Batam in the Riau Islands had from the mid1970s to the year 2000 developed as a favorite site for investors seeking cheap land, cheap labor, efficient business licensing bureaucracy and proximity to Indonesia’s huge market. Batam’s proximity to Singapore and the efficient, onestop service center for business licensing and land acquisition provided by Batam’s then powerful development authority, enabled the island to attract tens of billions of dollars in investments.
However, Batam’s economic promises began to fade after the launch of regional autonomy in 2001, or three years after the fall of Soeharto’s authoritarian administration. Dualistic administrative authorities emerged as the Batam municipal administration claimed part of the authorities formerly held by the Batam development authority. The rise of new export processing zones (EPZ) and bonded or special economic zones (SEZ) in Malaysia, China and Vietnam made Batam even less attractive.
But the government seemed to have been confused as to how to solve the dualistic authorities. The Megawati administration in early 2004 ended Batam’s status as a full-fledged free trade zone and imposed domestic consumption taxes (value added and luxury sales), notably on motor vehicles, electronic goods, tobacco and liquor.
The rationale was that it was different from other bonded industrial zones in the country, which are entirely isolated from residential areas. Batam had also developed into a large city, complete with a municipal administration and a wide mixture of many residential areas, trading centers and industrial complexes. Manufacturing is only part of its mainstream economic activity. Making the entire Batam island a free trade zone could turn it into a bastion for import smuggling to other Indonesian areas.
The Yudhoyono administration in early 2005 reaffirmed Batam as an enhanced free trade zone, not a full-fledged free trade zone. President Joko “Jokowi” Widodo’s administration promised to develop Batam and its surrounding islands into a SEZ after the new team it appointed from Jakarta last year seemed unable to resolve the problems of having dualistic authorities.
We think the SEZ status, based on the 2009 Law on SEZ, is the most effective way of removing the dualistic authorities, because the concept of SEZ development fully involves the local administration right from the outset.
Batam and its nearby islands would be suitable for a SEZ, which is designed to be a special zone with streamlined procedures for business licensing, the hiring of expatriates, flexible labor regulations, tax breaks, customs duty exemptions and certainly good infrastructure to woo investors in export-oriented industries.
The best lesson from successful SEZ development overseas is that a SEZ should be managed by a super ministerial body directly under the President, so that it can serve as Mr. Fixer for any problems encountered and holds the authority to ask for the cooperation of virtually all other ministries and government agencies.
The high-powered SEZ management team can thus make bureaucratic action more important than bureaucratic rules and rigidities, resolving problems by executive fiat on the spot, all with the clear objective of making things easier for investors.