As countries in developing Asia adjust to shifting global economic realities – including

lower trade volumes, volatile commodity prices, and ongoing slow growth in industrial
economies – new tools to drive development can appear hard to come by.

Economists have spoken about a “new normal,” in which economic development, like
the industrialization that made countries like Japan and the U.S. – and more recently
the People Republic of China (PRC) wealthy, will be more elusive and harder to
maintain.

While mainstream economic development across Asia remains focused on building and
maintaining infrastructure, providing better public services, and creating a positive
business environment, many countries, including regional heavyweights like India, have
returned to the concept of special economic zones (SEZs) as a core element in their
development strategies.

A new report from the Asian Development Bank on SEZs, part of the Asian Economic
Integration Report 2015, looks at the factors that can drive successful SEZs and what
can make them a tool for growth and development.

SEZs have a mixed reputation. There have been stunning success stories – such as
Shenzhen, which turned a fishing village in southeastern PRC into an industrial
powerhouse in under three decades.

Shenzhen’s success has been largely attributed to its ability to create what economists
call “backward and forward linkages” with its domestic economy. This meant that for
every foreign investor that took advantage of Shenzhen’s tax incentives and built-to-
export infrastructure, there were Chinese firms providing intermediate goods and
services, ensuring that the SEZ was not a stand-alone freeport, but an integral part of
the region’s industrialization. In turn, this fostered technology transfer and skills
development.

Shenzhen’s example inspired copycat SEZs not only in PRC, but around the world. The
latest estimate is that there are over 4,300 SEZs in operation globally, up from 500 two
decades ago.

But for every success story, there are also failures. Oversold and poorly planned, many
SEZs have promised industrial development and good jobs, only to incur heavy costs
through expensive tax breaks and poor governance. A common problem has been the
failure to calibrate incentives. Rather than promoting industrial clusters, like Shenzhen,
many zones have become enclaves with few links to the domestic economy.

Other issues include poor location and limited transport connectivity with major trading
destinations. Some have simply been too small to allow for economies of scale and
scope.

Some economists have recommended that countries steer clear of SEZs altogether.
Their rationale is that given the costs and mixed records, the risks outweigh the returns.
Better to concentrate on domestic reforms that have fewer distortions, the thinking goes.
Counting on domestic reforms to materialize, however, also poses risks. SEZs can be a
politically low cost way to experiment with economic reforms that may otherwise be
unable to be passed through national legislation. Where SEZs have seen the greatest
success, they have shown a politically viable path for development friendly economic
and regulatory reforms at a national level.

ADB’s new analysis argues that if designed correctly, SEZs can continue to help
countries attract foreign investment, develop domestic industries, and encourage better
economic policymaking and reforms.

The special chapter notes that the number of SEZs in an economy is positively related
to overall export performance. Countries in Asia with SEZs attract significantly more
foreign direct investment (FDI), with the existence of SEZs corresponding to 82%
greater FDI levels.

Putting in place independent governing authorities and enabling legal frameworks are
key ingredients that can help SEZs increase the chances of success. Among the
countries in Asia with SEZs, those with independent SEZ authorities increase exports
by 27% compared to those without.

Most importantly, the report argues that a clear link to an economy’s development
strategy increases the likelihood SEZs will have broad nationwide impact.

ndonesia’s Growing Special Economic Zones –

Opportunities and Challenges
Posted on October 28, 2015 by ASEAN Briefing
By: Fernando Vidaurri

Earlier this year, Indonesian President Joko Widodo announced the creation of 17 more special economic zones
(SEZs) by 2019. Ten of these zones would be dedicated to tourism, with the remaining seven hosting a variety of
different activities such as extraction of mineral resources and fisheries.
Currently eight SEZs are under development in Indonesia, thus the new zones would bring the total number to 25. In
addition, there are four existing Free Trade Zones (FTZs) that were originally created as SEZs and later made the
formal transition to FTZs. Economic zones currently employ four million workers around the country, and the
government is keen to increase job creation and facilitate technology transfer by attracting companies to the largest
market in Southeast Asia.

The Original SEZs

Indonesia originally opened the first SEZ in Batam, Bintan and Karimun in the Riau Islands, to take advantage of the
close proximity to Singapore, which is only 12 miles away. Legislation was signed with Singapore designating the
zone as SEZ in 2006, and in 2007 they achieved FTZ status after a new law was passed by the Indonesian House of
Representatives. In addition to the Riau Islands, Indonesia also has the Sabang FTZ, which seeks to attract
investment to the north part of the country.
One of the objectives behind the FTZ designation was to create jobs, as well as accelerate the transfer of technology
by taking advantage of the archipelagic nation’s proximity to Singapore and Malaysia. Batam, as well the other Riau
Islands possess capabilities that made them more attractive as FTZs, such as steady job and income creation,
foreign exchange earnings and credibility in the eyes of investors. Given its strategic location the Riau Islands FTZ
status allowed them to attract investment in the shipbuilding and shipyard industry. The booming of this industry
allowed Batam to become the largest shipbuilding region in the country, with more than 150 major maritime
companies operating in the province.

