Expanding SEZs

Indonesia

Economic News

22 Jul 2010
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Last week, the Indonesian government announced that it would further expand its special economic zones (SEZs) programme to other regions.



The head of Indonesia's investment co-ordinating board, Muhammad Lutfi, told the local press, the government is considering the development of three more SEZs in South Sulawesi, North Sumatra and Bojonegara.



Since taking office, President Susilo Bambang Yudhoyono and his government have been working hard to improve the business climate in Indonesia to attract foreign direct investment (FDI).



Despite a growth rate of 5.9% in 2005, unemployment remains high, estimated at 10.9%.



Several reforms aimed at boosting investment have been initiated. A new investment law levelling the playing field among foreign and domestic investors is currently being discussed in parliament, and is expected to be passed in the first half of 2007, while new tax legislation is due to be discussed early next year. The government is also working on amending the relatively restrictive existing labour legislation.



Meanwhile, Singaporean and Indonesian officials met to discuss the implementation of SEZs, which would be an extension of Singapore's economic development.



As the island state of Singapore lacks the land area to maintain its industrial expansion on its own territory, it is developing SEZs in Vietnam, China and now Indonesia. Singapore will provide technical and capacity advice and promotional support in exchange for the possibility of expanding its economic activities.



In June, the government signed a framework agreement with Singapore to develop special economic zones on the Islands of Batam, Bintan and Karimun (BBK) located in the Riau Islands province. In these zones, investors will enjoy special privileges with regards to financing, taxation, customs, employment and excise. Licensing procedures will be simplified (one-stop-shop) and processed within a shorter time frame.



So far, the SEZs in Riau have attracted around $580m in investment since their inception. This success prompted the government to expand the programme and to look at opening up SEZs in other regions.



However, Setyono D. Darmono, President Director of Jababeka Industrial Estate, told OBG last week that these expansions do not include existing estates.



"The establishment of SEZs in principle is a good initiative from the government," Darmono asserted. "However, it should actually also provide existing industrial estates with the possibility of becoming special zones. While it is true that economic development and employment should be distributed in a fair manner, it might prove difficult to lure investors to greenfield areas where no basic facilities exist, while there are hardly any new investors starting activities in already developed and mature estates" Darmono continued.



For instance in Jababeka's industrial estate, in Cikarang, Bekasi, East Jakarta, only two-thirds of the entire 3000 hectares are currently being used.



"It is also cheaper for the government to process, because there are already facilities in existing estates, while from an investor point of view it is much more attractive to enter an existing area with incentives such as improved licensing services or tax, customs and excise relaxations" Darmono concluded.



Darmono's argument echoes calls from the chairman of the Association of Industrial Estates in Indonesia (HKI), Johannes Archiadi, to allow existing and often under-utilised estates to become special zones. As it stands, the regions can request SEZ status, the industrial estates cannot.



While the association will continue its strife to obtain SEZ facilities, the existing zones in Riau and the planned ones in Northern Sumatra, Bojonegara and South Sulawesi are expected to support the ongoing economic recovery, which is gradually accelerating. With the stabilisation of inflation and of the rupiah exchange rate, increasing exports and government spending, foreign investment in these special zones is expected to increase.

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