Key Socio – Political Factors

Indonesia is:

• The 4th most populous country in the world, with a population of around 250 million people.

• The 3rd largest democracy in the world following its transition into a stable and thriving democracy since 1998.

• The largest Muslim country in the world with over 80% of the Indonesian population following the Muslim faith.

• The biggest archipelago in the world consisting of over 17,000 islands spanning three time zones.

Indonesia is a member of a number of regional and international organizations and has ratified many bilateral and multilateral trade and investment related agreements.

While Indonesia alone constitutes a high-potential business country, its membership of the Association of the South-East Asian Nations (ASEAN)—comprised of Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam--further increases its prospects.

Indonesia, together with the nine other ASEAN Member States, forms an economic bloc with a total market size of more than 600 million people and a progressively more integrated economic area, moving towards the realization of an ASEAN Economic Community (AEC) by the end of 2015. With the upcoming AEC, long-term investors in Indonesia are offered the opportunity to expand their horizons beyond the Indonesian market.

Under the ASEAN Free Trade Agreement (AFTA) the six original ASEAN members (Indonesia, Malaysia, Singapore, Thailand, the Philippines and Brunei) agreed to reduce import duties to five percent or less by 2010, and by 2015 for the four newer members (Vietnam, Laos, Myanmar and Cambodia). ASEAN also has Free Trade Agreements (FTA) with China, India, Japan, South Korea and Australia/New Zealand. The ASEAN Investment Area was established in 1998 to encourage FDI liberalization and promotion, but in later reviews was deemed insufficient, and ASEAN members completed the ASEAN Comprehensive Investment Agreement in 2009, covering liberalization, protection, promotion and facilitation. Indonesia is also a member of Asia Pacific Economic Cooperation (APEC).

In addition, Indonesia belongs to numerous international organizations including:

Economic Overview

In the past few years, Indonesia’s economy has undergone exceptional developments. The country has become an economic powerhouse and a global player having evolved to become the 10^th largest economy in the world.

Indonesia’s recent economic performance established it as the second fastest growing G20 economy in 2013, after China, with a strong and stable average growth of 6% over the last decade.

The growth of the Indonesian economy is largely based on a strong, domestic consumer base. The contribution of domestic consumption to total GDP has in recent years consistently exceeded 60%.

Indonesia’s population, with a consuming class estimated at 15%, drives not only Indonesian growth but also great market opportunities.

In contrast to many industrialized countries, Indonesia is a young country, with 43.7% of the population younger than 24. Furthermore, with wage levels still significantly lower than in neighboring or BRIC countries, Indonesia offers great opportunities in industry and production.

Rich in natural resources such as petroleum, tin, natural gas, rubber, nickel, bauxite, copper, coal, gold and silver, the country is not only attractive as a production base, but also as a trading partner.

The large domestic market, a sizeable and young work force, abundant natural resources and sound macroeconomic fundamentals leave European companies ample room for business opportunities.

Healthcare

• Indonesia’s spending on healthcare is expected o grow by close to 14% annually, reaching US$61 billion by 2018

• By 2019, an estimated 240-260 million Indonesians will be covered by a newly implemented National Health Insurance program

• The National Health Insurance program will generate demand in a new population group, by providing access to care among those that never could have afforded it before, thus driving increased demand for clinics, hospitals and clinicians

• Current public hospitals alone will not be able to meet the demand for services, therefore major private hospital groups, public hospitals and community healthcare centers are already expanding to address the gap in the healthcare infrastructure

Siloam – the largest Indonesian private hospital group – currently operates 20 hospitals located in 15 cities and by 2017 is projected to have more than 50 hospitals ?in more than 30 cities and regencies across the Indonesian archipelago.

Negative investment list: Business and management consulting service and/or hospital management service - Foreign capital ownership max 67%

Business Potential

Hospital beds, medical devices, diagnostic tests, IT systems and skilled manpower demand

Information and Communication Technology (ICT)

• Indonesia is emerging as a major ICT market

• It is now the world’s second largest market for both Facebook and smartphones, and has Twitter’s third largest user base

• With 275 million mobile phone users and 175 million expected internet users by 2016

• The Palapa Ring¹ Project will further boost the growth of the ICT market and the number of internet users

• The market potential for providing enterprises with ICT services in Indonesia is expected to reach US$3bn by 2015, while the potential for consumer services is estimated at approximately US$1.5 bn.

With nine mobile network players, and 98% of users opting for prepaid services in the mobile telecom sector, this market is one of the most attractive telecommunications markets for foreign companies.

The number of Internet users in Indonesia is also expected to rocket from 40 million in 2011 to 175 million by 2016, accompanied by a boom in data connection subscribers, which is expected to grow from 52 million in 2011 to 167 million in 2016. This significant market growth will translate into business opportunities for mobile operators and companies providing Internet-based services to consumers and enterprise.

Business Potential

Finance IT, e-commerce, e-logistics and cloud computing

Finance IT

• Indonesia’s ratio of mobile phone subscribers was 121% in 2013 (278 million mobile phone subscribers out of 250 million Indonesians).

• In 2012, around 50% of the Indonesian population was still unbanked.

• Mobile branchless banking and electronic payment systems are popularly viewed as the way forward for Indonesian financial inclusion.

E-logistics

• Indonesia Is aspiring to improve its national infrastructure and the industry needs reducing supply chain costs and increasing efficiency.

• High logistics costs, corresponding to 24% of Indonesia’s GDP, form a serious impediment to economic growth.

• IT Solutions are set to cut down costs and improve the quality of logistics and transport systems.

Cloud Computing

• Cloud Computing has emerged as a major element of IT policies for most Indonesian businesses. The market is set to reach more than US$120 million by 2017.

• Basic services such as system integration, support systems, training, professional services and outsourcing will continue to be in high demand.

• Telecommunication providers are looking for cloud services partners.

