Status of Batam free trade zone revisited<\/p>\n
Evan Jones, Batam<\/p>\n
The trade commission of the House of Representatives is
\ndeliberating on what kind of Free Trade Zone (FTZ) system will be
\nimplemented in Batam.<\/p>\n
Batam's business community is strongly opposed to the proposed
\nenclave system -- where only a few of Batam's many industrial
\nestates will be allowed free trade status.<\/p>\n
Proponents of the enclave system, as stipulated in the bill on
\nFree Trade Zone in Batam currently under deliberations at the
\nHouse, argue that the previous system, where the whole island was
\nin effect a single FTZ, caused the state great losses; they say
\nthat Batam's open system promoted wholesale smuggling of goods
\nfrom Batam to the rest of Indonesia.<\/p>\n
They also argue that the state loses revenue from the large
\nquantity of untaxed consumer goods used by the island's local
\npopulation; that it is not fair for Batam's wealthy residents to
\nenjoy tax breaks on goods which are taxed in the rest of
\nIndonesia.<\/p>\n
The problem with the proposed new tax rules for Batam,
\ncurrently under deliberation, is that they are not working, they
\nare ruining Batam's competiveness and the enclave system will
\nbring more harm than good.<\/p>\n
But firstly, let us review Batam's current position. In the
\nlate 1960's, Pertamina's then President Director Ibnu Sutowo put
\nforward the idea to develop Batam, an island of 7,000 fisher-
\nfolk, from raw uninhabited jungle to a modern centre of industry
\nand trade.<\/p>\n
Today, Batam is an unqualified success. Nearly a million
\npeople and over 700 multinational companies makes this city the
\nrichest and fastest growing in Indonesia (by physical measures,
\nsuch as numbers of cars and electricity consumption, it has grown
\nat a solid 30 percent annually for each of the previous 11
\nyears). Few places in the world have ever grown so fast for so
\nlong. Batam is a model to hold up and show the world what
\nIndonesia can achieve.<\/p>\n
Batam is living proof that if you offer Indonesian labor in a
\ngood geographical location and a relaxed regulatory environment,
\nyou can turn mud and mosquitos into a world class competitive
\neconomy.<\/p>\n
But the new tax rules are closing in on Batam's foreign
\ninvestors. No longer can they import and export materials without
\nthreats or hassle. No longer can they run their business in peace
\nwithout unwelcome visits from government officials.<\/p>\n
It is not only the rules that have changed but Batam seems to
\nbe losing that \"can do\" attitude, which made foreign businesses
\nfeel comfortable to be here.<\/p>\n
A growing number of expatriate managers of multi national
\nbranch operations talk of increasingly unpleasant encounters
\nwith Indonesian officialdom -- of being threatened with heavy
\nsanctions for trivial and even fictitious alleged regulatory
\ntrangressions.<\/p>\n
The FTZ enclave system proposes that goods for production
\noutside the enclaves are imported and exported under the \"Master
\nList\" system, a system notorious for its unworkablity and ease of
\ncollusive abuse by importers and government officials.<\/p>\n
Moreover, Batam Customs says it has no intention of providing
\nmanpower to police the 40 or so pelabuhan tikus (small, isolated
\nseaports) used by wooden ships to move goods in and out of Batam.
\nSo, while law abiding businesses will be retarded by the onerous
\nrules of the enclave system, cowboy companies can carry on
\nbusiness as usual over those 40 wooden jetties.<\/p>\n
Paradoxically, under the new rules, it is now less cumbersome
\nto source materials from Singapore than the factory down the
\nstreet.<\/p>\n
One feature of a highly successful economy such as Batam's, is
\nit's huge volume of trade. It is now seven full months since
\nGovernment Regulation No 63\/2003 on value added tax (VAT) and
\nluxury sales tax was enacted. Since then, enforcement of VAT and
\nluxury sales tax in Batam has been patchy, to say the least. By
\nmid year 2004, the number of cars on which VAT tax had been paid,
\nreached a grand total of five (5) vehicles. All the others were
\n\"imported as usual\" (smuggled).<\/p>\n
The new FTZ regulations require a factory site of at least 10
\nhectares for the place to qualify for FTZ status. This is
\nunworkable for those dozens of companies who will be forced to
\nmove millions of dollars worth of buildings and plant from one
\npart of the island to the other.<\/p>\n
One of the reasons why so few Batam industrial estates have
\nFTZ status is that the mostly Indonesian Chinese developers are
\nbeing asked by officials to pay an outrageous Rp 40 million per
\nfactory unit for FTZ certification.<\/p>\n
One of Batam's original investors, an American chemical
\nfactory established in Batu Ampar since the early 1970s, has been
\ntold to move the entire plant to another part of the island.<\/p>\n
Another reason given for imposing the enclave system is that
\nunder the previous entire-island free trade system, smuggling
\nfrom Batam to the rest of Indonesia was rampant. Well, in the
\npast seven months, the new rules have, if anything, triggered an
\nincrease in the volume of smuggled goods. The same system of
\npayoffs carries on exactly as before.<\/p>\n
This argument overlooks that Batam is actually a minor player
\nin the smuggling business. Indonesia's center of smuggled goods
\nis, and always will be, Singapore. If you want to ship 71,000
\ntons of sugar or 200 luxury cars to Indonesia, you don't ship via
\nBatam, you ship directly to the Indonesian port of consignment.
\nThis makes business sense: why smuggle the same thing twice if
\nyou only need to once?<\/p>\n
The price of alcohol is cheaper now than it was a year ago.
\nBottles now have tax labels, but where did the labels come from?
\nInto whose pockets is the \"tax\" revenue going? Who is backing VAT
\ntaxes for Batam? Why? Where is the backing-money coming from?<\/p>\n
It is argued that citizens of the rest of Indonesia must pay
\nVAT and luxury sales taxes, therefore Batam should too. But while
\nthis argument does have some merit, it overlooks that the cost of
\nliving for low-end workers -- the economy's backbone -- is
\nalready the highest in Indonesia.<\/p>\n
Batam's minimum wage is Rp 630,000\/month. But the cheapest
\nplate of nasi (rice) from a roadside warung costs Rp4,000. A
\nrented room in the most humble plywood shack costs Rp
\n200,000\/month. The cheapest, shortest ojek( motorcycle taxi) ride
\nis Rp 2,000.<\/p>\n
Batam's cost of labor, already the highest in Indonesia, must
\nincrease, if the cost of living rises. Suddenly, whole
\nindustries that depend of cheap labor, such as electronics,
\ngarment manufacturing and ship repair could become uncompetitive.<\/p>\n
The Chairman of the Batam Branch of the Association of
\nIndonesian Businesses (Apindo), Abidin Hasibuan warned last week
\nthat 16 foreign companies are planning to pull out. With 12,000
\nworkers, Abidin's company is Batam largest employer. A patriotic
\nself made Indonesian, born and bred within an hour's boat ride of
\nBatam, Abidin's plans for his next factory expansion are already
\nunderway -- in China.<\/p>\n
Batam used to work well because private enterprise could
\nfunction in a hassle free semi-deregulated environment. The world
\nis moving towards deregulation. Jakarta's FTZ policies are
\nputting Batam in the same over-regulated straight-jacket as the
\nrest of Indonesia.<\/p>\n
The author is a business analyst.<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/status-of-batam-free-trade-zone-revisited-1447893297", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }