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Rescuing Batam from the economic abyss

High and dry: Many shipyard companies have ceased operations or downsized due to a sharp decline in business

The Jakarta Post
Wed, December 27, 2017

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Rescuing Batam from the economic abyss

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span class="inline inline-center">High and dry: Many shipyard companies have ceased operations or downsized due to a sharp decline in business. In its heydey, the sector absorbed an estimated 250,000 workers, but now, fewer than 20,000 have retained their jobs.(JP/Fadli)

Once an industrial boomtown and part of a free trade zone within the Indonesia-Malaysia-Singapore Growth Triangle set up in 1989, Batam is facing its worst economic downturn due to a combination of maladministration, mismanagement and low world oil prices. The Jakarta Post Batam correspondent Fadli analyzes the root of the economic downturn and how the new management could make the bustling island great again.

Batam’s economic figures, released by the provincial Riau Islands Statistics Agency (BPS) in August, set off a shockwave that not only shook the local administration but also ruffled the central government’s feathers in Jakarta.

The agency reported that Batam’s economic growth had plunged further to 1.52 percent in August from 2.02 percent in the second quarter of 2017. This meant that Batam, an island city of 1.2 million people and the province’s economic backbone, shared the blame for placing the Riau Islands in the league of eight among the country’s 34 provinces that grew less than the national rate of 5 percent as of August.

The news hardly took economic observers by surprise. The free trade zone began showing signs of trouble in 2014, when global oil prices dropped and Batam took a hit, forcing many investors — foreign and domestic — out of business. This year, 300,000 migrant workers lost their jobs as a result of company closures, according to the Batam manpower agency, while 169 companies went bankrupt as of 2015.

Batam’s near-zero growth in the first semester especially dismayed the central bank, Bank Indonesia (BI), which had an optimistic forecast. BI had reckoned that the island city would grow after the local administration’s budget allocation was eventually disbursed this fiscal year, and on the back of substantial consumer spending spurred by the Idul Fitri holiday in June.

Last month, Coordinating Economic Minister Darmin Nasution replaced the seven members of the Batam Indonesia Free Trade Zone Authority (BP Batam) as part of efforts to turn around the freefalling economy.

Jakarta is determined to scrap Batam’s free trade zone status and upgrade it to “special economic zone,” doubling the incentives on offer to lure investors.



The shambles follows a 17-year limbo caused by the overlapping powers of BP Batam and the Batam mayor — the two administrators of the island that was billed to rival neighboring Singapore. Their enmity is well known among local businesses that often fall victims to red tape and dubious levies.

Officially, BP Batam’s authority includes distributing land for industry, issuing business licenses and developing infrastructure, while the municipal administration takes care of public services and administrative affairs. The division of power, however, often led to inefficiency. For instance, to build a factory, an investor must obtain land allocation from BP Batam, but has to apply for the building permit with the municipal government.

Critics say that the central government also shares the blame for the chaos: Jakarta has yet to make a long-term blue print since Batam was developed into an industrial zone in the 1980s. This has led to the public cynicism that every president had their own agenda for Batam.

Suyono Saputro, an economist at Batam International University, notes that the island’s economic downturn began in 2014 along with plunging world oil prices and the ensuing domino effect.

“The sluggish global economy was the most telling factor,” Suyono said. “The global demand for oil dropped, spelling doom for the supporting industry in Batam,” he said, referring to the production of oil and gas mining equipment components.

Batam’s economy has been largely driven by the manufacturing industry, which dominates its exports. BPS statistics showed that last year’s manufacturing exports was worth US$7.60 billion, or 90.30 percent of its total export value, whereas oil and gas exports were worth $820 million, or 9.70 percent of its export value.

The continual outflow of thousands after thousands of laid-off migrant workers from other provinces has, in turn, dealt a heavy blow to the economy’s property and real sectors. The workers constitute major subscribers to property and consumer goods. The banking system is bearing the brunt of the crisis, too.

Politically, the predicament has been attributed to the well-known poor coordination among the Batam Free Trade Zone Authority, the municipal administration and the provincial government.

The rivalry between the Batam zone authority and the government began in 1999 following the establishment of the Batam municipal administration, which — like other regency-level administrations — wields considerable power thanks to the autonomy laws that practically make them “little kings” of a region.