Food & Beverage

• In 2013 the Food & Beverage sector recorded growth of 8.2%, contributing 7.42% to the country's GDP

• The sector is expected to keep on rising in coming years, mainly due to rising incomes and increased spending on food by the growing middle class

• The food consumption growth in 2014 amounted 7.5% and is forecasted to grow 6.9% by 2017

• For alcoholic drinks, the growth amounted 11.7% in 2014 and is forecasted to grow 8.4% by 2017

• Growth in soft drinks sales increased by 9.5% in 2014 and is expected to increase by 8.8% by 2017

Indonesia is the fourth most populous country in the world. Developing the agriculture, food and beverages sector is one of the government’s industrial development priorities. To foster development in this vital sector, strong cooperation and coordination among all stakeholders is needed – including among both public and private actors, domestic and foreign companies.

Note that alcoholic beverages are subject to heavy regulations.²

Business Potential

Halal products, branded and specialty food products, food processing machinery, supply of food ingredients and packaging.

Soft drinks: Top three Indonesian favorite consumptions are hot coffee, tea and iced tea drinks.

Automotive

• More than 1 million cars were sold in 2012, exceeding all estimates (up 25% over 2011)

• In 2013, despite a slight slowdown in real GDP growth to 5.8%, another sales record was set in the Indonesian car market with a total of 1,229,901 units sold

• Indonesia is expected to overtake Thailand as the biggest automotive market in ASEAN

• However, it is expected that a so-called “low cost green car” (LCGC) regulation will inspire the most significant changes in the Indonesian automotive landscape

Issued by the Indonesian government in 2013, LCGC exempts cars that meet certain requirements in the area of production location, fuel efficiency and price from the luxury tax. The price advantage the new law generates for the LCGC industries is widely expected to transform the market. This segment is estimated to have a deep future impact on consumption, especially in the lower sector and among first-time car buyers and those switching from motorcycles to cars. This development may be further enhanced through the planned phase-outs of fuel subsidies and the expected general awareness increase regarding fuel efficiency.

Business Potential

Production facilities, mechanical tools

Agribusiness

• The Agriculture and livestock sector contributed roughly 10% to GDP in 2014

• Indonesia is the world’s largest producer of palm oil as well as a leading global producer of other high value commodities such as cocoa, rubber and coffee

• Consumption is low in comparison with other ASEAN nations. However it is growing steadily due to increasing in health awareness and incomes

• There is an increase of consumption around Ramadan month. It is the most significant sales period of the year, contributing 45% of annual sales

The new Government of Indonesia (GoI) has sought to promote acceleration in the agriculture industry, determined to achieve its goal of self-sufficiency future food supplies, and has initiated favorable investment policies to attract both local and international investors.

GoI priorities include agricultural infrastructure; agricultural research; control, prevention and eradication of animal's diseases; and enhancement programs for agriculture productivity.

Business Potential

Livestock, Animal Medicine, Agriculture Seedling, Fertilizer, Machinery

Livestock

Due to growth in domestic food demand, all livestock population in Indonesia have risen over the past eight years. The biggest population is poultry followed by goat, dairy cattle, and beef cattle, reflecting the preferences of the country’s Muslim majority.

There is a general lack of knowledge and technology in the areas of husbandry, upkeep, and production.

Indonesia’s dairy consumption was 13.4 liters per capita per year in 2013, while meat consumption is 4.3 kg per capita per year, of which beef & buffalo consumption is 0.26kg per capita per year, and chicken consumption is 3.95 kg per capita per year.

Animal medicines

The market reached US$246.1 million in 2013, an increase of 7% OVER the previous year. Poultry medicines contributed more than 70% of the total.

In 2014, poultry medicine sales reached US$388.4 million, of which US$223 million was spent on premix and the rest on vaccine and pharmaceuticals.

Agriculture Seedling

Imported seeds are still required to fulfill domestic shortage.

GoI has removed many of the duties and import barriers related to the seedling industry.

Fertilizer

Dominated by SOEs under Pupuk Indonesia Holding Company, especially in urea and NPK which they also export.

Indonesia imported about 80% of its mixed compound fertilizer. All KCl (Potassium Chloride) products, for instance, are imported.

Machinery

Indonesia imports about 80% of its agriculture machineries as they are cheaper than local products due to higher tariffs on raw materials than on imported machineries.

While able to produce most of the components for agriculture machines of low specifications, core engine technology and engineering steel are two of the most needed raw materials that cannot be produced locally.

Textile & Footwear

• The size of the Indonesian textile sector grew by 1.7% in mid-2013, performing well above other sectors

• It attracted 5.6% of Indonesia’s industry investment in the third quarter of 2012, with a total of IDR 2.6 trillion

• Indonesia was ranked in the top ten global exporters in 2011, with a total market share of 1.8% and contribution of US$ 12.8 billion

• Indonesia is the fourth biggest footwear exporter in Asia after China, Hong Kong, and Vietnam. It boasts a 2.8% global market share, with an average selling price of US$ 15.65. The top export destinations are the United States, followed by the European Union and emerging markets such as Brazil, Mexico, Panama, South Africa and Russia. Sports footwear accounts for 79% of exports

Acknowledged as one of the industries that “oil” the Indonesian economy, the textile and footwear sector continues to be a major contributor to the international market. The Indonesian government has displayed confidence in the potential of this sector, showing support for further development by implementing a machinery restructuring program for textiles and footwear in 2007. Price discounts and equity participation schemes in machinery funding have attracted increasing participation levels: 142 companies participated in the program in 2012. Weaving machinery is nonetheless one area where the Indonesian textile sector shows deficiencies, particularly related to processing knowledge and current trends information.

Business Potential

Textile

The production of man-made fibers, particularly polyester, nylon and rayon, man-made and cotton yarn spinning, weaving and knitting, dyeing, printing and finishing, and apparel manufacturing.

Footwear

Sports shoes, boots, formal and style shoes, casual shoes and leisure sandals, specific footwear.

