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.