what is the fuss all about MilInc by A.Siddiqui....
JANE'S DEFENCE WEEKLY - FEBRUARY 14, 2001
FORCES in BUSINESS
TIMOTHY HU JDW Special Correspondent - Jakarta
Making ends meet with dwindling defence budgets is one of the most difficult challenges military establishments across the world have had to struggle with in the post-Cold War era. For a growing number of armed forces, however, mostly in the developing and post-Communist world, their governments have been unable to provide adequate financial support and they have had to find their own means of raising money. Timothy Hu reports
Going into business has been a highly lucrative way of filling empty coffers and soldiers from Asia to Central and Latin America have become accomplished entrepreneurs. Armies in China, Ecuador, Honduras, Indonesia, Pakistan, Peru and Vietnam have established major commercial operations in a diverse range of industries that provide a major and recurrent source of income. They have been joined in the past few years by cash-strapped counterparts from the former Soviet Union, particularly Russia and Ukraine.
Military commercialism covers activities that are primarily oriented to making profits as well as self-supporting economic operations that many armies engage in such as farming and limited industrial production to meet logistical needs. Typical military business ventures include trading, financial services and the supply of telecommunications and transportation services.
Many of these money-making armed forces, however, have sought to downplay the extent of their commercial operations. This is due to a widespread unease in both civilian and military circles that soldiers should not be involved in business as this could cripple their ability to perform their military duties and lead to an expansion of their influence in domestic affairs.
This lack of transparency has hidden the growth of the military business complex, which today is a multi-billion-dollar undertaking. Military-owned corporations have quietly become major powerhouses in many economies. An international conference on Soldiers In Business, held in Jakarta in October last year by the Bonn International Centre for Conversion, found that enterprises belonging to armed forces in China, Central and Latin America, Indonesia, Nigeria, Pakistan and elsewhere have joined the ranks of their countries' leading corporate titans.
Despite diverse local conditions, the reasons why and how these armies have become involved in commerce are strikingly familiar. Armies generally have plunged into business because their governments cannot afford to meet their immediate and longer-term financial needs and they have had to rely on themselves to make up for these budgetary shortfalls.
For most armies, the bulk of their earnings appear to go to supporting welfare and personnel costs and only a small proportion is used to directly fund military operations or arms procurement. Some armies depend heavily on commercial earnings to supplement meagre official funds and without this extra-budgetary income they would virtually cease to be operational. Indonesian military officials say they rely on commercial earnings to cover as much as 75% of their financial needs.
The original rationale for many armies to become involved in business was to support the welfare of serving and retired military personnel and their dependants. A large proportion of military commercial operations in Honduras, Indonesia and Pakistan are ostensibly operated by military-owned pension funds, although the armed forces in these and other countries have subsequently moved in to take over direct control of lucrative lines of business.
Armies that have developed thriving commercial interests, such as those in Ecuador, Thailand, Turkey and Vietnam, have depended on the support of powerfully political parent military establishments that are able to assist them in gaining privileges and protecting them from outside civilian efforts to curb their activities. Civilian authorities are often reluctant or unable to interfere because they lack the political clout or do not want to risk a military backlash.
Professional standards in entrepreneurial armies tend to be low because budgets are insufficient to provide for adequate levels of training, attracting and retaining high-quality personnel and supporting the acquisition of weapons. They also often have large numbers of surplus uniformed manpower that are not needed to support military preparedness and these soldiers can be used for economic activities. The Chinese People's Liberation Army (PLA) employs hundreds of thousands of under-utilised troops to build roads or lay telecommunications networks.
In a few cases, however, well trained and professional armed forces are involved in business for political or other reasons, such as to support the welfare of retired personnel and family dependants or to control sensitive industries for national security considerations.
The Turkish Armed Forces have extensive holdings in the country's defence manufacturing, automotive, cement, food and chemical industries.
Many armies have turned to commerce as external threats to their country's security have subsided and they have been able to become more relaxed in their defence preparedness.
The Vietnamese military started to focus on making money at the end of the 1980s as external security threats dwindled and it pulled out of a costly occupation of neighbouring Cambodia. The military in Pakistan, by contrast, has had to balance its commercial interests with the constant threat of war with India and has done so by appointing retired military personnel to run its enterprises.
Many armies involved in business have traditionally supported themselves through sideline agricultural and industrial activities. The PLA has been involved in subsistence agricultural and light industrial manufacturing operations ever since its establishment in the late 1920s and it has regarded economic self-sufficiency as a core pillar of its institutional culture. This made the switch from agricultural self-support to market capitalism an easy transition for Chinese military chiefs.
