Singapore And Indonesia To Establish Special Economic Zones

by Mary Swire, Tax-News.com, Hong Kong

27 June 2006

Singapore and Indonesia have concluded an economic agreement which will see the creation of special economic zones in three Indonesian islands which are designed to attract greater levels of foreign investment.

The deal, known as the Framework Agreement on Economic Cooperation in the Islands of Batam, Bintan and Karimun, was inked Sunday by Singapore’s Minister for Trade and Industry, Mr Lim Hng Kiang and Indonesia’s Coordinating Minister for the Economy, Dr Boediono.

Conceived by the leaders of both countries, the Framework Agreement cements the Singapore-Indonesia partnership to establish special economic zones (SEZs) in Batam, Bintan and Karimun. The SEZs will lay the groundwork for both islands to become investor-friendly and cost-competitive manufacturing zones that can attract international flows of foreign direct investments.

According to Lim, the three islands are ideal for the purpose of attracting investment as they have an established infrastructure, a pool of skilled labour and strong name recognition among investors.

"Both countries can thus move quickly to make them a model for the other SEZs that Indonesia plans to establish," he observed.

Singapore and Indonesia’s cooperation projects in Batam and Bintan started in the late 1980s. Over the subsequent decade, the cooperation projects transformed the islands into manufacturing engines of the Indonesian economy, generating more than 200,000 jobs, and at one point accounting for 14% of Indonesia’s non-oil domestic exports (NODX). The projects were a success as they combined the complementary strengths of Indonesia and Singapore into a package that was competitive and attractive to investors.

However, over the past 5 years, Batam and Bintan have faced increasing competition from other emerging markets like China, India and Vietnam. Foreign direct investments to these markets have grown steadily, whereas investments into Batam and Bintan have plateaued.

The Framework Agreement aims to revitalise investor confidence and interest in Batam and Bintan in the face of increasing competition. To successfully develop Batam and Bintan as SEZs, the Framework Agreement spells out seven key areas where both countries will cooperate to ensure that business, regulatory and labour conditions in Batam and Bintam are favourable to investors. These are: investment, finance and banking, taxation, customs & excise, immigration, manpower and capability development.

The Framework Agreement establishes a Joint Steering Committee (JSC) appointed by the leaders of both countries to supervise these efforts. The JSC will be co-chaired by Mr Lim Hng Kiang and Dr Boediono.

In 2005, Singapore was Indonesia’s third largest trading partner, while Indonesia was Singapore’s fifth largest trading partner. Two-way trade reached S$54.2 billion, up 11.5% from 2004. Singapore was Indonesia’s top investor in 2005, with investments totalling US$3.9 billion.

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