From Traditional Trade to Free Trade

Singapore is one of the important trading partners of Indonesia.  Export of Indonesia to Singapore was US$ 12.862 million in 2008 and placed as the third largest export destination after Japan and USA.  Export of Singapore to Indonesia was US$ 21.789 million as the largest then followed by China and Japan.  Singapore has developed her industry significantly since 1961 with the remarkable start of Jurong Estate.  Consistent policy of free and open trade supported by efficient government and excellent infrastructures such as high-quality ports and telecommunication system have brought Singapore as what we have known now: the world hub of trade, logistic and shipping, procurement, financial services, information and e-commerce.

On the other side, Riau Archipelago, especially Batam, Bintan, and Karimun (BBK), the nearest islands of Indonesia to Singapore, has long been seen as strategic areas for international trade that benefit to Indonesian development. Traditional trade between these islands and Singapore, Malaysia and/or other Southeast Asian countries has been developed over centuries. In 1970, Batam become the first island in this archipelago to be developed after Central Government convinced the mutual benefit of trading with Singapore. By Presidential Decree Number 65/1970, Batam was developed especially for agricultural export hub and off-shore oil exploration. In 1973, Batam turned into site of industrial complex. Since 1978, the whole Batam become tax free bounded wharehouses. The development of sea and airports, streets, water and energy system and industrial sites has changed Batam into a kind of city island. Batam has replaced the previously traditional role of Bintan for international trade. From 1978-1983, Batam started to have a special authority for processing immigration, trade, cooperative institutions, tourism and investment activities.

From 1983,  industrial sites of Batam extended into its nearby islands such as Janda Berias, Tanjung Sau, Ngenang, Kasem dan Moi-moi. By Government Regulation Number 34/1983, a simple Local City Administration was established to provide public services. With Presidential Decree Number 7/1984, the Batam Industrial Development Agency (BIDA) was established to carry over public works and industrial facilities to  service the need of increasing investment flow.  After Law Number 22/1999 called the Regional Autonomy Law then followed by Law Number 53/1999, a city of Batam officially launched and its administration was created to follow the decetralization trend of local government in Indonesia. However, in 2000, the free trade policy for Batam was modified by the introduction of tax schemes on a bundle of products and services including luxury ones.  By the end of 2004, the policy for Batam changed again that only certain designated areas in Batam called Bounded Zone got tax free schemes.  With Law Number 44/2007 that replaced Law Number 36/2000, Batam has been turned again into a free ports and trade zone till the present day.

Investment activities from Singapore have increased overtime to this area. As in April 2009, among 527 foreign companies, 369 (71,4 %) come from Singapore.  Singapore has big interests in investing to this province due to cheap labor, basic technology, rich natural resources and unlimited land viability (Heng, 2006).  However, it seems that the “on-off” policy on free trade, lack of capacity of administration works, and of infrastructure have still been seen as bottlenecks to Batam and the archipelago to grow faster.  Singapore investors have raised questions on the implementation of FTZs in this province.  This paper is to discuss issues related to the FTZ implementation in BBK and recommendation policy related to these issues.

Riau Archipelago and Singapore Economic Relation

Global financial crisis in 2008 has serious impact on Singapore economy and at a certain grade on Riau Archipelago’s. Economic growth of Singapore decreased to – 9.6 % in Q1 of 2009.  While growth of Riau Archipelago was 0.35 % compared to Indonesia’s growth of about 4.3%.  However, by Q4 export growth had recovered to 3.3 % in Q4 so the average growth reaches 2.5 % (y-o-y).  Economic growth of Singapore achieved 3.5 % (y-o-y).  In 2009, Singapore growth was -2,1 % and Riau Archipelago was 0,56 %.

It’s clear that industrial development in BBK depends on demand of Singapore manufacture industry, some of them have offices in BBK. For example, the Batam Industrial Park and Bintan Industrial Estate are built by the Singapore Economic Development Board. When Singapore’ demand  decrease, the BBK industrial activities will also decrease.  Singapore depends on export. Her export to GDP ratio was 132,6 % (ASEAN, 2008) while  GDP of Riau Archipelago was Rp 59.208 billion that its export to GDP ratio is 132,4% (BPS, 2008)

Picture 1. Economic growth of Singapore, Riau Archipelago and USA, 2005-2009

Source : Bank of Indonesia (2010)

Notes: PDB=GDP, Kepulauan Riau=Riau Archipelago, AS=USA

Trade between Singapore and Riau Archipelago is significant.  Non-oil export of this province to Singapore was US$ 4.006 millions in 2008, passed through Batam.  Import from Singapore was US$ 6.508 million. Riau Archipelago is net importer to Singapore as also the case for Indonesia.  Import from Singapore is mostly capital goods. This province’s main export is manufacture products, like iron and steel products, transportation equipments, engine and electronic products. This data  provides for official trade.  It is arguable that illegal trade still happen in in this area.

Picture 2:  Non-Oil Export of Indonesia, Riau Archipelago and Batam, 2000-2008

            Source: BPS Batam (2009)

Picture 3. The Value of Riau Archipelago Export Development

Source : Bank of Indonesia (2010)

As of June 2009, total value of investment in Riau Archipelago was US$1.160 millions, where 72% comes from Singapore that was about 369 companies or US$836.9 millions. Most investment is in industrial sector. FDI has increased double in the last ten years, from US$ 2.818 millions in 2000 to US$ 5.244 millions in 2009 (BIDA, 2009).  Thru Batam, of total 1.061 million foreign tourists, Singapore tourists was 663 thousands or 62.5 % in 2008.  As of December 2008, the average daily spending of tourists was US$110 and stay 3.15 days per visit. It seems the mobility of products and people between Singapore and Riau Archipelago is high.

