A crucial component of Indonesia’s ongoing industrial development is found in the 200-plus industrial zones spread across the country, hosting businesses in many sectors, from food and beverage manufacturing to aerospace. These zones provide a focal point for manufacturing investment, allowing businesses to integrate supply chains across industries and enabling the concentration of infrastructure needed for efficient production and access to markets. As a result, investors, suppliers and consumers all benefit from this agglomeration of economic activity.
Evolving Estates
Since their inception in the 1970s, industrial estates have expanded dramatically in both size and scope over the ensuing decades. The end of the 1980s saw a shift away from first-generation, government-operated estates, as second-generation industrial estate businesses were opened up to private companies, with the state setting the legal and technical requirements for developing and operating the estates. The third and final generation of industrial estates currently operating in the country consists of more modern and sustainable set-ups which are focused on specific criteria. As of the third quarter of 2015, there were more than 230 industrial estates operating across Indonesia, according to marketing firm Solidance, with a combined total built-up area of over 27,300 ha. Roughly 60% of the land used for industrial estates is concentrated in West Java. In addition, another 19,124 ha is now under consideration for potential development.
Legal Framework
Activity within industrial estates is governed by four key pieces of legislation, which were updated most recently at the end of 2015. Key provisions of this system state the following: that all manufacturing activities must take place within designated industrial estates; and that the domestic or foreign private sector is allowed to own and develop designated industrial land within the estates, with up to 70% of land made available to be sold or leased to tenants. The rest must be set aside for green spaces and infrastructure. In addition, the estates must adhere to specific infrastructure requirements, including electrical technical specifications in line with national standards, with criminal and financial penalties applicable for violations.
Incentivise
Presently, the government is looking again to boost investment in the sector by implementing new regulatory measures designed to kick-start a fresh wave of development within its industrial zones. New legislation was issued in December 2015 that updates certain components of the previous regulations governing industrial zones, which according to remarks to the press made by Imam Haryono, director-general for industrial region development at the Ministry of Industry, specifically target the incentive aspects of the law to increase the attractiveness and growth of the zones. The purpose of these changes is two-fold – first, to boost overall industrial expansion, and second, to more evenly distribute investment around Indonesia by channelling new projects away from the traditional manufacturing hubs in Java to less-developed regions of the country.
Going Forward
The new amendments establish four separate categories of industrial zones specific to different regions of the country based on their degree of development: developed industrial estates in Java; developing estates in South Sulawesi, East Kalimantan, parts of North Sumatra and South Sumatra; potential estates in North Sulawesi, West Kalimantan, Bali and Nusa Tenggara; and potential estates in Papua and West Papua. To increase the attractiveness of the less-developed and more-remote zones, businesses looking to set up shop in these areas will be eligible for greater incentives compared to their more-established counterparts. Applicable to both industrial zone operators and the businesses operating within, the new incentive package will include tax holidays and tax allowances at the national level in addition to relief from regional taxes and levies, such as land and building acquisition fees, property taxes and street lighting taxes. The regulations also include a clause that simplifies environmental impact reporting requirements by allowing tenants of industrial zones to skip the step of filing an analysis of the environmental impacts of their businesses if the operator of the zone has already done so.
Evenly Distribute
By applying these incentives on a scaled level, the government also hopes to push investment and jobs into areas most in need of development and balance the country’s overall economic development. In the past, financial and industrial activity has been heavily focused on Java. As of the third quarter of 2015, West Java was home to 66 industrial estates, with East Java housing another 16, along with 19 in Central Java and four in the Special Capital City Region Jakarta, according to Solidance.
The Riau Islands, and Bintan in particular, were the next-largest contributors, with 41 estates, followed by Banten, with 32. Sumatra contained another 16, with the remaining 16 other estates spread out in other areas. This trend of concentration continued into 2015, when 19.9% of all local and foreign investment in Indonesia went to projects in West Java and another 11.8% went to East Java in the first nine months of the year, according to a statement by Haris Munandar, deputy minister for Industrial Research and Development at the Ministry of Industry.
According To Plan
These latest amendments to industrial estate regulations are part of an opening salvo in the implementation of the country’s Master Plan of National Industry Development (RIPIN) 2015-35, rolled out in 2015. Development of the estates plays a heavy role in the plan, which lays out a series of ambitious targets to expand the number of active industrial estates by 36 locations, adding an additional 50,000 ha of land prioritised in the areas outside Java through to 2035. To this end, the government is fast-tracking the development of 14 industrial estates outside Java in 2015-19. These projects will require an estimated Rp214.7trn ($15.7bn), along with nearly 1m labourers to carry out works on 28,854 ha. Sectors targeted for these new industrial hubs include fertiliser, petrochemicals, agri-business, iron, ferronickel, logistics, alumina, rubber, maritime and oleo chemicals, each with its own anchor tenant.
Supply & Demand
Prior to the fulfilment of these significant expansion plans, which are slated to add tens of thousands of ha of new industrial land to the estate network, companies continue to add capacity in the existing sites, particularly those in the Jakarta area. In line with sluggish economy activity in 2015, development of the surrounding industrial sites of Bekasi, Bogor, Karawang, Serang and Tangerang has been limited, with only one industrial estate located in Bekasi added to the supply, and an additional 20 ha made available during the year, according to a report by global real estate company Colliers.
Nevertheless, a large amount of additional industrial land is expected to become available over the next two years in Jabodetabek, Serang and Karawang. According to Colliers, cumulative industrial land sales for 2015 totalled 347.51 ha, about 79% lower than the previous year. Of this, almost 50% of industrial land sales were underpinned by those concluded at Modern Cikande Industrial Estate. In addition, Krakatau Industrial Estate Cilegon saw the 5000-sq-metre expansion of a chemical-related company, while national oil company Pertamina purchased another 7000 sq metres for development.
Signalling a growing shift from the years leading up to 2013, the vast amount of industrial land transactions in these estates are centred around the food and beverage manufacturing industry, which accounted for 31.4% of sales activity in 2015. The automotive sector, which dominated the sector prior to 2013, when it often accounted for more than half of all industrial activity, remains active, with 26.6% of industrial land activity in the Jakarta region, according to Colliers. Other sectors with significant development included building material producers, logistics and warehousing, and consumer goods.
Halal
In addition to these industries, the government has announced plans to develop new industrial zones in Java dedicated to producing halal products. Haryono told the local press in April 2016 that the zones would help develop Indonesia’s halal industry, which currently lags behind those in Malaysia and Thailand. Although the country is home to the world’s largest Muslim population, at around 200m, its halal industry is still in its infancy and is far less developed than in Malaysia, which has just 19.5m Muslims, and Thailand, a predominantly Buddhist nation. The global market for halal food and Muslim services, excluding Islamic banking services, is projected to expand by around 6.5% per annum through to 2020, when its volume will reach $2.6trn, according to a report on the Islamic global economy prepared by Thomson Reuters and consulting company DinarStandard.
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