Cleantech

• Macro developments such as urbanization, rapid growth, climate change and exhaustion of resources are driving the need for investments in clean technologies in Indonesia;

• New clean industries are coming on board to drive the future growth for clean technologies

• These particular categories are relevant when discussing Indonesia’s current approach in regards to an environmental paradigm change in the country, as Indonesia has a national commitment to reduce carbon emissions by 26% in 2020

Business Potential

Clean energy, Green Building, Waste water, Solid Waste

Clean energy

Indonesia’s primary energy supply is heavily dependent on fossil fuels; oil accounts for 48%, while natural gas and coal each account for 26%. This is posing great problems, especially since Indonesia became a net oil importer 10 years ago with only 12 years of reserves left. At the same time, energy demand is expected to grow by about 8-11% depending on the region, according to the Electricity Power Supply Business Plan (RUPTL).³

Green Building

Construction of buildings of certain types and sizes must meet the requirements of green building. This applies to both new buildings and renovation of existing buildings.

New buildings mean buildings that are currently in the planning stage. The technical requirements for green building of new buildings include:

• Energy efficiency

Energy efficiency includes the efficiency of the building veil systems, ventilation systems,
air systems, lighting systems, building transportation systems, and electrical systems.

• Water efficiency

Water efficiency includes the planning of water-saving sanitary equipment and planning of the use of water.

• Indoor air quality

Indoor air quality must calculate the air circulation in the room and the input of fresh air so it does not harm the occupants and the environment.

• Land and waste management

Land and waste management include the requirements regarding spatial landscape planning on the inside and outside of the building and planning of rainwater reservoir systems, supporting facilities, and solid and liquid waste management.

Existing buildings means buildings that are under construction and / or already in the utilization stage. The technical requirements for green building of existing buildings include:

• Conservation and energy efficiency

• Conservation and water efficiency

Conservation and water efficiency include the use of water efficiently and water quality monitoring.

• Indoor air quality and thermal comfort

• Operational management / maintenance

Operational management / maintenance activities include monitoring and evaluation activities.

Wastewater

Within the framework of PPSP (Acceleration of Urban Sanitation Development) the national government has helped local governments to prepare City Sanitation Strategies (SSK). As of mid-2012, 240 cities and regencies had prepared SSK’s, and 330 of the 496 local governments were expected to have completed them by 2014. The SSKs contain the policies and strategies for a comprehensive sanitation development at the district level, and are intended to provide clear directions for the construction of a sanitation system.⁴

Solid Waste

Indonesia’s rapid growth and improvement of living standards are generating increasing levels of municipal solid waste (MSW). About 80,000 tons of solid waste is generated daily, of which only 34,000 tons is collected and disposed in the country’s’ approximately 380 properly designed and managed landfills, several of which are approaching their maximum capacity.

While there is an obvious need to minimize the generation of waste and to reuse and recycle them, European private sector should explore the potential of solid waste as a raw resource by commercial means, as the technologies for recovering energy for electricity from waste shows a great business potential in the Indonesian market. Waste-to-Energy (WtE) technologies, besides recovery of substantial energy and heat out of different Indonesia’s waste streams, present an opportunity to decrease the amount of waste reaching landfills which can be better managed for safe disposal in a controlled manner, as at the same time, respond additionally to Indonesia’s increasing energy demand due its rising economic and population growth.

Maritime

• Indonesia’s strategic location: over half of all international shipping goes through Indonesian waters

• The government project known as Pendulum Nusantara includes the planned construction of at least 6 inter-linked deep-water ports, and another 22 ports including completely new ones and renovated ones

• The Indonesian shipbuilding industry is forecasted to record 10% growth. Between March 2005 and November 2013, the number of Indonesian vessels increased from 6,041 to 12,774

• For the period of 2012-2015, the priority is on increasing the capacity of local shipyards. A significant rise can be expected in the demand for tankers and freighters

The current port projects were part of the past administration’s MP3EI planning document. The grand project “Pendulum Nusantara”, whose implementation has already begun, shall be pursued further under the leadership of the president Joko “Jokowi” Widodo.

Development Scheme of Pendulum Nusantara’s Main and Sub Corridor

Business Potential

Development of roads, seaport construction and revitalization, shipbuilding such as tankers and freighters

Aviation

• Indonesia is home to 296 airports;

• 26 of these airports are commercial airports in big cities managed by the state-run airport operators PT Angkasa Pura I (AP I) and PT Angkasa Pura II (AP II). The others fall under Transportation Ministry's technical management unit (UTP)

• 19 new airport projects are currently in the pipeline

• Increasing tourism, international trade and the development of regional economic centers is driving demand for improved aviation infrastructure

Most of the new airports are to be built in eastern Indonesia, where the topography is challenging and airports are the most effective way to help distribute both people and goods.

There is an urgent need for new runways and terminals to accommodate the growth in passenger numbers. Jakarta’s Soekarno-Hatta International Airport, which handles the lion’s share of Indonesian air traffic, is running far above its intended capacity, serving some 58 million travelers in 2012 instead of the 22 million it was designed for. An expansion of Terminal 3 will boost capacity to 62 million passengers, but further upgrades will be needed before long. Almost all of the country’s commercial airports are also running far beyond their intended capacity.

The fleet surge at major carriers necessitates a similar increase in the capacity for aircraft maintenance, repair and overhaul (MRO). Having sufficient MRO facilities of their own is vital for airlines to contain their operating costs and buttress their independence. This creates a strong case for investment in hangars and equipment. 

Besides infrastructure bottlenecks, the shortage in human resources poses a threat to the future growth of Indonesia’s airline industry.

Currently, Indonesia requires around 1,000 new pilots every year until 2015 but cannot produce even half that number. Even greater is the need for technicians and engineers, while air traffic control officers and safety inspectors are also in short supply. Foreigners currently help to fill the gap but the government is keen to avoid this where possible, providing a potential investment case for pilot schools and other training institutions.

Business Potential

Building of new runways and terminals, hangars and equipment, training of human resources.

