Japanese investors start to return to Batam

Hendarsyah Tarmizi, The Jakarta Post, Jakarta

Japanese investors have started to come back to Batam and open up businesses in this industrial bonded zone thanks to the Japanese government's move to lessen the concentration of the country's overseas investment in China.

The chairman of the Batam Industrial Development Authority (BIDA), Ismeth Abdullah, said in Tokyo last week that the Japanese government's new policy of limiting the country's overseas investment in China had contributed to a significant increase in new investment commitments in the island this year.

"A large part of the new investment commitments made by foreign investors during the first semester of this year came from Japan. This indicates a growing confidence on the part of Japanese investors in doing business in Batam," Ismeth said following the signing of Memorandums of Understanding (MOUs) between BIDA and five Japanese companies in Tokyo last week.

In the MOUs signed at a business gathering held as part of BIDA's four-day investment campaign in Japan's capital, the five companies expressed their intention of setting up factories on the island. BIDA, for its part, agreed to provide all the necessities needed for bringing their investments to pass.

Ismeth said that besides the five companies, many other Japanese investors had informally expressed their interest in establishing factories on the island.

However, he said that most of these companies were waiting for the implementation of the proposed law on the strengthening of the status of Batam as a free trade zone, which would, among other things, provide a broader tax incentive base for new investors.

Lured by a large domestic market and attractive tax incentives, most Japanese medium and large-scale companies have being putting a larger part of their overseas investment into China over the past five years. As a consequence, the flow of Japanese investment to Indonesia has almost came to a halt, particularly over the past two years.

The concentration of Japanese investment in China has, however, caused concerns for the Japanese government. Focusing investment on one country not only entails higher risk but also could cause imbalances in economic growth in the Asian region.

Executive director of the Japan External Trade Organization (JETRO), Shinchi Saito, acknowledged that there had been a change in the government's overseas investment strategy.

"We are now encouraging our investors not to concentrate their investment on China. They are being asked to also invest in Southeast Asia so that every country in this region will have an equal opportunity to grow," he said during a meeting with BIDA executives on Wednesday.

Saito, however, warned that JETRO, which is in charge of monitoring and supervising the country's outbound and inbound investment, had no power to tell investors where they should invest their money.

"If Batam has a better business climate and more attractive fiscal packages, the investors will naturally go to this investment site," he said.

According to Saito, Indonesia as a whole should offer fiscal incentives as good as those provided by China, Malaysia and Vietnam if it wanted to attract foreign direct investment.

"If you want to attract foreign investors, you should offer better incentives than the others," he told Indonesian journalists covering the meeting.

The chairman of the Kansai's Japan-Indonesia Business Association, Hajime Kinoshita, shared Sato's view. He said that there was a growing interest among Japanese companies in setting up their overseas factories in Batam but they were still waiting for an improvement in the tax incentives available before coming to the island.

Japanese investors generally did not have any problems about the situation Batam or the quality of its infrastructure. "They are already familiar with Batam. Its strategic location and modern infrastructure are better than other investment destinations in the region but they want much more attractive tax packages, such as tax holidays, before doing business on the island," he said.

Batam, some 20 kilometers to the south of Singapore, is one of the most modern industrial bonded zones in Asia Pacific. At present, investors doing business on the island are exempted from paying import and export duties, as well as sales tax on luxury goods, and value added tax.

The Ministry of Trade and Industry is proposing a law to strengthen the status of Batam and its neighboring isles of Rempang and Galang, as a free trade zone.

With the new legislation, BIDA as the sole authority for the industrial bonded zone, will have more power not only in protecting the foreign companies' assets and operations but also in improving fiscal incentives to investors.

BIDA chairperson Ismeth said that the proposed law, which was now being deliberated by the House of Representatives in Jakarta, would pave the way for the introduction of the long-waited tax holiday.

With this new fiscal incentive, investors would not only be exempted from paying import and export duties, sales tax on luxury goods and value added tax, but also from corporate income tax for certain periods of time.

"I hope there is no problem with the bill as most of the articles in the bill are based on concepts prepared by the House members themselves," he said. "We are optimistic that the law will be passed by the end of this year and could be implemented next year," he added.

According to Ismeth, encouraging the passage of the new legislation was one of many efforts being made by BIDA to ensure that investors' operations on the island were more competitive than those in China and in other parts of the Asian region.

Batam, which was established as an industrial bonded zone in 1971, has become one of the largest investment destinations in Asia Pacific. There are 650 foreign companies operating on the island at present with a combined investment of about US$3.7 billion. Their existence has provided jobs for 173,000 workers, with a further 70,000 jobs in the informal sector. Last year, these companies paid corporate income tax of almost Rp 1 trillion.

There are now 50 Japanese companies operating, with their total investment being worth about $400 million. The companies include affiliates of Japan's business giant Sumitomo, electronics company National/Panasonic Matsushita and Nippon Steel.