I am failing to see the connection between the government and the cult? It seems like they both had entirely different objectives.
shareThe compound was in a remote area, privately owned, and full of people who had absolutely no affinity whatsoever for either Communism or the Soviet Union.
shareI think it was a question of convenience, not a need.
As I understood, they (the Chilean army) were only using Colonia Dignidad to cover an illegal detention and torture center, but I do not think that they intended to send their prisoners to actually live within the cult.
From my point of view, Daniel was only a special case. I assume the Chilean military forces decided it would be better to keep him there, given his mental condition, than to just kill him, as he was a German citizen.
Another connection, maybe a more important one, was implied: Schäfer was dealing weapons. The dictators wanted weapons to keep their "war against comunism" going. So there's that. They even ordered some lethal gas to Schäfer, which he intended to test on Daniel.