The House of Representatives endorsed the special economic zone (SEZ) bill on Tuesday, delegating legal powers to a new government body for the promotion of these more liberal trade and development regions.
The law basically allows the new National Council on SEZs to make feasibility assessments to request the establishment of SEZs proposed by regional governments, prior to presidential approval.
This delegation of power is seen as an positive and interventionist move as in the past the creation of these more liberal trade and development zones has required parliamentary approval on a case-by-case basis, as with the transformation of Sabang island into a free trade zone (FTZ) in August 2001, followed by the Batam, Bintan and Karimun islands in 2007.
Trade Minister Mari Pangestu acknowledged the new law on SEZs was an extension of the 2007 law on FTZs (free trade zones), providing both local and foreign businesses in designated areas with numerous incentives, particularly the zero tariffs on exports and imports.
“The free trade and port zones will be part of the special economic zones,” she told a House session.
With the help of regional government, the National Council, which will be headed by economic ministers, would lay out a master plan for the creation of SEZs including the detailed incentives for businesses operating in them, Mari said.
Mari said fiscal incentives would include tariff and tax concessions and customs rebates, as well as regional concessions, while the non-fiscal incentives would range from fast-track procedures for land rights, business licenses and port formalities, through to immigration clearance for foreign workers. She said the government would also provide work permits for foreign workers, which would be valid until they no longer held positions in companies operating within these zones.
The government always argues how economically more liberalized regions will support the overall economy, as in China. Nevertheless, the attempt to mimic this success has been hampered by lack of supporting infrastructure – particularly electricity supply, poor law enforcement, opaque business regulations and poor spatial planning.
Since its creation as an FTZ, dozens of companies have withdrawn from Batam due to its poor supply of electricity and water. Instead of becoming a manufacturing haven, Batam, Bintan and Karimun islands have instead become a tourist destination for local and foreign tourists alike, particularly for golfing and allegedly also for prostitution.
The biggest threat to the establishment of SEZs, analysts said, was poor law enforcement that could turn them into smuggling hubs for goods from abroad, as was already said to be the case in Batam island.
Regardless of these concerns, regional governments are more than convinced by the attractions and theoretical benefits of SEZs.
Deputy for Infrastructure and Regional Development at the Coordinating Ministry for Economic Affairs, Bambang Susantono, said currently there were 22 proposals for the creation of SEZs, with two likely to be accepted within a year.
To avoid smuggling, Bambang said the government plans to erect fences surrounding SEZs.
Industry Minister, Fahmi Idris, said the government would choose areas near international trade and shipping routes, as well as those with prominent potential resources.
Therefore, the government would pick regions complying with local spatial planning regulations, as well as those not damaging environmentally protected areas, he said.
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