The challenge of attracting investment in Jokowi’s first SEZ

Sei Mangkei SEZ management officeSei Mangkei SEZ management office. Photo courtesy National Council for SEZ

By: Ardi Wirdana

As the first special economic zone (SEZ) launched by President Joko Widodo, Sei Mangkei is a project the government is determined to get right. A successful Sei Mangkei would mark a special economic achievement for Jokowi, as it is something his predecessor has failed to pull off.

However, despite the early promise and excitement over Sei Mangkei’s potential, a number of challenges stand in the way, including a long standing infrastructure problem and a more recent regulatory uncertainty over foreign investment.

The law on SEZ was enacted back in 2009, but the development of the economic zones has stalled throughout the leadership of President Susilo Bambang Yudhoyono. President Joko Widodo was quick to emphasise the importance of special economic zones when he took office in 2014. He followed it up by launching the first of the eight SEZs approved by the national SEZ Committee. As of early 2016, only two out of the eight are under construction.

Experts have suggested that the appeal to investors of new SEZs to be launched in the future will hinge on the performance of the two existing SEZs, namely Sei Mangkei in North Sumatera and Tanjung Lesung in West Java.

Investors Lining Up

Sei Mangkei SEZ has been designated as a palm oil industrial zone following an agreement reached through the Council of Palm Oil Producing Countries (CPOPC) that was established late last year by Indonesia and Malaysia, which together account for 85 percent of the global palm oil market.

The Value of Indonesian Palm Oil Exports in US$ bil from 2008-2012

The Value of Indonesian Palm Oil Exports in US$ bil from 2008-2012 (Sources: Gapki & Indonesia Ministry of Agriculture).

Since being designated as a palm oil industrial zone, Sei Mangkei has been inundated with suitors looking to invest in the area, the government claims.

The Industry Ministry said that at least 10 companies have already expressed their interest in investing in Sei Mangkei’s 200.35 hectare of land dedicated for the development of palm oil industry.

According to the Investor Daily, the ten companies include PT Sinergi Oleo Nusantara with a planned investment of Rp 3.74 trillion (US$ 276.76), PT Unilever Oleochemical Indonesia with Rp 2.45 trillion investment and PT Cipta Buana Utama Mandiri which is looking to build a fertiliser factory worth Rp 537 billion.

The ministry said, however, that investors are still waiting for certainty over the status of land at Sei Mangkei. Though the management of Sei Mangkei SEZ has already acquired the principle permits to build an industrial zone, the land licenses is still being processed.

The status of the land is currently still under the right-to-cultivate (HGU) license, while for industrial purposes the land needs to be under the right-to-manage (HPL) license.

“To attract investors, the status of the land needs to be HPL, because this license can be used as guarantee for bank financing,” the Indonesian Palm Oil Producers Association (Gapki) chairman Fadhil Hasan told Asean Today.

Fadhil added that from an investor point of view, Sei Mangkei SEZ, which is currently managed by state-run plantation firm PT Perkebunan Nasional (PTPN) III, should be run by a consortium of stakeholders which would make it more “interesting” for investors.

Divestment Debate

The positive sentiment among investors for Sei Mangkei, however, was rocked in early January when The Industry Ministry’s director general for industrial-estate development, Imam Haryono, told local media that the ministry is drafting a regulation that will make it obligatory for foreign companies wanting to continue to operate in Indonesia’s palm oil industrial zones to divest its shares.

“We want to expand the role of the local players in the downstream palm oil industry. The plan is that we will make a divestment regulation of such. The industries processing palm oil should no longer be dominated by foreign-owned (companies),” Imam said, as quoted by CNN Indonesia.

The statement however was quickly refuted by an official at the coordinating economic ministry who said that the regulation has not been finalised. Edy Putra Irawady, the assistant to the coordinating economic minister for trade and industry, said that Indonesia’s Investment Coordinating Board (BKPM) had complained about the divestment idea and would require further deliberation.

Fadhil Hasan of Gapki said that he was confident that the divestment policy would not be issued by the government.

“If there is such a policy, then it’s not right. Its things like this that disrupts investment and create uncertainty,” he said.

Infrastructure Complaints

Another concern for investors is the serious lack of available infrastructure in Sei Mangkei. In November, PT Unilever Indonesia, a company that has opened a factory in the area, complained of inconsistent electricity supply to its factory.

Representatives of PT Unilever Indonesia greeted by Indonesian officials at Sei Mangkei SEZ

Representatives of PT Unilever Indonesia greeted by Indonesian officials at Sei Mangkei SEZ. Photo courtesy National Council for SEZ.

The Coordinating Economic Minister assured that the problem will be addressed, but last week the company was still complaining of a shortage of power in its factory. PT Unilever Indonesia told Kontan that as of February the lack of power supply has restricted the factory’s utilization to 80 percent. Out of the 12 megawatts (MW) required by the factory, the company says it has only been supplied with 8 MW of power.

The company has also said that it needs a large port because 85 percent of the products will be exported to Unilever factories in other countries. While waiting for the port to be constructed, the company said that it has been forced to pay higher transportation costs to import their products because they had to pass through Belawan port, which was quite far from the SEZ.

The Industry Ministry has responded by promising to quickly improve the transportation infrastructure as it does not want to disappoint the “queueing investors”.

As for the matter of electricity, State-owned electricity company PLN has said that it will supply an additional 60 MW of electricity in February to Sei Mangkei SEZ to ensure that the industry in the area can run optimally.