with Asroni Harahap, Deputy Chairman, BIFZA
Historically Batam began as a base for supporting oil and gas exploration operations for Pertamina back in 1971. This was also the year when McDermott established its manufacturing facilities on the island. These two events coincided to influence central government to grant Batam a special status within Indonesia as a bonded warehouse. This allowed the inflow of equipment and technology without the bureaucratic customs procedures which could hamper economic development and progress. However, it was not until 2007 that Batam was designated by national law as a free trade zone (FTZ). In 2007 the Indonesian government decided to expand the project because Batam had a series of attributes which could benefit the Indonesian economy. First and foremost, the island is strategically located close to Singapore and the busy shipping route of the Malacca Straits. Given its positioning, the government envisaged that Batam could become a regional center for industry, trade, tourism and transshipment. Today, Batam is one of four FTZ in Indonesia and BIFZA has the vision of making Batam a very competitive hub for investment across the entire Asia-Pacific region. Over the first 30 years, the strategy was dedicated to building up the island’s capacity especially in fields such as shipbuilding, electronics and oil and gas equipment. Now after over 40 years we are transforming Batam into a center for value-added industries and have established our 2011-2015 roadmap to develop our activities in this direction. In the first place we will continue to expand our capacity in Batam’s traditional fields of business activity including electronics, oil and gas equipment and shipbuilding. Secondly, we will diversify our activities beyond these traditional areas of competency. Thirdly, Batam will become a gateway for logistics and transshipment.
Relative to the strong growth of investment in Indonesia in 2011/12, Batam’s FDI has actually fallen. What measures are you implementing to reverse this picture?
To attract high-value industries, Batam needs to find the people, create regulations and provide the resources. All these elements are already in place, but they need to be adjusted more for the industries we are targeting. Taking taxation regulations as an example, if a company imports a replacement component it can end up paying the import taxation twice on the whole item. These problems need to be ironed out; fortunately President Susilo Bambang Yudhoyono visited Batam in April and addressed this particular issue which should be resolved by August this year. The 2011 roadmap should provide the strategy for increasing Batam’s positioning as a competitive hub for investment. Of course, as an export-driven region reliant on sales of manufactured products to international markets, Batam is more susceptible to shortfalls in global orders. Europe and the USA are both experiencing either recessionary trends or extremely low levels of growth and therefore the order level from these markets has dropped and impacted on Batam’s performance. This is why Batam’s roadmap is focusing on diversifying our activity as we cannot rely on the region’s traditional economic strategy and industries. Ancillary, service and support industries will receive a boost under our new strategy making the region less reliant on the export of manufactured goods.
The transshipment port project, designed to become operational in 2015, is another key element in our new economic strategy. Lying on the same shipping routes as Singapore Batam can become a transshipment hub for the region and although geographically close to Singapore, the market is more than large enough to provide business for both countries. Indeed the limited land availability in Singapore represents a limit on capacity and drives up the cost of transshipment creating opportunity for Batam.
Aside from being competitive in transshipment, how do you see Batam’s competitive advantages relative to other FTZs in the Southeast Asia region?
Each FTZ has its own characteristics and naturally there are certain industries which will prefer to invest in other FTZs such as those in Vietnam for example. Indeed Vietnam offers a very low cost production and business environment. However, there are other factors which will attract investors specifically to Batam including the accessibility of Batam, the island’s positioning on the major shipping routes through the region, the country’s political and economic stability and the burgeoning domestic market. These attributes provide plenty of incentives for international investors and international companies ultimately feel comfortable entering and investing in Indonesia in 2012 thanks to the stable, democratic rule in the country. The main change in strategy for BIFZA today is to focus more our strategy on attracting particular types of players and targeting certain industrial niches. Looking at shipbuilding in Batam, although the industry is export oriented, we are not competing with Korea or Japan in the very high-end shipbuilding market. Batam will find its own mid-range niche, introducing technology clusters to the island to develop our capabilities. Given our export focus, Batam is not competing with the domestic shipyards of Surabaya. It is the one location in Indonesia which has the capacity to build the large ships demanded by the international markets. In the West of Indonesia the draft for shipyards is mostly 6-10m which is insufficient for very large crude carriers (VLCCs), but Batam has a natural draft of 20m on the East of the island which would allow for construction and maintenance of such vessels. Commencing production of these types of vessels represents a 5-10 year project for Batam and in the meantime the region will diversify its business activities and find the industries which would benefit most from manufacture in Batam and coordinate their wishes with central government.
Last year there was an Organization of Private Investment Companies (OPIC) seminar held in Jakarta and the coordinating ministry asked us to present Batam at this seminar. This elicited a lot of responses and the organization saw plenty of opportunities for investments in the Batam region. American and Korean investors are keen to get into this market, many of which have already tried to establish operations in Vietnam and seen that the environment did not work. Taking into account, Batam’s largest investor, Singapore, Batam offers access to land, labor and raw materials, elements that Singapore lacks despite its immense financial resources.
BIFZA has been working on increasing knowledge about this region internationally and MNCs are surprised by the opportunities available in Batam, if for nothing else than gaining access to the Indonesian market. International companies are starting to realize that they cannot compete in regional markets just having a small office in Singapore as their competitors will establish a presence in the various countries of the region, including Indonesia. Indeed, Indonesia is a very large country and it is necessary to have a presence here to be successful.
Batam was set up as an export base but there is huge domestic demand coming from the oil and gas industry at the moment. How do you see the balance between Batam’s export and domestic activities evolving in the future?
The potential for supplying Indonesia’s shipping industry in terms of vessels and as a center for transshipment is definitely significant. 90% of the world’s trade goes by sea rather than air and Indonesia as an archipelago nation is no exception. However much needs to be done to improve the cost of transshipment which is very high in Indonesia especially when transporting to and from the East of the country. Taking a container from Jakarta to Irian Jaya costs upwards of $2,000 because it is on a 20,000DWT vessel. This high cost suppresses the market and it is a direct result of shipping companies using smaller vessels rather than large cargo vessels which would benefit from economies of scale. Better government regulation and investment in port and harbor infrastructure would alleviate these problems, encourage investment and give shipping companies better access to financing.
The MP3EI expresses the desire to integrate the hinterland network of Indonesia so that goods produced in the East can be brought to the West, however the shipping pattern for achieving this is not there yet. The level of financial responsibility for the government is falling with the introduction of public-private-partnerships with for example the government only investing just 30% in the Sorong port. With this reduced financial responsibility the government just needs to impose adequate regulation. There are some sectors where the government will have to invest on its own but it can then leave these infrastructure projects to be managed by private operators. 15 years ago the government was responsible for almost all major investments in Indonesia; the growing involvement of the private sector is cause for optimism in the future of the shipping industry.
Within this developing market, Batam is positioned as an excellent point for transshipment with its deep harbor able to accommodate heavy ships. Batam will act as a gateway for Indonesian industry to send goods from feeder ports and for the international industries to provide for Indonesia. Given the future growth of this business, we are already investing communication and transportation routes with neighboring Bintan so as to provide ample expansion room for our future growth. The only challenge we face is convincing others to see the vision, but fortunately Batam is supported by key figures in central government. We are spurred on by a belief that our plans for making Batam a transshipment center are fully achieveable.
What would be your final message to our readers?
BIFZA would like to invite international investors to explore the many opportunities of Batam.