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Clouds of Funding for Defense Equipment Expenditures in 2022
OPINION - Alman Helvas Ali, CNBC Indonesia
06 September 2021 06:10
Clouds are likely to engulf the Indonesian government's ability to finance the activities of the Ministry of Defense (Kemenhan) in the 2022 fiscal year. After the government submitted a defense budget allocation in the 2022 RAPBN to the Indonesian House of Representatives worth Rp 133.9 trillion, it is now revealed the government's fiscal capacity to finance activities in the 2022 RAPBN for the Ministry of Defense is also quite limited. To quote a term often used by senior officials of the Ministry of Finance (MoF), the government's fiscal space is currently narrow. Although the exact allocation of the defense budget still has to wait for the results of the executive and legislative discussions, the possibility of a reduction in the defense budget allocation is a necessity because the current government's fiscal space is in fact narrow.
One of the activities that will be affected by the very narrow fiscal space is capital expenditure, including the expenditure on defense equipment in it. The expenditure on defense equipment in the APBN can be sourced from pure rupiah, domestic loans (PDN) and foreign loans (PLN). Regarding PLN, the Minister of Finance Sri Mulyani Indrawati at the end of April 2021 had issued a Financing Source Determination (PSP) worth US$ 5.8 billion which is valid until 30 April 2022. The PSP allocation includes 31 activities approved by Sri Mulyani and will be financed by Foreign Private Creditors and Export Credit Guarantee Institutions referring to Government Regulation Number 10 of 2011 concerning Procedures for Procurement of Foreign Loans and Grant Receipt.
In accordance with Government Regulation Number 50 of 2018 concerning Amendments to Government Regulation Number 45 of 2013 concerning Procedures for Implementation of the State Revenue and Expenditure Budget, the government must provide Companion Pure Rupiah (RMP) to assist foreign loans or grants. The amount of RMP is an average of 15% of the total value of activities, while the remaining 85% is borne by the lender. The RMP must be prepared by the government in the APBN so that an activity can be executed after the contract is signed. The issue of RMP is now one of the challenges in realizing the Ministry of Defense's ambition to spend on weapons in accordance with the PSP allocation.
With a PSP allocation of US$ 5.8 billion, the RMP requirement for the Ministry of Defense in the 2022 budget year is US$ 870 million or around Rp 12 trillion. However, according to information from a senior official in the government who is familiar with budget matters, the Ministry of Finance is only able to provide Rp 3 trillion as an RMP for weapons spending next year. In other words, the government's fiscal capacity in the 2022 fiscal year is only a quarter of the RMP's real needs. So that of the 31 activities that received the PSP, most of them would not be executed into effective contracts due to the narrow fiscal capacity to provide RMP.
Since some time ago the Ministry of Defense had a discourse to allow PLN without RMP or all financing was borne by lenders in purchasing defense equipment. However, the discourse did not get the Ministry of Finance's approval to be implemented because it contradicted the applicable rules, namely Government Regulation Number 50 of 2018 concerning Amendments to Government Regulation Number 45 of 2013 concerning Procedures for the Implementation of the State Revenue and Expenditure Budget. The RMP must still be available to PLN, but the percentage of the RMP from the total activity value will depend on the agreement between the Ministry of Finance and the lenders. It may be that the amount of the RMP percentage is less than 15% if the lender approves it.
Of the 31 activities that received the PSP, until now only one activity has a contract signed, namely the acquisition of a Lead-In Fighter Training (LIFT) aircraft worth US$ 240 million. Meanwhile, other activities are still in the tender stage or exploratory discussions with potential suppliers. There is still a fiscal space of around IDR 2.5 trillion for the RMP which the remaining 30 activities must fight for. Faced with such conditions, the Ministry of Defense needs to re-screen these 30 activities so that only very priority activities will receive RMP according to the government's fiscal capacity.
Next is whether the Ministry of Finance still has the fiscal space to issue the PSP in 2022? This question is very relevant because the Ministry of Defense has signed a contract for the acquisition of 36 Rafale fighter aircraft, six FREMM frigates and two Maestrale frigates with a total value estimated at around US$ 12 billion. Is there still fiscal space to finance the two large expenditures amid the government's efforts to return to a budget deficit of 3% of GDP in the 2023 fiscal year? As previously mentioned, the Ministry of Finance has closed the door on the possibility of financing PLN without RMP as the Ministry of Defense wishes.
Until now, the planned acquisition of weapons made in France and Italy has not been included in the List of Foreign Loan Priority Plans (DRPPLN) published by the Ministry of National Development Planning/Bappenas. Listed in the DRPPLN is the entrance to get a PSP. Because a contract without getting a PSP is useless. If the Ministry of Finance issues the PSP in 2022 to support the two programs, then what about the fiscal capacity for the provision of RMP in the 2023 fiscal year?
Awan Mendung Pembiayaan Belanja Alutsista Tahun 2022
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