At this occasion, Prabowo highlighted President Joko “Jokowi” Widodo’s statement to push collaboration in technology transfer programs and defense equipment procurement as Indonesia is expected to spend a total of US$12 billion for fighter jets, submarines, missiles, radars and other equipment from France.

Increasing defense industry capacity through the transfer of technology is indeed one of the aspects of the defense cooperation agreement (DCA) signed between the two countries back in 2021. Securing such cooperation would not only increase Indonesia’s strategic ties with other countries amid the evolving security challenges, but could also help the national defense industry develop.  

According to the Foreign Ministry’s Law and International Agreements Directorate General, a total of 79 DCAs were signed by Indonesia between 1953 and 2022. Just in the past decade, Indonesia signed such agreements with France, Spain, South Korea and Saudi Arabia, to name a few. Furthermore, Australia renewed its DCA with Indonesia in 2021, and Slovakia is expected to ink it this year.

Negotiation at the government-to-government (G2G) level is critical to pave the way for defense cooperation at the business-to-business (B2B) level. Partnerships with France and Spain are the most recent examples that have led to B2B cooperation.

First, the frequent meetings after the signature of DCA with France have provided a platform to push for B2B cooperation between Indonesian defense firms and foreign original equipment manufacturers (OEMs). For example, during the 2+2 dialogue, Retno encouraged both countries, particularly Indonesian state-owned enterprise PT Len Industri and French company Thales, to set up a joint venture and joint production in the hope that the Indonesian defense SOE could enter the global supply chain.

In the case of Spain, the DCA signed by both countries has led to the partnership between PT Dahana and Sa Electronica Submarina (SAES) to jointly develop and produce naval mines.

On the other hand, cooperation could also start from the industrial level using a bottom-up approach, since the public and private sectors also play important roles in maximizing the benefits of an arms procurement deal that could develop the domestic defense industry. For example, eight out of 18 Harimau/Kaplan medium tanks (MT) worth US$153 million will be produced in Indonesia thanks to the cooperation and joint development between state arms maker PT Pindad and Turkish manufacturer FNSS Defense System.

Another example is the joint production contract signed by Len Industri and Thales for 13 Ground Controlled Interception (GCI) radars that are expected to be delivered by 2026.

Eventually, the implementation of defense cooperation at the B2B level could further generate more benefits for the national industry. In fact, defense cooperation at the B2B level between Indonesian firms and foreign OEMs is regulated under Defense Industry Law No. 16/2012 in which the latter should offer economic benefits to Indonesia through obligations of countertrade, local content and offset (CTLCO).

In detail, the law requires that local content and offset must be at least 45 percent of a contract value. If countertrade is included, the value should be at least 85 percent of the procurement contract value. To note, the value should increase by 10 percent every five years.

 

In addition, to meet the Indonesian Military (TNI) modernization plan, the government does not only look for the best supplier and weapons systems. Preparations have also begun to ensure that the domestic defense industry could fully absorb the Transfer of Technology (ToT) from procurement deals.

For instance, the government has allocated Rp1.28 trillion ($83.3 million) worth of state equity participation (PMN) to state shipbuilder PT PAL Indonesia. The Surabaya-based SOE stands a chance to increase its ToT if the government signs the procurement plan for two Scorpene-class submarines. The procurement deal would not only fulfill the operational needs of the Indonesian Navy, but also increase the production capacities and capabilities of PAL Indonesia.

The challenge of maximizing the benefits of defense cooperation would be to ensure that it would reach the B2B level. In this case, the role of DEFEND ID, the state defense industry holding, is critical to ensure that procurement deals do not only generate economic benefits, but also advantages for public and private defense companies.

Indeed, the holding is the lead actor in developing strategies to strengthen the defense industry ecosystem, which consists of 10 public and 204 private defense companies so far. In parallel, active diplomacy is needed to look for the right strategic partner that could contribute to the Indonesian defense industry target to master 10 key technologies.

The question is whether the government will ratify and implement the existing agreements before their momentum runs out. The next few months will be a critical period for two reasons.

First, the TNI modernization program will soon end and it is expected to reach only 70 percent of the target by 2024. Second, policies related to the national defense industry might be affected as key decisionmakers shift their focus to the 2024 elections, including Prabowo who is contesting the presidential race.   

Nevertheless, the current defense diplomacy trend seems to have strengthened Indonesia's strategic ties with prominent foreign partners and brought potential arms procurement deals that could benefit the domestic defense industry. Indonesia has been intensifying partnerships with countries that have advanced technology and flexible arms export policies, such as France and Turkey.

The existing DCAs or other similar agreements are also a good starting point to establish the basis of a beneficial and long-term defense partnership. Moreover, a DCA could also be a window of opportunity to secure deals at the B2B level, which would support the national technological and industrial base.

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The writer is a lead analyst at PT Semar Sentinel Indonesia. The views expressed are her own.