LEVELLED hills and large brown swathes of cleared forest land mark the landscape in Batam.

These forerunners of upcoming industrial projects and new roads may seem like sure signs of a bustling island. But look more carefully among some of its industrial parks and one can see the hollow shells of factories which once hummed with activity.

There are more than 20 industrial parks and in some, canteens that once had trouble coping with the waves of shift workers have closed. Traffic jams, once a bother, are less of a headache now.

The numbers at Batamindo Industrial Park - Batam's largest - sum up the woes. From a peak of 96 tenants employing 85,000 workers in 2001, it now hosts 83 companies with 65,000 workers.

Batam certainly has slipped a couple of notches from the good times that followed the 1990 signing of a pact between Singapore and Indonesia to develop the Riau Islands.

That kick-started a boom in the once-sleepy Indonesian islands south of Singapore, especially in Batam, which emerged as the jewel in the chain. Foreign investors flocked there for its strategic location and cheap land and labour, launching an accelerated boom that lasted over a decade. The island attracted a total of US$5billion (S$7.9billion) in foreign investments, some 200,000 jobs were created, and Indonesians arrived from across the archipelago to work.

But things have sputtered in the last five years. Between 2000 and 2004, non-oil exports declined by US$1.11 billion, or about 20 per cent. And last year, new foreign investment fell by 34per cent.

Now, Singapore and Indonesia are again working together to try to resuscitate Batam's waning bustle.

First floated by Indonesian President Susilo Bambang Yudhoyono to Prime Minister Lee Hsien Loong in February, the new gameplan is to woo investors by turning the area into a special economic zone (SEZ).

By June, a pact for the SEZ, which will include the nearby Bintan and Karimun islands, was sealed.

For Indonesia, the success of the SEZ is crucial to the country's target of establishing up to eight such zones, which can serve as showcases for best practices and spur speedier nationwide economic reforms.

For Singapore, a growing Indonesian economy would help it realise its wish of seeing a stronger Asean economy, said economist David Cohen of Singapore-based Action Economics.

With a population of 230 million, Indonesia accounts for almost half of the Asean market's 500 million people.

But what went wrong in Batam?

Businessmen The Straits Times spoke to said that issues related to labour matters played a big part. Problems included the payouts made to workers even if they resigned or were fired for misconduct.

Rising salaries are a worry too: last year, wages in Batamindo rose by around 30 per cent as workers pushed for help to cope with surging inflation. There was very little room for negotiation, said Batamindo's general manager, Dr John Sulistiawan.

He added wryly: "After Suharto fell in 1998, the labour movement was granted more freedom to organise workers and express their opinions. In other words, it was easier for them to call for strikes."

Workers like factory technician Purnomo say the labour movement's wage demands are justified, given the rising cost of living.

"We understand that if investors move out, we'll have no jobs," he said. "But you can't expect us to compare ourselves to workers in China and Vietnam if they don't face high inflation."

The way to go, said hotelier and local legislator Yohannes, is to tackle labour-related issues in a holistic way. He suggests providing subsidised transport and housing for workers to dampen demands for bigger pay hikes. Problems have also sprung from Indonesia's implementation of regional autonomy in the last five years.

Batam is under the direct control of the Batam Industrial Development Authority (Bida), but new laws have given the island an elected local government as well.

Like many other local governments, it has also introduced new levies to generate income. Indeed, despite its problems in retaining and attracting investors, Batam's tax revenues reportedly rose last year to US$117.2 million from US$111.8 million in 2004.

Having two authorities is not good for investors, said several businessmen, who complained of having to pay more taxes and negotiate the inconsistencies, contradictions and overlaps in policies from both bodies.

Said Batam Chamber of Commerce and Industry chairman Nada Faza Soraya: "You need to state clearly who's in charge of what. You can't have two captains on one ship."

Batam businessmen, long used to the previous system of making "unauthorised payments", say the situation has become more complex. "Now we have to pay off more people to get the same things done," said one.

Fortunately for Batam and the SEZ plan, there is likely to be more coordination among the authorities. A strong Bida link now runs through the key players. The new Batam mayor, elected early this year, is Mr Ahmad Dahlan, a former Bida officer of 20 years.

At the provincial level, the governor of the Riau Islands is Dr Ismeth Abdullah, who headed Bida from 1998 until last year. His successor there is his former deputy, Mr Mustofa Widjaja.

Personal ties aside, Dr Ismeth says a legal framework is needed before investors can be convinced about improvements.

"The framework will be a key signal to investors of the political will of the government to make the SEZ work," he said.

In a significant move, Vice-President Jusuf Kalla has invoked the use of special interim regulations - usually tapped only under extraordinary circumstances - to be used as legal substitutes for the future SEZ laws. He has given officials a one-month deadline to come up with the rules while waiting for the actual laws to be drawn up.

Efforts to cut red tape are also being made. The pilot SEZ project in the Riau must not fail, said Dr Ismeth.

He added: "Batam has a strategic location, a ready infrastructure and Singapore's help.

"If this fails, we will not only lose the confidence of foreign investors but also that of Indonesians."