Although the nature and extent of military commercial practices vary widely, a number of common features are apparent in how armed forces make money and how they are impacted by commercialism.
One of the most obvious consequences of military commercialism is corruption and other economic-related vices, which have become rife in many armies. In Russia, selling military assets such as property, arms and transport equipment is rampant. The Chinese government ordered its soldiers out of business in 1998 following the uncovering of pervasive smuggling by military units.
While individuals and occasionally military units have been responsible for much of this crime, some armies have also been found to be systemically involved in illegal activities, such as logging drug trafficking. The Cambodian Army has been reported to be illegally smuggling timber abroad without handing the proceeds to the government.
Many entrepreneurial armies are able to operate with wide-ranging autonomy as they are not usually subject to the scrutiny of civilian law-enforcement authorities. Military authorities are responsible for checking the activities of their enterprises, including the auditing of their books, and this task is normally given to the logistics apparatus. Logistics chiefs, however, often lack the expertise or resources to do this effectively and this has allowed military units and personnel independence in their money-making operations with minimal supervision.
Military-owned enterprises also depend heavily on the exploitation of military resources, privileges and manpower for profit. This is why armies are often involved in the same industries, such as telecommunications, broadcasting, transportation and construction, where they are able to make use of valuable military assets, such as equipment, funds and control of radio bandwidths, often without cost.
In the past few years, the Russian military has sought to exploit its substantial logistics base for profit. Support facilities such as repair outfits, construction units, healthcare facilities and research and development institutes have rushed to offer their services for sale. The Russian Defence Ministry has also been actively offering its vast and increasingly rundown arsenal for sale through affiliated arms export companies such as Promexport. The export of surplus military hardware is estimated to have accounted for around 38% of total annual extra-budgetary revenue earned by the Russian military at the end of the 1990s. Promexport, for example, had an income of $156 million in 1999.
The Chinese military has also been a major arms trader, earning huge sums for the export of surplus tanks, fighter aircraft and even ballistic missiles. The PLA's most lucrative deal was in 1987 when it sold CSS-2 Intermediate-Range Ballistic Missiles to Saudi Arabia, earning more than an estimated $2 billion. These exports have dropped substantially in the past few years and PLA arms trading outfits such as Poly Technologies have become more involved in importing arms.
Military units have also been keen to get involved in lucrative industries such as banking, real-estate development, broadcasting and import-export trade. A proliferation of armies, including those in Guatemala, Honduras, Pakistan and Thailand operate their own banks, which often lend to military-backed enterprises. The Honduran military's primary commercial vehicle also has stakes in financial outfits that provide insurance, credit card and stock market trading.
Another feature of military businesses is that armies are often the dominant entrepreneurs among the different service branches and they are involved in an extensive range of operations. Air forces and navies tend to have much smaller and more specialised commercial interests, such as the running of airlines or shipping companies. The Chinese, Pakistani and Peruvian air forces each operate their own airlines and their navies own commercial transport fleets using naval vessels.
By contrast, armies in the developed world have been less entrepreneurial. This is primarily because they are politically acquiescent, receive adequate levels of funding, are highly professional and do not have any traditions of commercial entrepreneurship. Nonetheless, in the aftermath of the Cold War, some of these armies have found themselves being pushed by their governments to become more commercially minded and more cost-effective.
In the UK and the USA, military-owned units belonging to the logistics and support bases have become increasingly profit-oriented since the early 1990s in order to justify their continued existence in an era of force restructuring and downsizing.
The US Army Corps of Engineers, which belongs to the US Department of Defense, is a sprawling public works bureaucracy that has built more than $100 billion of locks, dams and other waterworks projects. It has aggressively expanded its involvement in the civilian economy and this is its main source of financial income.
Other parts of the US military have also been outsourcing a growing proportion of their non-core military support functions to the commercial sector, including housing, information technology services and financial management.
In Africa, a different form of military commerce has developed with the rise of private armies. Governments such as the Democratic Republic of Congo and Liberia use private armies, often made up foreign mercenaries, to fight on their behalf in internal civil wars because they cannot afford or are unable to maintain their own military establishments.
Although the privatisation of military operations differs significantly from military commercialism, these trends show that the traditional separation between military and economic power has been steadily eroded in the post-Cold War era and that they have become closely intertwined in an era in which market forces are dominant.
As the ranks of armed forces engaging in business continue to expand, the lessons of the Chinese military's withdrawal may indicate that there are limits to this commercialism. As the pioneer of the entrepreneurial army, the PLA eventually found that the economic benefits were outweighed by the disadvantages of corruption and other vices that undermined professionalism and discipline. This may mean that military commercialism may be a short-term economic expediency rather than a long-term solution to the budgetary woes of many armies.
