The Finance Ministry is encouraging strategic state firms to compete with foreign companies in tenders for the procurement of arms, with financing help from the newly established Indonesian Eximbank.
"*The Eximbank financing* is expected to empower local industries to produce weaponry," Finance Minister Sri Mulyani Indrawati said last week at a ceremony to hand over a patrol boat from state shipbuilder PT PAL to the customs and excise office at Tanjung Balai Karimun Port in Riau Islands.
Strategic state firms are defined as those operating in sectors of high strategic importance for the country. In the defense sector, such companies include PAL, aircraft maker PT Dirgantara Indonesia and arms manufacturer PT Pindad.
Defense firms have long sought government help to finance schemes and legislate on policies beneficial to the local defense industry.
One proposition they have raised is for the government to use long-term contracts in its defense procurement schemes, to allow the companies to work under a more structured production cycle.
Eximbank senior managing director Arifin Indra pointed out strategic state firms had a hard time competing with foreign companies because they were not able to secure the financing they needed.
"But since the establishment of the Indonesian Eximbank, we can now support strategic state firms," he said.
The Eximbank, or the Indonesian Export Financing Agency (LPEI), is a state agency specializing in providing financing for local companies looking to export their products.
Arifin added there was a cap on the amount of loans that could be provided, regulated by the central bank.
Another way to help boost state firms' earnings is for the Eximbank to finance foreign parties' purchases of Indonesian-made goods, Arifin said.
A source at the Eximbank said the amount of financing disbursed in 2009 was set to reach Rp 9.5 trillion (US$1.1 billion), or 74.8 percent of the initial target of Rp 12.6 trillion, citing the higher interest rates as the reason for the shortfall.
"Plus, loans for some debtors couldn't be disbursed because of unfulfilled terms and conditions," the source said.
The Defense Ministry says the government will prioritize domestic-made arms in the 2010-2014 period.
In the 2010 state budget, the allocation for defense is Rp 42 trillion, up from about Rp 34 trillion this year.
The government is looking to overhaul its armory, after a slew of accidents this year involving aging military aircraft.
