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.