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Military-owned businesses and corruption risks

Source: Thomson Reuters Foundation - Thu, 26 Jan 2012 12:27 GMT
Author: Saad Mustafa
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Any views expressed in this article are those of the author and not of Thomson Reuters Foundation.

By Saad Mustafa of Transparency International's Defence and Security Programme

A significantly under-researched and often overlooked subject, military-owned businesses (MOBs) pose a significant corruption risk within the defence and security sector. They are usually, but not exclusively present in weak or transitioning democracies attempting to assert a certain degree of civilian control. However, by allowing militaries such influence and authority, the civilian government essentially weakens its position and allows the armed forces to play a significant role in society.

Given that this is such a pressing issue in countries that receive large amounts of overseas development assistance funds – Egypt, Pakistan, and Turkey to name a few, Transparency International UK Defence and Security Programme’s (TI-DSP) new report provides a timely first-look into how such businesses are structured, what some of the inherent corruption risks are, and why and how some countries have reformed their respective MOBs.

There are a number of reasons why military entrepreneurship should be a cause for concern for both policymakers and civilians. For starters, when you introduce profit incentives into an organisation whose sole purpose is defending the country, it distracts officers from their official duties. Second, there are significant costs to the country’s economy because not only can it encourage monopolistic behaviour, it may also prevent the liberalisation of the economy by promoting cartelisation in certain key economic sectors. There is an opportunity cost as well: private entrepreneurs will regard the military’s involvement as a significant barrier to entry seeing as how MOBs will always enjoy a competitive business advantage.

Most worryingly of all however is that military businesses are usually linked to the exploitation and eventual depletion of a country’s natural resources. This is especially worrisome when one considers that in some countries the military is responsible for policing borders and inspecting what is brought in and what is taken out of the country. In Indonesia for example, the military uses this privileged position to move illegally logged timber without any worry of accountability or external oversight.       

Natural resource exploitation

Indonesia: Indonesia has a large formal military business infrastructure which is technically legal. The Indonesian Armed Forces (TNI) holds particular forestry concessions which grant it the right to utilise certain resources. However, rather than using such allowances for their intended purpose, the TNI abuses their power by actively participating in illegal logging. Considering that illegal timber accounted for as much as 70% of the country’s total timber production in the 1990s, it is quite a lucrative trade. In 2010, a study conducted by the University of Indonesia highlighted the extensive involvement of the country’s military in every aspect of illegal logging be it coordination, facilitation, or investment on the island of Borneo between 1999 and 2006. However, rather than admonish such behaviour, certain senior army officers including Rear Admiral T.H. Sosetyo almost seemed to excuse it because of the “difficulty of their lives at the border areas”. Yet, when one considers that the average bribes companies pay to have their operations unhindered by local authorities is US$ 200,000, the practice seems to go further than simple sustainability.

In the mining sector, the TNI acts as a security provider to the multitude of international companies. In 2003, Freeport McMoRan Copper & Gold, a U.S. based mining company, disclosed that it paid over US$10 million to the TNI between 2001 and 2003 for security services. Moreover, they paid US$ 250,000 directly in to the bank account of an Indonesian General. In return for the army’s protection, Freeport allegedly helped pay any third party costs incurred by the TNU – air fares, vehicle maintenance, and even hotel bills. This represents a clear dereliction of duty by the officers, whose primary objective should and must remain the protection of civilians in the country.       

Pakistan: MOBs in Pakistan have a 7% share of GDP, control a third of total manufacturing, and are in possession of 7% of total private sector assets. The four major foundations which control the military’s various business interests have all, due to their accessibility to government officials and the existence of patronage networks, received significant government subsidies not available to other private companies. As Christian Caryl argues in his timely piece on the subject in Foreign Policy “generals understand they won’t be able to compete if the playing field is levelled out” so they will always try to insulate their businesses from internal and external economic factors by utilising patronage networks.

In terms of natural resources, the Pakistani Armed Forces are reported to be one of the country’s largest land owners – they control nearly 13% of state land. Despite being given such land specifically for defence purposes (military training, construction of barracks, etc.) the army uses a significant proportion of this land for commercial farming purposes. In the energy sector, the military owns Pakistan’s second largest gas field and runs its own Liquefied Petroleum Gas (LPG) marketing and distribution company. In a country suffering from a crippling energy crisis, the business is highly lucrative. 

The scale of corruption that can infect MOBs has encouraged certain countries, most notably China, to embark down the path of reform. In 1998, President Jiang announced a significant reduction to the military’s involvement in the country’s private sector. The downscaling process has proven to be largely successful, despite the military continuing to hold onto certain businesses which it argues serve its logistical demands. Other reform efforts, such as those undertaken by Indonesia and Cambodia have proven to be less successful.

All this is not to say that corruption is an inevitable consequence of MOBs. It is more that the military’s participation in the economy creates certain vulnerabilities which compromise the degree of professionalism within the armed forces and create opportunities for corrupt practices to take place.

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