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Indonesia Seeks to Develop More Special Economic Zones

Six new 'special economic zones' (in Indonesian: kawasan ekonomi khusus, or KEK) should become operational in Indonesia soon. These six KEKs are: (1) Bitung, (2) Palu, (3) Tanjung Api-Api, (4) Mandalika, (5) Morotai, and (6) Maloy Batuta Trans Kalimantan. Indonesia's special economic zones are designated areas that offer both foreign and local investors preferential regulatory and tax regimes, as well as - in theory - the availability of key physical infrastructure such as harbors and power plants that should attract foreign investment in these zones.

KEK National Board Secretary Enoh Suharto Pranoto is optimistic that three of the above-mentioned special economic zones will be ready for operations before the end of the year. These KEKs are: Mandalika, Maloy Batuta Trans Kalimantan, and Palu. The other three will most likely not see the start of operations in 2017 because there remains disagreement between the regional parliaments (DPRD) and the local district heads about the company that will determined to manage the KEK.

So far, the Indonesian government determined 12 KEKs across the Archipelago (see map below). However, only two - Sei Mangkei (North Sumatra) and Tanjung Lesung (Bantan, Java) - have started commercial operations. Sei Mangkei is the center for palm oil and rubber processing, while Tanjung Lesung is a center for tourism.

Location of Indonesia's Special Economic Zones:

But the Indonesian government is eager to develop more KEKs across the nation, especially outside the island of Java as this would boost the value of the regional economies and reduce the dominating role of Java - especially Jakarta - within the Indonesian economy. The government is currently studying various locations for the development of eight more zones. It is estimated that it will require IDR 726 trillion (approx. USD $55 billion) worth of investment to have developed all these KEKs by 2030.

For the development of the KEK the government offers incentives to private investors. For example those investors who invest at least IDR 1 trillion in a KEK can expect a corporate income tax holiday ranging from 10 to 25 years. Moreover, regional authorities will offer non-fiscal incentives, such as an easier land acquisition process for the investor. It is known that many infrastructure, property and construction projects in Indonesia are plagued by delays due to the long and lengthy land acquisition process.

However, it is important for the Indonesian government to first provide the basic infrastructure that is required by businesses in these special zones (for example, roads, harbors, railways, power stations, and more). If not, few investors will be interested to invest in the zone. Basic infrastructure should be financed through the state budget or - if there is private interest - through public-private partnerships (PPP).

However, we assume that few private investors are interested to develop basic infrastructure.

(SAILINGS/II/SP)


 

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