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2 Indonesia gets emergency free
zones By Bill Guerin
JAKARTA - After years of policy confusion
and political gridlock, Indonesia's Parliament
this month ratified a government plan to establish
full free trade zones (FTZ) for areas of three
islands located near Singapore. The move
represents the latest bid by President Susilo
Bambang Yudhoyono's pro-business administration to
attract more badly needed foreign direct
investment (FDI) into the country.
His
government fast-tracked the policy for the island
of Batam, the
country's main industrial
center, and also parts of Bintan and Karimun, in
response to growing regional competition,
including from nearby Malaysia's ambitious
Iskandar Development Region project, which
envisions the establishment of a massive new
regional manufacturing hub also aimed at forging
linkages with Singapore.
So urgent were
those competitive concerns that in June
Yudhoyono's government issued a state emergency
regulation to amend existing FTZ legislation.
Indonesian law requires that any emergency law
must be approved by the House of Representatives
before it can take effect, while legislation
enacted in 2000 stipulates that any area formally
designated an FTZ must be backed by law.
Indonesia is ranked 15th, fourth among the
five Southeast Asian countries included in the
world's top 20 economies most attractive for FDI,
according to the just-released World Investment
Prospects Survey 2007-2009 FDI. The Investment
Coordinating Board reported this month that FDI
approvals were up almost threefold to US$33
billion between January and September compared to
the same period last year, while actual FDI flows
almost doubled to $8.54 billion from $4.29
billion.
Still, compared to its
attractiveness with foreign investors before the
1997-98 Asian financial crisis, FDI to Indonesia
continues to trail several regional rivals – not
to mention China and India. Despite a new
investment law passed this year that promises
equal treatment for foreign and local investors,
investor concerns over Indonesia still center on
rampant corruption, red tape, poor infrastructure,
powerful labor unions, local-autonomy problems and
judicial unpredictability.
The new status
for the strategically-placed islands aims to
counteract some of those poor perceptions. The
designation means import taxes, customs and excise
duties, value-added tax and luxury goods sales
taxes will be completely abolished. The government
also plans to establish 11 more special economic
zones (SEZ) across the country, using Batam,
Bintan and Karimun as prototypes.
Batam
has enjoyed limited FTZ status since 1978,
entailing investment incentives that included
exemption from import duties and income and
value-added taxes for all export-oriented
industries. Since then the central government's
investment in infrastructure in Batam has run over
hundreds of millions of dollars, while the island
has attracted over 600 foreign companies and
billions of dollars worth of foreign investment,
including $4.5 billion last year.
Singapore's entrepreneurs, starved of land
at home, have in particular been attracted to
Batam's unique hybrid free-trade environment and
its cheap land and labor. Those advantages
afforded Singaporean entrepreneurs one of the best
manufacturing, industrial and logistical
environments in the region from which to export
products globally. Some 70% of the island's
economic growth since the early 1980s has come
from the export-oriented manufacturing sector.
In 2003, an additional 25 Singaporean
companies set up factories on Batam, attracted by
tariff advantages in the then upcoming
Singapore-United States Free Trade Agreement. The
bilateral pact allowed for certain goods,
manufactured or assembled on Batam, to qualify as
of Singaporean origin and hence enjoy the
preferential benefits accorded to a Singapore
product. Batam attracted $22.6 million in new
investments that year, of which at least half was
contributed by the Singaporean companies.
Political snags However, by 2004
political opposition to Batam's special treatment
had mounted with some Indonesian legislators
claiming that formalizing FTZ status for the
island would run contrary to the spirit of new
local autonomy laws, which gave greater
administrative powers to local governments.
Batam's investment incentives meant for
export industries had been widely abused by local
Indonesian companies with no products or services
for export. Rampant under-invoicing, manipulation
of import duty exemptions and tax breaks sparked
resentment among domestic companies operating in
areas without FTZ privileges.
President
Megawati Sukarnoputri's administration, which held
power from 2001 to 2004, promised business leaders
in Singapore that Batam's crucial FTZ status would
be formalized by April 2003, when Singapore was
due to ink its bilateral free-trade pact with the
US. Her government wanted official FTZ status to
apply only to several separate enclaves or
industrial zones that actually
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