Most businesspeople and analysts hailed the economic cooperation agreement Indonesia and Singapore signed in June, 2006, to develop special economic zones (SEZ) on Batam, Bintan and Karimun islands near Singapore as the best chance of quickly attracting foreign investment.
Singapore, with its excellent logistic capabilities, superb transportation and financial facilities and experience in building SEZs in China, Vietnam and India was seen as the best partner to provide synergistic cooperation to Indonesia to develop SEZs as islands of competence to jump start robust economic growth.
However, more than one year later, the government is still struggling to enact legal foundations for that economic concept. The latest reform package, issued last June, called for the government to submit a bill on SEZs to the House of Representatives only by November at the latest. This means the regulatory framework for SEZ would be in place only by next year.
But while more Asian countries, including Malaysia, Vietnam and Thailand have adopted the SEZ concept as a leapfrog to increase the international competitiveness of their economies, the Indonesian government and the House seem to have been confused about the differences between SEZs and free trade zones (FTZ).
Instead of working harder together with the House to complete legislation on SEZs, Vice President Jusuf Kalla recently decided, against the views of the majority members of the National Team on SEZs, to give Batam the status of a full free trade zone, thereby reversing the 2004 policy making the island an enclave FTZ.
We don't see how FTZ in an area which has developed into a large city island complete with a municipal administration and a wide mixture of many residential areas, trading centers and industrial complexes, could contribute to the country's economic development. FTZ Batam, besides depriving the state of large sums of tax and import duty revenues, could also turn this island into the bastion of import smuggling to other Indonesian areas.
Even though the SEZ concept is not without its shortcomings and despite the criticisms that SEZs may simply divert investment which would otherwise have flowed in anyway, the SEZ is still one of the most effective ways of strengthening Indonesia's economic competitiveness by establishing islands of competence in the form of SEZs.
This model follows what the government has been doing in its bureaucratic reform by embarking on the development of islands of integrity and efficiency at the Finance Ministry (tax administration in 2002 and customs service this year).
The rationale is that by making merely incremental progress through an overarching reform conducted simultaneously in all areas it could take several decades to make a significant impact on the national economy. It is thus deemed more effective to start with bold moves in particular areas (islands), selected for their strategic role, to establish show cases of success and jump starting the process of rebuilding confidence in the overall reform move.
These islands of economic competence amid a sea of inefficiency and bureaucratic inertia are expected to serve as the beachhead and as catalysts for reform in other areas.
An SEZ essentially calls for the development of enclaves or islands with streamlined licensing procedures, good physical infrastructure, flexible labor regulations, superior logistical efficiency, all of which is anchored on the fast flow of goods, labor and documents, and efficient tax administration and customs and immigration services.
Put another way, the idea is to develop small geographical reserves with much better regulatory framework and physical infrastructure than in place in the rest of the country.
This is the concept that Vietnam has been implementing through industrial parks since 1986, China through SEZs on its southern coasts, especially Shenzen, since 1978, Malaysia in Johor state and India through its export processing zones since the early 1970s which were turned into SEZs in 2000.
In fact by cooperating with Singapore, Indonesia can learn a lot from the island republic's mistakes and successes in developing SEZs in India, China and Vietnam.
The main reason behind Batam's failure to compete with Singapore to attract foreign investment -- despite the huge investment the government had made since the mid-1970s in its physical infrastructure -- is the acute lack of integrity and technical competence of the bureaucratic machinery.
It is precisely this fundamental weakness the SEZ concept is designed to address.
We are therefore confused as to why the government and the House still don't see it as urgent to accelerate the SEZ legislation process to provide stronger strong legal certainty for investors in SEZs.
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