RELATED: Pre-Investment Services from Dezan Shira & Associates

Assessing SEZ Performance Several Years On
In addition to becoming a success story, both for special economic zones and the shipping industry, it has also
become the setting for the rise of the country’s electronics manufacturing industry. The increasing demand for
electronics among Asian consumers has proved very attractive for foreign multinationals. Some of the firms that have
been that have been attracted to Batam include companies such as Sanyo, Panasonic, Siemens, Philips and Sony.
The success of the electronics industry has benefitted from its proximity to Singapore, as well from technology
transfer facilitated by the access to components and expertise.

Despite the success of Batam and the other FTZs, some businessmen have called for caution in opening extra SEZ,
even as early as 2011. The sentiment was that the government should avoid opening too many zones and instead
wait to show outside investors tangible results before rushing to open more. One of the reasons for the cautious
approach is that the success of Batam in shipbuilding and electronics manufacturing can be explained by its strategic
location close to Singapore and from the technology transfer in the electronics manufacturing industry. Some of these
factors cannot be transferred to other SEZs. For this reason, each SEZ’s natural and strategic advantages must be
considered carefully when assessing their investment potential.
Additionally, most of the projects tend to suffer from inadequate infrastructure. This issue has plagued many of the
recently announced SEZs and thereby slowed their growth. According to a report from the Centre for Strategic and
International Studies (a Washington based think tank) published last month, out of the eight SEZs decreed by the
government, only two have actually started operations. One of them is Tanjung Lesung in Western Java, oriented
towards tourism, and the other is Sei Mangke in North Sumatra, centered on palm oil production. However, the report
found that Semangke SEZ has only two factories in operation, and that basic infrastructure, such as roads and
railways, still has to be built in Tanjung.

Attracting Investors to SEZs

Some factors such as excessive regulation and complicated licensing and establishment procedures have the
potential to keep many would be investors away. Additionally, as in the case of the Tanjung SEZ, a lack of
infrastructure can adversely affect investment. The additional lack of ministerial coordination can be seen as a by-
product of the excessive red tape and explains why some of the infrastructure needed for the demands of current
SEZs is not yet in place, causing investors to stay away.
However, the government has recognized these issues and is working to streamline the process, as well as offer new
incentives to companies seeking to invest in the region. President Joko Widodo has made reforming the investment
licensing process one of his top priorities. However, the reform process may take some time given that every new
measure being implemented must be assessed to make sure it doesn’t violate existing regulations – a manifestation
of the bureaucratic complexity at work in Indonesia.

RELATED: Understanding Laos’ SEZs: Untapped Potential

One of the incentives proposed to attract more investors involves longer-term land rights within SEZs. Under current
regulations, companies can acquire land rights for 30 years and are able to renew them for 10 more years twice.
Under the new proposed period, companies will be able to lease the land for 50 years and be allowed to renew it
twice for 15 year intervals. Indonesian authorities hope that this will help attract companies to build plants, hotels and
other facilities. Additionally, companies investing in the Sei Mangke SEZ in North Sumatra, which plays host to the
palm oil and rubber industries, will automatically be eligible for tax allowances under a new decree.

Future Outlook
As the government moves forward with plans to open an increasing amount of SEZs, reforms will be needed to make
sure the application process becomes less complex. Adequate infrastructure and ministerial coordination will also be
needed for the success of these new investment initiatives. In this respect, the government may heed the advice of
some business leaders and make sure the current SEZs are performing to capacity before plans about new zones
are made.

But as the case of Batam shows, both infrastructure and excessive regulation issues can be overcome, and in turn
attract more investors. For example, a study by Political and Economic Risk Consultancy showed that despite some
initial shortcomings Batam now lays claim to the best infrastructure in Indonesia, and ranks favourably compared with
investment zones in Thailand, Vietnam and India. Additionally, as the longest standing FTZ Batam has streamlined
the application process by make it a one stop process managed by single governing body. Thus, if ministries work
together and remove some of the hurdles they will be able to attract investment to some of the newly proposed SEZ.

Further Support from Dezan Shira & Associates

As the largest economy in ASEAN, Indonesia offers investors immense potential upside – a fact which only becomes
more apparent as the country develops further. However, as the saga of Indonesian SEZs and FTZs illustrates,
penetrating the market’s complex legal and bureaucratic needs can pose a challenge to even the most seasoned
investor. With decades of experience operating throughout the region, the specialists at Dezan Shira & Associates
are well placed to help businesses overcome this challenge, and make Indonesia apart of their “Asian Success
Story.” For more information, please get in touch further at asean@dezshira.com.

