Trade Minister Mari Elka Pangestu admitted last week that the implementation of free trade zones on the three Indonesian islands near Singapore - Batam, Bintan and Karimun - is beset with administrative problems and that institutional capacity is inadequate.
Even though Mari conceded that such start-up problems are part and parcel of the introduction of such a new concept, the enforcement of the free trade zone law, which was enacted in October 2007, has been too slow. After all, free trade systems are not completely new at least to Batam, where a bonded industrial zone had operated for almost three decades.
True, institutional and ground-work preparations for the development of the free trade zones are rather complex, requiring the division of authority between the central government and regional administrations. Security measures against smuggling should be institutionalized to prevent the three islands from being used as a beachhead for entry into the country’s black market.
But good coordination between the central government and local administrations could have accelerated the development of the agencies in charge of managing the FTZ system, including all matters related to investment or business licensing.
But what many businesses have faced is arduous bureaucratic procedures and confusion in the division of licensing authorities, and, yet more damaging, much slower customs clearance.
These problems virtually nullified the basic advantages which are supposed to be provided by the FTZ concept: Expedient business licensing and smooth flows of imports and exports.
The FTZ system is useless if it is not effective in minimizing encumbrances involved with shipping materials into and within the islands, as this concept is designed to attract companies which need modern “just-in-time” manufacturing infrastructure.
To be successful, a FTZ requires superior logistical efficiency, which is anchored on the fast flows of goods, labor and documents. All this in turn needs efficient tax administration and customs and immigration service, flexible labor regulations and expedient business licensing – as well as superb basic infrastructure.
The development of the FTZ affects the implementation of the Indonesia-Singapore Framework Agreement on cooperation, which aims to develop the three islands into special economic zones (SEZs). Signed in June, 2006, the agreement is still waiting for the enactment of the law on SEZ, which is still under deliberation at the House of Representatives.
It is imperative that the government improve coordination in developing FTZs on the three islands because they could become a confidence-building show-case for the future development of SEZ.
The smooth operation of FTZ could make the three islands a catalyst for the introduction of a similar economic development concept on other islands.
SEZ are essentially based on the development of enclaves or “islands of competence” with streamlined licensing procedures, good physical infrastructure, flexible labor regulations and superior logistical efficiency in its broadest sense.
This is, by and large, the concept Vietnam has been implementing through its industrial parks, China through SEZs on its southern coasts since 1978, Malaysia, in cooperation with Singapore, in Johor state, and India through its export processing zones and later SEZs.
Find Article by Date