As investment continues to pour into Indonesia from Singapore, much of it heads to the Batam free trade zone. However, the area is taking on some big challenges in its bid to remain an attractive proposition for investors as well as homebuyers and tourists.
By Victoria Wah, edited by John Pennington
Singapore has beaten Malaysia and Japan for the third straight year to become Indonesia’s top investor, say Indonesia Investment Coordinating Board (BKPB) statistics.
Source: Indonesia Investment Coordinating Board
Batam is one of Indonesia’s hotspot destinations for Singaporean investors. Ngurah Swajaya, Indonesian ambassador to Singapore says, “Singaporean businessmen favour the Batam-Bintan-Karimun special economic zone as their investment destination.”
Singaporean investments in Batam are increasing year-on-year
In 2015, Singapore beat Hong Kong and Japan to become Batam’s top foreign investor with a total of S$181.05 million (US$124.96 million) in investments. Last year, its investments made up almost half of the total amount of foreign direct investments in Batam.
The large industrial land area, low labour costs and the tax and duty exemptions offered by the Riau Islands have propelled many foreign businesses, particularly from Singapore, to relocate their labour-intensive industries to the free trade zone (FTZ). Out of 588 foreign companies that currently operate in Batam, 410 of them are Singapore-owned.
Inadequate infrastructure and regional competition are hurting Batam
Despite the initial influx of investments, Batam may be losing its competitive growth. This is due to its inadequate infrastructure. Ports are not big enough to accommodate and ship mass goods from Batam to other destinations. Companies based here must bear the costs of transporting goods through a third country like Singapore. The heightened costs dissuade investors from setting up shop.
Furthermore, weak security surrounding its main trading port has also caused a loss of confidence among investors. There have been numerous calls by the business community for the Indonesian government to convert the main port of Batu Ampar into an international facility that complies with international security standards.
Batam’s regional counterparts are moving ahead as a result
These factors have dampened Batam’s competitive edge against its regional counterparts like Malaysia. BP Batam general services deputy chairman, Gusmardi Bustami, says, “In the last 10 to 15 years, development in Batam has been slow[ed] down, whereas the same cannot be said about other free trade areas, such as in Penang and Johor Bahru in Malaysia.”
Many companies prefer Malaysia to Indonesia due to the convenience of directly transporting goods over the Singapore-Johor causeway. Malaysia’s recent Iskandar project has also attracted more Singapore-based investments that would have otherwise flowed to Indonesia due to its efficient infrastructure.
Investors are being put off by the licensing system
Administrative complications also deter investors from investing in Batam. Bustami says, “Most complaints from investors are also about licensing, which takes one to two years to complete.”
Following the government’s recent introduction of a more efficient system, the licensing process will now be shortened to a maximum of three hours and more than S$543 million (US$400 million) is predicted to be invested in Batam next year as a result.
Hatanto Reksodipoetro, BP Batam chairman, says, “The new system will expedite investment in Batam, which has been long sought by potential investors.”
However, this service only applies to investors who have invested a minimum of Rp 50 billion/S$5 million (US$3.5 million) or employ 300 workers. It remains difficult for smaller businesses to access faster licensing services and this could deter Small and Medium Enterprise (SME) growth in Indonesia.
Restriction on the free movement of goods also minimizes growth
Current restrictions on the free movement of goods across Indonesian borders also minimise investment growth. Mr. Tan, manager of a Singaporean-owned shipyard in Tanjung Uncang, says, “Indonesia ought to be its natural market but Batam is strictly an export zone and there’s a firewall between them. It’s a flawed protectionist strategy.”
Companies who manufacture in Batam do not benefit from Indonesia’s domestic market. FTZ benefits do not apply when goods from FTZ areas are transported to the rest of Indonesia and due to the poor infrastructure, high logistics costs are also incurred when goods are shipped to other parts of Indonesia.
These protectionist policies have discouraged Singaporean and Malaysian investors from setting up production outlets in Batam due to the lack of a domestic market.
The minimum wage surge is also discouraging foreigners from investing
The increased minimum wage has additionally discouraged foreigners from setting up labour-intensive industries in Batam. Suyono Saputra, a Batam economy analyst, says, “The electronics industry is reliant on cheap labour. Since every year workers demand higher wages, the investors are the ones taking the hardest blow.”
Following the 2011 minimum wage riots, Batam’s monthly minimum wage has soared from Rp 1.18 million (US$101.89) in 2011 to Rp 2.9 million (US$222.16). This will be increased by a further 8% in 2017 as recently announced by the Batam regional administration.
Labour costs are high and some companies are relocating
Although the current minimum wage is lower than Jakarta’s minimum wage, which is at Rp 3.1 million (US$228.97), Batam’s labour costs are now expensive for foreign investors. As a result, big electronic companies like PT Sanyo Energy Batam (SEB) are relocating their factory operations to more cost-efficient countries in response to the higher labour costs.
It is impossible to stop this wage rise without the government’s intervention. Saputra says that local politicians are allowing wages to keep rising in order to secure electoral votes from the working class. The uncontrollable surge in wages may cause the electronic manufacturing industry and all other labour-intensive industries to collapse.
However, there is renewed hope for Batam in the future
Despite these issues, Batam remains popular with investors. Donald Han, managing director of Chesterton Singapore, says, “One obvious reason (for the increased interest in Batam) is that the Indonesian President is looking at revamping land laws for foreign investors.” The potential deregulation of red tape will allow foreign investors more room to invest in the real estate sector.
As such, foreign investors have already commenced big property development projects in Batam. Such projects include the construction of apartments, hotels and townships.
These projects seek to strengthen Batam’s tourism and hospitality sector to attract more homebuyers and tourists. Batam is no longer perceived as just an industrial hub – it is now seen as a town that everyone can live, work and enjoy.
The Indonesian government has committed to improving the infrastructure
To add to the list of developments in Batam, the Indonesian government approved more than one trillion rupiah (US$74.3 million) worth of infrastructure projects in 2016. These include the construction of new ports and improvements to Hang Nadim airport. These projects will increase the free movement of goods across borders and boost investor confidence in Batam’s trading facilities.
Although wage rises and protectionist policies have been left untackled, efforts have been made to diversify the economy and to improve infrastructure. On the whole, Batam is slowly yet steadily rising. Once a fishing village, Batam has now revamped its image ready to potentially emerge as a thriving metropolis.
