerations, particularly the limited space available to state enterprises to expand their production facilities due to the high population density and land use on the island of Java. Ryamizard Ryacudu, then defense minister, said around 10,000 hectares of land would be needed to build new factories for the three companies.
However, 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 resettlement plan, but with a different scenario. He ordered that Pindad and PT DI be relocated near Kertajati International Airport in Majalengka, West Java, and that the two companies’ headquarters in West Java’s capital, Bandung, be converted for tourism or other relevant sectors.
Observers seem to back the idea, saying relocating state-owned companies could help them revive stalled projects. Furthermore, the government says the relocation plan is part of its efforts to revitalize the defense industry to eventually achieve self-sufficiency.
The venture is also seen as a strategy for the government to achieve its goal of equitable development to build national resilience. In this sense, the revitalization of the defense industry, including the relocation plan, opens up opportunities not only for the central government, but also for the administrations of the regions where the companies operate.
The benefits of the relocation plan can take many forms, such as jobs and tax revenue. For example, Pindad’s production plant in Malang, for example, has created over 300 jobs and generated a multiplier effect for 300 local businesses. Meanwhile, the production facilities of PT DI and Pindad in Bandung have generated tax revenue for the local government 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 started operating in 2017.
Another notable achievement was the delivery of two CASA/IPTN CN-235 military transport aircraft to the Senegalese Air Force in 2021, which reportedly employed over 4,000 Indonesian workers. In addition, the construction of two Makassar-class landing platform docks (LPDs) in 2008-2011 at the PT PAL factory in Surabaya is said to have absorbed 800 workers.
As part of the modernization of TNI and the revitalization of the defense industry, whether short term (until 2024) or 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) which implements a compensation policy in the transfer of technology (ToT), it can maximize economic opportunities through arms deals.
In terms of return value, investments can be obtained from Defense Offsets/ToT large supply deals worth millions or billions of dollars for weapons such as fighter jets, carriers multi-role tankers (MRTT) and submarines.
In fact, the agreement for the acquisition of six Dassault Rafale fighter jets signed earlier this year includes defense/ToT offsets in the form of maintenance, repair and overhaul (MRO) capabilities for PT DI. Nevertheless, as part of the MRO capabilities for PT DI, the agreement also has favorable outcomes for the local administration and creates opportunities for local businesses to become part of the supply chain.
In a broader context, the agreement can attract more investment to Bandung, create more jobs, empower local businesses, such as raw material suppliers, and benefit local government through tax revenue.
In addition, the Indonesian shipyard is also expected to benefit not only from lithium-ion battery technology through offsets/ToT from the MoU between PT PAL Indonesia and Naval Group, but also from long-term construction capacity impacts. of submarines to support PT PAL. 4.0 Sea Processing.
For example, the acquisition of Scorpene-class submarines by the Brazilian Navy through the collaboration between Naval Group and Itaguaí Construções Navais (ICN) has created jobs for more than 1,700 workers in the South American country. It has also built the capacity of domestic enterprises in the construction supply chain, such as small and medium-sized enterprises specializing in metalworking.
These examples show that the return on investment from the purchase of arms 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 governments and communities.
The first is the preparedness of all parties involved, including local governments and businesses, in terms of communications and infrastructure, capacity and human resource capacity, as well as regulation and political climate.
The second is how the Ministry of Defence, the Ministry of Public Enterprises and the new defense industry holding company, DEFEND ID, can ensure inclusiveness and fairness, in particular by providing a level playing field so that local businesses can join the supply chain. It is important to note that many domestic companies, especially those in the second, third and fourth tiers, have faced difficulties in joining the defense supply chain due to bureaucracy.
The last is the government’s general commitment to oversee the implementation of all defense offset/ToT programs to achieve the best results, including for local governments and communities. While government commitment is essential, changes in national leadership and cabinet ministers often pose a major challenge to achieving defense industry objectives.
Overall, amidst the socio-economic issues currently plaguing the country, such as soaring inflation, local or global supply chain disruptions following the war in Ukraine, and the recovery efforts of COVID-19, defense spending offers many opportunities for local governments and communities to generate new revenue.
It is now up to the government to consider all necessary steps for the benefit of all stakeholders, particularly in its choice of defense offsets/ToT programs to support the national defense industry ecosystem in the short and long term. term.