Indonesia shares the characteristics that have attracted multinational companies to establish production units in Southeast Asia in recent years. Among them are low production and labor costs and financial incentives, made available by the governments of several countries in the region. In Indonesia, one of these incentive policies is the establishment of Special Economic Zones (SEZ), designed to encourage foreign companies to invest in the country in order to spur economic growth and competitiveness.⁵

Generally, the development of SEZs are expected to attract investors and thus have a positive impact on the economy of the host country. Lower taxes, as well as low wages and flexible labor laws are offered as incentives to investors,⁶ creating optimal investment conditions characterized by an abundant labor supply, specialized suppliers and knowledge/technological spillovers.

In Indonesia, an SEZ is an area of defined dimension that provides accessibility to global markets by setting incentives and granting certain facilities to attract investors and create employment opportunities.⁷ In these designated estates, goods are traded with limited barriers (quotas, tariffs, duties) imposed by customs authorities.⁸ The business carried out in these zones is subject to special conditions and regulations, especially directed towards the fields of trade, services, manufacturing, mining and energy, transport, fisheries, post and telecommunications, tourism and other fields.⁹

The generic term SEZ encompasses many types of economic zones that differ according to the specific activities carried out within a particular zone. They include Free Trade Zones (FTZ), Export Processing Zones (EPZ), Free Zones (FZ), Industrial Estates (IE), and Free ports.¹⁰ In Indonesia, SEZs are mainly used as an instrument to strengthen its position as a regional production base using its comparative advantages, namely cheap labor, abundant natural resources, and its proximity to the broader South-East Asian market.¹¹ This leads to the conclusion that SEZs in Indonesia tend to be focused on generating large inflows of foreign investment into the manufacturing industry.

Source: BKPM, Investing in Indonesia, National Medium-Term Development Plan 2015-2019, 2015¹²

Besides the Investment Coordinating Board of the Republic of Indonesia (Badan Koordinasi Penanaman Modal – BKPM), another relevant government agency monitoring as well as participating in regulating SEZ development is the National Council for Special Economic Zones.¹³ Regarding the relevant legal framework, in each SEZ favorable conditions for the location of SMEs and cooperatives are to be made available.¹⁴ The laws applicable in each SEZ govern restrictions on both imports and exports.

SEZ are expected to provide a variety of investment incentives and facilities to attract business. Hands-on advantages for European companies to affiliate in an Indonesian SEZ are as the following:

Source: Information provided by BKPM, Applicable Laws and Regulations to SEZ, 2015

Please note, requirements to be met for being granted admission to these incentives are often connected to a certain industry or thresholds. For instance, to be authorized for tax holiday a capital investment at a minimum of one trillion IDR is necessary including 10% of asset investment on a bank account in Indonesia ahead of the commercial production commencement¹⁵.

Source: Information provided by
BKPM, Applicable Laws and Regulations to SEZ, 2015¹⁶

The Negative Investment List (DNI)¹⁷

Companies considering investing in Indonesia need to be aware of certain national regulations established by the government to protect selected domestic industries in order to improve Indonesia’s competitiveness in advance of the establishment of the ASEAN Economic Community (AEC). The Negative Investment List specifies sectors that are either wholly or partially banned to foreign investment, but with exceptions for SME and cooperatives. The DNI applies also to SEZs.

Relevant Laws and Regulations regarding SEZ are:

Establishment of SEZ: Presidential Decree No. 25/2007, Art. 31

Investment Allowance: Ministry of Finance, Income Tax Law No. 16 – 20/2000

Tax Holiday: Ministry of Finance, Tax Holiday Regulation No. 130/PMK.011/2011

Import Duties: Ministry of Finance, Import Duty Facility Regulation No. 176/PMK.011/2012; Amendment of No. 176/PMK.011/2009

Value Added Tax and Excise Presidential Decree No. 39/2009 Art. 32 (1b,c)

Negative Investment List: Presidential Regulations No. 39/2014, Annex I

General: Presidential Decree 39/2009

As a sub-type of SEZ, Free Trade Zones (FTZ) (Kasawan Perdagangan Bebas - BPK) are areas within the jurisdiction of the Republic of Indonesia which are treated if they were outside of the Indonesian customs territory focusing on free trade. Therefore the business activities conducted within FTZ also enjoy special conditions regarding tariffs and non-tariff barriers.¹⁸ FTZs are often located at or close to a port of entry to facilitate import and export.

The regulations under which FTZs are created provide specific coordinates and boundaries. The regulatory framework as well as business activities conducted within the particular FTZ are stipulated in its “Regional Master Plan”.

Currently, 4 Free Trade Zones has been established in Indonesia. :

• Batam Free Trade Zone and Free Port

• Bintan Free Trade Zone and Free Port

• Karimun Free Trade Zone and Free Port

• Sabang Free Trade Zone and Free Port

Indonesia has concluded International Guarantee Agreements with 52 countries, establishing compensation mechanisms to discourage reluctance regarding nationalization or expropriation; damages and losses caused by incidents of war, revolution or insurrection; as well as payments for any approved remittance pursuant to the investment in case of non-convertibility of the currency of the host country.

General Conditions for Import and Export of Goods into and from FTZs

Companies that intend to carry out business within FTZs need to meet certain standards and provisions to import and export of goods from and to foreign countries into Batam – Bintan – Karimun Free Trade Zones (BBK).

The standards to be met are the following:¹⁹

• Importation of goods can be carried out by importers, except for prohibited goods such as weapons, drugs or any goods as stipulated by the government;

• License from the Free Trade Zone Executing Agency (Badan Pengusahaan Kawasan, BPK) must be obtained prior to the importation;

• Importation of all consumption goods can only be carried out by importers approved by the relevant BPK;

• Goods imported must be in line with the scope of business of the importers (kind and quality must be mentioned);

• All export of goods to foreign countries and non-FTZs in Indonesia must be reported to the BPK;

• Customs procedures (including audit and penalties) are applicable to the FTZ;

• There is no requirement as to registration as a Taxable Enterprise (Pengusaha Kena Pajak, PKJ) for VAT purposes. Entry and removal of goods to and from an FTZ may only be performed by business performers/entrepreneurs who have received business permits, and in designated ports or airports that are already covered by a permit from the Minister of Transportation and thus already designated custom zones.

