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The current state of Indonesia’s defense industry is still characterized by the dominance of state-owned enterprises such as PT Pindad (Persero), PT PAL (Persero), PT Dirgantara Indonesia (Persero), PT Dahana (Persero), and PT Len (Persero). These players, in particular the former two firms, are major producers of several ready-to-use main weaponry systems (hereinafter shall be referred to as “alutsista”) for national defense and security needs. However, something has been lacking in the industry since 70% of raw materials are imported and the local manufacturers, specifically in upstream sector, are still unable to provide the required raw materials in order to meet the needs of industry. Factors such as economies of scale, and /or the absence of technology and specific ingredients for production are major reasons why the current national defense system only used up less than 50% of its locally produced alutsista.

The government may, in coming years, shifts the purchases of alutsista toward domestically produced goods and reduce import dependability by making certain initiatives. On November 5, 2019, Ministry of Finance has issued regulation Number 164 of Year 2019 (hereinafter shall be referred to as “PMK 164/PMK.04/2019”) regarding exemption of import duties on imports of weaponry, ammunition, military and police equipments including spare parts and other goods and production materials intended for defense and security purposes. The initiative is a part of continuous progress in the government effort to further develop the national defense industry. It is worth noting that Ministry of Defense received the highest amount of 2020 state budget amounting to IDR 127.4 trillion, following the recently approved state budget with a total figure of IDR 2.528,8 trillion. Ministry of Defense is also in an on-going negotiation process with Ministry of Finance regarding additional budget proposal for purchases of alutsista. The existing proposal for 2020 is currently under-review by the Ministry of Defense in order to come up subsequently with a list of more modern, improved, as well as solid alutsista prior to submitting the fresh proposal. Under PMK 164/PMK.04/2019, the primary intention of the government is to strengthen, the tools and equipments required for the implementation of functions and responsibilities of Cyber Body and National Encryption Agency (hereinafter shall be referred to as “BSSN”). The changes in this import regulation could see Ministry of Defense gaining easier access to import alutsista in order to facilitate BSSN in providing better protection and management within the national cyber-security environment.

The opportunity may present itself in the form of more private sector involvement in this process of absorbing the budget in meeting the needs of alutsista for all defense-related authorities. Based on the latest data from Ministry of Defense, there are 102 privately owned enterprises in the defense sector, of which 54 companies are reportedly active. Due to its capital-intensive nature of Defense industry, the significant number of local companies engaged in this field of business comprise of small to medium-scale enterprises. Along with the updated regulation, the government may also establish strategic partnership with other countries and/or invite and recommend firms to form a consortium to combine for more solid capital and skilled human resources. An ecosystem that is friendly to private companies should also be encouraged, albeit with law enforcement for breaching any code of conduct or regulation in protecting national security interest. This will in turn incentivize privately owned companies and potentially spur more investments in all defense-related industries which ranging from main weaponry, primary and supporting components, to raw materials and other supporting industry.

PMK 164/PMK.04/2019 allows relatively simple importation requirements, needing only two documents as well as signature of internal staffs as appointed by Ministry of Defense with the minimum level of echelon II. Moreover, Ministry of Defense is no longer required to submit import letter to the Directorate General of Customs and Excise (hereinafter shall be referred to as “Direktorat Jenderal Bea dan Cukai”). The regulation also added extra authority to Direktorat Jenderal Bea Cukai to be able to carry out the delegation of authority from the Ministry of Finance for approval and issuance of the aforementioned imports. However, certain limits to its new authority are applied.