The Batam mayoralty claims greater authority because it is established upon a higher law, while BP Batam’s authority is confined to trade-related matters in accordance with the mandate of the “lower” presidential decree. They often have overlapping powers that result in unresolved conflicts. An epic constitutional blunder is the central government’s failure to issue a regulation as required by a subsequent 1999 law, which is needed to standardize relations between the mayoralty and BP Batam.

Consequently, the two institutions and the Riau Islands provincial administration have been engaged in endless bickering over power, instead of coming together and developing Batam into a competitive, regional Singapore-style business hub as they are meant to.

“Had they joined hands, Batam would have been extraordinary. Imagine if there had been two machines delivering cash into the central government’s coffers,” Suyono said. “But look at what’s happened. No one promotes Batam to the world, because none of the authorities thinks it’s their responsibility.”

Mook Sooi Wah, the general manager of PT Batamindo Investment Cakrawala at Gallant Venture Ltd, voiced a similar concern.

“The three should have worked together as a machine, but instead they acted like three captains commanding the same ship, each setting their own destinations. No wonder Batam is going nowhere,” he said. “It needs the central government’s presence as coordinator.”

Today, Batamindo houses 68 foreign electronics investors, a quarter of which are from Singapore, and employs 60,000 workers, down from more than 100,000 during the industry’s heyday.

Worrying sign: As the local economy grinds to a halt, more and more houses in Batam, Riau Islands, are being put up for sale.(JP/Fadli)
Worrying sign: As the local economy grinds to a halt, more and more houses in Batam, Riau Islands, are being put up for sale.(JP/Fadli)

President Joko “Jokowi” Widodo has his own vision regarding Batam development. He has always wanted to reform BP Batam as the driver of investment and the economy.

So, last year, he fired the board under Mustofa Widjaja, who had been at the helm since 2005 with a third term that would end only in 2021. He was replaced last year by Hatanto Reksodipoetro, a Trade Ministry bureaucrat and member of Jokowi’s presidential campaign team.

But the leadership reform was a total flop. Under Hatanto, Batam saw its growth fall from 4 percent to 2 percent. His policy to increase the tariffs on various services by up to 300 percent scared off the much-sought investors and set off protests among the local businesspeople. The central government dismissed and replaced him in October with Lukita Dinarsyah Tuwo, an ex-bureaucrat of the National Development Planning Agency (Bappenas).

The urgent task of the new BP Batam leadership would be to restore the region’s image as an attractive place for global investors to do business. Easing regulations and cutting back tariffs would be a logical move. Electronics manufacturers have, for many years, proposed a zero percent tax so they can expand their domestic market.

Ismeth Abdullah, who chaired from 1998 through 2005 the Batam Authority – the brainchild of BP Batam – warned that the local policy chaos would scare away more investors unless the new free trade zone leadership under Lukita took proper and swift remedial measures.

The easiest way to resolve the bureaucratic entanglements, he said, would be to dissolve BP Batam and entrust full authority to the municipal administration.

In his first public appearance after his inauguration, Lukita met with Riau Island Governor Nurdin Basirun, business leaders, politicians, Batam Mayor Muhammad Rudi and community leaders to present his plans. At the top of his agenda is improving communication with the city administration and other stakeholders.

At the gathering, Lukita and Rudi threw cold water on the fire, promising to end the infamous bickering between the two agencies and improve coordination to rebuild the Batam economy.

Lukita has set an ambitious target of 7 percent growth over the next two years. To achieve it, he plans to transform Batam from a free trade zone into a special economic zone as the central government wishes. Under the new scheme, business incentives will be expanded from five to 12 over the next couple of years to restore the island’s reputation as an attractive investment destination and a driver of national economic growth.

Transforming Batam into a special economic zone is thought to be easy, as it is already divided into different zones, such as tourism, oil and gas and seaports that facilitate industrial, export and import activities.

Licensing will be simplified. Security, facilities and legal certainty will be guaranteed. Fiscal incentives, such as tax holidays and tax allowances, are on offer. “We will also cut red tape,” Lukita told the gathering.

Rudi believed that Lukita’s presence meant that “the worst is over.” “There should be no more squabbling in Batam,” he said.

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