Economy and development[edit]

Bintan Agro Beach Resort

In 1824, the Treaty of London finally settled that the islands south of Singapore are Dutch Territories.
Bintan was again under the control of the Dutch. Bintan's power and central role disappeared with
the regional political changes and the island's past fortune was now overshadowed by
neighbouring Batam and Singapore. Following its founding by the British in 1819, Singapore became
a new regional trading centre. Due to its limited size, Singapore initiated the Sijori Growth Triangle in
1980 and 1990s, and signed agreements with the Indonesian government to invest in Batam and
Bintan.[8][20]
The economy of Bintan island is centred on tourism, given its close proximity to Singapore. In the
year 1990, according to a Presidential Decree (25 July 1990), a coordinating team was set up for the
Riao Province Development with the mandate to plan and develop development projects within the
framework of Indonesia-Singapore cooperation. Investment plans, similar to that of Batam, were
evolved with basic intention to provide leisure space to Singaporeans on the white beaches of Bintan
and this approach also conformed to the Indonesian Policy of declaring the 1990s as the "decade of
Visit Indonesia". In 1991, Bintan Management Resort for establishing a resort with intent to develop
resorts, industrial parks and water projects was planned. In December 1994, partial opening of
Bintan Resort Development was agreed under a Memorandum of Understanding signed by trade
ministers of Singapore, Malaysia and Indonesia.[20] As per the Master Plan prepared for Bintan, the
emphasis was on tourism, industrial projects and agricultural products, all under private-sector
initiative, involving formation of a consortium of the Singapore Technologies Industrial Corporation,
Wah Chang International (whose specialisation is development of resorts), the Keppel group and the
local banks.[21] Thus, the once wild and deserted Bintan island has now become an industrial
"hinterland" for Singapore and a special investment zone for world industrial companies, also
attracting thousands of workers from the entire country. This industrial estate agreement is in
partnership with Batamlndo Industrial Park. The Bintan industrial estate has been allotted 4,000
hectares (9,900 acres) and is designed as a "One-stop investment centre" providing all services
essential for the investing companies to devote exclusively towards production. It targets industries
such as textiles, garments and wood processing, unlike the Batam industrial estates. This functions
as a supplement to Singapore's economy by way of manufacturing low-value goods here.[22]
Earlier, Singapore's Batam Industrial Park had signed an agreement with Indonesia to lease its
northern coast and develop it into a resort ("Bintan Resort") for Singaporeans. An area of 23,000
hectares (57,000 acres) had been allocated to this project, which was further divided to 20–30
projects – 3,000 hectares (7,400 acres) for hotels and resorts and sports facilities. Further, the
Bintan Lagoon and Beach Resorts, designed exclusively for wealthy tourists, have been planned
with "two 18-hole championship golf courses with superlative accommodation". This resort area has
an exclusive approach from Singapore that bypasses the capital city. It has modern facilities of
museums, handicraft shops, artists' villages and other eco-tourism related attractions.[4]
The agribusiness venture planned under the Master Plan for Bintan envisages pig rearing for export
to Singapore and seafood processing plants.[21] Fishery cultivation of grouper fish, Napoleon, kakap
and bream are also planned in the island.[23]
Under the industrial sector, the identified fields for development are mining of Bauxite (Bauxite
reserve is 15.88 million tons), kaolin, granite, white sand and tin. The government of Indonesia has
also planned the petroleum industry with its subsidiary industry of manufacture of plastics in
Bintan.[21][23]
Bintan Eco-Tourism Venture Project has been launched to generate better income avenues for the
low-income families. The eco-tourism destinations identified are all within approachable distances
that could be covered in about 30 to 90 minutes from the starting point by car. Village handicrafts
made from the local pandanus plants are a popular attraction during the eco-tour to villages in
Bintan.[13] Private operators are meanwhile succeeding in putting Bintan on the world map for Eco-
tourism, with both Nikoi and LooLa Adventure Resort being amongst the four finalists
of WildAsia's highly respected 2012 award for "Asia's most inspiring responsible tourism operators",
which LooLa went on to win. LooLa furthermore is one of three finalists in the 2013 WTTC's
"Tourism for tomorrow, community benefits" awards.
The Integrated resort management is highly dependent on the International tourism industry. Tourist
footfalls, as recorded till 2004, have been reported to be on the increase.[24]
Thus, the massive and ambitious economic development plan envisaging "10 golf courses, 20
hotels, 10 condominiums, three village clusters, a township, several marine and eco-tourism
attractions" launched in 1995 with a gestation period of 20 years, was according to the leisure
industry analyst of Singapore: "Bintan has better prospects because of the people behind its
development. They are big names who will have to maintain their reputation.[25]
In 2010, 300,000 tourists visited Bintan Island and most of them came
from Singapore, Korea and Japan. 75 percent of foreign tourists came by ferry from Singapore, while
domestic tourists mainly came by airplanes. A new airport is planned to be built at Lobam industrial
area to accommodate Boeing 737s and Airbus 320s for one million tourists predicted to come in
2015. The new airport is 35 minutes from Bintan Resort, whereas the current Tanjung Pinang
airport is 90 minutes away.[26]