theaviationist.com
Master of Strategic Studies (Advanced)
student at Australian National University
Canberra | Wed, September 27, 2017 | 02:19 pm
In August, Indonesia announced that
state-owned trading company PT Perusahaan Perdagangan Indonesia and Russia’s
state-owned defence holding company Rostechad signed a memorandum of
understanding, on a countertrade deal for the procurement of 11 Russian Sukhoi
SU-35 Flanker E combat aircraft. While the precise details are yet to be
finalized, Trade Minister Enggartiasto Lukita has stated that
Indonesia is offering to trade rubber, coffee, palm oil, tea, and other strategic
products in exchange for the SU-35 jet fighters.
The countertrade deal is surely convenient as it allows
Indonesia to reach the requirements of the second phase of its modernization
doctrine, the minimum essential force (MEF), amidst the limited state budget.
Still, the deal will face some challenges in its implementation.
Indonesia has a long history of countertrade arrangements
for the procurement of defense platforms from Russia, including the 2003
acquisition of Russian SU-27SK and the SU-30MK combat aircraft.The 2003 deal
involved a hard currency down-payment of 13.5 percent of US$192 million
contract, with the remaining settled through the countertrade of commodities.
This deal represents the first major defense acquisition
project for President Joko “Jokowi” Widodo’s government that falls within the
parameters of the 2012
defense law. The law allows the engagement of foreign defense contractors
for acquisition unable to be achieved domestically through countertrade, local content,
and or technology transfer offset arrangements.
According to
Defense Minister Ryamizard Ryacudu, the countertrade deal will involve a local
content and offset arrangement of 35 percent, and a countertrade arrangement of
Indonesian exports equals 50 percent of the total US$1.14 billion contract.
Indonesia is struggling to
achieve the requirements set out in the second phase (2015-2019) of its MEF
modernization doctrine due to a limited budget. The second phase of MEF
includes several big-ticket items such as submarines, new and existing upgrades
of fighter aircraft, as well as advanced missile and radar systems.
Indonesia’s revised defense
budget for 2017 is Rp 109.3 trillion, a 1.2 percent increase of the approved
budget, and a 4.6 percent increase overall from the original draft defense
budget. However, this funding has already been allocated to finance satellite
lease payments and to support Indonesia’s deployment as part of the United
Nations peacekeeping operation in the Central African Republic.
It’s estimated that
Indonesia requires Rp 150 trillion to achieve the requirements in the second
phase of the MEF. There is a defense
economic gap between tangible funding in the state budget and what is actually
required for MEF.
Countertrade deals make sense given Indonesia’s fiscal
constraints. It will allow acquisition of expensive defense platforms without
paying the total price in hard currency. Indonesia’s economy will also benefit,
as state funds budgeted for defense acquisition will now be used to purchase
commodities from domestic suppliers.
Indonesia has also revealed that
the countertrade deal will involve the establishment of maintenance, repair,
and overhaul facilities (MRO) as part of the offset arrangements. This will
reduce whole-of-life sustainment costs significantly. Currently, Indonesia
must send its
Sukhoi fighters to Russia, practically dependent on Russia for maintenance.
Initial details indicate
this offset arrangement will include the maintenance capability for radar
targeting, synthetic and enhanced display, integrated logistics management, and
facilities to maintain and repair the AL-417-1S and AL-31F engines. This will
enable Indonesia to maintain the new SU-35s and its legacy fleet of Sukhoi jet
fighters. An MRO facility in Indonesia has the potential to become a regional
maintenance hub, providing MRO services to Malaysia’s and Vietnam’s Sukhoi
fleets.
Nevertheless, there are still important domestic
challenges in implementing this countertrade arrangement. The main challenge
will be centered around the procurement of requested commodities. The 2003 deal
under former president Megawati Soekarnoputri involved a multi-phase tender process
through the State Logistics Agency (Bulog), which awarded tenders based on the
cheapest price. However, the current deal is worth substantially more, and the
market price of crude palm oil and rubber – the most likely requested
commodities – has also increased. This will make it a more contested process
prone to corruption.
This risk is amplified by the political and military
links to many of the palm oil and rubber conglomerates in Indonesia. These
lucrative businesses are known to operate under an organized patronage
political network, which involves well connected politicians and
former military officers being appointed to director and advisor positions. The
military and major political figures at the national and regional level are
also known to hold substantial shares in some of these companies.
Furthermore, it is estimated that
more than two-thirds of the total production of Indonesia’s palm oil is
controlled by Malaysian and Singaporean companies through subsidiaries in
Indonesia.
A political scandal involving this countertrade deal such
as a corruption involving Indonesia’s palm oil conglomerates with links to the
military or serving politicians, or the involvement of foreign-linked companies
in the countertrade deal at the expense of Indonesia’s smaller farmers, could
make effective political ammunition come campaign time in 2019.
The Jokowi government will have to implement this
countertrade deal much more carefully than the former Megawati government. The
2003 countertrade deal became heavily politicized leading to
a parliamentary inquiry referred to as the “Sukhoi-gate” affair. President
Jokowi will want to avoid such a scenario by demonstrating the successful
implementation of the first major defense acquisition project under his
government.
If implemented correctly, however, Indonesia may find one
answer to its underfunded military modernization plans and domestic defense
industry ambitions. But if implemented poorly, the SU-35s may not be worth
their weight in commodities, but in political capital for Jokowi’s opposition
come 2019.
***
The writer is a Master of Strategic Studies
(Advanced) student at the Australian National University’s Strategic and
Defence Studies Centre. He was the 2017 Robert O’Neill scholar at the
International Institute for Strategic Studies (IISS-Asia) based in Singapore.
Original post: thejakartapost.com
"According to Defense Minister Ryamizard Ryacudu, the countertrade deal will involve a local content and offset arrangement of 35 percent, and a countertrade arrangement of Indonesian exports equals 50 percent of the total US$1.14 billion contract."
"Initial details indicate this offset arrangement will include the maintenance capability for radar targeting, synthetic and enhanced display, integrated logistics management, and facilities to maintain and repair the AL-417-1S and AL-31F engines. This will enable Indonesia to maintain the new SU-35s and its legacy fleet of Sukhoi jet fighters. An MRO facility in Indonesia has the potential to become a regional maintenance hub, providing MRO services to Malaysia’s and Vietnam’s Sukhoi fleets."
"Initial details indicate this offset arrangement will include the maintenance capability for radar targeting, synthetic and enhanced display, integrated logistics management, and facilities to maintain and repair the AL-417-1S and AL-31F engines. This will enable Indonesia to maintain the new SU-35s and its legacy fleet of Sukhoi jet fighters. An MRO facility in Indonesia has the potential to become a regional maintenance hub, providing MRO services to Malaysia’s and Vietnam’s Sukhoi fleets."
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