Legal uncertainties are looming over investors on Batam, Bintan and Karimun islands near Singapore after four factions representing more than 260 of the 550-member House of Representatives decided to reject the legislative foundation that would have given the government the mandate to designate certain areas as free trade zones (FTZ).
The four factions said last week that Government Regulation No.1/2007 in lieu of a law regarding free trade zones and free ports could not be used as the legal foundation for the free-trade zone policy because such a legislative instrument was allowed only under an emergency situation.
They argued they didn't see any evidence that the country was now in such an emergency situation so as to require such a legislative product. They instead urged the government to propose a bill on special economic zones (SEZ), a broader concept to develop islands of competence.
The legislative piece could still be passed by the House if the other six factions move to support it, but the chances now seem quite slim.
The government had argued that the high rate of unemployment and under-employment (more than 40 million or 35 percent of the total labor force) was enough of an emergency to warrant such a policy breakthrough in order to reinvigorate investments and generate jobs.
The House also seems ignorant of the blunt fact that without such special measures as the creation of SEZ or FTZ to woo investments Indonesia cannot compete with other Southeast Asian countries such as Vietnam, Thailand, Singapore and Malaysia, which have implemented the SEZ concept to leapfrog ahead an increase the international competitiveness of their economies.
The thought process behind that concept is that instead of trying to achieve incremental progress through an overall, simultaneous reform across this vast archipelago country that could take several decades to accomplish, it is more effective to start with bold moves in particular areas (islands), selected for their strategic location. Areas designated as SEZ or FTZ are to be developed as islands with streamlined licensing procedures, good physical infrastructure, flexible labor regulations superior logistical efficiency, efficient tax administration and customs and immigration service.
These islands of economic competence are expected to become building blocks of confidence and the catalysts for reform in other areas.
However, the government should also be blamed partly for the rejection by the four House factions of the special regulation in lieu of a law regarding FTZ.
The government itself seems to be confused about the SEZ and FTZ concept. It did almost nothing in the way of improving the legislative foundation for SEZ or FTZ even after it signed with the Singapore government an economic cooperation agreement in June, 2006, to develop SEZ on Batam, Bintan and Karimun.
Instead of giving top priority to the completion of legislation on SEZ, the government issued early this year a government regulation in lieu of a law on FTZ and pushed for the development of FTZs on the three islands.
Worse still, the economics ministers were not united in their stance regarding the designation of the three islands as FTZs, especially because these islands have developed into large city islands complete with municipal administrations and a wide mixture of many residential areas, trading centers and industrial complexes and could not be converted wholly into FTZ. They could instead become the bastion of import smuggling to other Indonesian areas.
True, the SEZ concept is not without its shortcomings, but the experiences of Indonesia's main competitors in attracting investment have shown that this concept is still one of the most effective ways of strengthening a country's economic competitiveness.
We therefore fully support the suggestion of the four House factions that the government focus on making a bill on SEZ. The rationale is that FTZ should simply be made part of SEZ.
The June reform package requires the government to propose to the House a bill on SEZ by November at the latest and the new investment law that was enacted last March also stipulates the urgent need for legislation on SEZ.
