Free trade zone, finally

The Jakarta Post , Jakarta | Mon, 10/15/2007 10:57 AM | Opinion

The legal limbo investors on Batam, Bintan and Karimun islands, all near Singapore, had worried about for the past few years was removed after the House of Representatives and the government finally agreed to make the three islands a free trade zones (FTZ) under a new law enacted Tuesday.

People on the three islands also will no longer have to pay a value added tax or luxury sales tax on motor vehicles, electronic goods, liquor and tobacco.

The new legislation will theoretically make the three islands more attractive to new investors. But whether they will be able to compete with similar zones in other Asian countries in wooing foreign investors still depends on how the law is implemented.

The government should therefore see to it that the agencies that will be set up to manage the FTZ are highly credible and technically competent in serving investors with an expedient licensing system.

Certainly, the objective of the FTZ is to create job opportunities and income, increase the country's foreign reserves through exports and accelerate the transfer of technology. Conditions in Indonesia show there is no other area with the same potential as Batam and the two other islands in becoming an FTZ.

The first full-fledged and only FTZ so far in Indonesia has been Sabang, but it has not been very successful.

Batam, originally designed as an FTZ, had been treated as a bonded industrial zone (limited FTZ) since the early 1980s. But this limited FTZ status was put into limbo when the government, under pressure from the International Monetary Fund, tried to turn Batam into several enclave FTZs, or multiple bonded zones, in 2003. The imposition of multiple bonded zones on the island would only have served to delay shipments.

Unlike Sabang, the three Riau islands, especially Batam, possess several conditions conducive for an FTZ, such as steady job and income creation, foreign exchange earnings and good credibility in the eyes of investors. Batam especially has already become a growth center for surrounding areas. Other regions that have requested FTZ status lack such capacity.

Developing physical infrastructure, institutional capacity and security measures against smuggling is vital for protecting the three islands as an FTZ from potential negative impacts. Another important precondition is clear and complementary authorization between the local governments and the FTZ management agencies that have yet to be set up.

Batam's competitive edge over neighboring free trade zones such as Penang and Langkawi will increase with its new status as a full FTZ and not just a bonded industrial zone, or limited FTZ, as it had been up to this point.

The FTZ system minimizes encumbrances involved with shipping materials into and within the islands.

Bonded zones use a system of bonded warehouses to transship goods between suppliers, factories and customers. But bonded warehouses cost more to operate, suffer heavy material handling costs and serious delays involved with customs approvals.

The FTZ system is easy and attractive to foreign investors and readily lends itself to modern just-in-time manufacturing processes. It was this system that was applied to Batam when it was launched in the late 1970s as a bonded zone. The hundreds of foreign companies that have set up operations in Batam in the past 20 years have been attracted mainly by its FTZ-like system.

Just look at the types of factories already operating in Batam. They are highly mobile and highly sensitive to factors that delay goods shipments or increase costs. Under the FTZ system, greedy customs and tax officials have little opportunity to hinder the flow of goods for their personal gain.

The new law will also ease the implementation of the Indonesia-Singapore framework agreement on cooperation to develop the three islands into special economic zones (SEZs), which was signed in June 2006 but has been slow to be implemented, waiting for the new legislation as its legal foundation.

To be successful, FTZs requires superior logistical efficiency, which is anchored in the fast flow of goods, labor and documents. All this in turn needs efficient tax administration and customs and immigration services, flexible labor regulations, efficient business licensing and superb international financial networks.

It is therefore quite strategic that the framework agreement will emphasize cooperation in streamlining customs and immigration services and improving the tax administration, investment climate and financial and banking facilities, as well as accelerating capacity building for Indonesia's public sector.

But all in all, whether the three islands will be able to compete with similar facilities in other ASEAN countries will depend on the political commitment of the Riau administration and its awareness of the vital importance of new investments to build up the regional economy.

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