The Indonesian Rupiah is the legal medium of payment within the Free Zone. Entry and removal of Rupiah currency inter-Customs area to and from a Free Zone is subject to the rules established by the Government. In addition, the movement of Rupiah between the Free Zone and foreign countries is subject to the general rules applicable in a Customs area. Conversely, foreign currencies can be traded in the Free Zone through licensed banks or moneychangers. In the Free Zone, all international trade transactions are performed in foreign currency by licensed banks.

The province of Kepulauan Riau Islands is home to three of the four Indonesian FTZs: Batam, Bintan, and Karimun (BBK). Together, BBK were selected in 2007²⁰ as the preferred location for setting up an FTZ due to their unique geostrategic advantages. The province consists of 2,408 islands and is located strategically in the Malacca Strait, the busiest shipping route in Asia, and is part of a growth triangle involving Singapore, Malaysia and Indonesia. The following abstract conveys essential information about these three FTZs.

Benefits

In Indonesia, the distinguishing feature between a SEZ and a Free Trade Zone is its export focus. The regulations and investment incentives established by national and regional authorities (Badan Pengusahaan Kawasan, BPK) are equally applicable²¹. Particularly in terms of labor supply, BBK has an abundance of potential workers. A marked difference to SEZ is, that within a FTZ import and export duties as well income tax, VAT, and sales tax on imported capital goods, equipment, and materials are exempted without a time limit, but only until the portion of production destined for the domestic market is "exported" to Indonesia, in which case fees are owed only on that portion.²²

Indonesian immigration regulations generally apply in the Free Trade Zones. Some zones provide an immigration service onsite.

Challenges

Previously there have been some reported challenges regarding investment climate in BBK FTZ, namely a declining competiveness and the FTZ’s institutional setting.

The multiple layers of government with sometimes overlapping roles regarding governmental levels in the zones’ development are one obstacle to an efficient and coordinated regulatory approach.²³ Companies have highlighted problems with inconsistent interpretation or application of regulations by government officials, corruption, as well as limited coordination between the provincial and national governments.²⁴ The overlapping regulatory authorities lead to confusion, delays, and slow-decision-making processes. A current measure to tackle the legal uncertainties and to improve the institutional setting is to further centralize the management of FTZs in order to steer efforts to attract more investors. The Jakarta Post recently reported that the central government is considering appointing Trade Minister Thomas Lembong to chair the FTZ Management Board and take over the leadership from the provincial governor, based on the reasoning that FTZs operate on an international level and are better managed by the national government.²⁵

Another crucial element obstacle to attracting foreign investment is the ambiguity regarding land acquisition and protection of land-use rights. Even though government authorities highlight the ease of land acquisition as a comparative advantage of FTZs, the weak law existing does not stipulate clearly enough whether and how land could be acquired for investment purpose and at the same time balance the safeguarding of local livelihood²⁶.

The declining competitiveness is connected to a critical extend to labor flexibility, but also to an over-extensive approach in terms of industries to focus on. To increase the competitiveness of the BBK FTZs, particularly compared to other regional hubs such as Vietnam, the national government plans to limit the focusing sectors to maximum six²⁷. Even though FTZ’s essential comparative advantages in order to attract foreign investors is cheap labor, the lack of high-tech skilled labor seems to be crucial for investors in certain key industries like consumer electronics and engineering. Companies operating in industries requiring high-skilled labor are thus forced to hire from outside the region. Additionally, the infrastructure onsite remains limited, making the prospects for meeting future demand challenging (particularly in Bintan and Karimun) taking into account the authorities effort to push the BKK FTZ even further. In the drawers of government institutions responsible for the zones’ development can be found action plans to involve the private sector using public-private-partnership (PPP) to ease the strain on the public budget.²⁸

The chart below provides a quick overview of average expenses involved in carrying out business in the FTZs.

Source: Investment and Promotion Board of Kepulauan Riau Province, Investment Profile of Kepulauan Riau Province,
Appendix IV “Cost of Doing Business in BBK FTZ”, 2013

Batam

Batam is considered as one of the growth engines of Indonesia and thus an attractive investment destination due to the availability of industrial land, competitive wages and an abundance of skilled labor. Moreover, Batam has an established history as a manufacturing base, and has consistently attracted companies in this industry. The most common industries in Batam are electronics and related products such as printed circuit boards, computer components and parts. There are also businesses involved in shipyards, agroindustry, fisheries, leather, garments, toys and healthcare products as well as steel and oil exploration equipment production. The Batam Regency is attracting investments by providing lower manufacturing costs, logistics facilities, and an international financial center. An additional feature is its proximity to the trading and business hub Singapore, which is connected to Batam by a regular high-speed ferry. Batam has been profiting from Singapore’s economic expansion ever since. The Batam FTZ is home to 22 Industrial Estates and more than 1,000 Multi National Companies are located here. Until 2014, US$17.71bn in total investment has been made (21% by public contribution, 36% domestic shares, and 43% foreign investment).²⁹

Investment in Batam FTZ According to Sector

Source: Batam Indonesian Free Trade Zone Authority (BIFZA),
Development of Foreign Investment per Sector (until June), 2015

Bintan

Less well developed than Batam, Bintan is the largest island in Kepulauan Riau Province. The region is continuously investing in the development of this FTZ, focusing on the improvement of supporting infrastructure to industrial production and tourism. As a tropical island with white sand beaches and international standard resorts, Bintan has grown to become an attractive tourist destination comparable to Bali. Bintan is the location for a number of Industrial Parks, providing tenants with modern infrastructure and complete integrated facilities. The core sectors are the shipbuilding industry (with investments from Saipem and Sembawang), manufacturing, garment, and as well as agribusiness and fisheries.³⁰

Karimun

Karimun is the least developed FTZ in Kepulauan Riau Islands province. However, the regional authority is actively investing in the zone’s infrastructure development such as roads, seaports (cargo and passenger), airport, electricity, fresh water, hospital and training centers. The regency has also allocated land to support various investment activities, notably agriculture and tourism.³¹

An industrial estate (IE), also known as an Industrial Park, is defined as an area managed and marketed by a private or public company offering basic infrastructure such as electricity, water, and a sewerage system. In addition, it also provides a range of supporting services (permits, security) and property facilities. In Indonesia, the initial development of industrial estates (Jakarta, Surabaya, Cilacap, Medan, Makassar, and Lampung) took place during the 1970s through the joint efforts of local and provincial governments. A milestone of the development of IEs was Presidential Decree 53/1989, which opened up the business of developing industrial estates to private companies and set the legal and technical standard requirements for the development of and operation of such estates. In 1996, Presidential Decree 41/1996 established the first guidelines for industrial estates in Indonesia. Government Regulation No. 24/2009 highlights the IE as “a center for manufacturing industries supported by infrastructure, facilities, and services”.

