Relocation of industries

The Jakarta Post ,  Jakarta   |  Fri, 09/22/2006 9:11 AM  |  Opinion

A draft government regulation that would force industrial companies near residential areas to relocate their plants to industrial estates is another example of an otherwise good policy causing undue controversy and opposition because it was never properly introduced.

The shocking reaction from the manufacturing community to Industry Minister Fahmi Idris' announcement last week of the new policy shows just how out of touch the government is regarding the wide-reaching impacts of the compulsory relocation of manufacturing plants to industrial estates or areas designated as industrial zones.

The government apparently failed to consult with industrial associations while drafting the regulation. It also did not brief the associations, the parties directly impacted by the new regulation, on the benefits of the new policy and how it will be phased in. Predictably, there were soon allegations flying around that the government had succumbed to the industrial estate lobby.

Indeed, Yohanes Archiadi, chairman of the Industrial Estates Association, acknowledges his organization lobbied the government over the relocation of factories in residential areas to industrial estates.

It is of course regrettable that occupancy rates at many industrial estates remain low due to a lack of interest from new investors, who claim the estates charge punitively high prices for their industrial plots and support facilities. But the government also deserves blame for its policy inconsistency in allowing new investors to set up plants near residential areas.

From the outset the government should have stopped issuing licenses for industrial factories located outside of industrial estates.

Now, however, with so many factories having been built outside industrial estates, some in residential areas, they cannot be ordered immediately to relocate. After all, they are operating with legal business licenses, meaning they have fulfilled all the regulatory requirements, including those regarding the environment. The government cannot simply issue a regulation to force them to relocate to industrial estates.

True, plants are best located in estates for better coordination on waste treatment and infrastructure development, and to expedite the processing of business licenses.

More importantly, locating most factories in industrial estates -- except a few that must be sited near natural resources -- can develop clusters of industries to generate localized economies.

Industry clusters can reduce the costs of transportation and significantly improve supply chain management. This in turn can decrease the costs of distribution and other logistical arrangements that are still unusually high in Indonesia.

The superior logistical capabilities of industry clusters allow companies to revamp their supply chain management to ensure the smooth movement of goods to final users. Clusters of industries also enable assemblers and big retail chains to gain maximum cost savings by rationalizing when and where they want to procure products and how they organize production.

Given the multiple benefits of relocating factories to industrial estates or designated industrial zones, the government should consult with local (regional) administrations, industrial associations and industrial estate companies on technical details such as an acceptable transition to the new policy and the pricing of industrial plots and other support facilities in industrial estates.

After all, regional administrations are responsible for issuing location licenses to business establishments according to their land use or spatial plans.

To make the new policy more credible, the draft regulation should also be designed to provide directives and incentives for regional administrations and investors to develop new industrial zones. After all, most existing industrial estates are located in Java. It would be better if new industrial estates could eventually be turned into special economic zones.

We think an appropriate transition period of five to 15 years, depending on the validity of the business licenses of the factories, would be adequate for the smooth phasing in of the new industrial plant location policy.

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