I

ndustrial estates have often been cited as engines for economic growth in the developing world, but it seemed that Indonesia had missed the boat '€” until recently.

Fellow members of the ASEAN and manufacturing hubs such as Vietnam and Thailand have been more successful at attracting foreign investors to build production facilities in their industrial estates. Factors such as location, infrastructure, services and management capability have all been acknowledged as crucial ingredients for their success.

On the other hand, industrial estate development in Indonesia has not been all smooth sailing, according to research conducted by the Center for Public Policy Transformation in collaboration with the
Coordinating Economic Ministry.

Based on the research, there are at least five main aspects that need to be examined:

First, there is inadequate basic infrastructure surrounding the estates, for example direct access to roads and ports and reliable power supply.

Energy is critical for powering operations, including at industries located within industrial estates.

Second, there is a shortage of skilled workers for more specialized industries in remote areas.

As a result, companies have to either bring in foreign talent or recruit skilled workers from outside of the area, thus inflicting additional labor costs.

Third, the labor relations between workers and employers inside some industrial estates are frictional at best. Labor demonstrations for higher wages and severance pay are notoriously frequent, causing disturbances to businesses.

Batamindo Industrial Park management indicated that these may have caused several foreign companies, including Siemens, to leave the estate in recent years.

Fourth, companies at industrial estates were not facilitated by streamlined administrative and licensing processes.

Interviews revealed that a multinational furniture company located inside an industrial estate in Indonesia had to spend three years to obtain 80 licenses and permits to legally operate a factory in 2011.

By contrast, the company'€™s factory in Vietnam '€” which is not located inside an industrial estate '€” only needed 20 licenses and six months to complete the licensing process in 2002.

Fifth, the Indonesian government offered fewer incentives '€” including favorable taxation and customs policies '€” to potential investors, thus reducing the competitiveness of Indonesia'€™s industrial estates against its neighbors in the region.

In an attempt to address these issues and to spur more industrial investment to flow into the country, the government recently announced a series of economic policy stimulus packages incorporating aspects of industrial estate development.

One of these policies is the availability of a three-hour licensing policy for investors intending to start projects that are worth at least Rp 100 billion (US$7.3 million), employ a minimum of 1,000 employees and are located inside industrial estates designated by the Investment Coordinating Board (BKPM).

Another item lauded by many investors was the new minimum wage policy. It introduces a new formula that calculates wage increases using each province'€™s inflation rate and economic growth, therefore enabling businesses to better approximate the costs they are expected to incur.

The development of Special Economic Zones (SEZs) and industrial estates gained further momentum earlier this month when the government allowed foreign investors to operate SEZs and own residential property within these zones.

Administrative efficiency can also be improved by setting up a one-stop shop inside industrial estates.

The government had also indicated plans to reimburse investors for building basic infrastructure, which previously had been cited by private developers as a reason as to why they were unable to keep prices down.

The much-anticipated revision to the 2009 Government Regulation on Industrial Areas, scheduled to be announced at the end of November, is also expected to include a number of investor-friendly fiscal incentives, such as tax reductions from both the central government and local administrations.

While these policies may address some of the concerns that investors have surrounding industrial estates, there is still considerable work to be done '€” particularly in the areas of infrastructure, administrative efficiency and workers'€™ productivity.

The development of 15 new integrated industrial estates '€” including 13 outside of Java '€” emphasized the need for the government to operate properly functioning infrastructure, such as the recently launched so-called sea toll road.

Indonesia'€™s vast size and archipelagic nature mean that geographical distances will continue to obstruct the flow of goods between the islands, unless the issue is properly addressed.

In addition, the government must also ensure that power generation projects will be implemented effectively, particularly in the less developed eastern region of Indonesia, where 218 projects are planned for the year 2015-2019.

Administrative efficiency can also be improved by setting up a one-stop shop inside industrial estates to process and approve all of the licenses and permits that a company is required to obtain.

At the moment, industrial estates in Indonesia are still supported by regional-level OSS, whereas other manufacturing hubs like Vietnam already have an OSS available inside industrial estates to streamline the licensing process.

Lastly, measures should also be put in place to ensure workers'€™ productivity. These include providing housing for workers near the estate, basic welfare services such as health insurance, as well as vocational and technical education to upgrade skills, particularly for more specialized industries.

Taking all these factors into consideration, both existing and new industrial estates can become powerful tools for growth if they are properly and holistically developed.

As the government is gradually opening up its doors to more foreign investment, it must also keep in mind both the necessity of safeguarding political stability, as well as the importance of maintaining and respecting a high level of human rights standards in the country.