Picture 4: Govt, Domestic and Foreign Investment in Million US$.

            Source: Batam Industrial Development Agency/BIDA (2009, recalculated)

Notes: Pemerintah=Government, Swasta Domestik=Domestic Invesment and  Swasta Asing=Foreign Investment

Riau Archipelago FTZ and It’s Challenges

In 1998, IMF persuaded the Government of Indonesia to reactivate a tax scheme for trade in Batam and/or Riau Archipelago. However, this policy delayed by Government Decree No. 45/2000 and No. 13/2001. After the enactment of Law Number 44/2007 on FTZ, government launched three regulations Number 46/2007 about Free Trade Zone and Free Port (KPBPB) Batam, Number 47/2007 about KPBPB Bintan and Number 48/2007 about KPBPB Karimun. BBK now becomes an important region of Indonesia for free international trade activities. The FTZ policy officially started on April 1^st, 2009 by Trade Ministry Regulation Number. 12/M-DAG/PER/3/2009 about the overflow of the license authority in foreign trade to Executing Board of FTZ BBK.

Ministry of Finance (MoF) also launched the MoF Regulation (PMK) Number 45/PMK.03/2009 on control mechanism, administration, payment and sinking of value added and/or turnover tax on articles of luxury, dismissal, transfer of goods an/or services from FTZ to non FTZ zone of Indonesia.  MoF launched PMK Number 46/PMK.04/2009 about notice of customs to enter and release of goods to and from FTZ zone. Then, PMK  Number 47/PMK.04/2009 about the mechanism of entering and releasing of goods to and from FTZ zone. Those MoF regulation still cannot solve the rigidity problem  of investment permit.  Then,  government issued PMK Number 240/04/209 to replace PMK 45/2009, PMK Number 241/04/2009 for PMK 46/2009 and PMK Number 242/04/2009 for PMK Number 47/2009 on January 15^th , 2010.  Previous approach with the “rigid master list” replaced to “flexible master list” approach. It means that if the goods is not appropriate with the master list than entrepreneur will report to customs (Bea Cukai) for checking. 

Jakarta has more enthusiasm to create business climate more conducive in BBK. Many things need to be more clear.  First, implementation of FTZ in Batam is improved, Bintan and Karimun still need to be improved, especially in making them more efficient.  Second, the flexible master list policy to more friendly service,  so industrial sector become more developed and more competitive.  Third, BBK needs speacial attentionby especially from Central Government in providing more infrastructure,  more efficient in ports and customs service, and mobility of products and services in BBK area.  Fourth, socialization of regulation for people in charge of making everything easy.  Five, More pro-active syncronization of policy and implementation from the BBK Zone Council (Dewan Kawasan) and Executing Board of FTZ (BP Batam, BPK Bintan and BPK Karimun).  Problems with bureaucracy have to to be solved thru increasing capacity and renumeration system.

The Future of FTZ to Riau Archipelago and Singapore

Singapore has policy favor to private sectors thru; (i) giving concession (like as pioneer status to new company, hair cut tax for export gain and to increase capacity in human resources); (ii) develop more industry with good infrastructure (manufacture factory with high technology located near in densely populated); (iii) to guarantee good investment climate (including responsible labor movement).  Those free trade policy also supported by political stability, a good business infrastructure, strategic location, a good frame of law, the world financial services and pro-business approach.

Indonesia need to push more works on such good business envrionment. The Global Competitiveness Report (2009-2010) reports that the most problem due to investment climate, the bureaucracy is still inefficient.  Gurita of license permits has to be cut, so time in doing business is shorter.  Inadequate infrastructure is big problem.  Others such as instability policy, corruption, access to financial sources, labor regulation, tax regulation and inflation.

Picture 5. Major Problem In Doing Business In Indonesia 2009

Source : The Global Competitiveness Report 2009-2010

The fruits of FTZ will not only benefit Riau Archipelago but also the rest of the country. To take these benefits, Riau Archipelago,  First, need more forum for all stackholders to address problems and opportunities. Second, incentive schemes haave to be provided for housing and condominium, hotel, restaurant, trade centre and residential have tosuppose to increase more investment. Credit is increased to Rp 183.5 billions (3,9%) with annual growth is 17.9% of Rp 752,6 billions is a signal that Riau Archipelago is the big market.  Industry of Singapore shares 31,7 % and services  68,3 % to this area. Third, Ports in FTZ BBK (Batu Ampar, Sekupang and Kabil) has to be developed better to carry trade need.  Fourth,   Kra canal in Mekong Valley in 2020 have to be seen as new threats as well as opportunies. This agenda including making better of shipping track system, port facilities, logistic, warehouse,and commerce and financial services. Fifth, idea of building Batam-Bintan bridge as well as Batam-Singapore bridge is better formulated to make bigger market size of the area.

Closing

ASEAN Free Trade Arrangements (AFTA) reduces tariff 0-6 % by Common Effective Preferential Tariff (CEPT) scheme.  China-AFTA arrangements is new opportunity. This imply that the export and import speed will grow faster.  Riau Archipelago has many things to do.  Start from simplify the permit procedure, integrated one stop services, increase coordination between central and regional government,  publish and communicate all benefits to entrepreneur and public,  provide more acces to public, more transparancy and accountability. This will make friendly of trade, not threats, that will benefit for all.

Thank you

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