Chinese withdrawal
From the early 1980s to the end of the 1990s, the Chinese army operated the largest and most profitable military business complex in the world. The PLA invested enormous effort and resources to build a vast but loosely-connected commercial empire stretching into virtually every corner of the economy and abroad.
The PLA went into business to make up for severe financial shortfalls after defence spending was slashed at the beginning of the 1980s in favour of economic development. But its rapid expansion also sowed the seeds of its demise. Lax supervision of the activities of military enterprises allowed corruption, smuggling, profiteering and other vices to flourish. These problems became so rampant that the political reliability of the military and the health of the Chinese economy began to be undermined.
In the Chinese military business complex's aspirations of becoming a domestic and international commercial powerhouse, a key goal was the development of a stable of conglomerates that controlled many of the largest and most profitable PLA commercial entities. They were given special treatment to boost their growth, including numerous financial and administrative privileges.
It is estimated that there may have been as many as 20,000 army-owned enterprises at its peak in the beginning of the 1990s, although this has steadily decreased since then. Most of these entities were small outfits and there was only a core of around 500 to 1,000 large enterprises and conglomerates.
The military business complex's power and influence was not dependent, however, on the total number of enterprises under its control. An overwhelming proportion of the enterprises that were established during the freewheeling years of the late 1980s and early 1990s were small unprofitable ventures. Most military units lacked access to credit and there were only limited inflows of domestic and foreign investment.
Even before its entry into business in the mid-1980s, the PLA was already economically self-sufficient. The logistics system had its own hospitals, transportation and telecommunications systems, factories and virtually any other operations that were required to support the running of a huge military machine. By allowing large parts of this logistics apparatus to be converted to civilian use or exploited for commercial purposes, PLA units and enterprises were able to quickly establish themselves as a major presence in many parts of the economy, especially transportation, telecommunications and construction.
Other PLA companies were lured into new fast-growing and lucrative but also risky industries, such as real estate and speculative financial activities like futures and commodities trading. Although they had little experience in these areas, they used numerous privileges that they enjoyed as military units to gain advantages over their civilian competitors. These perks included tax breaks, fast-track bureaucratic approval and access to state-subsidised materials.
Although business profits were a crucial source of supplemental income for the PLA, their importance in covering budgetary shortfalls gradually declined from the early 1990s as the government boosted defence spending by more than 10% annually. Profits may have accounted for as much as 10% of the PLA's official defence budget at its peak in the early 1990s, although this had steadily dwindled since the mid-1990s.
At a national anti-smuggling seminar held by the PLA high command in July 1998, Chinese President and Commander-in-Chief Jiang Zemin instructed the military, paramilitary and law-enforcement organs to clean up and divest themselves from commercial activities. He told the assembled military brass that "to properly develop the army in an all-round manner, the central authorities decided that the army and the armed police should earnestly screen and rectify various commercial companies operated by their subordinate units and shall not carry out commercial activities in the future".
Despite these tough words, the civilian leadership was sceptical whether the top brass could be relied on to rigorously enforce the divestiture. Past rectification campaigns had failed to tackle corruption, smuggling and other problems. In an embarrassing political slight to the military, civilian leaders and party and government institutions were put in charge of implementing the separation process and the military was sidelined to a supporting role.
The PLA continues to retain substantial economic interests even after its separation from commercial activities. The divestiture may have reduced the size of the military business complex by upwards of 75% in asset terms, but there are still several thousand small and medium-sized military-affiliated business entities in operation. However, the stable of around 50 prominent military-owned corporations has had its formal ownership ties with the PLA severed.
Remaining enterprises are primarily concentrated in the agricultural, industrial and welfare-support sectors, which are the same areas that the PLA was engaged in before the 1985 decision to go into business.
The structure of the post-divestiture PLA economic apparatus comprises several elements:
1 The PLA's farming system is being expanded to allow military units to partially compensate for the loss of commercial income through sideline production;
2 The PLA has kept control of several hundred industrial enterprises, maintenance and repair factories and research facilities to provide logistical support for the rest of the military establishment. These factories produce uniforms, bedding, food and other quartermaster supplies;
3 Several thousand small-sized family-run workshops, shops and other entities have been allowed to retain their ties with the PLA to provide work and welfare support for family dependants and demobilised troops. These enterprises are generally located on or close to military bases;
4 Military units retained a significant proportion of hotels and guesthouses, although many were required to close their doors to commercial business and revert to hostels and guesthouses for state, party and military personnel;
5 The PLA has been permitted to retain a small number of corporations that are considered important for national security or for the public interest. This includes telecommunications and aviation, although it was forced to hand over a fledging mobile telephone network to the civilian authorities at the end of last year. The air force's China United Airlines has been allowed to continue to operate its key routes in China, which are usually to cities in impoverished outlying provinces.
