SPECIAL ECONOMIC ZONES

PROMINENT Indonesian businessmen are declaring that the recently concluded economic agreement between Singapore and Indonesia could turn the Indonesian economy around even as public confidence in President Susilo Bambang Yudhoyono shows early signs of waning.

Mr Ilham Habibie, the chief executive officer of a private holding company and eldest son of former president B.J. Habibie, put it this way: The special economic zones (SEZs) in the Indonesian islands of Batam, Bintan and Karimun may get off to a slow start but he believes 'the necessity and foundations are there' and that these could spell a 'win-win' outcome for Singapore and Indonesia.

The agreement to develop the SEZs began in February when Dr Yudhoyono first floated the concept to Prime Minister Lee Hsien Loong over the telephone after the former visited Batam. By as early as June 25, a Framework Agreement was inked.

The aim of the SEZs is to renew investor interest in the three Riau islands which has tapered off over the past five years. Officials will focus on seven areas - investment, finance and banking, taxation, Customs and excise, immigration, manpower and capability development.

A joint steering committee will meet soon to discuss the implementation of the SEZs. It has been given four months to make recommendations.

Already, Indonesian Trade Minister Mari Pangestu projects exports from Batam to double in the next three years, from US$4 billion (S$6.3 billion) last year.

The agreement has been hailed as 'historic' by Prime Minister Lee, who cast it as an important milestone for bilateral relations, while Dr Yudhoyono hoped investors would make the most of the SEZs that are expected to offer opportunities in a variety of sectors, from shipyards to garments.

But are prospects really that promising? What is so special about the SEZs or so different about this joint effort from previous efforts to carve out the islands as investment hot spots or 'bonded zones'? In fact, investors have been steadily making their way to cheaper pastures such as China, India and Vietnam.

The difference now, according to Riau Islands Governor Ismeth Abdullah, is that the pro-jobs central government is fully committed to the SEZs; there is a spirit of cooperation between Singapore and Indonesia - both their leaders are eager for Riau to grow; and more importantly, the Batam Industrial Development Authority (Bida), a national-level development agency, and the municipal authorities today share the same vision and mission, and are 'very anxious' to have the SEZs run well.

Prior to the bilateral Framework Agreement, Jakarta installed Mr Mustofa Wijaya as the new chairman of Bida. Mr Mustofa was Governor Ismeth's deputy at Bida before the latter left Bida to run in the gubernatorial election held last year. In the past, investors often complained about conflicting policies and decisions taken by the national Bida and local officials. The key political hurdle has now been overcome. Dr Ismeth says the two power centres will form a one-stop and joint service centre that investors have been crying out for, and Jakarta is prepared to have essential business licences issued in the region instead of in the capital.

The governor says the two-in-one investment agency should have an integrated system for Customs, immigration and taxation that won't scare away businesses with hidden and additional costs from separate authorities. For example, businesses often cite the time-consuming process needed to obtain costly work permits that require clearance from various offices in Jakarta before they are issued locally.

As the one-stop agency is set up, there is one cloud: The make-or-break factor for the SEZs will be the all-important labour law. The Yudhoyono government went too far trying to amend the law in favour of businesses. In the end, the changes were scuttled in the face of union protests in April. Legislators are having another go at the draft law, this time with more consultations with stakeholders. But Dr Ismeth says he is working with Jakarta to introduce a separate labour law for the SEZs to ensure that core business issues of union representation, minimum wage and the hiring and firing of workers can be better addressed at the local level more expeditiously.

Can this be done? Dr Ismeth thinks it can because the national Parliament had set a precedent with the Free Trade Zone of old. (The FTZ fizzled out with the demise of successive governments during the rapid change of leaders during Indonesia's complex transition to democracy.)

Clearly, a separate labour law for the Riau Islands would boost the chances of the SEZs. But the devil is in the details. Businesses are now expected to pay hefty compensation to workers even if they resign or are fired for misconduct. Investors want the termination benefits reduced and the payout for sacked workers abolished. Overtime payment is too high: double during weekends and public holidays, and it can rise to four times more on graveyard shifts of some labour-intensive industries. The working week is currently 40 hours long, compared with 56 hours in some parts of India. Businesses want one union per industrial sector.

Dr Ismeth thinks he can get all these for the Riau Islands ahead of the rest of the country, maybe in just six months. But if the last national strikes are any measure, maybe he is being unrealistic. Nevertheless, labour reform is necessary if the SEZs are to have a chance to succeed.

This is where Singapore comes in. As PM Lee has noted, Batam and Bintan already have what it takes for the SEZs to work, including the necessary infrastructure, brand recognition and availability of skilled workers. Also, Singapore can draw on its experience in Suzhou and other SEZs to help implement the agreement. One Singapore businessman with eight years of experience in Batam thinks the National Wage Council, for example, can have a training and advisory role on the difficult issue of minimum wage.

There are 815 foreign companies in Batam and half are Singaporean joint ventures. The sentiment in the Singapore Framework Agreement camp is: There is never a good time to have a deal - the challenges are immense - but the moment is right for a win-win outcome.

Mr Sofjan Wanandi of the National Economic Recovery Committee in Indonesia says relations at the official and personal levels are now good enough for SEZ problems to be fixed quickly: 'We can call each other directly.' And Dr Ismeth offers this anecdote: 'Singapore and Riau are close, every day we trade in agriculture and fisheries, and we have done so for quite a long time. There are 90 ferry trips from Batam to Singapore every day, it is like taking the bus, and the trading conditions are harmonious.'

The journey is likely to be bumpy. But the bus can reach its goal of increasing foreign investment if there is enough horsepower pushing it.

The writer is a visiting public diplomacy fellow at the Institute of Defence and Strategic Studies, Nanyang Technological University.