Industrial Estates in Indonesia generally offer:

• Infrastructure

Roads, water supply, drainage systems, waste water systems, electricity and telecommunications;

• Special facilities

Employee housing, office space, hotels, fiber optic telecommunications cables and special transport services;

• Service

Medical services, fire brigade, security, commercial services and recreational area;

Industrial facilities are suited to many manufacturing and industrial activities because investors can choose whether to plug into a commercially ready-to-use factory with complete facilities, or acquire a piece of land to build a factory customized on production requirements.³²

Some industrial parks offer a complete package, which even includes the processing of permits and licenses with the relevant authorities and the recruitment of workers from the local pool and from the rest of Indonesia who are readily available.

Land Price

In Indonesia industrial land is in high demand. So to keep up with economic development almost 1000ha per year are required, from which nearly 60% is located in West Java. According to HKI (the Industrial Park Association), industrial land in Indonesia had grown to more than 27,300ha in 2012 in total. Authorities determine to use 70% of the land available to build industrial areas, while the remaining 30% is assigned to infrastructure development and open green spaces.³³

In recent years, land prices have skyrocketed. Serang, Bekasi and Karawang are witnessing a significant increase in land prices, largely due to the scarcity of land and continued demand.³⁴ The high demand in these areas has led many land buyers to acquire land speculate the circumstances had a motivated effect on many land buyers seeking to acquire pieces of land speculating that it will be granted a SEZ one day, thus allowing them to make a high margin on reselling it.

The main industries acquiring land in the SEZs are the automotive, chemical, warehouse companies, steel-related, F&B, consumer goods, and manufacturing industries.³⁵

Source: BKPM, Investing in Remarkable Indonesia,
Indonesia Investment Promotion Centre Singapore, 2014

The most relevant laws and regulations regarding FTZ and IE are:

Law No. 37/2000 on Sabang Free Trade Zone and Free Port

Law No. 44/2007 on Free Trade Zone and Free Port

Government Regulation No .46/2007 about Batam Free Zone and Free Port

Government Regulation No .47/2007 about Bintan Free Zone and Free Port

Government Regulation No .48/2007 about Karimun Free Zone and Free Port

Regulation of the Minster of Finance No.47/PMK.04/2009 about Procedures within FTZ

Government Regulation No. 24/2009 about Industrial Estates

The world’s largest archipelago, Indonesia consists of over 17,000 islands spanning three time zones. Given its geography, size, population, and dependence on waterborne transport, the maritime industry plays a significant role in both the domestic and regional trade, with Indonesian ports emerging as key trading hubs and handling a huge share of long-distance transportation, cargo capacity and logistics. Indonesian ports will take on ever greater importance in the context of the AEC. Ensuring connectivity through infrastructure development is one of the crucial pillars of the ASEAN Connectivity Master Plan.³⁶

Source: Drewry, Maritime Advisors, Market briefing:
Indonesia's Master Plan for Ports, Shipping & Logistic, 2015

Indonesia’s trade grew constantly over the last decade and as the third fast growing G20 economy in 2014 the long-term expectations are promising either. In 2014, however, Indonesia’s economy has faced the slowest growth pace in five years (~5%), mainly caused by sluggish exports (-8%) and weak investment growth. Among other things, the political year 2014 (legislative and presidential elections) appeared to be an significant reason why the market was concerned about political instability and hence investment realization has declined³⁷.

Following recent neglect of the maritime sector, the new administration has pledged to foster its development and to adjust to future demands. In line with the ASEAN Connectivity Master Plan, upgrading infrastructure and enhancing inter-island connectivity are viewed as essential to efforts to foster regional economic growth. In this regards, 14 ports³⁸ have been designated as main ports within the trans-ASEAN transport network.³⁹ As Indonesia’s biggest port, Jakarta’s Tanjung Priok handles over two-thirds of Indonesia’s international trade. The container traffic is estimated to increase by over 160% by the end of 2015, when the extension of the terminals is supposed to be finish in order to cope with the huge container turn-over everyday. The modernization of one of ASEAN’s biggest ports will be crucial towards overcoming the logistical bottleneck caused by rising trade inflows and will have a significant impact on Indonesia’s future trade pattern. The dwell time, a measure of the time required to unload shipping containers and move them out of port increased from 4.8 days in 2010 to 6.4 in 2013. Not surprisingly, this results in high logistics costs for businesses, which are then passed on to consumers. In 2014 the Indonesia Port Corporation signed an agreement with the World Bank to receive strategic support and advisory services for the government’s connectivity agenda.⁴⁰

The EIBN Sector Report Maritime (2015) will help to understand challenges and business opportunities of Indonesia’s commercial maritime sector, its infrastructure development as well as public and private players involved in the industry.