South East Asian armies
Armies across Southeast Asia have been engaged in business for many decades and they have used their powerful political influence to carve out lucrative niches in their national economies.
The Indonesian armed forces (TNI), have been running commercial operations since the late 1950s and their tentacles have extended in many directions. They have invested in luxury hotel joint ventures with foreign firms, airlines and aviation services, forestry, shipping, insurance, property investment, petrochemical processing, and film production.
TNI has a number of non-profit foundations known as Yayasan that provide welfare and educational support for serving and retired military personnel and these organisations own or control an extensive collection of companies. For example, the Yayasan that belonged jointly to TNI headquarters and the government's defence department was ranked among Indonesia's 200 largest conglomerates in the early 1990s.
Each of the service arms has at least one or more Yayasan that usually control dozens of enterprises and companies. The army's commercial operations come under Yayasan Kartika Eka that has its own airlines, banks, trading outfits, plantations, agricultural and forestry production facilities, and construction companies. The air force owns Yayasan Adi Upaya, which runs an airline and air service companies, a bank and a construction company.
Yayasan Bhumyamca is the navy's primary foundation and owns companies engaged in shipping and real estate. At lower levels of the chain of command, especially in outlying regions, military units operate co-operatives that primarily provide welfare support for military personnel and their dependants. Total business assets of the Indonesian armed forces in 1998 were estimated to be worth at least $8 billion.
Following the ousting of President Soeharto and his successor BJ Habibe at the end of the 1990s, efforts were made by the newly-elected government of Abdurrahman Wahid to curb the TNI's pervasive influence in the country's political, social and economic life, including its commercial activities. But the move to rein in the military's business operations proved to be shortlived as the government could not make up for any shortfalls in commercial earnings. Military officials have claimed that the official defence budget only covers 25% to 35% of the military's financial needs and the rest of the budgetary requirements have to be met from off-budget sources.
Thailand's armed forces have been a major player in the country's economy since the 1940s, controlling some of the biggest and best-known corporations. These include the Thai Military Bank, a publicly-listed medium-sized financial institution that is managed by a mixed staff of senior military officers and civilian bank executives, two TV channels and more than 200 radio stations. Proceeds from the radio stations go back into the military's coffers and are not scrutinised by the government.
The air force also controlled the national air carrier, Thai Airways, until the early 1990s. In the wake of the Asian financial crisis in 1998, Thai military chiefs and civilian leaders pledged to reduce the armed forces' involvement in business and make military-controlled companies more financially transparent. The government has asked the military to relinquish control of most of their broadcasting interests and the Thai defence ministry has promised to sell more of its stake in Thai Military Bank to foreign investors. However, military chiefs have made similar promises previously that were subsequently not honoured.
A relative newcomer to military commercialism is the People's Army of Vietnam (PAVN), which was given formal permission to go into business in 1990, although it had been heavily involved in road building and providing other assistance for the building of the civilian economy before then. By 1998, the PAVN was reported to have been operating around 200 companies and was involved in more than 50 joint ventures with foreign companies. Operations included banking, air charter, commercial fishing and garment manufacturing.
The PAVN has several major corporations. The largest is Truong Son Construction General Corporation, which built the famous Ho Chi Minh Trail, and is one of the country's leading infrastructure construction outfits. Flight Service Corp. has close ties with the Vietnamese Air Force and provides air transport services for tourism and helicopter shuttle services for oil and gas exploration. Tay Nguyen Corporation primarily focuses on rubber, coffee and timber production in the country's central highlands and Thanh An Construction and Assembly Corporation is engaged in construction, mineral exploration and coal mining.
The PAVN also operates 13 'special economic defence zones' in border zones facing China, Laos and Cambodia. Business turnover from these military enterprises was estimated to have totalled around $600 million in 1998. Around 20% of PAVN personnel, or 100,000 troops, were estimated to be involved in business operations by the late 1990s.
Central and Latin American armies
In Central and Latin America, the involvement of the armed forces in business is part of the legacy of military rule in many of the countries in the region. Military officers have played prominent roles in the management of national economies of many South American regimes. A key reason for their intervention has been to deal with acute economic crises caused by serious domestic instability.
