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alu, a medium-sized city in Central Sulawesi with a progressive minded mayor is seeking to reinvent itself as opportune choice for investment in Indonesia on President Joko “Jokowi” Widodo’s “maritime road” by way of its Special Economic Zone (SEZ).

This SEZ is also a critical juncture test for developing Eastern Indonesia, namely Sulawesi, Maluku, Kalimantan and Papua. These are all provinces sorely in need of human development and investment past the raw commodity processing trades of coal, oil and CPO.

Having previously worked on both the Chinese Tianjin and Pudong SEZ’s in the late 1990s, the Chinese model of endogeneity looms large here for opportunity and in avoiding past mistakes.

The Palu project offers some 1,500 hectares of land positioned on a deep water port that reaches up to 50 meters deep, enough to accommodate oil tankers and cargo ships. The land is in 3 phases of about 500 ha a phase, at this point only the first phase has developed some.

In fact, President Jokowi cancelled a visit there last month, sending a minister instead as the SEZ has still not found an ‘anchor’ tenant. Both the local and federal governments are pushing heavily the idea of public private partnerships (PPP), but a PPP is government and industry in the same bed, but dreaming different dreams. More on that at the end.

This endeavor will require a few things to create a workable SEZ. But the idea should not be just to create another mediocre SEZ in words, but an actual community integrated SEZ than can drive Indonesian economic growth, in particular for remote and unskilled areas. Some key points are in order of what needs to be done first.

Anchor tenant. This is key. The anchor tenant will define the type of SEZ Palu becomes. All contractors and vendors will ultimately orbit around the anchor tenant. Anchor tenants in China SEZs have included Motorola, Siemens and General Motors. Nonetheless before an anchor tenant can be formalized, the type of SEZ must be considered.

The Indonesian central government has made it clear it wants mining processing, or heavy industry, to be the denominator, locals would like to see an agro based SEZ. China made its name on light manufacturing (cell phones, Nike shoes, laptop computers). Different industries have pros and cons with all of them.

Agro is very enviro-friendly, but low profits; heavy industry is big profits, but also very polluting; light manufacture requires a highly skilled workforce, with a lot of investment beforehand in local people. Clearly, Sulawesi is not ready for the latter.

Free or highly discounted land. Chinese SEZs were in part so successful in the 1990s as they offered investors free land. The land was not free in an ownership title sense, but conditional in the order that the company had guarantees to the land as long as a factory or manufacturing plant was placed on it, and that a large percent (verified and audited) of its products were going for export.

This enticement was too good of an offer for many of the world’s leading companies, who beat a path to China’s door to have ultimate access to the Chinese market. These days, “free land” is no longer being offered to foreign companies as motivation to invest in the eastern and central SEZs which have been take over by joint ventures with many Chinese companies, or have become Chinese companies outright.

Freedom from Byzantine, and contradictory regulations. What is mostly referred to here are overlapping or regional regulations that create duplication.

The Investment Coordinating Board (BKPM), despite its long run of slick advertisements on Bloomberg and CNBC, now under Tom Lembong, has not been able to paper over deep and persistent problem. Nor has Finance Minister Sri Mulyani Indrawati. Nor has any fiat directive by Jokowi’s government.

The issues of overlapping regulations are due to deep seated rent seeking activity from incumbents in the myriad of ministerial offices having a “say” in projects. The easiest way to clear out this behavior is in having a one-party state.

But Indonesia does not seek to be a one party state, they had that under Soeharto.

On paper, the Palu SEZ charter promises both heavily discounted land leases and freedom from regulatory interference, essentially creating a foreign country for investment inside of Indonesia. That is also the ideal, and the Chinese model used. However, despite these promises, serious doubts remain in investor’s minds. The recent Freeport mining and Mahakam offshore oil disputes have not been reassuring or edifying.

Palu needs a strategy to be sure. However, it appears the only taker at this time will be a Chinese state-owned company in energy or mining processing, which will also become the anchor tenant, thus creating a heavy industrial SEZ for mining processing. This may be good for China access to commodities, and by extension Chinese workers, but Palu may not gain much out of this.

What Palu really needs to increase its capability and expertise past the before mentioned issues of land, regulations and anchors is in up-scaling its people for capability and ultimately creation of value added products.

The Palu SEZ is now setting up the PPP investment center with the expectation that they can start the PPP infrastructure next year.

This will include port expansion, energy supply, roads, water supply, and electrification. Nonetheless it’s not only about physical amenities available to investors.

To get to competitive downstream activity requires know how, not just export of semi-finished products. Palu is in need of a real SEZ strategy, Indonesia can enhance this by focusing on building human resources in Sulawesi, not merely grabbing any investor.
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The writer is ASEAN scholar at Guangdong University of Foreign Studies, in Canton, China.