Important Laws and Regulations on Shipping and the maritime sector are:

Presidential Decree No. 78/2005 about the Management of Outermost Small Islands

Law No. 17/2008 about the Cabotage Principle on Shipping (Shipping Act)

Government Regulation No. 61/2009 about Port Affairs

Government Regulation No. 21/2010 about Maritime Environment Protection

Government Regulation No. 22/2011 about Offshore Oil and Gas Industry
(exemption of Cabotage Principle)

Government Regulation No PM 13/2012 about Vessel Registration

Presidential Decree No. 180/2014 about Tourism

Ministry of Transportation

Kementerian Perhubungan - Republik Indonesia

Jl. Medan Merdeka Barat No.8. Jakarta 10110 – INDONESIA

http://dephub.go.id/

Office of the Secretariat of the National Council for Special Economic Zone

Address: Gedung Barli Halim Lt.5 BKPM, Jl.Gatot Subroto No.44, Jakarta

Tel: +62 21 34832655

Fax: +62 21 34832658

Email: info@kek.ekon.go.id

Website: http://kek.ekon.go.id/

Liaison Office of Riau Islands Province

Address: Jl. Dempo I No.30, Kebayoran Baru, Jakarta Selatan – 12120, Indonesia

Tel: +62 21 723 7701, +62 21 7236701

Fax: +62 21 7258701

Email: penghubung_kepri@yahoo.com

Website: http://www.penghubungkepri.org/index.php/en/

Batam Indonesia Free Zone Authority

Address: P.O. Box 151, Jl. Sudirman No. 1 Batam Centre, Batam 29400

Tel: +62 778 462047, 462048

Fax: +62 778 462240, 462259

Website: http://www.bpbatam.go.id/eng/index.jsp

Bintan Free Trade Zone Authority

Address: Jl. D.I Panjaitan Km. 6 No. 32, Tanjungpinang

Tel: +62 778 51953

Fax: +62 778 51953

Email: bpkbintan@yahoo.co.id

Karimun Free Trade Zone Authority

Address: Jl. Jend. Sudirman, Office Complex, Tanjung Balai Karimun

Tel: +62 777 736 6030

Fax: +62 777 736 6030

Email: bpkkarimun@yahoo.co.id

Indonesian Industrial Estate Association

Address: Wisma Argo Manunggal 12Ath Floor,

Jl. Jend. Gatot Subroto Kav. 22, Jakarta Selatan (12930) - Indonesia

Tel: +62-21-5207442, 5207462

Fax: +62-21-5207462

Email: hkipusat@hki-industrialestate.com / hkipusat@yahoo.co.id

Website: http://www.hki-industrialestate.com/

Indonesia Port Corporation I

Address: Jl. Krakatau Ujung no.100, Medan, 20241, Sumatera Utara

Tel: +62 61 6610220

Fax: +62 61 6610906

Email: palabuhan1@inaport1.co.id

Website: http://www.inaport1.co.id/

Indonesia Port Corporation II

Address: Jl. Pasoso No.1, Tanjung Priuk, Jakarta Utara, 14310

Tel: +62 21 4367505 , +62 21 4301080

Fax: +62 21 43911704

Email: corp_sec@inaport2.co.id

Website: http://www.indonesiaport.co.id/, http://www.inaport2.co.id/contact.php

Indonesia Port Corporation III

Address: Jl. Perak Timur No. 610, Surabaya 60165 - Indonesia

Tel: +62 31 3298631-37

Fax: +62 31 3295204, 3295207

Email: humas@pp3.co.id

Website: http://www.pp3.co.id/

Indonesia Port Corporation IV

Address: Jl. Soekarno no.1, Makassar 90173

Tel: +62 411 3616549

Fax: +62 411 3619044

Email: humas@pelabuhan4.co.id

Website: http://inaport4.co.id/

ASEAN, Master Plan on ASEAN Connectivity, 2009. Available at: http://www.asean.org/resources/publications/asean-publications/item/master-plan-on-asean-connectivity-2

Batam Indonesian Free Trade Zone Authority, Greetings, 2014. Available at:
http://www.bpbatam.go.id/eng/aboutBida/greetings.jsp

Batam Industrial Development Authority, Investment Guidelines, Batam Indonesia, n.d. Available at: http://www.kwrintl.com/Batam/BROCHURES/INVESTMENT_GUIDELINES/INVESTMENT_GUIDELINES.PDF

BKPM, Applicable Laws and Regulations to SEZ, 2015. Available at: http://www7.bkpm.go.id/contents/p13/applicable-laws-regulations/13

BKPM, Investing in Remarkable Indonesia – Frequently Asked Questions on Investment, 2015. Available at:
http://www.iesingapore.gov.sg/~/media/IE%20Singapore/Files/Venture%20Overseas/Browse%20By%20Market/Indonesia/BKPM20investing20in20indonesia202015.pdf

BKPM, Investing in Remarkable Indonesia – Indonesia Investment Promotion Centre Singapore, 2015. Available at:
http://www.iesingapore.gov.sg/~/media/IE%20Singapore/Files/Events/iAdvisory%20Series/Indonesia_29Apr15/220Investing20in20Indonesia.pdf

BKPM, Investment Opportunities – Industrial Zones, 2015. Available at:
http://www7.bkpm.go.id/contents/general/117110/industrial-zones#.VgIyBMuqqko

Centre for Strategic and International Studies, Study on the Impact of an EU-Indonesia CEPA, 2015. Available at: http://eeas.europa.eu/delegations/indonesia/documents/more_info/pub_2015csiscepa_en.pdf

Colliers International, Industrial Estate Sector, Research & Forecast Report 4Q 2014;
Available at:
http://www.colliers.com/-/media/files/marketresearch/apac/indonesia/researchandforecast-jakarta-4q2014-industrial.pdf?la=en-GB

EIBN Sector Report, Maritime, 2015.
Access is available after registration with EIBN: http://www.eibn.org/

Department of State of the United States of America, Indonesia Investment Climate Statement , 2015. Available at:
http://www.state.gov/documents/organization/241809.pdf

Indonesia Investment, Trade Balance Indonesia: Import and Export Fall in January, 2015. Available at: http://www.indonesia-investments.com/news/todays-headlines/trade-balance-indonesia-import-and-export-fall-in-january-2015/item5309

Investment and Promotion Board of Kepulauan Riau Province, Investment Profile of Kepulauan Riau Province, 2014 [printed version]

Investment and Promotion Board of Kepulauan Riau Province, Regencies, 2014. Available at:
http://www.penghubungkepri.org/index.php/en/19-regency-investment/126-bintan-regency