The armed forces in Ecuador and Honduras are among the most entrepreneurial in this part of the world. Those in the former are reported to be the country's largest business owner, with major stakes in the country's steel, mining, copper, munitions, agricultural, electronics, aviation, shipping, port management and footwear industries.
Similarly, the armed forces in Honduras and its pension fund have capitalised on their political clout to build up a substantial business complex, which is the largest in Latin America. According to Kevin Casas-Zamora, a specialist in Latin American military business activities, the Instituto De Prevision Militar, which is the Honduran military's commercial arm, had assets of around $400 million in 1998 and employed more than 15,000 workers in scores of ventures. This included a bank, an insurance firm, agricultural enterprises, radio and publishing companies, security outfits, a cement factory and real-estate construction companies. Other military companies are involved in running telecommunications companies and the country's immigration bureaucracy.
Armies in El Salvador, Guatemala and Nicaragua and also operate smaller military business operations through pension funds. The Nicaraguan armed forces' pension fund has interests in banking, stock trading, infrastructure construction and healthcare and its assets are estimated to be worth $10 million to $20 million. As with their counterparts elsewhere in the world, these military-affiliated enterprises are non-transparent and outside the supervision of civilian authorities.
Pakistan's armed forces
Pakistan's armed forces wield enormous political clout and have taken over control of the country through coup d'états on three occasions since its independence in 1948. The armed forces have also developed a sizeable commercial apparatus that dates back to the 1950s.
All the service branches, as well as the defence ministry, operate their own businesses that are influential players in the domestic economy. These business interests are controlled by money-making foundations that are headed by either serving or retired officers from each of the three armed services.
The defence ministry owns the Fauji Foundation, which is the largest and oldest of the military-controlled foundations. It was established during British colonial rule and one of its primary functions is to ensure the welfare of retired military personnel and provide employment for demobilised soldiers. It is officially a charitable trust that enjoys privileged tax breaks and had nearly 30 industrial enterprises in the late 1990s that were involved in sugar production, food crop cultivation and processing, oil refining, gas distribution, cement production, fertiliser manufacturing and electric power generation. Its declared net assets in 1996 totalled Rs8 billion ($135 million) and its operations earned Rs1.4 billion in profits that helped to finance a sizeable education and welfare apparatus that included 12 hospitals and nine training centres.
The army's foundation is the Army Welfare Trust (AWT), which was established in the late 1970s and is involved in an extensive range of businesses that include farming, rice, sugar and fish processing and cultivation, cement production, pharmaceuticals, travel agencies, banking, commercial real-estate development, insurance, aviation and housing construction.
The AWT's Askari Commercial Bank is regarded as one of the best-run banks in Pakistan and a number of AWT-operated enterprises are listed on the country's stock exchanges. The army's general headquarters closely oversees the AWT and the service chief is the head of the foundation's governing board.
The army's National Logistics Cell is also very involved in commercial haulage operations, especially in the country's frontier regions and is reported to have been responsible for supplying Afghan rebel forces during their war against the Soviet Union in the 1980s.
The air force operates the Shaheen Foundation that has specialised in aviation-related activities, including the running of the country's second largest airline, Shaheen Air International (SAI), and also air transportation and maintenance services. In addition, the foundation has insurance, commercial real estate, television and radio broadcasting and computer technology services. The foundation nearly collapsed in 1998 after an investment in a road toll project went wrong and SAI also stopped operating following a failed joint venture.
The Pakistani Navy has more modest commercial operations compared to the other service branches, which is under the umbrella of the Bahria Foundation. This foundation owns businesses in the shipping, fishing, travel, real-estate development, farming, port management and paint production sectors.
The military has also been occasionally brought in to run key state corporations that have suffered under civilian mismanagement. In 1998, for example, the army was given responsibility for running the country's Water and Power Development Authority, which was on the verge of bankruptcy.
Most of the declared earnings of the foundations and other military-controlled businesses appear to go largely to supporting welfare programmes and for business reinvestment. The armed forces apparently do not receive any sizeable share of the profits from these commercial operations and they have to rely on the government for their financial needs. This has not been a pressing concern, however, as the military has enjoyed priority access to the allocation of fiscal resources because of their powerful political influence in the country's decision-making elite and the enduring security threat posed from India.
Although the Pakistani military has earned a positive reputation as a well-run and relatively clean organisation in contrast to the civilian apparatus that is widely perceived as corrupt and inefficient, this image has been tarnished by a number of corruption scandals involving serving and retired military officials who were responsible for the management of these foundations.
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