At the end of last month, Jakarta signed a memorandum of understanding (MoU) with the island nation on the joint development of three Special Economic Zones (SEZs).
Both President Susilo Bambang Yudhoyono of Indonesia and Prime Minister Lee Hsien Loong of Singapore attended the signing ceremony, which took place on Batam, one of the three islands designated an SEZ. Located on Indonesian territory, Batam is located near Singapore, just like the other two islands involved in the deal - Bintan and Karimun.
After the signing, President Yudhoyono expressed the hope that "investors will be able to benefit from the deal".
To help with this, several incentives for investors will be put in place in the SEZs. Via these, Indonesia expects to generate new investment, initially mainly in shipyards and oil-related industries, but later also in garments, electronics and tourism.
Ever since the government of Susilo Bambang Yudhoyono, or 'SBY' as he is popularly referred to, took office, he has been stressing the need for new foreign direct investment (FDI) in Indonesia. The president and his government need fresh foreign capital to accelerate GDP growth in the country, which in 2005 reached 5.6%.
It is estimated that Indonesia needs at least 7% growth per year to absorb new entrants into the labour force and to reduce the high numbers of unemployed. The World Bank measured an open unemployment rate of 10.4% in 2006, but hidden employment is estimated to be double this figure.
The move could be seen as a shortcut to quick success, badly needed by the Indonesian government, which has been plagued by several natural and human disasters in its first 21 months in office.
These disasters drew enormously on the resources of the new government, and therefore seriously hampered the progress and speed of the reforms that SBY had aspired to in his campaign, such as improving the infrastructure, revising tax and customs procedures, increasing the flexibility of the labour market and combating corruption.
In the past few months, it has become increasingly clear that most of these reforms are taking longer than many might have wished. As the World Bank last month observed in its Brief for the Consultative Group on Indonesia, "2005 was marked by relatively more clarity in intent than concrete implementation".
The bank did however see "impressive momentum in the fight against corruption". Yet tax and customs laws failed to make it in parliament due to "a lack of support from the business community". The World Bank saw mixed results in infrastructure, where "concrete results remained few, but progress has accelerated on improving government project co-ordination and on the critically important creation of a unit responsible for risk sharing".
Regardless of how realistic the high expectations of many were, the government is now pursuing some sort of a shortcut, hoping to achieve swift successes with the establishment of the three SEZs as pilots for more of such projects elsewhere in Indonesia.
The deal aims to develop an effective institutional framework with clear and consistent policies, simplification of investment procedures, and providing specific incentives on finance, banking, taxation, and customs and excise.
Singapore will provide investment advice and capacity building to this effect for Indonesian officials and workers. It will furthermore assist Indonesia in the promotion of the islands as manufacturing investment destinations.
Singapore, which is in dire need of space, will in return be able to expand its economic activities, helping it remain competitive with countries like China, India and Vietnam.
Muhammad Lutfi, chairman of Indonesia's Investment Co-ordinating Board (BKPM), explained last week that Indonesia is furthermore "exploring the possibility of relaxing the implementation of the labour legislation in the SEZs".
Current labour legislation is widely criticised as hampering businesses, with specific concerns on the ease of unionisation and the legal right to pay compensation if an employee leaves the company, even if this happens voluntarily. Yet a new labour law introduced earlier this year was quickly withdrawn after it sparked ardent protests from labour unions.
To provide a firm legal basis for the incentives in the zone, which are arranged by special decree, in early June Finance Minister Sri Mulyani Indrawati added provisions to the new customs and excise bill currently under discussion by parliament.
Lutfi also ensured that future revisions of the tax and customs bill would include the necessary arrangements for the special SEZ facilities.
The implementation of the agreement will be elaborated in a joint steering committee chaired by Boediono and Lim Hng Kiang. This committee will report directly to President Yudhoyono and Prime Minister Lee in four months time.
Even though the agreement, and especially the speed and pragmatism with which it was realised, has been widely welcomed, not all reactions have been positive.
The chairman of the Association of Industrial Estates in Indonesia (HKI), Johannes Archiadi, told Antara news agency last week that the development of SEZs would severely hurt the existing 206 industrial estates, of which only 60 are actually being used.
Industry Minister Fahmi responded to these worries by proposing this week in parliament to include tax holiday incentives in the current draft of the new investment law that has been submitted to parliament.
The government can, in the meantime, claim its first success for the SEZs. Industrial estate PT Kabil Indonusa Estates (KIE), owning 400 ha of land on Batam, has announced it has attracted investments totalling $120m from three major corporations in Singapore and Canada.