Jakarta Post, Trade minister may chair Batam FTZ: Sofyan (Article from May 4, 2015).
Available at: http://www.thejakartapost.com/news/2015/05/04/trade-minister-may-chair-batam-ftz-sofyan.html

Ministry of Foreign Affairs of the Republic of Indonesia, Indonesian Special Economic Zones, 2015. Available at: http://www.kemlu.go.id/canberra/Lists/Banner/Attachments/66/Indonesian%20Special%20Economic%20Zones%20(1).pdf

KWR International, Riau Islands, 2011. Available at:
http://www.kwrintl.com/riauislands/

PLN, Power Supply Business Plan 2012-2021 (RUPTL), 2013. Available at:
http://energy-indonesia.com/02electrcitylaw/0130213RUPTL.pdf

Rachmi Hertanti & Laura Ceresna-Chaturvedi, Working and Living Conditions In Special Economic Zones In India And Indonesia, 2012. Available at:
http://cividep.org/backdoor/wp-content/uploads/2013/01/Working-and-Living-Conditions-in-SEZs.pdf

Sari Wahyuni, Irwan Ekaputra, William Tjong, The Impact of Competitiveness on Firm Growth in Special Economic Zone, a study of electronics cluster in Batam, 2012. Available at:
http://www.i-jibe.org/achive/2012fall/5-Wahyuni,%20Ekaputra,%20and%20Tjong.pdf

Syamsul Hadi, Globalization, Neoliberalism, and Local Development (Studies on Special Economic Zones in Indonesia), 2011. Available at:
http://cividep.org/backdoor/wp-content/uploads/2013/01/Working-and-Living-Conditions-in-SEZs.pdf

Umar Juoro, Khee Giap, Kong Yam, Joint Expert Study on Competitiveness of Batam-Bintan-Karimun, 2013.
Available at: https://ekon.go.id/ekliping/pdf/hasil-kajian-joint-expert.237.pdf

UNIDO, Economic Zones in the ASEAN, 2015. Available at:
https://www.unido.org/fileadmin/user_media_upgrade/Resources/Publications/UCO_Viet_Nam_Study_FINAL.pdf

The World Bank News, Moving Cargo Faster in Indonesia’s Main Sea Port, (Feb. 19 2014). Available at: http://www.worldbank.org/en/news/feature/2014/02/19/moving-cargo-faster-in-indonesia-main-sea-port

AEC ASEAN Economic Community

AFTA ASEAN Free Trade Agreement

APEC Asia Pacific Economic Cooperation

ASEAN Association of the South-Ea

BBK Batam – Bintan – Karimun Free Trade Zones

BIFZA Batam Indonesia Free Trade Zone Authority

BKP Free Trade Zone Executing Agency (Badan Pengusahaan Kawasan)

BKPM Indonesian Investment Coordinating Board (Badan Koordinasi Penanaman Modal)

BRIC Brasilia, Russia, India, and China

DNI Negative Investment List (Daftar Negatif Investasi)

EIBN Europen-Indonesian Business Network

EPZ Export Processing Zone

EU European Union

F&B Food and Beverage

FTA Free Trade Agreement

FTZ Free Trade Zone (Kasawan Perdagangan Bebas)

FZ Free Zone

G20 The Group of Twenty

GDP Gross Doemstic Product

GoI Government of Indonesia

HKI Industrial Park Association (Himpunan Kawasan Industri)

ICT Infomration and Communication Technology

IDR Indonesian Rupiah

IE Industrial Estate

LCGC Low Cost Green Car

MSW Municipal solid Waste

MP3EI Masterplan for Acceleration and Expansion of Indonesia's Economic Development

MRO Maintenance, Repair and Overhaul

PKJ Taxable Enterprise (Pengusaha Kena Paja)

PLN State-owned Electricity Company (Perusahaan Listrik Negara)

PPP Public-Private-Partnership

PPSP Acceleration of Urban Sanitation Development

RUPTL Electricity and Power Supply Business Plan

SEZ Special Economic Zone

SME Small and Medium Enterprises

SSK City Sanitation Strategies

UNIDO United Nation Indutriaol Development Organization

US United States (of America)

UTP Transportation Ministry's Technical Management Unit

VAT Value Added Tax

WCO World Customs Organization

WIPO World Intellectual Prop[erty Organization

WtE Waste-to-Energy

WTO World Trade Organization

About EIBN

The EIBN is a partnership project between five European bilateral chambers of commerce in Indonesia (BritCham, EKONID, EuroCham, IFCCI, INA) and two counterparts in Europe (EUROCHAMBRES, CCI Barcelona). The EIBN’s aim is to promote Indonesia and ASEAN as high potential trade and investment destinations towards companies from all EU28 member states – particularly SMEs – and support them in their endeavor to explore the full market potential in Indonesia. The project was initiated and is co-funded by the EU.

Acknowledgements

The Indonesia Business Guide series is the product of a joint research and editorial effort of the EU-Indonesia Business Network team throughout 2014 and 2015. EIBN hereby acknowledges with gratitude the contributions of members of the EIBN team during the said period: Agrika Puspita, Antaressa Pritadevi, Armyta Rahardhani, Chloe Martinez, Giandomenico Zappia, Giovanny Tutupoly, Ferdi Ferdian, Firrisky Nurtomo, Johannes Kotschenreuther, Joaquim Torrinha, Laura Aramo, Triesti Prabawati, Ruzha Likja, Sri Kumala Chandra, Martin Krummeck, Michael Gramlich and Yacinta Esti.

Research, Writing and Editing

EIBN Team

Proofreading

Cillian Nolan

Disclaimer

This publication has been produced with the financial assistance of the European Union. The contents of this document are the sole responsibility of the EIBN and can under no circumstances be regarded as reflecting the position of the European Union.

The figures in this report correspond to EIBN’s best estimate of value of the corresponding variables. Although due care was taken in the preparation of this publication, EIBN makes no warranty as to its accuracy or completeness and is not to be deemed responsible for any errors or loss resulting from its use. Other organizations quoted herein are in no way responsible for the content of the report or the consequences of its use.