BUSINESS: Abri and Business 1
Far Eastern Economic Review
Feb 5, 1998

Merchants in Uniform:
 Indonesia's generals may make good business partners
  * By Salil Tripathi in Jakarta
    1499 Words
02/05/98
p17    

The sounds of crashing Asian economies can be heard deep in the
forests of Kalimantan, at the sawmills of the International Timber Corp.
Cash-strapped South Korean buyers of processed logs have been cancelling
orders, leaving this 450,000-hectare concession with mounting
inventories and shrinking profits. ITC President-Director Abbas Adhar
has already had to postpone plans to build a $600 million pu and paper
unit. And the shareholders, he says, will have to be satisfied with
smaller dividends.
   The chairman of Admiral Lines has a similar message for his
shareholders. Once a leading Indonesian shipping company, Admiral is a
victim of the 1994 deregulation of the industry. New players have since
sailed into Indonesian waters; with only 11 ships, Admiral is too small
to compete effectively. "Freight rates are down," laments Sunardi, "and
there is a global oversupply of ships. We'd like to get more ships and
become bigger, but this is a bad time to plan that. We won't have enough
cargo to pay for the mortgage."
 Stories of hardship are commonplace in corporate Indonesia these
days, but there's a special twist in the tales of ITC and Admiral: Their
principal shareholders are foundations controlled by Angkatan Bersenjata
Republik Indonesia, or Abri, the official name of the country's armed
forces. In addition to processing logs and ferrying cargo, these firms
-- and dozens like them -- he maintain Indonesia's 500,000-strong
military.
   "We are here to service the army," says Adhar. "We make profits to
meet the nonbudgetary expenses of Abri." In 1996, ITC paid Abri $30
million in dividends; this year, the military will be lucky to get $19
million, Adhar says. By his reckoning, companies like ITC provide over
60% of the army's nonbudgetary finances. (Abri has never disclosed how
much money it raises from commercial ventures. Abri chief Gen. Wiranto
didn't respond to the REVIEW's questions on the subject.)
   Abri has played an active role in the Indonesian economy since the
country's independence from the Dutch in 1949. The principle of
dwifungsi -- the dual political and military function that's enshrined
in the constitution -- allows the armed forces to pursue matters
mercantile as well as military. Abri justifies its businesses by
pointing out that Indonesia's budget has traditionally been less than
generous in allocations for defence spending. According to a 1995
Defence Ministry white paper, Indonesia's per-capita defence expenditure
is a mere $10, puny when compared to neighbours Thailand ($40), Malaysia
($99) and Singapore ($511).
   "We had to run businesses to meet routine needs like the upkeep of
barracks," says a retired general who commanded forces in eastern
Indonesia. Successful companies like ITC and Admiral Lines are pivotal
to Abri's financial strategy.
   Such business may also prove pivotal to the strategy of investors
looking for a long-term stake in Indonesia. With questions swirling over
the political future of President Suharto, his children are starting to
lose their lustre as business partners in the eyes of foreign investors.
The military, on the other hand, has long been seen as Indonesia's most
stable, cohesive institution. Its role is almost certain to increase
during any political transition -- and with it the role of its business
empire.
   "It is a good idea to take the military as your partner because it is
an institutional arrangement; therefore there is continuity," says the
head of a regional venture-capital firm active in Indonesia. "Today's
influence-pedlars will be gone five years from now, but Abri will always
be around." The venture capitalist isn't the only one to think so. A
number of foreign firms have hooked up with Abri-controlled companies,
including American firms Caterpillar Corp., a maker of earth-moving
equipment; Cigna Corp., a giant insurer; and the Westin hotel chain.
   To be sure, doing business with the armed forces is not free from
uncertainty. For one thing, many Indonesians -- some of them powerful
government figures -- want to curtail Abri's role in civilian affairs,
including commerce. Indeed, many senior officers are themselves opposed
to Abri's business forays.
