Government to divide Batam into free trade 'enclaves'

Urip Hudiono and Fadli, The Jakarta Post, Jakarta/Batam

The government has finally decided to propose free trade zone (FTZ) status for Batam in certain industrial areas on the island, dismissing worries the move might only discourage investors.

Coordinating Ministry of Economic, Financial and Industrial Affairs official Mahendra Siregar told The Jakarta Post on Friday the proposition, dubbed "enclave FTZ", had been affirmed in the government's final draft for the law on an FTZ status for Batam.

"We hope to be able to submit the draft to the House of Representatives for deliberation soon," Mahendra said. "We only need to work out several remaining details of the FTZ's implementation with customs and taxation officials."

The government has been under pressure to grant an FTZ status to all of Batam and the adjacent islands of Rempang and Galang in a bid to boost investment there.

Batam has 14 industrial zones including Batam Center, Nagoya and Muka Kuning. About 650 foreign companies are operating on the island, with a combined investment of about US$3.7 billion. They provide jobs for 173,000 workers, with a further 70,000 jobs in the informal sector.

Mahendra said the enclave FTZ scheme was chosen to ensure only export-oriented industries would receive exemptions on customs duties and taxes.

"Industries targeting the domestic market should be excluded from the FTZ status, as it would not be fair for local competitors located in other regions," Mahendra said.

"The enclave FTZ scheme will also prevent Batam from being misused as an entry point to flood foreign goods into the domestic market," he said.

Mahendra denied the proposed enclave FTZ scheme was just another name for the bonded zone policy, which has been implemented in Batam since the 1970s. An FTZ, which was completely outside the authority of customs and taxations offices, would further enable companies to import goods without paying customs duties and taxes, pending their eventual processing, shipment or export, he said.

Mahendra said the enclave FTZ scheme could be just as effective attracting investors as a whole-island FTZ. Investors would still come to Batam because of its advantages -- a better- than-average infrastructure and a strategic location only 20 kilometers from Singapore.

Batam Industrial Development Agency head Ismeth Abdullah, who had been aggressively campaigning for the implementation of FTZ for the whole of Batam, said he accepted the government's decision.

"Investors care more about legal certainty than whether the FTZ is an enclave or covers the whole island," Ismeth said.

However, Association of Indonesian Industrial Estates (HKI) Batam chapter chairman Johannes Kennedy Aritonang said the enclave FTZ scheme, along with the recently imposed domestic consumption taxes, were likely to increase the cost of labor on the island and dissuade investors.

The government imposed in January new taxes on cigarettes, automotive products, liquor and automotive products, as well as new value-added tax and sales tax on luxury goods in March.

Batam's local administration would start in September deliberating of a new minimum wage for the island, Johannes said. As many workers lived outside the enclave FTZ, they would be subject to the recent consumption taxes and would face higher prices for essential goods, he said.

"(The administration) is likely to require companies in Batam to provide a higher minimum wage," Johannes said. "We can only hope companies will stay and maintain their operations in Batam."