Finalising Free Trade

Indonesia

Economic News

22 Jul 2010
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Indonesia's parliament enacted legislation on October 9 finalising the legal framework for investment in the special economic zones on three islands in the Riau archipelago south of Singapore. The new bill, which amends the law on free port and trade areas, gives full free trade zone (FTZ) status to the region.



The Riau island of Batam has benefited from a limited FTZ status since the 1980s, with certain exemptions on export-oriented production. A trade agreement signed with Singapore in June 2006 established the two countries' intention of expanding the zone to include the neighbouring islands of Bintan and Karimun, though no clear guidelines were established at the time.



The new bill delineating the Batam Bintan Karimun (BBK) FTZ will further minimise bureaucratic and administrative hurdles in the shipping of goods in and out of the islands. All import taxes, Customs duties, VAT and luxury goods tax will be phased out. The zone includes a one-stop shop for investors, offering business permits, tax payments and immigration services. Business permits will be scheduled for delivery in less than two weeks.



"Electronics companies and textiles companies, for example, find it very competitive to site themselves in the BBK special economic zone to make use of the lower cost of land, as well as other resources and utilities," Lim Hng Kiang, Singapore's minister for trade and industry, told OBG. "Meanwhile they can leverage off Singapore's advantage when it comes to financial infrastructure."



Each island will focus on certain specialities. Batam will act as a platform for IT, electronics, mechanics and shipbuilding. Bintan is set to attract investment in tourism, textiles and footwear, while Karimun will specialise in agribusiness, marine products and metal works. To alleviate pressures on human resources, a tripartite labour committee has been established within the FTZ to facilitate employment and training.



Domestic companies based in Jakarta have voiced criticism of the bill, claiming it gives unfair advantage to companies based in the BBK region. In addition, companies that produce for the local market have said the bill leaves their needs unanswered, as it provides advantages mainly for export-oriented producers. Despite opposition from the Indonesian Democratic Party of Struggle, headed by former President Megawati Soekarnoputri, who raised these concerns in parliament, the bill was approved by a landside majority by the nine other political factions represented in parliament.



Investment in Batam alone reached $4.5bn in 2006 and the trend is set to accelerate. The Batam Industrial Development Authority forecasts that the BBK zone will attract $15bn in new investment over the next five years. Of this sum, an expected 60% is expected to come from Singapore-based investors.



In the midst of growing competition from other FTZs in the region, such as the Iskandar Development Region in Malaysia and similar FTZs in China and India, a sense of urgency was felt by Indonesian authorities.



"The Indonesian government has embarked on this new experiment of establishing special economic zones (SEZs), and they chose the Batam, Bintan and Karimun (BBK) SEZ as one of the prototypes," Kiang told OBG. "To that end they have promulgated legislation on FTZs, not only clarifying the procedures by which investments would be approved in BBK but also laying out the incentives for investing there, particularly the tax incentives."



The Indonesian government plans to roll out the Riau model to 11 more zones across Indonesia, from Sumatra to Sulawesi and Java.



"The partnership works well for both Singapore and Indonesia," Kiang told OBG. "We hope that this being the prototype, the Indonesian government would then be able to replicate that in other parts of Indonesia."

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