Contribution of offset to defence industrialisation in Indonesia

Abstract

Offset is compensation given to a buyer country for an arms sale. Initially perceived as ‘necessary evil’ in an imperfect defence market, it now serves dual purposes: a marketing strategy for defence industry and a procurement policy for buyer country to generate add on benefits from arms import. Offsets proliferate, and so are stricter mandatory government policies. Still evaluation of offset has been difficult, mostly done in a country-based setting using anecdotal evidence that result in mixed findings. Following the issuance of mandatory offset policy in Indonesia through Law on Defence Industry in 2012, evaluation of past and current offset practice have become not only relevant but also critical to provide policy feedback. This dissertation provides an empirical examination on how offset has been understood and practised in Indonesia, and its contribution to defence industrialisation. The timeframe chosen is 1988-2014, when countertrade has been used to support the lifecycle of strategic industries: development (1988-1998), survival (1999-2009), and revitalisation (2010-2014). This study derives its validity and reliability from triangulation, comprising secondary data, survey, and case study. Three variables are analysed: technology development through ‘strategic industries’, defence offset, and defence industrialisation. Technology development focuses on how technology policy centred on a strategic industries paradigm and ladder of production to initiate industrialisation push. Defence offset discusses the conceptual and practical aspects of offset in Indonesia, including strategic objectives, regulation and institution frameworksin the defence procurement context, and offset life cycle and financing. Defence industrialisation discusses the impact of offset through employment, skill enhancement, transfer of technology, export promotion, domestic supply chain creation, and R&D. Field works were conducted in three firms representing different industrial sectors: PT DI (aerospace), PT Pal (shipbuilding), and PT Pindad (landsystem). Research findings indicate that, first, offset practice has mostly taken place on an ad hoc basis, with no clear reference to strategic objectives, as well as long-term management and financing- that mirror deficiencies in defence procurement. Second, as result of the deficiencies, offset results have been varied from one firm to another, across the different industrial sectors of aerospace, maritime, as well as ammunition and land system. While offset has a positive impact on skill enhancement and technology transfer, it seldom translates into new employment, supply chain creation, export, or R&D. This study generates the following recommendations. First, Indonesia needs to strengthen the management of offset through pre-offset planning and preparing practical guidelines for offset stakeholders in parallel with human resources to support the programme. This means identification of offset potential in procurement (convergence of long term technology policy and long term defence procurement plan), estimation of offset premium cost, allowing participation of industry in the early stage of the offset cycle, as well as devising methods of evaluating offset. Second, Indonesia needs to formulate strategic objectives for offset that relate closely to the dual purposes of defence modernisation and industry revitalisation. Third, Indonesia must strengthen the technology absorptive capability in industry in order to sustain the benefit of offset.