Batam to receive free trade status by year end: Official

Batam to receive free trade status by year end: Official

Tantri Yuliandini, The Jakarta Post, Batam, Riau

The government is expected to grant Batam Island in the Riau
province the long anticipated Free Trade Zone (FTZ) status by the
end of the year, the Batam Industrial Development Authority
chairman Ismeth Abdullah said.

He said that the government was currently deliberating the new
bill on the status of Batam and that it was "serious" and had the
backing of the House of Representatives.

"All it needs (for the status to be imposed) is for it to be
formalized. There was a dispute before about the FTZ status, but
it has been resolved," Ismeth told visiting foreign reporters.

He said that the FTZ status was important to Batam and its
future as Indonesia's center of industry, as it would act as a
magnet to attract foreign investors into the country.

A Free Trade Zone status would enable companies on Batam to
import goods without paying customs duties and taxes, pending
their eventual processing, transshipment, or reexportation.

Batam, located some 20 kilometers from Singapore, was
initially declared as an industrial bonded zone in 1978 to
attract foreign investment and bolster export competitiveness.
The same status was later given to the nearby islands of Rempang
and Galang, making the zone a total area of 715 square
kilometers.

However, Ismeth said, the island had technically acted as a
free trade zone beginning 10 to 15 years ago and tax incentives
originally intended for industry had also been enjoyed by all
residents of Batam, including Indonesian companies even when
their products and services were not destined for export.

This policy led to resentment among companies based outside
the island, leading the government to reimpose value added tax
(VAT) in 1998 to ensure equitable tax treatment.

The ruling, which was originally to take effect in April last
year, met with strong resistance both from Batam residents and
foreign industrialists based here.

It was then decided to postpone the imposition until next
year.

Since then the status of the island has been in question, not
only due to uncertainties over tax incentives but also because
legally a bonded zone status would not include noncommercial
inhabitants.

Ismeth said that the uncertainties had caused many foreign
investors to postpone their investments on the island and from
the expected 100 new investors last year only 49 had pushed
through with their planned investment.

Foreign direct investment (FDI) on Batam has steadily
increased even during the years of economic crisis. Last year FDI
was US$2.8 billion compared to $2.3 billion the year before.

Ismeth said that between January and September this year
approvals for foreign direct investment totaled $382.1 million
comprising 55 new investments and 16 expansions.

He said that he expected some 80 new foreign direct
investments to arrive by the end of the year.

However, the effects of the global economic slowdown in the
aftermath of the U.S. terrorist attacks would also effect
business activities on the island.

"The New York tragedy makes us worry because who knows how it
will tighten investment worldwide," Ismeth said, adding that due
to the recession Japanese electronics company Hitachi had pulled
out of the island.

Exports from Batam would also likely drop between 10 to 12
percent this year compared to $6.8 billion last year, he said.

"In general (the recession) will affect us, but we hope we
will not be hit hard," Ismeth said, explaining that he expects
new projects to commence early next year that would compensate
for this year's decline.