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The battle for
Batam
By Bill Guerin
JAKARTA
- In 1969, Pertamina's controversial president director,
the late Ibnu Sutowo, who almost sank Indonesia with the
national oil company's massive debts and corruption,
officially launched an ambitious project to convert
Batam Island's raw rainforest jungle tracts into a
splendid new industrial zone.
Only 20 kilometers
across the Singapore Strait from gleaming towers and
huge container terminals, Batam, with its cheap labor
and access to the Indonesian archipelago, was the
logical alternative as Singapore ran short of land and
labor. Batam then had a bedraggled population of about
2,000. Today, some 532,000 people live and work there.
Only 415 square kilometers, Batam has experienced an
astonishing influx of people and investment and in 2002
ranked third among the top nine investment destinations
in Southeast Asian countries.
Today, however,
the special tax status that turned Batam into
Indonesia's golden goose is in jeopardy despite soothing
words by Indonesian President Megawati Sukarnoputri, who
on Wednesday inaugurated six new industrial sites and
suggested that she was being "tolerant" to Batam. She
referred to the fact that Batam continues to enjoy tax
exemptions after an April deadline to formalize its
crucial free-trade-zone status was delayed.
Whether that special tax status continues is a
major concern to the multinationals on the island and
across the strait. At the same ceremony that Megawati
attended, John Kennedy, chairman of the Indonesian
Industrial Estates Association-Batam Chapter, said that
foreign investors are going to remain cautious about
investing on the island until the status is cleared up.
His words were echoed by Abidin Hasibuan, chairman of
the Indonesian Businessmen Association, who said that
"the fact that no legal certainty prevails in Batam
prompted many investors to leave the country".
A
variety of governments and public bodies are squabbling
over free-trade status and the spoils produced by the
island, while being closely watched by Singaporean and
multinational businessmen. If they botch it, Batam's
promise could fade. Its 20 industrial parks and 611
resident foreign companies from 34 countries have helped
make to Batam Indonesia's main industrial epicenter.
Some 70 percent of its growth has come from the
export-oriented manufacturing sector.
Batam's
unique offshore/onshore hybrid environment has been the
target of government efforts to impose value-added and
luxury taxes since 1998, after the downfall of Suharto.
Special legislation in 1978 gave Batam the
status of an industrial bonded zone to lure further
investment and foster export competitiveness. Investment
incentives include no import duty, exemption from income
and value-added taxes for all export-oriented
industries, and its unique de facto status as a
free-trade zone. The latter, however, is not supported
by law, and thus the plan to confer the long-awaited
status is back in the "pending" tray.
The Jakarta
government is noticeably cool because the incentives
meant for industry were widely abused by local
Indonesian companies with no products or services for
export. This sparked anger and resentment from domestic
companies operating in the rest of Indonesia, and in
1998 the Finance Ministry, at the behest of the
International Monetary Fund, tried to slap a value-added
tax (VAT) on Batam to raise revenue for its
cash-strapped budget.
Though reimposing the VAT
was meant to redress the balance and ensure equitable
treatment for Indonesian companies, strong protests and
threats by foreign investors to withdraw forced the
government to postpone the plan. Jakarta, true to
dilatory form, continues to postpone it. In fact, in
March the coordinating minister for the economy,
Dorodjatun Kuntjoro-Jakti, told reporters that the
government plans no action before the end of this year.
Kuntjoro-Jakti says postponing the plan to impose taxes
is simply to give more leeway for the drafting of a bill
to convert the island into a free-trade zone (FTZ).
Singaporean businessmen are more than a little
disappointed with the delay, given that at several
business meetings held in Singapore, Jakarta had
promised FTZ status by April. Conversely, several
Indonesian lawmakers say FTZ status for Batam runs
contrary to the spirit of the autonomy laws, which give
greater administrative powers to local governments.
They point to the fact that FTZ status would
mean Jakarta still had a say in determining policy on
the island. Mayoralties have the right to govern their
areas and Batam's city administration has stated that
Batam should be controlled by the Riau provincial
governor, under whose jurisdiction it falls.
Everybody's concerns are justified. Last year
the island exported more than US$6.5 billion in goods,
or some 14 percent of the Indonesia's exports for the
year. Currently 60 percent of foreign-owned enterprises
operating in Batam are involved in the electronics
sector. In 2002, Singapore was one of Indonesia's
largest foreign investors, contributing $3.3 billion.
The island republic, starved of land space, had taken up
the slack in Batam and set up a bridge to Indonesia's
massive domestic markets and nearly unlimited supply of
cheap labor.
Jakarta's essential infrastructure
investment has run to hundreds of millions of dollars
over the past three decades. That investment and
infrastructure, particularly from Singapore, less than
an hour away by hydrofoil, spurred the growth of a major
services industry as well as subcontractors to look
after their needs.
The real target was export
markets. Batam's flexible Hong Kong-style free-trade
environment, where importers face few obstacles, the
cheap land and labor costs, and the logistical
advantages give Singaporean entrepreneurs one of the
best environments in the region, if not the world, from
which to go global.
In addition, the outbreak of
severe acute respiratory syndrome (SARS) in China and
Singapore forced companies such as General Electric,
Motorola, Ciba, P&O Nedlloyd, International
Financial Corp (IFC), Pegasus Capital and JP Morgan to
revisit their regional business expansion strategies.
They are reportedly eyeing Batam as a base.
Many
of these companies remain in doubt, however, because of
the uncertainty created by the delay. Batam's city
administration says the planned format of the draft bill
doesn't accommodate the interests of all the people and
they also reject it. The Batam chapter of the Indonesian
Chamber of Commerce and Industry (KADIN) also objects to
implementation of the FTZ, saying the rampant smuggling
would become uncontrollable if Batam were given FTZ
status. Such political uncertainty has frequently been
cited as a discouraging factor for potential investors
to Indonesia, but accommodating the interests of the
government and the House of Representatives, Batam's
city administration and the provincial legislative
assembly in Riau, as well as investors and would-be
investors, is clearly impossible.
Home Affairs
Minister Hari Sabarno says Jakarta should control the
free trade in Batam, and his ministry is preparing
legislation to separate the Batam mayoralty's tasks from
Batam Industrial Development Authority (BIDA) control.
The pro-business BIDA has played a major role in
recent years, and chairman Ismeth Abdullah on Wednesday
explained how important it was to grant Batam FTZ
status.
"Such a law will provide legal certainty
for the investors here. In return, it will attract more
investors, meaning more employment," he
said.
(Copyright 2003 Asia Times Online Co, Ltd.
All rights reserved. Please contact content@atimes.com
for information on our sales and syndication policies.)
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