The TNI modernization plan, also known as the Minimum Essential Force (MEF), set in 2010, is aimed to be achieved by 2024 and implemented through three strategic plans (Renstra).

While the government has less than four years to achieve its target, several concerns have hampered the modernization program. First, realization of Renstra I and Renstra II as of December 2020 had only reached 62.31 percent. Even if the budget is enough to meet the MEF target, negotiations and manufacturing processes will take years before the equipment can be delivered to the TNI.

Another challenge is related to financial constraint. Budget refocusing because of the COVID-19 pandemic further cut the defense budget. In the draft budget for 2022, the government allocated the highest portion for the Defense Ministry, amounting to Rp133.92 trillion (US$9.3 billion). It should be kept in mind that not all of the budget will be earmarked for defense equipment. Meanwhile, funding for major equipment acquisition relies heavily on foreign loans mechanisms, which should be validated and realized with the consent of the Finance Ministry.

An extremely important aspect in procurement is to make sure that the modernization program will not only benefit the TNI, but also the Indonesian Defense Technological and Industrial Base (DTIB).

Indonesia has already implemented several regulations to ensure that defense equipment procurement will also support the development of the DTIB, namely Law No.16/2012 on Defense Industry (UU Inhan), Government Regulation No.76/2014 and Defense Minister Regulation (Permenhan) No.30/2015.

Put simply, these regulations create mandatory obligations for foreign suppliers, such as Counter Trade, Offset and Transfer of Technology (CTLCO), so Indonesia could, in the future, fulfil domestic demands and decrease dependency on foreign Original Equipment Manufacturers (OEMs).

Offset and Transfer of Technology (ToT) are not new to Indonesia, as such mechanisms have been in place since the 1960s. With Prabowo’s commitment to modernize the TNI through a long-term policy, which overpasses the framework of the MEF plan, offset and ToT have become increasingly important. Experts have argued the government must carefully assess its planification and strategy to maximize offset and to ensure that it can be fully absorbed by local defense firms.

Yet, there are challenges for offset and ToT programs. First, despite the existing regulatory framework, Indonesia does not have the necessary blueprint or strategic planning to determine what the most valuable offset and ToT programs are for the national defense industry.

Evaluation of the ongoing programs is not as effective as one could expect. For example, offset implementation in the past few years has mostly relied on three mechanisms, namely co-production, purchasing licenses and co-development. Nevertheless, most offset and ToT programs within defense procurement deals were “approved” only to meet the foreign OEMs requirements, without a careful assessment on their impact on the national defense industry.

It seems that for the government, intangible values – and more specifically transfer of knowledge - remain the easiest, quickest and cheapest way to process offset. Yet state aircraft maker Dirgantara Indonesia (DI) engineers' experience from Grob’s G-120 TP procurement show that less than 15 percent of the total offset contract was allocated for ToT through in-class training.

Short course training alone brings insignificant results, if not accompanied by the aforementioned offset mechanisms. These kind of issues have also been experienced by state ship builder Penataran Angkatan Laut (PAL) engineers during their first years of On-the-Job Training (JOT) for the Chang bogo-class submarine in South Korea. In some ways, the insignificant ToT result has hindered the whole process, amid Seoul’s request for quality assurance enhancement that includes infrastructure readiness in PAL’s shipyard in Surabaya.

Hence, such experiences show there is no real value-added if our decision-makers persist in requesting a puny offset mechanism.

Indonesia could learn from India’s and the United Arab Emirates’ current offset policies, as both countries require additional multipliers to include investment as a priority for direct offsets. It should be kept in mind that investment recipients are expected to absorb advanced technology and manufacturing capabilities until they achieve an adequate technology readiness level (TLR) and manufacturing readiness level (MRL).

Success stories from Brazil Embraer and Korea Aerospace Industries (KAI) during their infancy shows how an effective offset policy which combines a definite ToT and proportional investment arrangements, along with robust licensing rights have led to both companies becoming competitive actors on the international market while meeting domestic needs and participating in the national economic performance.

The second challenge is related to the lack of a comprehensive defense industry ecosystem. Synergies and coordination between stakeholders are, at best, limited, including for research and development (R&D), which hampers the implementation of offset and ToT programs.

A quadruple helix system, which includes industrial actors, government, end-users and synergies and the academic world would actually boost Indonesia’s DTIB. An attempt of such scheme was carried out back in 2010, when the KF-X/IF-X development team, which consisted at the time of the Defense Ministry R&D agency (Balitbang Kemhan), Indonesian Air Force (TNI AU) pilots and engineers, DI engineers and aeronautical experts from Bandung Institute of Technology (ITB) worked on the project’s core and critical technology elements (CTEs), which provided essential guidance for the first phase of the program.

Unfortunately, as of today, the future of the program is unclear due to financial constraints, technology restrictions and procurement plan priorities. As a matter of fact, ongoing discussions on the purchase of Dassault Rafale and/or Boeing F-15EX could affect the development of the KF-X/IF-X project if offset and ToT programs agreed in the framework of these potential procurements do not benefit the development of the first indigenous combat aircraft project.

The third challenge of offset program enforcement in Indonesia, and maybe the easiest to solve, is the lack of appropriate management. Weak monitoring systems prevent the full and effective implementation of offset and ToT programs. It can also create a vacuum of responsibility, where each party – the OEM, the end-users and the program receiver – blames the other for failures. 

Moreover, the lack of effective monitoring system can also increase the possibility of bribery and corruption. Transparency International Indonesia revealed that the current Indonesian offset policies rarely included anticorruption clauses and that no audit was conducted.

Random offset arrangements can be considered a “bonus” for parties involved in the procurement process. In this perspective, it is essential to setup a strong and effective monitoring mechanism to assess the implementation process and ensure the accountability of offset program stakeholders.

As offset and ToT programs will play an important role in the TNI’s long-term modernization plan, they should also support Indonesia’s DTIB to improve its capacities and capabilities. It is worth noting that according to a recent report from Jane’s, offset market values in Indonesia could reach $18.1 billion by 2030.

In this perspective, defense industry stakeholders should ensure that such value truly benefits the development of Indonesia’s domestic defense industry.

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Anastasia Febiola Sumarouw is a research analyst on defense matters at Semar Sentinel PTE Ltd. Cynthia Sipahutar is a marketing analyst for aircraft services at state-owned Dirgantara Indonesia. The views expressed are personal.