   Besides, recent years have exposed some fundamental weaknesses in
Abri's business strategy. For instance, many military-backed companies
have gone into decline because they have had to pay out hefty dividends
to their Abri shareholders when they should have been ploughing profits
back into their businesses. Admiral Lines, for instance, should have
been buying new ships instead of passing profits on to the navy.
   Abri is also widely perceived as unsympathetic towards labour; the
army and the police have routinely put down fledgling union movements
and jailed labour leaders. Some Abri officers were charged with the 1993
murder of labour activist Marsinah -- a case that's still winding its
way through the courts. The police -- an arm of Abri -- still enforce a
ban on the performance of a play about Marsinah's struggle.
   For prospective foreign partners, there may be one other area of
concern: No relationship with Abri can be about equals. Says Bilveer
Singh, an Abri expert at the National University of Singapore: "The
playing field can't be level. One side has the gun."
   Still, many of those who have business ties with Abri say such
relationships can be quite stress-free. Abri is for the most part happy
to take a back seat in the management of its joint ventures, leaving
that to its business partners.
   And, whatever its failings, no other Indonesian institution can match
Abri's promise of continuity -- an attribute that makes it all the more
attractive as a business partner now that doomsday scenarios are being
aired about the post-Suharto political arena. Says one retired general:
"Abri is the strongest social force in the country, and any change in
Indonesia will only happen with its support."
   In a sense, the economic downturn has reversed Abri's failing
fortunes. In recent years, its business clout had been superseded by
that of the Suharto children, who had become the business partners of
choice for foreign investors. But with their father pressed by the
International Monetary Fund to withdraw all special privileges to his
family, the Suharto offspring may now face an uncertain future. While
there may also be questions about the future of Abri's business
operations, their survival is not in doubt.
   Coping with Indonesia's economic downturn will put Abri's business
mettle to its toughest test. The defence budget is likely to shrink,
making it imperative for the armed forces to find money from
nonbudgetary sources. But profits at Abri-controlled companies like ITC
and Admiral Lines are shrinking, too. "Abri is being squeezed from both
sides," says the research head of a Jakarta-based foreign brokerage.
   There are also other pressures. The IMF's demand for greater
corporate transparency applies to Abri-controlled firms as well. The
generals will inevitably be asked to open up their business empire to
scrutiny. At the moment, Abri's commercial interests are distributed
widely among a bewildering network of national and state-level
cooperative societies and foundations. In turn, many of their
investments are virtually unknown outside military circles. In addition,
some retired officers have their own businesses, and private companies
form alliances with any combination of these at any given time, creating
scenarios befitting the finest traditions of wayang kulit, Indonesian
shadow puppetry.
   The process of changing all this has already begun. Military
historian Salim Said says Abri now wants to streamline its commercial
operations, bringing them under some sort of central authority. But few
details of these plans are known.
   Abri will also need to clean up its ranks -- some officers are
believed to be involved in unsavoury businesses. In 1996, a Jakarta Post
editorial noted that "there are indications that some Abri members are
involved in lucrative protection rackets in Jakarta's night spots. Some
of the rackets have been tolerated in the past, which explains why
gambling dens and unlicensed brothels continue to flourish despite macho
police rhetoric."
   Some important changes in personnel have been made in recent years.
Recognizing the need for better managers in its ranks to run the more
complex businesses, Abri has been sending senior officers to business
schools abroad. It now has over 100 officers with MBAs, and at least
1,000 with assorted masters' degrees.
   Juwono Sudarsono, the deputy governor at Lemhanas, the defence
think-tank in Jakarta, suggested last year that senior military officers
with dim prospects for promotion should switch track to business. "Many
have better managerial skills than civilian managers," he said in a
speech to Indonesia's Defence Staff College.
   Senior officers say the switch should be easy. Admiral Lines' Sunardi
-- who's also an admiral in the Indonesian navy -- thinks the transition
from officer to executive is perfectly natural. "Business is war," he
says. "Soros, GM, Intel and Microsoft are successful because they
protect their business intelligence the same way we preserve our
military intelligence. What business does with strategic information in
the marketplace is no different from what the military does with it on
the battlefield. The weapons are different but the tactics are the
same."