Status of Batam free trade zone revisited

Status of Batam free trade zone revisited

Evan Jones, Batam

The trade commission of the House of Representatives is
deliberating on what kind of Free Trade Zone (FTZ) system will be
implemented in Batam.

Batam's business community is strongly opposed to the proposed
enclave system -- where only a few of Batam's many industrial
estates will be allowed free trade status.

Proponents of the enclave system, as stipulated in the bill on
Free Trade Zone in Batam currently under deliberations at the
House, argue that the previous system, where the whole island was
in effect a single FTZ, caused the state great losses; they say
that Batam's open system promoted wholesale smuggling of goods
from Batam to the rest of Indonesia.

They also argue that the state loses revenue from the large
quantity of untaxed consumer goods used by the island's local
population; that it is not fair for Batam's wealthy residents to
enjoy tax breaks on goods which are taxed in the rest of
Indonesia.

The problem with the proposed new tax rules for Batam,
currently under deliberation, is that they are not working, they
are ruining Batam's competiveness and the enclave system will
bring more harm than good.

But firstly, let us review Batam's current position. In the
late 1960's, Pertamina's then President Director Ibnu Sutowo put
forward the idea to develop Batam, an island of 7,000 fisher-
folk, from raw uninhabited jungle to a modern centre of industry
and trade.

Today, Batam is an unqualified success. Nearly a million
people and over 700 multinational companies makes this city the
richest and fastest growing in Indonesia (by physical measures,
such as numbers of cars and electricity consumption, it has grown
at a solid 30 percent annually for each of the previous 11
years). Few places in the world have ever grown so fast for so
long. Batam is a model to hold up and show the world what
Indonesia can achieve.

Batam is living proof that if you offer Indonesian labor in a
good geographical location and a relaxed regulatory environment,
you can turn mud and mosquitos into a world class competitive
economy.

But the new tax rules are closing in on Batam's foreign
investors. No longer can they import and export materials without
threats or hassle. No longer can they run their business in peace
without unwelcome visits from government officials.

It is not only the rules that have changed but Batam seems to
be losing that "can do" attitude, which made foreign businesses
feel comfortable to be here.

A growing number of expatriate managers of multi national
branch operations talk of increasingly unpleasant encounters
with Indonesian officialdom -- of being threatened with heavy
sanctions for trivial and even fictitious alleged regulatory
trangressions.

The FTZ enclave system proposes that goods for production
outside the enclaves are imported and exported under the "Master
List" system, a system notorious for its unworkablity and ease of
collusive abuse by importers and government officials.

Moreover, Batam Customs says it has no intention of providing
manpower to police the 40 or so pelabuhan tikus (small, isolated
seaports) used by wooden ships to move goods in and out of Batam.
So, while law abiding businesses will be retarded by the onerous
rules of the enclave system, cowboy companies can carry on
business as usual over those 40 wooden jetties.

Paradoxically, under the new rules, it is now less cumbersome
to source materials from Singapore than the factory down the
street.

One feature of a highly successful economy such as Batam's, is
it's huge volume of trade. It is now seven full months since
Government Regulation No 63/2003 on value added tax (VAT) and
luxury sales tax was enacted. Since then, enforcement of VAT and
luxury sales tax in Batam has been patchy, to say the least. By
mid year 2004, the number of cars on which VAT tax had been paid,
reached a grand total of five (5) vehicles. All the others were
"imported as usual" (smuggled).

The new FTZ regulations require a factory site of at least 10
hectares for the place to qualify for FTZ status. This is
unworkable for those dozens of companies who will be forced to
move millions of dollars worth of buildings and plant from one
part of the island to the other.

One of the reasons why so few Batam industrial estates have
FTZ status is that the mostly Indonesian Chinese developers are
being asked by officials to pay an outrageous Rp 40 million per
factory unit for FTZ certification.

One of Batam's original investors, an American chemical
factory established in Batu Ampar since the early 1970s, has been
told to move the entire plant to another part of the island.

Another reason given for imposing the enclave system is that
under the previous entire-island free trade system, smuggling
from Batam to the rest of Indonesia was rampant. Well, in the
past seven months, the new rules have, if anything, triggered an
increase in the volume of smuggled goods. The same system of
payoffs carries on exactly as before.

This argument overlooks that Batam is actually a minor player
in the smuggling business. Indonesia's center of smuggled goods
is, and always will be, Singapore. If you want to ship 71,000
tons of sugar or 200 luxury cars to Indonesia, you don't ship via
Batam, you ship directly to the Indonesian port of consignment.
This makes business sense: why smuggle the same thing twice if
you only need to once?

The price of alcohol is cheaper now than it was a year ago.
Bottles now have tax labels, but where did the labels come from?
Into whose pockets is the "tax" revenue going? Who is backing VAT
taxes for Batam? Why? Where is the backing-money coming from?

It is argued that citizens of the rest of Indonesia must pay
VAT and luxury sales taxes, therefore Batam should too. But while
this argument does have some merit, it overlooks that the cost of
living for low-end workers -- the economy's backbone -- is
already the highest in Indonesia.

Batam's minimum wage is Rp 630,000/month. But the cheapest
plate of nasi (rice) from a roadside warung costs Rp4,000. A
rented room in the most humble plywood shack costs Rp
200,000/month. The cheapest, shortest ojek( motorcycle taxi) ride
is Rp 2,000.

Batam's cost of labor, already the highest in Indonesia, must
increase, if the cost of living rises. Suddenly, whole
industries that depend of cheap labor, such as electronics,
garment manufacturing and ship repair could become uncompetitive.

The Chairman of the Batam Branch of the Association of
Indonesian Businesses (Apindo), Abidin Hasibuan warned last week
that 16 foreign companies are planning to pull out. With 12,000
workers, Abidin's company is Batam largest employer. A patriotic
self made Indonesian, born and bred within an hour's boat ride of
Batam, Abidin's plans for his next factory expansion are already
underway -- in China.

Batam used to work well because private enterprise could
function in a hassle free semi-deregulated environment. The world
is moving towards deregulation. Jakarta's FTZ policies are
putting Batam in the same over-regulated straight-jacket as the
rest of Indonesia.

The author is a business analyst.